Living off Equity

[Propertunity]

Paying debt with debt is dumb.

Spoken like a true banker

It certainly can be dumb but at other times it can simply "buy you some time". At certain parts of the cycle if you can hang in for, say, another 2 years it can be a saviour.

At other times it can just dig the hole that much deeper.

 

[Token Funder]

Spoken like a true banker

It certainly can be dumb but at other times it can simply "buy you some time". At certain parts of the cycle if you can hang in for, say, another 2 years it can be a saviour.

At other times it can just dig the hole that much deeper.

Ancient banker's saying: Your First Loss Is Your Best Loss

 

[Trogdor]

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.

Exactly. And you dont need two banks - i.e. A and B!! If you have sufficient equity the one bank will (all things being equal) lend you the "deposit" and the "balance" secured against the first property. Just need 20% deposit (or whatever the minimum is), in aggregate, across the portfolios.

 

[Rixter]

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.

That goes without saying, however bank B doesn't know where bank A's funds are apportioned. But spoken like a true bank employee at one time or another by the sounds of it!

It's seen as borrowed capital[/U

Exactly.. 'borrowed capital'. Debt & Capital - two sides of the same coin!

Its seen as up front capital to be used as deposit. For the purposes of what it's being used for bank B is not interested where it comes from.

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).

Bank policy does not address wanting to know how an annuity's original capital is funded in the first instance, therefore their employees dont get paid to ask. All they are paid to do is to verify that an annuity income payment does actually exist as stated upon the clients loan application.

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.

Exactly - its your view based upon your own personal risk profile. It does not mean the structure is an ineffective way and doesn't work. Its just one of many ways available - no right or wrong way, just different ways.

At the end of the day is up to the individual investor to weigh up all options known to them and choose the one that best suits their situation based upon their own personal risk profile.

Hope this helps.

 

[Rixter]

Exactly. And you dont need two banks - i.e. A and B!! If you have sufficient equity the one bank will (all things being equal) lend you the "deposit" and the "balance" secured against the first property. Just need 20% deposit (or whatever the minimum is), in aggregate, across the portfolios.

Its called cross collateralisation - Ok in small doses but restricts future options in my experience.

 

[Kando]

Hi Rixter, my first post! I am finding your information very interesting. Hubby and I (baby boomers) are very long term business owners and investors, now semi retired. Have 7 IP's plus PPOR. IP's in 3 different states and PPOR in very leafy street in western suburbs. Net assets are considerable. (we started with nothing). We are at crossroads. First option - call it quits and retire on what we have - or find a way forward and buy more property. We are asset rich and income poor and have hit the DSR wall. I have been property mad since I was a teen and still am. My idea of fun at 16 was looking at AV Jennings display homes with my boyfriend (now husband of several decades). He was very patient then and still is - bless him. I would like to have a long talk with someone in Perth who knows property and can give good advice on different options. Went to a financial adviser once and he was a total waste of money. My MB has run out of ideas. Our accountant doesn't believe in direct property investing. Our close friends are on a different page financially. No joy there. I need to find a clever person who is in the game and knows what they are talking about. Any ideas?

 

[Rixter]

Hi Kando,

First off welcome to the Somersoft forum, this being your first post.

I would suggest you sit down and strongly think about what exactly it is that you are wanting to do - retire or move on.

To retire work out does your investments provide the passive income you need to support your lifestyle costs of living you want to enjoy. If so, then you are financially independent & self funded. If not, then you need to work on increasing your asset base to a level that supports the kind of lifestyle you desire.

Do you have answers to those questions?

In relation to Financial Advisors you have hit the nail on the head...the majority of them do not recommend property investment because there is no financial incentive or gains in it for them. The majority are merely managed share fund salespeople because thats where they derive their trailing commissions & kick backs from to put food on their tables. Most are not financially free themselves and are still working for income themselves.

I find it quite amusing that they are in the financial advising business themselves, however most still work for living...bit of an oxymoron if you ask me. How can they advise if they have not reached the destination themselves.

Hope this helps.

 

[Kando]

Hi everybody, thanks for the quick reply Rick. The total equity in the IP's is not enough to start living off yet. We need to wait a couple of years yet to let it reach a critical mass so it grows faster than we need to live off. Although substantial, three quarters of our net worth is in our PPOR. We could down size and pay off IP's and live happily ever after, but do not wish to do that (at this stage) as we love our home. I would much prefer to move forward and buy more property.

