Living off Equity - is this still an option?

Bill.L said:
Hi all,

Simon, if you really think that a 25%-30% decline in the stockmarket and a 15% fall in property prices is equivalent to the end of the world scenario, then may I suggest you do a little bit of study to bring you back to reality.

bye
Bill
What are you implying by the above statement?
Simon
 
:D :D

Bill.........you have all the religeous zeal of the righteous right don't you? Yet I don't think you even see it? :confused:

It's Bill's way or the highway.........remember what I said about people's risk profiles Bill? This is up to the
individual to decide. Not YOU Bill. The ficticious example(which I quickly bashed out some figures
for in 20 minutes before going off to work) was based on an assumption that the couple would like to know if there
was any way of them getting $120K pa. I gave an example of a way they could do it.......and it IS a way Bill.
Whether their risk profile allows them to do this now, in two years time or a modified version I guess is up to
them isn't it Bill.

Maybe this process would open their eyes to some new possibilities they hadn't thought of? Gulp! They may decide to
do something along these lines but have a slightly reduced income or sell one property as a backup? Who knows?

I think I previously responded to your other queries and thank you for your wonderful farmer example Bill.

You've convinced me Bill. Nobody should really ever buy an asset because the possibility DOES exist that it could go down
in price......and then of course the banks will sell it off.......and their life will be ruined. I'll look at the
young married couple who scrape together a 10% deposit for their first home in a totally new light based on your view
of the world. I'd tell them not to do it. Prices might go down 30%, the banks will sell their house and you'll be
ruined. It would be MUCH safer to save at least 50% of the purchase price wouldn't it Bill. I'll get them to give you
a ring though so you can advise them what to do in case it falls 60%.

Is the glass really always half empty in your world Bill?

Yes they have $4.54mil in debt in the most extreme example.......but they have $6.81mil in assets........yes they have $333K
in interest payments but they have $454K in income..........in the first year.........without any asset growth....
they start with a LVR of 66%..........yes they have debts but they've also diversified considerably....


You certainly didn't disappoint me with your 'classic Bill' reply though........I guess in such a changing world
it's at least nice to have some predictability :) Thanks for that. The subtle attack on anyone who would venture beyond your fixed
view of the world.......all wrapped up in a noble delivery from a white charger that you're really only doing it to
protect people's interests.
 
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Hi all,

Alan, Alan, Alan,

What a wonderful personal attack.

Now let's stick to reality and the topic.

Where in any of the threads on LOE, have you or other proponents of the strategy laid out the potential risk??

I see that you talk about different peoples risk perception, but you don't address exactly what those risks are.
Statements like ......
"remember what I said about people's risk profiles Bill? This is up to the
individual to decide."

Yes, I fully agree!! BUT, Where do you spell out in your quick 20 minute example what the risks are???

Do you really need to attack the messenger, because the risks are spelt out, where you were not prepared to spell them out??

Do you really think I am soooooo wrong in stating what has happened in the past, at fairly regular intervals (10 -15 years), and also noting that the same type of interval has elapsed since the last downturn???

I actually have no objection whatsoever to people putting all their equity into a scheme of debt that lets them live comfortably. However they need to at least know what the risks are rather than be told there is no risk!!!

Simon, I am not implying anything, I was suggesting you do further study if you believe a property downturn and a sharemarket correction cannot happen at the same time, and that such a thing is not the end of the world, but a normal part of the boom/bust cycle as shown by history.
Also from your personal attack on me, I assume you think I have no property and don't invest. Do you also think active investors will always do well??
Does letting someone else put you into great debt, throwing half the money at an income fund and the other half into some newish property (at the top of the cycle) and then sitting back and LOE, constitute "active investing"???
bye
 
BillL's strategy

Hello BillL,
It seems that you have read and done lots of reserach and hence has found holes in the LOE . If you think the strategy proposed here is not that great ect, would you please :

1./ post the risks you think LOE have since others did not post them
2./ post your proposal of a strategy that could apply now given the current environment , risks etc ? If yous strategy is doing nothing right now and wait till a certain time then please suggest when and what.

If you have already posted these 2 points at other threads please give me the links.

Looking forward to learning from you.

Regards,
 
Bill.L said:
Hi all,
Simon, I am not implying anything, I was suggesting you do further study if you believe a property downturn and a sharemarket correction cannot happen at the same time, and that such a thing is not the end of the world, but a normal part of the boom/bust cycle as shown by history.
1. What makes you think that I think the above?

