Living off Equity

[battler]

What provisions would you need to put in place, to continue living off equity in the event of a stroke/ other debilitating illness?

For someone to operate this process, they would have to have perfect understanding, of LOE and be able to keep all the balls in the air.

It seems to me to be quite complicated for older or infirm people to have to deal with, compared with living off the rent, which is no more complicated than multiple ppor, which could be managed by anyone used to running a single dwelling.

 

[Rixter]

What provisions would you need to put in place, to continue living off equity in the event of a stroke/ other debilitating illness?

For someone to operate this process, they would have to have perfect understanding, of LOE and be able to keep all the balls in the air.

It seems to me to be quite complicated for older or infirm people to have to deal with, compared with living off the rent, which is no more complicated than multiple ppor, which could be managed by anyone used to running a single dwelling.

Once structured correctly, it basically runs on auto-pilot without any real input from yourself.

IMHO the whole purpose to building a portfolio is to get time back and create income to fund ones desired lifestyle.

The last thing I want is to become a slave to my portfolio - defeats my purpose for building it in the first instance.

Hope this helps.

 

[chilliaa]

These type of questions are always hard to answer.
Theoretically i much prefer to 'live' of the rent. The problem with this strategy is the effect of CGT. By disposing of some properties to pay off the debt on others you, you get hit by CGT which reduces the net $value available to pay off the remaining debt. Especially if you have a number of properties to dispose of.

 

[HiEquity]

Perhaps an Affirmation:

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

ROFLMAO!!! Nice one Rixter!

What provisions would you need to put in place, to continue living off equity in the event of a stroke/ other debilitating illness?

For someone to operate this process, they would have to have perfect understanding, of LOE and be able to keep all the balls in the air.

It seems to me to be quite complicated for older or infirm people to have to deal with, compared with living off the rent, which is no more complicated than multiple ppor, which could be managed by anyone used to running a single dwelling.

We need to start using some numbers to get anywhere near answering questions like this! How about an example...

$5m total assets - say $4m property + $0.5m blue chip shares (easier to liquidate if you need the money) + $0.5m cash buffer
50% LVR = $2.5m total debt
Let's also say for the sake of argument that the portfolio as a whole (including PPOR) is cashflow neutral just to remove that complexity from the discussion.

Enough for the average Aussie family to LOE?

I think not but I'm a conservative type? To provide an income of $100k you would need a circa 3% average growth assumption, assume the cash and share balance will see you through the lean times and assume someone will keep lending you more money on the increasing value of the portfolio. If IRs double to 10% you would need a circa 6% growth assumption to keep up (which may not be unreasonable as there will probably be rampant inflation at this point)

Anyone reckon they would do it? What numbers would be required for you to do it? More assets / less debt / wait until you can live off rent?

I wouldn't do it at $2.5m debt but would do it at $0.5m debt - there is an awfully big grey area in there though that I'm not so sure about - need to get my head around that! This is further complicated by the fact that if my LVR ever got that low I would go out and buy more IPs anyway so I could never get there!

My head hurts... I'm sure it will all get clearer after a glass of wine...

 

[Trogdor]

ROFLMAO!!! Nice one Rixter!



We need to start using some numbers to get anywhere near answering questions like this! How about an example...

$5m total assets - say $4m property + $0.5m blue chip shares (easier to liquidate if you need the money) + $0.5m cash buffer
50% LVR = $2.5m total debt
Let's also say for the sake of argument that the portfolio as a whole (including PPOR) is cashflow neutral just to remove that complexity from the discussion.

Enough for the average Aussie family to LOE?

I think not but I'm a conservative type? To provide an income of $100k you would need a circa 3% average growth assumption, assume the cash and share balance will see you through the lean times and assume someone will keep lending you more money on the increasing value of the portfolio. If IRs double to 10% you would need a circa 6% growth assumption to keep up (which may not be unreasonable as there will probably be rampant inflation at this point)

Anyone reckon they would do it? What numbers would be required for you to do it? More assets / less debt / wait until you can live off rent?

I wouldn't do it at $2.5m debt but would do it at $0.5m debt - there is an awfully big grey area in there though that I'm not so sure about - need to get my head around that! This is further complicated by the fact that if my LVR ever got that low I would go out and buy more IPs anyway so I could never get there!

My head hurts... I'm sure it will all get clearer after a glass of wine...

Why would you bother with all the risk to get 100k p.a., and risk it all coming crashing down in that scenario?

