Living off Equity - who's doing it? Figures?

[Land]

My wife and I are attempting to quickly build a 3M portfolio in Sydney, and wait until it doubles, and then 'retire' with LOE. The idea is we will have a portfolio of about 6M, and an LVR of about 42-45%, and we can then start LOE. After that we'd like to just do small developments for fun and to keep us occupied.

At the moment we are doing our first dual occupancy development and when that's finished our portfolio will be up to 1.3M, so a little bit more to go to hit the $3M mark.

I am very interested to hear from those people who are living off equity now, and what figures/size of portfolio/LVRs they have used to achieve it?

 

[Dazz]

Not me....yet !

 

[Ausprop]

the trouble with LOE is you need inflating asset values. If you have a 50% lvr, Steven Keen would argue that in a couple of years you wil be sitting on 100% lvr!

 

[Aaron Sice]

speak to Rixter.

 

[keithj]

I am very interested to hear from those people who are living off equity now, and what figures/size of portfolio/LVRs they have used to achieve it?

No real figures... just ratios etc

Positive cashflow covers about 60% of living expenses this year, I forecast that it'll increase enough to cover 100% within 5 years. This is assuming 6%pa increase in living expenses, CPI@3% & portfolio growth at 90% of long term averages.

LOC/margin loan/cash buffer of around 10 yrs.

IP LVR is 80% ish
Overall LVR is 50% ish

Portfolio growth approx 300% of living expenses this year.. more in subsequent years.

One v. important thing that will make LOE redundant for me is that I'm expecting the portfolio income to increase faster than either rents or CPI or my living expenses. Generally speaking share income increases with the share price (or rather vice versa). OTOH, long term rents increase at a slower rate than capital growth.

 

[troyhunt]

OTOH, long term rents increase at a slower rate than capital growth.

I know this is a popular belief and I always find it interesting as the consequence is that yields (based on market value of the asset), will continue to decrease into virtual obscurity.

Personally I'm not convinced on this but would love to hear feedback.

 

[alexlee]

I know this is a popular belief and I always find it interesting as the consequence is that yields (based on market value of the asset), will continue to decrease into virtual obscurity.

Personally I'm not convinced on this but would love to hear feedback.

I agree. I think rents do rise slower than prices. What I see happening is that an old house, say, has a lower and lower yield until it's basically unhabitable. Then it's redeveloped and the yield 'resets'.

You see this in a lot of older suburbs. Lots of old weatherboard houses that are relatively expensive for the rent, because a lot of the value is in the land itself and the house is basically worthless. The value is in demolishing the house and building a new house or units or whatever.

Note that rents rising slower than value assumes nothing is done to the house. If you do a reno, for example, then it also 'resets' the yield.

Also, if a suburb becomes more and more dominated by owner occupiers, yields gradually fall. Owner occupiers don't look at yield.
Alex

 

[handyandy]

If I had to than I could LOE but for the last 3 years we have been living of rental income and generating additional income from utilizing our equity. This extra income is intended for further investments.

My fall back position is living of rental income. This may be necessary if the managed fund returns deteriorate below an acceptable level.

We are presently busy renovating about 10 more units which I expect to finish this year. Once these are out of the way then we will have oodles of time on our hands. As a result next year may be the year we start another business and to this end I am toying with a number of concepts.

Just reading through the post the thing that stands out is the level of 'income' that you will require or regard as acceptable income.

Personally for us (Myself, wife and 2 sons) its about $75k per person so that we stay within the 30% tax rate. It actually ends up being more income, as we receive various imputation credits from both our own company dividends and also public company dividends. Additional income stays within our structure and gets reinvested thus we pay no more that 30% tax.

Cheers

PS the income I mention is net income in that we pay no expenses apart from normal day to day expenses from these funds ie food, electricity but not any mortgages phones cats vehicle expenses etc (just imagine any possible business expense and that's what it is)

 

[Land]

Hi handyandy,

Are you saying that you need 75K per person - so $300K per year?

Wow, the wife and I get by on basically $50K per year, including our own rent, and the shortfall on IP no. 1. We used to save the remainder of our income, but now it's getting pumped into this dual occupancy development we are doing.

Do you mind me asking where the units are that you are renovating? I notice that you're from the Shire, I grew up in Mortdale and spent a lot of time hanging around on the Port Hacking so I know the area well.

Cheers

 

[landlubber]

By definition if you pay any tax you're not LOE. LOE means just that. Expenses ( ..from the IP flock) exceed income ..( in our case by LOT's )...so tax returns each year show a loss for all our entities ....unless you sell an IP and have to account for the CG. If they ever get near to "break even" we go and buy more IPs.) For LOE to work the portfolio MUST increase in value each year (on average) by more than the losses ...otherwise you're slowly going down the s-bend with the blue-loo mate. But you DO have to bestructured so you can carry for a few years with no increases. Right now, that's about 10 years for our numbers. If LOE is your "plan" then you'd best focus on growth oriented IPs. We're capital cities ONLY.

For some reason forumites who are quite intent on GROWING their flock with capital growth, balk at the idea of LOE in "retirement".....Like the CG game is going to somehow "stop" when you give up the salary. I can't quite follow this logic, but it's their problem, not mine. Personally, having seen much of the world in my salary days, I have immense faith in Oz and hence Oz real estate for lot's and lot's of reasons. If you have definite questions PM me.
It's a fine day, gotta roof to paint.
LL

 

[Belu]

I think he means $150k a year

That is my aim, in today's money to have $150k p.a

long time away though - im only 22

 

[handyandy]

Just to clarify

Land - No I am not saying that we need the full $75k per person, its just the income we declare. Its all just a matter of where the money is accounted, up to this level we can personally account for it and stay under the 30% beyond that the structure accounts for it and we still only pay 30% company tax.