Bill.L said:
Also from your personal attack on me, I assume you think I have no property and don't invest.
2.What personal attack?

Bill.L said:
Do you also think active investors will always do well??
3. Where have I ever said that?

Bill.L said:
Does letting someone else put you into great debt, throwing half the money at an income fund and the other half into some newish property (at the top of the cycle) and then sitting back and LOE, constitute "active investing"???
bye
4. Where have I ever made such a statement?

I believe you may have totally misunderstood my position on this topic. I suggest you read my posts again.

Simon
 
Keep up this healthy debate peeps - loving it. whilst appreciating the great possibilities that LOE offers, I think Bill's "LOE Reality Check" is great too. Asset inflation is not always a given. My reasons for interest in this is simple: I am very much torn between the sell and lock in profit (and get hammered on tax) strategy and the refinance and LOE strategy. My attempts to LOE have generally failed as I receive offers for the property which just seem way too good to knock back. these properties are depreciating buildings with difficult tenants after all. In a market like Perths which still has a good run left in it, the hold/sell decision is tough.
 
Hi Ausprop
I agree that healthy debate is good so I would like to reestablish clarification or defianition of terms so this debate may continue succesfully.
I for one have become confused as to what we are debating.
Is living off equity that and nothing more?
If so how is that any different to living off wages or social security?
What I mean is one has X amount of capital and Y amount of time to enjoy it's benefits.
Alternatively, my understanding of the above is that equity is used to both buy time and create more equity ............. and so on and on it goes. If an adverse economic climate appears and prevails for any length of time the strategy or structure needs to be anylised to see whether it can weather the tough times.
The various tools an investor would use to address these problems are found in the depth of their own experiences.
Kind regards
Simon
 
salsa said:
It seems that you have read and done lots of reserach and hence has found holes in the LOE . If you think the strategy proposed here is not that great ect, would you please :

1./ post the risks you think LOE have since others did not post them
2./ post your proposal of a strategy that could apply now given the current environment , risks etc ? If yous strategy is doing nothing right now and wait till a certain time then please suggest when and what.
Hi salsa,

As someone who has posted previously as the risks of using LOE, I'd suggest you read the whole of this thread containing this post by simonjulie, in which s/he says 'I am an incurable optimist. I do not spend a lot of time thinking about worst.' And again compares a worst case LOE scenario to aliens invading.

I think the difference is twofold -






  • the likelyhood of aliens attacking is small compared to an LOE strategy failing
  • that one can take precautions against LOE failing, but it would be trickier to take precautions against aliens attacking
In the same thread a former proponent of LOE in this post agrees this post that LOE is v. risky and he would have recommended it to Japanese property investors 20 years ago (here).


Another point worth making is that we've just had the best possible 4 years in the history of IP investing for using any strategy that relies solely on growth (as LOE does). If the property cycle we all know and love is still revolving then the next 10 years are going to be lean times for some people who rely solely on LOE.



The low risk strategy I use which incorporates LOE is also outlined in that thread & earlier in this thread, and also here.

Cheers,

KJ
 
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simonjulie said:
Is living off equity that and nothing more?
If so how is that any different to living off wages or social security?
What I mean is one has X amount of capital and Y amount of time to enjoy it's benefits.
Alternatively, my understanding of the above is that equity is used to both buy time and create more equity ............. and so on and on it goes. If an adverse economic climate appears and prevails for any length of time the strategy or structure needs to be anylised to see whether it can weather the tough times.
Simon,

I agree we should define LOE. What (I believe) you are doing is buying, renoing, revaling, drawing down equity to live on & invest. I didn't consider this to be LOE. Now I can see your point - you don't have an income, so you don't pay tax. However, you continue to work (at renos).

As Jamie mentioned earlier we need to make a distinction between using LOE & continuing to work, and using LOE & retiring forever.

I'd suggest LOE is what you're doing ie continuing to work and increasing your nett assets via renos & possible IP growth.

I'd also suggest that pure LOE (maybe Retiring on Equity) is using solely growth to increase nett assets (no working & no renos). This is what I understood the gurus were talking about when they recommended using LOE strategies.

Any comments ?

KJ
 
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G'day Salsa,

In case you are getting confused, this is "slightly" incorrect:-
As someone who has posted previously as the risks of using LOE, I'd suggest you read the whole of this thread containing this post by simon, in which he says 'I am an incurable optimist. I do not spend a lot of time thinking about worst.' And again compares a worst case LOE scenario to aliens invading.
In the above example, Julie was posting, not Simon. They seem to share a Login name. Not wanting to "nitpick" here, but since Simon has been posting in this thread, I thought it important to differentiate.......

