Living off equity (LOE)

[want2bewealthy]

What are peoples thoughts on this subject?

Its my chosen strategy currently and what I aim to do and well illustrated in M. Yardney's book.

It seems a somewhat 'risky' strategy but once there is enough equity there is enough to pay all interest and live off while you still come out with more than you started the year with the year after when you repeat the process.

If all fails for a little while you could always just get a job. . heaven forbid

 

[BayView]

Living off equity can be done safely as long as the portfolio is large enough that if you applied an historical AVERAGE cap gain to it, and only spent a portion of that possible average gain you would never be able to spend more than the portfolio went up in value, AND have a very low LVR.

For example, it is reasonable to assume that property goes up on average around 5% per annum over the longer term.

So, if you have a portfolio of $2 mill, an LVR of 50% = $1 mill of equity.

The portfolio goes up by $100k per year, based on the historical 5% average, and you LOE to the tune of $50k.

Each year, your nett worth increases by at least $50k even though you spend $50k. Nice.

 

[BillC]

I am semi retired and my properties are all positive geared with a 40% lvr
I also have super (self managed fund) and all in fixed interest and have made money from my fund this year
Have a part time job which gives me a small income
What I call LOE is a balance of having property super and a small income
What I like about my situation is I dont have to work but prefer too, not for money but interest
Using 5% growth on property as the portfolio builds it will give you an income over time
Now this is the hard part YOU HAVE TO BE PREPARED TO KEEP THE PROPERTIES and eventualy they will be positive geared
I always bought negative geared properties in good locations
I bought my first IP in 1996 so its along term plan
On the ABC news tonight most super funds have lost 20%
So my message is keep buying IPs and also look at other income streams

 

[Rob Williams]

Hi BayView. My scenario is close to what you describe above. There is one small flaw - when there's a credit squeeze (like now), regardless of your LVR, it can be difficult getting that $50k out of the bank so yo can spend it.
Of course, if you had the ability to milk some cash from your growing equity prior to the current situation unfolding, all well and good.
However, the markets (financial and property) can work against you so you really do need to plan for times when credit gets tight.
I plan to utilise the LOE strategy, but have always known that the major weakness of the strategy is the inability to siphon off equity when the banks start playing hard ball.
I won't go into detail about the drama I've had with mortgage insurers changing the rules daily (one of the recent changes has been the scrapping of the negative gearing "add back" into my serviceability calculations), but rest assured, I'm real glad I'm not soley reliant on LOE to get me through the next year.
The strategy, I believe, is sound and valid. It just needs some careful consideration when planning for the future.

 

[Y33]

W2BW,

Living off equity or living off +cashflow properties?

If you can arrange your properties the right way then the latter is best.

Hopefully interest rates will drop enough to put an extra 3K per month into my pockets and not the banks next March.

If time is on your side then go for the B&H with 6-10 properties spread between low to middle price range. If all goes to plan then sell off the low ones to cover the debt of the middle and then have no debt and live off passive rental income.

LOE is achievable but also has problems if prop decreases and rates go up changing the balance of things.

 

[grossreal]

hi
couple of issues that need to be addressed to make it work.
cash flow
this can be done with bonds,posi property cash( caveat lending) or the like
growth you need to have a mix
so comm and resi
one moves up as the other goes down so you need a mix.
and
you need to have real budget so you can work out cash flow
what you need is multi income streams and you need debt to keep the level keel
and it does take a bit of work to work it correctly
so have fun

 

[craigb]

i like and try to work the living off equity, thing, so i built this 770m2 home , but the v$ didn,t come up to scratch,, so im back to work, but had i continued with smaller and kept on with all the value adding things, including 1 bedroom extensions im sure it would have been ok too! but then there is the credit squeeeez! and living off equity is not considdered a job (one of the boxes for the banks) and low doc/no doc for a million dollers is hard to get without a so called job?
But apart from those few things i like it!!!!

 

[Token Funder]

i like and try to work the living off equity, thing, so i built this 770m2 home , but the v$ didn,t come up to scratch,, so im back to work, but had i continued with smaller and kept on with all the value adding things, including 1 bedroom extensions im sure it would have been ok too! but then there is the credit squeeeez! and living off equity is not considdered a job (one of the boxes for the banks) and low doc/no doc for a million dollers is hard to get without a so called job?
But apart from those few things i like it!!!!

Indeed.

LOE was always a pipe deam without the income to support the debt.

The old Greek/Italian property investors had the right idea...live off actual rent!

 

[Sheryn]

The old Greek/Italian property investors had the right idea...live off actual rent!

Agree - Owning 3 sets of duplexes and living off the rent is one of the options available to us in the future.


