Living off Equity

[DonG]

Hi Everyone,

I've done some reading about Living off Equity (LOE) and Capitalising Interest. From the reading, these strategies seem sound (and very clever). However, I find that actual experience tends to present us with challenges that we don't factor in at the start of our endeavours.

Is there anyone on this forum who actually use these strategies and would like to share their experiences? Have any problems ever arisen and how were they managed? Your responses would be greatly appreciated.

 

[travelbug]

There are LOADS of discussions on this topic.
Search or someone may be kind enough to do it for you and post links here.

A few people I know who advocated this approach have changed their goals due to the economic climate.

But a lot of people love it.

It only works while there is capital growth and the banks will keep giving you the money.

Things change so I'm keeping my options open. Just trying to get a portfolio built up first.

 

[Rob Williams]

I'm opting for a hybrid strategy.
Other sources of investment income to pay living expenses.
LOE to cover the big ticket items (holiday, car etc) as credit availability permits. When the money taps are flowing, I'll take what I can get and park it in an offset account.
I've given myself another year before I hit the button ...

 

[Xenia]

That is the strategy that we used while we built up our businesses.

If we had worked for a salary we would not have had the time required, each business was a year in preparation before launching which means planning, research business and marketing plans, licenses etc...

Businesses sometimes need to be capitalised at the begining (depending on type) and no income, shareholding can be drawn from them so they were funded and we were funded through property equity.

It is not a strategy I would advocate or advice in any way but something that we needed to use at the time out of necessity. It worked for us at that particular time of the market.

 

[soyabean]

I am sort of starting LOE by getting into purchasing income producing businesses, funded by the IP equity (in the form of a line of credit).
I find the banks won't just keep giving you more loans if you do not have the income to service them no matter how low your LVR is.

 

[Rixter]

I find the banks won't just keep giving you more loans if you do not have the income to service them no matter how low your LVR is.

Try aCashbond Structure for providing banks proof of dsr.

Hope this helps.

 

[RumpledElf]

If you have equity and can't service a LOC its useless.

I'm in the situation of having a house I could rent out for about 30% yield on what I paid for it, but the place has quadrupled in value since then. But because I can't borrow any more, and because renting it out really doesn't help (that yield sounds high but is almost completely eaten up by insurance, rates and maintainence), the only way I can get the equity is to sell the place and lose a small fortune in selling fees. Particularly irritating because I only need a small amount of that equity.

 

[Rixter]

If you have equity and can't service a LOC its useless.

Its not that LOE is useless its just that You've put yourself into a catch 22.

Its a common situation for the unwary investor.

 

[Rob Williams]

Its a common situation for the unwary investor.

But being an unwary investor is less likely thanks to the way you share information and resources. Thanks!!

 

[firstmillion]

But being an unwary investor is less likely thanks to the way you share information and resources. Thanks!!

And you too

Thanks heaps

 

[RumpledElf]

Its not that LOE is useless its just that You've put yourself into a catch 22.

Its a common situation for the unwary investor.

Not really common, the house is in an area we can't borrow more than 60% against it and my income is just too low, I don't think many investors would touch a property in a town with < 200 people and > 30% unemployment, wary or unwary. I didn't buy the house as an investment. It has saved me tens of thousands in rent in the period I owned it though, so it has certainly served its purpose, but I have to sell it to move on.

Unless you want to give me $10,000 for my subdivision

 

[markp]

LOE is just a capital raising exercise once you get past buying property for income.

I have a property that I do not rent and do not borrow against. Some say it's dead money but it has grown in value by some 34% compounded per year. It's current value is 25% of my net worth and that frees me up to borrow up to 100% on the balance of my net worth. I love my locked in equity. Give me dead money any time.

 

[HiEquity]

I have a property that I do not rent and do not borrow against. Some say it's dead money but it has grown in value by some 34% compounded per year. It's current value is 25% of my net worth and that frees me up to borrow up to 100% on the balance of my net worth. I love my locked in equity. Give me dead money any time.

Why not have both the income and the capital growth / equity - dead and live money at the same time? You (usually) have to have an awful lot of capital growth to outweigh the loss of income and there are only so many properties you can buy like this anyway?

 

[josko]

But being an unwary investor is less likely thanks to the way you share information and resources. Thanks!!

And boy do I wish I knew this forum existed when I was building my little empire!

It nearly fell right down all around me!

I lived off equity and Capital Growth.

Be very, VERY careful when you find yourself with multiple properties, no CG and high interest rates.

You are correct in your assumption on real life experiences.

Regards JO

 

[sash]

Jo

You are absolutely correct....the days of LOE are gone in my view.

From where I sit....cashflow is the best way to do it. That means the income after all expenses and interest needs to be positive!

JO, by the way I found a gem in Scarborough....you have one there don't you?

And boy do I wish I knew this forum existed when I was building my little empire!

