Living off equity

[stumpie]

hey folks

i've just finished reading 1 of michael yardney's books and he is a keen proponent of the strategy of refinancing to live off the equity based on low LVRs of around 50% this is off course after one's acquisition phase to build a decent size asset base.

wondering what you folks personally think about this strategy?
have anyone of you been doing this? and what have your pitfalls been?

cheers
Jerry

 

[Terry_w]

Do a search as there are hundreds of posts on here about that.

Doesn't really work that well as without a 'job' you basically won't be able to borrow.

A variation is to borrow and then 'retire' for a while, come back into the work force and borrow some more before retiring again.

Another variation strategy is to live off rents and borrow to pay interest - if you can get a loan. This may be more tax effective. You may not have any tax to pay but still can help you carry forward losses maybe.

 

[MTR]

+1

I don't believe there is anyone on SS that has been able to achieve this, I mean 100% LOE?? that's got to tell you something and some of the gurus promoting this strategy, well they are long gone, once bank policy changed, GFC hit well they seem to have vanished as well. The notion of continually increasing/compounding debt is not an attractive option, and at the mercy of bank to secure loans and no job, good luck with that one, not for me.

I think when MY wrote the initial version on this it was the day of lo doc/no doc loans, in other words you write down/sign off on exactly WHAT YOU NEED TO EARN to secure loan, those days have long gone.

 

[Edmond Dantes]

Ask Rixter.

 

[datto]

I think the "real way to LOE" is to use the equity to reinvest into other income producing activities, be it more IPs, shares or a business or even furthering your education. Eventually your equity will get you there.

 

[MTR]

Ask Rixter.

My understanding is that Rixter plans to implement this strategy in the near future, however he is not currently LOE.

I don't know anyone on SS that is LOE only?????? Please put your hand up if this is what you are doing as I would be interested on how it is working for you.

I believe it was Landlubber who started off with this strategy LOE and I think he has some 20 properties, but he has had to tweak it because if I recall rightly it was not working as well as he had expected, sh..t happens... who could have foreseen GFC, bank policy changes etc.

In a perfect world all markets will keep rising and your as safe as houses just like pigs will fly....

 

[stumpie]

In his book MY was against my strategy of selling half the assets to pay down the remaining properties so they are unencumbered and living off the rental income streams.

MTR, me too i'm real curious if anyone out there has this strategy and its working relatively well for them.

 

[Richard Feynman]

Over the past two years I'd pulled enough equity to have covered my current living costs (including mortgage repayments) for 6 years. But it's all been/being reinvested.

I'm employed though, and also pretty tight on borrowing capacity now.

It'd all come down to how much money a bank will lend based on your LVR, expenses and total non-salaried income, right? If you're around 50% and rents are covering all your properties with change to spare, doesn't seem like that much of a stretch. Or am I ignorant?

 

[MTR]

In his book MY was against my strategy of selling half the assets to pay down the remaining properties so they are unencumbered and living off the rental income streams.

MTR, me too i'm real curious if anyone out there has this strategy and its working relatively well for them.

He is promoting LOE more sales.

But MY is not LOE ..... he has been LOB (Living off business) for years, promoting his strategy LOE and advising investors to buy in the so called 'A' Class, no risk areas, blue chip because these markets will always continue to rise. However we all know its a fallacy when markets crash blue chip is NOT bullet proof, it can also drop in value.

 

[keithj]

wondering what you folks personally think about this strategy?

The upside is - it will work for as long as your lender will allow you to do it... however, that's also the downside.

have anyone of you been doing this? and what have your pitfalls been?

It can work well for short time frames.
Anyone who plans to do it long term is taking a huge risk - your lender has control over your strategy rather than you.
It can work OK when combined with other passive income sources.
It's not really passive - action (another drawdown) needs to be taken periodically.

Generally speaking, anyone who has enough equity to consider LOE can achieve a similar result with lower risk using other strategies.

LOE can help with early retirement provided a medium term income based strategy is in place.