Also, there was a duplicated link further on:-
Keithj said:
In the same thread a former proponent of LOE in this post agrees that LOE is v. risky and he would have recommended it to Japanese property investors 20 years ago (here).
The second link is a duplicate of the earlier (Simon/Julie) thread rather than the Steve Navra thread intended.

So, Keithj, can I ask that you repost the correct link as you also seem to refer to it here:-
Keithj said:
The low risk strategy I use with incorporates LOE is also detailed in that thread
and I'd be interested to understand to what you are referring, too.....

Regards,
 
keithj said:
Simon,

I agree we should define LOE. What (I believe) you are doing is buying, renoing, revaling, drawing down equity to live on & invest. I didn't consider this to be LOE. Now I can see your point - you don't have an income, so you don't pay tax. However, you continue to work (at renos).


KJ
Hi KJ
Yes I do still work(play) at renos because I have found a magic formula that has increased our asset base significantly. However, because of the way we have strategised and grown our portfolio we do not have to do anymore renos if we wanted to quit tomorrow. We just love doing it. :)
The draw downs that I am using for new purchases today are the result of established growth from some of our early projects.
One only needs to establish how much $$$ one needs to live on for a future time period and invest the rest back into growing it further or stop and live off the proceeds until they all run out and that may take a long time for us.

Simon
 
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Hi mark
I suggest that you read up some of our previous posts.
This is starting to sound like a broken record to me.
No malice intended I am just tired of going around in circles.
Kind regards
simon
 
Bill, Bill, Bill,

Thanks for getting back to me..........always a pleasure. :)

Bill.L said:
Do you really need to attack the messenger
Ahhh......you didn't disappoint again Bill........bless you.....there's an old favourite. :)


Ok Bill, I think it's apparent this will go round and round in circles with little resolution and I for one don't have the time........so one last time.......

If I understand you correctly, you'd like me to list ALL the risks and then eliminate them one by one for you?

Ok.......lets go back to my example which you are so fond of ridiculing.

Wouldn't you agree that a number of the 'risks' could probably be all but eliminated with adequate cashflow reserves? (Don't worry....it was only a retorical question......I don't expect you to agree with any of this. :) ).

In the example, I tried to display one way the couple could get the desired cashflow but you're quite right there was a couple of reasons I didn't want them to simply sell the properties and invest the money.

The first reason was to give a little 'backup cashflow' that I didn't even include in my original LOE annual income of $120K pa. It's simply there to reduce risk. ;)

Let's not forget that because they still have these properties, they also still have the $55.5K NET coming in from rent and this is indexed for life. This is a 'little extra' I didn't include. :D

Actually, since we were really only meant to find $100K pa for them, we now have $75K pa indexed ($20K + $55K) extra as a 'bit of a backup'.

Now I suppose we could simply put this $75K pa in a Bank Term Deposit each year and get some interest as well to cover emergencies. However, as you've clearly stated, banks can be unreliable places......afterall they've been known to go broke someplaces in the world and therefore I guess this is yet another risk you'd like me to cater for.

Instead, let's get a large tin box.......... which for want of a better name we'll call 'Bill's Buffer Box' ..........and we'll bury the money in the backyard. As the rents etc come in we'll dig it up and put the money in the box.

The purposes of the money in the box is to help cover crook events that may occur every 10-15 years. That should give us up to the $750K-$1.125mil range in the box to help with 'incidentals'.

The second reason I didn't really want them to sell their property assets was also to help reduce future risk.

As you quite rightly stated, this couple could live for another 35-40 years......

How about we be pessemistic for a change and assume they only live for another 35 years? Remember they are starting with $2.27mil in property.

If we project an historicaly known property growth rate of 7% compound on their $2.27mil property portfolio for 35 years it would mean that this same property portfolio could be worth approx. $25mil in 35 years time.

Now I guess your risk is that there will be no property growth for the next 35 years so in all probability the potential Capital Gain will be somewhere between $0 and $25mil.

How about for the sake of argument we at least split the difference and say a potential Capital Gain of $12.5mil is quite possible in this 35 year period?

Up to $12.5mil in additional equity may also help to reduce the odd risk along the path in the future ..........