Why not just move $1.4m into commercial property and/or blue chip shares - @ 7%p.a. yield, thats 100k p.a. The most you could ever lose would be your $1.4m (and thats much much more unlikely than having the entire $5m in assets crash down!!

 

[keithj]

" 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"

I'd agree with this. Rixter is taking a risk that he can purchase cashbonds/annuities in the future. That risk has increased recently & is likely to continue to do so. Some highlighted this risk several years ago.

However, Rixter has various other strategies available if the cashbond strategy becomes to high risk or fails to work completely.

My view is that he's done well to get as far as he has... he'd never have built up significant equity without using cashbonds. We got to the top of the food chain because of our ability to adapt. IMO, now is a good time to adapt to the new investing/credit environment.

There are Different Implementations of the LOE.

 

[Rob Williams]

Exactly, Keith. About time someone said that.
There is no right or wrong strategy. Only the right stratgey for YOU at the right TIME.
We live in a dynamic world. The product we may rely on to fund our lifestyle in the future may not even exist today. Our children will most likely be doing jobs in the future that we dare not even imagine today.
Yet, many try SO hard to make things black or white, right or wrong etc.
There's no right or wrong. Only what works for YOU.
I've taken elements of Rixters strategy, Keithj's strategy and other peoples strategies and made them my own, in my own space and time. They work for me "like a bought one" and that's all that matters to me.

 

[HiEquity]

Why would you bother with all the risk to get 100k p.a., and risk it all coming crashing down in that scenario?

Why not just move $1.4m into commercial property and/or blue chip shares - @ 7%p.a. yield, thats 100k p.a. The most you could ever lose would be your $1.4m (and thats much much more unlikely than having the entire $5m in assets crash down!!

Because this would not be LOE! The question was asked surrounding LOE due to the greater exposure it allows to growth assets and hence greater upside, while also getting out of the wage slave problem. Of course it's not without its risks, whatever our perceptions of them may be.

Selling up is not a good path to wealth creation anyway IMHO.

Keith - thanks for the links - I hadn't seen those threads before... this has obviously all been discussed before. Everyone has a different risk / reward equation - my use of sample numbers was to try and "flush out" these different perceptions of risk with an example that was "on the borderline" IMO.

The same old question of "how much is enough?". Wish I knew the answer to that one! Guess I'll just keep working...

 

[keithj]

Keith - thanks for the links - I hadn't seen those threads before... this has obviously all been discussed before.

they're both 5 star threads.

A tip.

At the bottom of each forum (eg Property Investing - Other, Innovative techniques) in the Display Options there's the option to sort threads - try sorting by Thread Rating rather than the default Last Post Time. That will show the all time top rated threads (as voted by SSers) at the top. Some are fairly old, but worth a read.

 

[evand]

So you are living on equity?

I've taken elements of Rixters strategy, Keithj's strategy and other peoples strategies and made them my own, in my own space and time. They work for me "like a bought one" and that's all that matters to me.

 

[Rob Williams]

So you are living on equity?

As with much that goes on in my life, it's complicated and there's no simple answer.
I could if I wanted to, but not to the living standard I aspire to. I have pre approval to pull enough equity out of my latest reno project to keep me going for a year or more, if I wanted to go down that path right now. The longer I hold off doing that, the better off I'll be when I do decide to push the start button on my plan.
I have other income streams from other investments in addition to still having a PAYG J.O.B. My best efforts to get a redundancy package have failed miserably. So far.
By this time next year, I'll not be doing the J.O.B and relying on a hybrid strategy of other investment income for living expenses and milking equity from my portfolio to fund big ticket items like car purchases, travel etc.
I'm open to the possibility of changing that strategy between now and then as circumstances dictate.
I have a lot of flexibility built into my investment structure and can move quickly and easliy in any direction I choose. To paraphrase Sun Tzu "The able general values, above all else, manoeuvrability".
This may not answer your question directly, but it's the best I can do.

 

[evand]

Thats fine, thanks. Just that your previous post read like you were doing it now.

This may not answer your question directly, but it's the best I can do.

 

[joanmc]

We are LOE in a fashion. We have enough equity that we already have the loans on that we could live for about 7 years without drawing down again. but instaed of just using the loan as a cash supply we are using it in the share market and living off that income. We don't have jobs, so all our income is investment/trading income and our properties have funded it.

 

[Rob Williams]

We are LOE in a fashion. We have enough equity that we already have the loans on that we could live for about 7 years without drawing down again. but instaed of just using the loan as a cash supply we are using it in the share market and living off that income. We don't have jobs, so all our income is investment/trading income and our properties have funded it.