Your ideas about cash bonds sounds interesting. I have a house in the country (WA) that has been a great little money spinner in the past. (no debt on this house). Would it be a good idea to sell this down and keep some for a deposit for new IP< ; some to top up the bank account (and to fund the next holiday); and put about $150K in a cash bond (or similar) to earn me $30k per year income plus interest? This would top up our monthly income. My husband works 4 days per week and increasing his work hours is not something either of us wish. We could then borrow to buy another house in an area with better capital gain prospects?? Problem is the loss of rental income($250pw net), and sell/buy costs, and cap gain tax. Will it be 2 steps back and 2 steps forward, or 1 step back and 3 steps forward? (ie reward worth the effort) Most of the posts I have read are about borrowing the money to put into cash bonds. I have nothing left in my LOC to draw down, so cannot go down that track.

Thanks so much for your feedback Rick, I really appreciate it. We would also love to hear from any other seasoned investors that have faced and resolved similar DSR problems. It seems to be a common problem.

 

[Rixter]

I have nothing left in my LOC to draw down, so cannot go down that track.

Do you have any DSR left to increase your LOC or set up another LOC secured against your country IP which has equity in it?

Send me a PM (so as to not high jack this thread) so you are not posting your specifics on the forum.

 

[The Fence]

Oh, keep it posted here.... this is getting even more interesting...please....maybe hide numbers but keep us posted with strategy going forward....so long as kando is happy with that...?

 

[Token Funder]

Bank policy does not address wanting to know how an annuity's original capital is funded in the first instance, therefore their employees dont get paid to ask. All they are paid to do is to verify that an annuity income payment does actually exist as stated upon the clients loan application.
.

I can say with a degree of confidence that you're not quite on the mark with this one. You may also want to consider the potential impact of the new National Consumer Credit Reform Package.

 

[Trogdor]

Its called cross collateralisation - Ok in small doses but restricts future options in my experience.

Not strictly I think???

I.e. if both with Bank A:

Property 1: worth 100, debt of 60.

Take a new standalone loan out secured by only property 1 with Bank A. Proceeds 20 (80% LVR).

Borrow 80 from the same Bank A, secured only against property 2 (to be bought) using 20 form above for "deposit".

Not x-coll.

My point was only the fact that in the original posts you dont need two banks.

 

[Rixter]

I can say with a degree of confidence that you're not quite on the mark with this one.

We'll have to agree to disagree then because I've got the runs on the board from practically applying it.

 

[Rixter]

My point was only the fact that in the original posts you dont need two banks.

No probs. Sorry for the misunderstanding on your point.

I have also used the same bank to structure a CB without issue.

 

[JIT]

Rick,

I have money in a loan redraw account and on the bank loan documents it says that the funds can only be used for business/investment purposes...

Are you not finding this with your loans?

So even if you have the equity there, how can you use it to live off and pay for personal expenses?

Thanks.

 

[MTR]

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.

From my experience it has been a great way to move ahead and everything seems just so perfect when the property market is booming. However, when the market goes backwards it can hurt badly and it really comes down to how much equity you have to service all the debt and fund lifestyle, rising interest rates is also something that changes the scenario dramatically. Personally I would use this strategy, however combine with a mix, growth, buy -hold (usually negatively geared), cash flow properties (6% yield) and deals that you can onsell and make money to continue providing equity for investing and rationalise debt.
This took me some time to get this working.

At the end of the day, everyone does what suits and as Rixter stated there is no right or wrong.

Cheers, MTR

 

[Rixter]

I have money in a loan redraw account and on the bank loan documents it says that the funds can only be used for business/investment purposes...

Are you not finding this with your loans?

So even if you have the equity there, how can you use it to live off and pay for personal expenses?

Our portfolio loans are a mix of fixed rate and variable rate full doc investment property loans, variable rate no doc investment property loans, and also 4 x lines of credit loans. We live on our credit card and pay it off in full each month from our line of credit.

Hope this helps.

 

[DonG]

Send me a PM (so as to not high jack this thread) so you are not posting your specifics on the forum.

Don't feel that you are hijacking this thread - at least not in a bad way! One of the reasons I was looking at the LOE strategy is because it would give me a way around any future DSR problems. So as long as you and Kando are comfortable, please feel free to continue your discussion...

 

[Token Funder]

We'll have to agree to disagree then because I've got the runs on the board from practically applying it.

Perhaps a disclaimer:

" Previous ability to obtain certain credit terms or arrangements should not be taken as evidence of a future ability to obtain those same credit terms or arrangments"

 

[Rixter]

Perhaps a disclaimer:

" Previous ability to obtain certain credit terms or arrangements should not be taken as evidence of a future ability to obtain those same credit terms or arrangments"

Perhaps an Affirmation:

"Better to be a player than a Monday's expert"