I'm sorry Bill, I guess I can't eliminate all investment risk for you, but neither do I think we are ignoring reasonable risk.

Buying a business is a risk.......the young married couple buying a house is a risk........anyone who has ever had a mortgage has probably run a risk of losing their job/income.........and on it goes.......life can be a risk........not ever taking a risk can be a risk.

As I said, I don't think we'll ever agree on this issue Bill........so be it.....
 
Hi all,

Simon, I think we are getting our wires crossed on LOE. I was using Alans example of the couple with a PPOR and 3 IPs, who could go into a lot of debt, and buy more IPs and a whole lot of sharemarket income funds.
This was an example of passive LOE. The almost set and forget as the proponents would have us all believe.

What you do with your formula, is not LOE by the same definition as Alans. It involves the work to hunt and continue to value add (we did this to a property a couple of years ago and have not used the extra equity gained yet), you continue to do this.

There is a gulf between the two strategies.

I inferred the personal attack from the following post of yours....

" Whether or not the market falls or rises,property booms and crashes and plain boring sidways tracks, there is one thing that an active investor will NEVER lose and that is the knowledge gain through experience. So you can sit around all day long pondering formulas and arguments so that mistakes can be avoided but the bottom line is that, for me and other active investors nothing beats doing it. Only then does this whole brave new world become real.

Bill L.
What if we are invaded and our currency is not recognized by the invaders and what if some one drops a bomb on us and we all blow up?"

Maybe I was just a bit too sensitive at the time.

For your 4 points /questions.
1/ Pretty much came from the above statement of yours.
2/ Also from your statement above.
3/ and 4/ were actually questions, your opinions on them is what I sought.

Salsa,

In quite a few different threads over the years, I have indicated the Jan Somers approach, it may not be as fast as some wish, but it is fairly safe. In the situation under discussion, where the 50 year old couple who have no debt but have 3 fully paid IPs, my interpretation would be living off the rental (Alan indicated a nett $55k for this approach) if they wanted to retire now. (They would be on a retirement income that was above 90% of the rest of the populations). Out of this $55k they would have the income that gives them the option to invest further if they so wish, but at no time would I be going into millions of dollars debt as suggested by Alan.

I also think Simon's approach is brilliant. They value add to each property as they progress. They gain by sweat equity, that works exceptionally well in a boom market, as they have proved, but also works in a flat market with careful selection. However their approach is not for everybody, and does still require hard work (doesn't it Simon).

Simon/Rixter it does not hurt to go over old ground as there are always newer people who have not had the time to read volumes of older threads.

bye
 
Hi all,

Alan, you have reallly got wound up over this. I mean your numbers prove how safe this system is.

Except for one minor problem.

Your numbers don't add up.

Lets look at the begining wher you bought up the mythical couple.

Your numbers from post 87...

"Let's say they draw down 80% of their equity.......

$736K from home valued at $920K
$1.08mil from IP's valued at $1.35mil
Total of $2.27 mil available.

They get a Margin Loan at 50% giving them $4.54mil in Managed Income Fund."

Whoops, looks like they don't get $2.27m to me. More like $1.816m
But what is a lazy $454,000, that is when using margin a mere $908,000 below the amount you state they can have in the managed fund.

Now if you really want to throw numbers around like your last post, then show us all how well it will work if the couple starts TODAY, but instead of the nice steady 7% growth in property you claim, we have one of those periods like '89-'91 or '81-'83 or '74-'75 in the next 2 years, and then have several flat years.
You will need to show us all the numbers from the beginning as we will use the fact that they can only borrow 80% against their property not the 100% you started with.

bye
 
simonjulie said:
Hi mark
I suggest that you read up some of our previous posts.
This is starting to sound like a broken record to me.
No malice intended I am just tired of going around in circles.
Kind regards
simon

What a good idea.

Thankyou Simon
 
Bill.L said:
looks like they don't get $2.27m to me. More like $1.816m

Now that's fair enough Bill..........my apologies for that one. Not an intentional error......

While the Margin Loan will decrease, so will the overall interest so not all bad.
6.7%(LOC's) on $1.816m = $121,672
8.0% (Margin Loan Rate) on $1.816m = $145,280
Total Interest = $266,952

The couple would now have $3.632mil giving an annual return of $363,200 based on a 10% return.
$363,200 - $266,952 = $96,248pa

Add the existing rent of $55.5K pa and the couple will get their $100K pa but still have an additional 'buffer' of $51,748 pa........
 
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