 

[Terry_w]

You will get bored not working or conducting some sort of business, but why not just LOE for half the year and then work the other half and have the best of both worlds.

 

[Player]

You will get bored not working or conducting some sort of business, but why not just LOE for half the year and then work the other half and have the best of both worlds.

Rixter from the forum does a variation on this. Part time work and he has his LOE strategy in place.

To undertake LOE in the current lending environment, one would need a hefty net worth with very skinny LVR's on those assets chosen to suck the equity from. Not impossible of course, although a bit beyond most average punters IMO.

 

[Peter_Tersteeg]

Honestly if you've got to ask the forums opinion on this you're probably not a good candidate for the strategy. It's very difficult to pull it off and those who do successfully implement this on a long term strategy are generally combining it with something else to actually generate the equity on an ongoing basis.

Pretty much everyone I've met who would be in a position to do this reliably is likely in a financial position where they could make a few changes and find a different and more sustainable strategy to stop working.

 

[Edmond Dantes]

From what I remember, Rixter is partially LOE. Let's wait for his contribution here.

 

[sash]

MTR

I can see the pink piggies flying also......

I have done a lot of research...unfortunately just LOE WILL NOT WORK! I like you have not found anyone who has implemented this successfully.

However, as per my previous posts if you LOE to supplement less than 20% of the your potential income along side with CF+ income it can work. But LOE on its on is not likely to work.

My understanding is that Rixter plans to implement this strategy in the near future, however he is not currently LOE.

I don't know anyone on SS that is LOE only?????? Please put your hand up if this is what you are doing as I would be interested on how it is working for you.

I believe it was Landlubber who started off with this strategy LOE and I think he has some 20 properties, but he has had to tweak it because if I recall rightly it was not working as well as he had expected, sh..t happens... who could have foreseen GFC, bank policy changes etc.

In a perfect world all markets will keep rising and your as safe as houses just like pigs will fly....

 

[stumpie]

Honestly if you've got to ask the forums opinion on this you're probably not a good candidate for the strategy. It's very difficult to pull it off and those who do successfully implement this on a long term strategy are generally combining it with something else to actually generate the equity on an ongoing basis.

i've always had the approach that i can always learn something new from someone. its not neccessarily the strategy that i'd like to use for myself but rather to learn from those who have perhaps used it and to learn from their mistakes.

 

[Peter_Tersteeg]

I'm not saying that it's not worth learning about, but those who are able to use this strategy with any level of success tend to be very experienced investors with a substantial amount of equity.

 

[Dazz]

Pretty much everyone I've met who would be in a position to do this reliably is likely in a financial position where they could make a few changes and find a different and more sustainable strategy to stop working.

Spot on Peter.

Retirement cannot be reliable if you hand control over to some lending officer from a Bank. One micro change in their lending policy and bam, there goes your entire stability and strategy.

We ain't talking about some mickey mouse little hiccup.....this is your entire life.

Even if you think you are ready for LOE at the mercy of a bank, your loved ones who need to rely utterly on the strategy will quickly pull you back into line, if the Bank officer doesn't.

LOE was a joke before the Banks tightened up their credit lines, now it's bottom of the garden type stuff with the pixies.

 

[Greg Reid]

I have clients (not many) who are doing it, they built their asset base, had the capital growth as well as super and prior to retirement over a couple of years, set up their loan facilities by refinancing and establishing facilities for long term retirement based on LOE mainly. The properties return an overall positive cash flow, not enormous but will grow over time.

If circumstances change, their strategy will be to sell their IP's over time to reduce debt, however the risk is that they are unlikely to be able to borrow again. They understand that so it was critical to put the facilities in place when they were working. Another benefit of using multiple lenders. They use a combination of LOC and offset facilities against IP loans.

As has been previously stated, GFC changed the lending environment and government regulation has changed it forever so the days of self declaring income and obtaining 105% loans are long gone. It is possible but requiring more long term planning than pre GFC.

 

[Aaron_C]

Yes time has proven over and over again that the only thing that ensures retirement is cashflow, not spending equity. LOE sounds great but cashflow is king.