Nice. That's more or less where I'm heading. Just need to let time and compounding work a little more magic on the property porfolio.
I guess the mottom line is that we are all heading toward the same place, just taking different paths.

 

[Bill.L]

Hi all,

Keith,
Ahh the memories of debates over LOE. It is a shame many of Steve Navras posts were deleted.

As nobody else has mentioned it, Steve Navra has a web site......

http://www.navra.com.au/

....where you can go and discuss his form of LOE. I'm sure nobody will say I am just advertising for him, as I still hold to my opinion as in the thread Keith highlighted.
If you visit the site, look at the case study given with a calculator in hand to work out how that would have performed for "Susan" if it had been implemented 2 years ago.

Adaption as has already been mentioned is the key to surviving financially, but in retirement most people are looking at an easy hands off approach, where you can go on the around Australia trip for 18 months and not worry about what you need to do next, what rules are banks changing etc etc.
I still find it really difficult to accept the need to go past the Jan Somers approach of selling down some of the properties (say 1 per year to minimise CGT) , paying off debt and living off rent.

bye

 

[capitalEyes]

Ahh the memories of debates over LOE. It is a shame many of Steve Navras posts were deleted.

Agree, and the best thing I found about Navra was that his ideas were extensions of the concept of living within your means. Same with the strategies discussed in this thread. Rob's got it sussed. Rick's LOE path works; accumulate, sell, live off rent works; accumulate CF+ until you're simply bathing in excessive cash works. Common threads would be mindset, investing well, working time and having your spending under control. This last one's probably key and where 99% of popln falls down.

 

[joanmc]

I think a lot of people assume that LOE is a "get rich quick" type of thing. But it certainly isn't. it takes time to have the equity available build up enough to safely use. I think you can certainly cut back on retirement age (we are 40 and 45), but it also depends on what you are trying to achieve. What level of income are you after? If you want to be able to live off 200 000 per year you would obviously require much much more available equity and a larger portfolio than someone who is maybe only looking to relace 50 000 a year.

Then of course your risk tolerance comes into it too, how do you feel about debt? What is your safety net? Do you have a property available to sell if it all goes pear shaped on you?

To me investing and then LOE is a lot easier than working the 9-5 until I'm 60 but it does require a much different mindset. And as Rob has discussed in his thread mindset can make all the difference.

I also agree with capital eyes that control of yor spending is important. I know of many people who LOOK successful but really all they are good at is juggling huge consumer loans! Where as we look like a couple of dags, but we don't have to work anymore. We only bought our first new cars last year ever (with cash) but now we look at them as a total waste of money! Won't do that again, but it was nice to be able to do it.

 

[Ridin-High]

My mother does partial LOE, 700 bucks p/m

 

[BayView]

We have lived off equity in part for about the last 5 years now - to supplement the PAYE.

In other words, we have been using a LOC with a decent amount of spare funds, and our PAYE jobs, which are really only average wage each.

We use a little bit of the funds on a weekly basis, and all our tax returns and rent are re-invested to keep the LOC "healthy" as possible.

We don't capitalise the interest. Having said that, there have been occasions when we did use more equity than we could replace to keep things afloat cashflow-wise, but not by choice.

Our lack of income has not allowed us to increase the LOC funds, but we have had a low-ish LVR (50% approx) which keeps it all reasonably safe.

This is all about to change as we have used some of the equity for a business purchase last year and another one about to be finalised shortly (the Tyre and Service Centre for those who know).

This will mean our entire income will be investment income - rents and business. These are fed back into the loans immediately to reduce debts and we will be drawing a wage each from the existing LOC.

The wife will continue to do a bit of "Agency" nursing as she enjoys the work and keeping engaged in her profession. A day or maybe two per week.

 

[landlubber]

LOE works.

Haven't been here for a while. Interesting to see this being discussed again.
Just for the record it DOES work. We're full time LOE now for three years. No job (except tending the IP flock). No shares. No managed funds. No cashbonds. No seminars. No books. No commercial. Just resi IPs. We deal direct with banks (only big four), on full doc basis. No MBs. Went from "four kids and a mortgage" to LOE in ten years. You need a GOOD property cycle to do this, and you need to make hay while the sun shines. LOE strategy still works fine in stagnant markets. Low IR just makes it better/safer. We have not sold any. Many posts on this previously. Any other info you want, PM me. Please be as specific as you can. Have fun.
LL