Living on interest calculator

[DEC]

I am trying to guess if living on rent from property with associated costs gives me a better result over time than selling it all and living on interest and leaving say 20% of the interest earned to roll over and compound yearly.

Is there a spreadsheet that anyone has come across that would help with this, I have looked through the collection, but have not found anything that does a comparison.

 

[DEC]

164 views and no reply.
I guess that's a no then.

 

[streetie]

Negative...

 

[chrispy]

I live off rents from the p[ropertiesd I have kept and interest from the houses I have sold.

Your situation will be totally different to mine because :

a) The type of properties
b) The rents being received
c) The value of the properties
d) The overheads

You will need to calculate it based on your individual situation

Chris

 

[knightm]

Friends of mine sold up in 2003 and did the loi thing as they moved to spain. For them the interest at the time was 7-8% and rent on that house in sydney was only gross 4-500 pw before costs. they netted 500k so they were significantly better of (670pw approx from the bank.) but I did make sure they knew about inflation eating their capital. (they used some as they needed it - a lifestyle choice not a wealth generation decision) Now their interest rates are down and rents have risen so they are thinking about buying into real estate again.

the yeilds will differ greatly depending on the type of property and the costs are a big issue.

remember owning re is more work than cash in bank.

 

[Aaron_C]

164 views and no reply.
I guess that's a no then.

DEC if you give us the assumptions you want then I can create something bu without that it's meaningless.

 

[Dazz]

I am trying to guess if living on rent from property with associated costs gives me a better result over time than selling it all and living on interest

Hi DEC,

I think Jan Somers in her 101 stories book comprehensively answered this question in one of her stories.

An elderly couple amassed a sizeable portfolio of houses and were living off the rent. With rents and yields being typically low, and with the burden of maintenance, they decided to sell all of their houses and lived off the interest.

That was in 1970.

It wasn't long before the twin ravages of inflation and taxation whittled their income stream down to a pittance.

They rued the day they sold their portfolio of houses, with their capital value now well out of reach and the torrent of rents pouring in that they missed out on.

I read the story and thought - yep - selling their real estate to place the funds into a bank account and live off the interest sure was a dumb thing to do.

They should of bought industrial property instead.

 

[westminster]

I am trying to guess if living on rent from property with associated costs gives me a better result over time than selling it all and living on interest and leaving say 20% of the interest earned to roll over and compound yearly.

Is there a spreadsheet that anyone has come across that would help with this, I have looked through the collection, but have not found anything that does a comparison.

I don't have a spreadsheet but I think it's better to hold than to sell. Banks historically offer pretty crap interest rates.

Inflation will reduce the value of the money in the bank.

 

[DEC]

DEC if you give us the assumptions you want then I can create something bu without that it's meaningless.

Thanks
I am in the position where I could call one of my debt free ip's a ppor and sell my actual ppor debt and cgt free. I could also sell several other of my ips and I think after paying off existing loans and tax on those , and using the proceeds from the PPOR sale, I would get close to owning 6 other ip's outright which are currently generating $370/week each in rent.
That would be $2200/week in rent less fees, rates, insurance, tax and maintenance.

Or I could sell them for about $2.1m less agents fees and CGT.

In all honesty I have no idea what I would pay in tax, but I would not be working at that stage so I was guessing that sale less purchase price = $1.14m CG, 50% of which is exempt. Tax on $570k would be around $171k? agents fees say $70,000 leaving about $1.85million.
$1.85 million earning 4.5% in the bank is $1600/week before tax Vs $2200/week in rent, increasing with inflation, minus fees, maintenance and tax.

I do realise that inflation would erode the principle in the bank deposit, but I dont think I would spend all of the money generated from interest, so at least a few hundred dollars a week could be rolled over compounding.
If $200 a week was rolled over at year 5 the $1.85m could have grown to $2.36m and naturally interest will have increased accordingly.

Whether or not this beats the rent scenario or not I have no idea, I think they are both fairly close, one is a lot less effort than the other.

 

[Terry_w]

Thanks
I am in the position where I could call one of my debt free ip's a ppor and sell my actual ppor debt and cgt free. I could also sell several other of my ips and I think after paying off existing loans and tax on those , and using the proceeds from the PPOR sale, I would get close to owning 6 other ip's outright which are currently generating $370/week each in rent.
That would be $2200/week in rent less fees, rates, insurance, tax and maintenance.

Or I could sell them for about $2.1m less agents fees and CGT.

In all honesty I have no idea what I would pay in tax, but I would not be working at that stage so I was guessing that sale less purchase price = $1.14m CG, 50% of which is exempt. Tax on $570k would be around $171k? agents fees say $70,000 leaving about $1.85million.
$1.85 million earning 4.5% in the bank is $1600/week before tax Vs $2200/week in rent, increasing with inflation, minus fees, maintenance and tax.

I do realise that inflation would erode the principle in the bank deposit, but I dont think I would spend all of the money generated from interest, so at least a few hundred dollars a week could be rolled over compounding.
If $200 a week was rolled over at year 5 the $1.85m could have grown to $2.36m and naturally interest will have increased accordingly.