Even a potion of the personal money still stays within the structure but under our personal loan account.

Most of our units are in Cabramatta which is not a high cap growth area. We bought these for cash flow. After reno's we are returning about 16-17% on original purchase + reno costs.

LL - Spot on 'LOE' is as per your definition. Bottom line is you are utilising equity with the LOE simply taking money out of a loan account and personally using it. We take the same equity and reinvest in income producing assets rather than growth assets then take the income declared and reinvest where ever. It works for me as your system works for you

As I mentioned is see my position as levels of fall back. My worst case scenario would be that I use LOC funds for personal expenses. Its my worse case scenario only because it has never been my intention ( but its there)

Cheers

 

[Land]

Thanks LL!

Thanks LL!! I am completely comfortable with LOE as well (as you define it). Most resi property investors recognise that the reason we are in the game is for the CG, so once we've alll achieved our desired CG, why would it all of a sudden stop? If people think this might happen, why would they bother investing in CG assets (as opposed to postive cashflow) in the first place?

Obviously one needs to be prudent with the buffers they have in place etc, but provided buffers are factored in, the theory is identical to that we all prescribe to with regards to accumulating our wealth in the meantime.

You said that you have a 10 year buffer - do you mind me asking what LVR you would be at at the end of the 10 years (assuming no CG in the meantime)?

Handyandy - that's a pretty impressive yeild!! Is this something that could be repeated or did you manage to buy really well?

 

[Cartoon]

nice area to buy in for yeild,
Most ppl dont even bother looking at places like cabra or mt druitt ect ect, but if u ask me there is a very very low amount of un-rented places and good rent return.
i bought in mt druitt for these exact things, got it cheap and im renovating now.

I hope to do what your doing but have a long way to go, only 1 place and im still 25 so plenty of time. As long as i dont buy cars

Good luck with it

 

[handyandy]

Bought all the Cabramatta units at market price. Started buying in '98 with the last purchase in '01 (I think) with the average price at $75k.

Current values are at about $180k, depending on who you ask.

As per Cartoon have never had a problem getting tenants.

Cheers

 

[landlubber]

I wouldn't have thought LOE to the exclusion of taxable income is the goal. The goal is to have enough passive income to live the life you want, right?

Hi Alex...This may qualify as semantics ... but to me LOE ( by definition Living Off Equity) means living soley and purely off the capital growth of your assets. In essence, living off LOC ONLY.

If you pay income tax AT ALL then your'e not LOE. IF the taxable income is large enough, you're living off "taxable income". If you have a "mix" then you're (maybe) living off "LOE plus taxable income"....but you're not "pure" LOE. If you live off the profits of IP sales, then you're living off realised capital gains ( once again taxable, depending on the creativity of you and your accountant)...but once again , you're not LOE. LOE is no -tax land.

If you're a serious residential property investor, and you follow the "Jan plan", and you keep growing ... re-valuing regularly, releasing the equity to use for more deposits for more purchases ...you NEVER stop being negatively cash -flowed. (If you stopped buying , in time, you may become positive cash-flow as rents increase .. and then you'd have pay income tax ... but where's the fun in that ? ) While cash flow is overall negative , the acquired equity gets very high. If you're concentrating on growth IPs, the yield is too low. I'm sure this is no news to forumites!

LL

 

[landlubber]

- do you mind me asking what LVR you would be at at the end of the 10 years (assuming no CG in the meantime)?

Hi Land, no problem, our "10 year" buffer is made up of (1) unused LOC's that we have in place already with our lenders plus (2) (I think) 6 IPs (small renovated houses) that we own outright. Just as HandyAndy has his fall-back position, the latter is ours... a few IPs free&clear that we can just dump quickly if we need to without having to deal with any banking hassles. If we had no CGs AT ALL in 10 years (.. bummer) our overall LVR would then be about 70%. The 10 years is a bit "rubbery" as it depends on what IRs do and also what rents do...( and how many cars I "need" !) Also in less than 10 years I can then access my super assets tax free if need be ( under present legislation !!) so it all gets pretty conservative....well I think so!!
LL

 

[grossreal]

hi landlubber
If you're a serious residential property investor, and you follow the "Jan plan", and you keep growing ... re-valuing regularly, releasing the equity to use for more deposits for more purchases ...you NEVER stop being negatively cash -flowed. (If you stopped buying , in time, you may become positive cash-flow as rents increase .. and then you'd have pay income tax ... but where's the fun in that ? ) While cash flow is overall negative , the acquired equity gets very high. If you're concentrating on growth IPs, the yield is too low. I'm sure this is no news to forumites!
I have not read the jan plan and maybe thats just me.
but the idea is to keep the structure growing and then when you retire that growth is what you live on from the yeild
and using the yield or return to reinvest and if you do it when retired and there is no tax on income in a super fund again thats the idea.
I am not one for loe more living on investments from equity.
a bit different but a better way to go

 

[Rixter]

(If you stopped buying , in time, you may become positive cash-flow as rents increase .. and then you'd have pay income tax ... but where's the fun in that ? )

In this situation I plan to purchase another property to write that income tax off.

As you can all imagine Im going to be pretty cut up having to purchase again and increase my net worth further in order to reduce our taxable income back to 0% again.

So I suppose you're right, where's the fun in that?!!