Sheryn

 

[want2bewealthy]

But whatever happened to 'buy and never ever sell'???

I understand things change with the time but selling incurrs fees and you have to pay back all your 'negative gearing' to the tax man when you sell so essentially you 'loaned' the money and pay it all back when you sell but never have to do this if you never ever sell. . ?
paying less tax is a good idea no?

 

[Peter_Tersteeg]

Many funders are putting major restrictions on how much cash they'll allow. In one cases the maximum amount a lender will give for undisclosed purposes is $10k.

Most lenders are far more generous, but they are tightening up.

LOE will be a bit of a problem when lenders see enquiries for credit every month or so...

 

[want2bewealthy]

Thanks PT, Im thinking more pull out 2 or so years worth of equity to pay all bills and live on, so Michael Yardney's 'ultimate strategy' the one we all should be aiming for is not reliable?

If I had 1million dollars in equity I cant really see it being a problem, Im aiming for much more but just a scenario.

I guess you can never totally depend on anything in the investment world but thats what Im aiming for, my rents should be ticking along nicely by then Id suspect but then again I wouldve purchased more so you never know.

 

[BayView]

But whatever happened to 'buy and never ever sell'???

I understand things change with the time but selling incurrs fees and you have to pay back all your 'negative gearing' to the tax man when you sell so essentially you 'loaned' the money and pay it all back when you sell but never have to do this if you never ever sell. . ?
paying less tax is a good idea no?

Buy and never sell - that's me.

The problem with this for many is that they can't access all that lovely cap gain they see sitting there on the balance sheet.

If their servicability is not good, the Bank won't let them access the equity to live off, so they end up having to sell to realise the gain - and cop the lovely fees and taxes.

But it's not all just property - we realised we weren't going to be retiring early from the IP portfolio (unfortuantely) unless we went way more aggressive and with risk and did some developments, so we have used the equity for buying existing profitable businesses. Much quicker and in my case much safer as businesses are what I know.

This way, we get to keep all the assets and "buy" ourselves a decent income that the properties wouldn't provide in the short term.

The developments will come later and there is no extra pressure for them to be an absolute winner to get us through. They'll be the icing.

 

[Ridin-High]

Just build a bigger portfolio 1% growth on 10mill is 100k that seems abit better

 

[keithj]

What are peoples thoughts on this subject?

Its my chosen strategy currently and what I aim to do and well illustrated in M. Yardney's book.

It seems a somewhat 'risky' strategy but once there is enough equity there is enough to pay all interest and live off while you still come out with more than you started the year with the year after when you repeat the process.

Have a look at this thread, particularly the spreadsheet attached to post #6.

Volatility matters, we've had 5 yrs with little/no growth in Sydney, there's a possibly of another 5 yrs of the same.... would your plan withstand that ?

I can't remember what Yardneys book stated (my copy got lent to someone ), but most gurus assume no volatility and present LOE as virtually risk free ).

 

[sparky23]

If I had 1million dollars in equity I cant really see it being a problem, Im aiming for much more but just a scenario.

Well about a year ago I was very close to the million dollars in equity now I would be lucky if there is $400,000 sitting there and none of it accessible as we have taken out as much as the banks will allow us to without selling. Aiming for much more is a good plan!

 

[mystery]

Volatility matters, we've had 5 yrs with little/no growth in Sydney, there's a possibly of another 5 yrs of the same.... would your plan withstand that ?

You could get around this by diversifying. We have IP's in Vic, NSW, QLD and SA .... at some point some of them are growing while other states might be flat. At the moment we are seeing some growth in our SA and Vic IP's, whereas our IP's in NSW and SE QLD are flat. Spread the risk.

I can't remember what Yardneys book stated (my copy got lent to someone ), but most gurus assume no volatility and present LOE as virtually risk free ).

Agree, ... they make it sound very easy and always seem to give the example of 10% growth per year .... .

Martin

 

[want2bewealthy]

I guess it doesnt really matter either way, Im accumulating as many properties as Im able to, in 10 years I can always just sell a few (I hope not) and pay down some debt, no worries.

 

[Rixter]

Indeed.

LOE was always a pipe deam without the income to support the debt.

Easily fixed. Use a cashbond additional to existing rental & any other disposable income. This is what I have done. It converts existing portfolio equity into cash flow income (without the need to sell) to meet the bank/lenders DSR requirements.

Hope this helps.

 

[Token Funder]

Easily fixed. Use a cashbond additional to existing rental & any other disposable income. This is what I have done. It converts existing portfolio equity into cash flow income (without the need to sell) to meet the bank/lenders DSR requirements.

Hope this helps.

Rixter,

Is the annuity from a bank, life company or somewhere else? What effective IR is it costing you?

Just curious...