It nearly fell right down all around me!

I lived off equity and Capital Growth.

Be very, VERY careful when you find yourself with multiple properties, no CG and high interest rates.

You are correct in your assumption on real life experiences.

Regards JO

 

[josko]

Jo

You are absolutely correct....the days of LOE are gone in my view.

From where I sit....cashflow is the best way to do it. That means the income after all expenses and interest needs to be positive!

JO, by the way I found a gem in Scarborough....you have one there don't you?

Fantastic, Sash! So you have settled on your other one? Margate was it?

Yes, I'm in Rock Street.

Sorry to hijack the thread, DonG- you'd better PM me, Sash!

Regards JO

 

[markp]

Why not have both the income and the capital growth / equity - dead and live money at the same time? You (usually) have to have an awful lot of capital growth to outweigh the loss of income and there are only so many properties you can buy like this anyway?

I choose not to take income on this IP for various reasons. I agree this is not the norm but the locked in equity keeps me safe. Its like having a safe deposit box with a stack of cash in it only it keeps on growing and gives me a SANF. In the meantime my other properties can be mortgaged to the hilt providing all the growth and income I need. And that suits me just fine for now.

 

[THEHEATH]

Try aCashbond Structure for providing banks proof of dsr.

Hope this helps.

I've always wondered....doesn't the bank see/recognise that the money is coming from a source other than a job and reject it? I mean surely they can tell it's not "real" income (presuming the funds are borrowed)???

 

[Rixter]

I've always wondered....doesn't the bank see/recognise that the money is coming from a source other than a job and reject it? I mean surely they can tell it's not "real" income (presuming the funds are borrowed)???

The bank employees get paid to fit round pegs into round holes. As long as the peg fits it gets a tick as being acceptable income.

Let me explain it to you another way........

When you purchase a property a lender requires you to bring a portion of your own capital commonly known as a deposit (ie 20%) to the table so you in turn can borrow the remainder of funds (ie 80%) required from them to complete the purchase transaction.

Now that 20% deposit that you bring to the table can from come cash savings or it can come from borrowed funds. For the purpose of this exercise you are borrowing it from 'Bank A'. The remaining 80% of borrowed funds is coming from 'Bank B'.

Now let looks at it more closely - both 'Bank A' and 'Bank B' have 2 completely different perspectives of the transaction taking place.

'Bank A' views the borrowings you used for the deposit exactly for what it is - that being 'Debt'.

How ever 'Bank B' does not share the same view. 'Bank B' views it as 'Capital'.

But how can it be?? It's exactly the same funds!

My point is that 'Debt' & 'Capital' are two sides of the same coin.

Now getting back to your original question of 'real income' in relation to CB's. As long as your bank 'views' the annuity as a round peg to fit into their hole (DSR lending module), thats all that matters to them, so gets a tick of approval.

All a CB does is flip the coin over from 'Debt' to 'Capital' side up because the 'Capital' side of the coin is what they (the bank) is looking for.

I hope this helps.

 

[Token Funder]

The bank employees get paid to fit round pegs into round holes. As long as the peg fits it gets a tick as being acceptable income.

Let me explain it to you another way........

When you purchase a property a lender requires you to bring a portion of your own capital commonly known as a deposit (ie 20%) to the table so you in turn can borrow the remainder of funds (ie 80%) required from them to complete the purchase transaction.

Now that 20% deposit that you bring to the table can from come cash savings or it can come from borrowed funds. For the purpose of this exercise you are borrowing it from 'Bank A'. The remaining 80% of borrowed funds is coming from 'Bank B'.

Now let looks at it more closely - both 'Bank A' and 'Bank B' have 2 completely different perspectives of the transaction taking place.

'Bank A' views the borrowings you used for the deposit exactly for what it is - that being 'Debt'.

How ever 'Bank B' does not share the same view. 'Bank B' views it as 'Capital'.

But how can it be?? It's exactly the same funds!

My point is that 'Debt' & 'Capital' are two sides of the same coin.

Now getting back to your original question of 'real income' in relation to CB's. As long as your bank 'views' the annuity as a round peg to fit into their hole (DSR lending module), thats all that matters to them, so gets a tick of approval.

All a CB does is flip the coin over from 'Debt' to 'Capital' side up because the 'Capital' side of the coin is what they (the bank) is looking for.

I hope this helps.

Bank B views the 20% as borrowings that are another bank's problem if the deal goes pear-shaped. They will also assess your ability to pay inclusive of the 20% debt.

It's seen as borrowed capital

Equally, annuity income from cash bonds is viewed for what it is ...short to medium term income funded from debt (which is included in the serviceability calcs). My personal view is that, like most LOE thinking, the certainty with cash bonds are promoted as a solution to servicing "issues" is both unfounded and unwise.

Paying debt with debt is dumb.