Whether or not this beats the rent scenario or not I have no idea, I think they are both fairly close, one is a lot less effort than the other.

dec, what is the aim.? what are you trying to acheive?

some said to me the other day that everyone that sells a property regrets it within 2 years. i think this is true,

 

[HomePage]

$1.85 million earning 4.5% in the bank is $1600/week before tax Vs $2200/week in rent, increasing with inflation, minus fees, maintenance and tax.

The bolded bit is what will put the rental property ahead of the live off interest scenario. Assuming inflation of 3%, you can only draw a maximum of 1.5% (or $533 per week) in the live off interest scenario to preserve the real value of your principle such that it can keep generating that today's dollar income. Alternatively in the rental property scenario, over time, your property values and rent should go up by at least inflation, thus preserving your ability to draw $2200 per week (minus expenses) in today's dollars.

If you are going to go the passive income route, consider shares for a much better return, albeit with much greater volatility.

 

[DEC]

Alternatively in the rental property scenario, over time, your property values and rent should go up by at least inflation, thus preserving your ability to draw $2200 per week (minus expenses) in today's dollars.

The expenses of eventual new paint, new kitchen/bathroom, new carpet etc on the rental?
Re-let fees, rates , insurance, maintenance
Did you take that into account?

If you are going to go the passive income route, consider shares for a much better return, albeit with much greater volatility.

Forget that for the bolded bit

 

[DEC]

dec, what is the aim.? what are you trying to acheive?

Debt -free retirement on a reasonable pay-packet keeping up with inflation with as little drama as possible

 

[DEC]

It wasn't long before the twin ravages of inflation and taxation whittled their income stream down to a pittance.

But there has to be a number where it can work if a % of the earnings are re-invested to work for you.

They should of bought industrial property instead.

There are plenty of for lease signs near where I live and have been for a long time now.
I would hate to be making the repayments with no tenants.
Little chance of that happening for any length of time with resi.

 

[HomePage]

The expenses of eventual new paint, new kitchen/bathroom, new carpet etc on the rental?
Re-let fees, rates , insurance, maintenance
Did you take that into account?

Even if you estimated those expenses ridiculously pessimistically at $1000 per week, you'd still be able to draw more than double the income over the live off interest scenario while preserving capital on both.

Forget that for the bolded bit

Fine, but if you want simplicity and low risk/volatility, then you can basically throw good investment performance out the window. Volatility just takes stomach, not effort.

 

[DEC]

Even if you estimated those expenses ridiculously pessimistically at $1000 per week, you'd still be able to draw more than double the income over the live off interest scenario while preserving capital on both.


.

You did look at the numbers didnt you?
Rent at $2200 - costs vs bank at $1600 with significant less costs.
and that interest was at a 4.5% interest rate which is historically low

 

[DEC]

Fine, but if you want simplicity and low risk/volatility, then you can basically throw good investment performance out the window. Volatility just takes stomach, not effort.

Tell that to these people and thousands of others like them.

http://www.news.com.au/business/com...eral-court-hears/story-fnda1bsz-1226506684131

I have no wish to start again because the gambling didn't pay off.

 

[HomePage]

You did look at the numbers didnt you?
Rent at $2200 - costs vs bank at $1600 with significant less costs.
and that interest was at a 4.5% interest rate which is historically low

Yes I did look at the interest rate. Your 4.5% is 1.5% after inflation if you want to preserve capital, as I stated in my original response. That brings your $1600 down to $533 which is less than half of the $1200 you would get from your properties even with a ludicrous $1000 for upkeep.

 

[redwing]

I am trying to guess if living on rent from property with associated costs gives me a better result over time than selling it all and living on interest and leaving say 20% of the interest earned to roll over and compound yearly.

Is there a spreadsheet that anyone has come across that would help with this, I have looked through the collection, but have not found anything that does a comparison.

Hi DEC

Just thinking about the below and associated ravages of tax and inflation, I've put it down with numbers as I'm curious for someone to QC the below and assist, if not give a better indication on the numbers

$1.85 million earning 4.5% in the bank is $1600/week before tax

$1,600.00 per week is $83,200.00 per annum before tax and inflation

4.5% interest, less tax of 24% (roughly) will leave you with 3.42% left.

Or $63,221.00

Figures, published on the 16th August 2012 by ABS showed that the average full-time adult ordinary time earnings for both private and pubic sectors is now $70,262 (December 2012 figures due February 2013)

3.42% interest rate, less a 3% inflation rate

Does this then give a net interest rate of 0.42%?

0.42% of $1,850,000.00 will give you $7,700 NET interest income to ensure your money keeps pace with inflation.

 

[HomePage]

Tell that to these people and thousands of others like them.

http://www.news.com.au/business/com...eral-court-hears/story-fnda1bsz-1226506684131

I have no wish to start again because the gambling didn't pay off.

That's the effect of putting all your eggs in one basket with one investing company not diversified investing in the share market. I had shares through the GFC and while I initially lost some capital, I'm up higher than where I was because I bought more depressed stocks while it was down and dividends were continued to be paid in the interim. That the sort of stomach I am talking about, which is not gambling.