LOE: Starting with $560k.

[MTR]

Is there any way you can take an extended break from work but still be able to go back?
We packed everything in a few years ago to LOE and trade shares. It was AWESOME for the first year and then quite a few things went to custard. We had walked away from a very profitable business and were then stuck. Our portfolio of properties had dropped by about 20% so we had no servicability and and no equity for a refi/LOC. We are actually living the disaster that can happen when you jump too early
We are only now (3 years in) starting to make a comeback but our properties are still way below their last bank vals when things were good.
I am not trying to scare you and you may not make the mistakes we made BUT the reason we jumped when we did was sheer exhaustion from the business clouded our judgement. If there had been a way to take 6 months off maybe we would have done things differently.
Good luck with whatever you decide.

Thanks for sharing.
Read an interesting post by landlubber recently regarding LOE and I think he has been doing this for 5 years now.

What I learnt from his post and your post is the LOE strategy is flawed, as one is relying on properties continuing to rise, ability to access equity, bank policies not changing etc. If the market goes into free fall you could suddenly find yourself bleeding badly, compounding debt is sure easy way to go broke.

I also know someone who LOE for about 4 years, due to property declining over this period and playing in the same market they have had to sell their family home to pay back banks and now they are both back to work and starting all over again.

What I also find interesting is the property gurus who promote LOE are actually not doing this themselves and probably never will, they are LOB (Living of their Business).

MTR

 

[china]

T.

I also know someone who LOE for about 4 years, due to property declining over this period and playing in the same market they have had to sell their family home to pay back banks and now they are both back to work and starting all over again.

This must be quite difficult financially, physically and psychologically. After an extended period of time away from compulsory work to be forced back into a work routine is terrible. I think once you make the break from work, you hope never to return unless by personal volition. I have met many people who were ready for retirement and then GFC dashed their plans. I think falling or stagnant property prices would have the same effect on people who rely living off LOE.

 

[MTR]

I think the generally accepted amount, depending on age, you need to retire/achieve financial independence is PPOR plus 1 mil of income producing assets. I think this is regardless of how you choose to structure this, LOE, dividends, LICS, ETFs, etc. This allows a frugal lifestyle so I think that the OP is still at least 500k away. Personally, I don't think 40k per year would suffice in Sydney, with a personal preference for living on the north shore.

40K would not cut it in Perth either, whenever I visit Sydney I have found it cheaper than Perth, ie food, clothing, entertainment.

 

[Truly Exotic]

What I also find interesting is the property gurus who promote LOE are actually not doing this themselves and probably never will, they are LOB (Living of their Business).

MTR

or LOS (Living off other's Stupidty)
or LOG (Living off other's Guillability)

 

[Sheryn]

I am really over work at the moment and would love nothing better than take a year off in 2014 (as a minimum), do some travelling, and then reassess what I want to do with my time .

Anyways, would appreciate any thoughts on whether this stategy seems feasible and if there are any alternative strategies that would allow me to not have to work ASAP.

I think your LOE will come back to bite you big in time..

Need more details please...

What are the IPs (houses units shops) individual rental income and their loans and their individual leverage?
What would your house rent out for a week?
Would you sell your house if the rental income is a poor amount?

You are over work maybe you need to a) reduce hours, b) change jobs and c) work out a slightly different plan.

 

[Rolf Latham]

This must be quite difficult financially, physically and psychologically. After an extended period of time away from compulsory work to be forced back into a work routine is terrible. I think once you make the break from work, you hope never to return unless by personal volition.

I feel part of the solution here is, find something that you actually like to do, that does more than just provide a paycheque

ta
rolf

 

[Rixter]

I feel part of the solution here is, find something that you actually like to do, that does more than just provide a paycheque

ta
rolf

Gigolo possibly? Seriously though, Rolf's on the money (pardon the pun). Find your passion.

 

[D Money]

Exactly, triple it and add 10. If it was possilbe to retire on half a million odd dollars everyone would be doing it.

Hi ok180,

I guess it depends what cost of living your asking the half million dollars to support, ie its definitely not going to support a Hollywood superstar but it might support someone who needs just a bit of extra cash on the side.

Note I have more equity than $500k but I am using this up in the first phase which would last 9 years if me and the missus generated absolutely no income, 12 years if we worked part time and generated $20k per year (easily achievable) and obviously infinite number of years if we generated our living expenses of $40k through more hours of working through the year

cheers

 

[D Money]

What's more stressful/straining in the long run:

a, Work part time for 10 years while your move forward with a CF strategy
b, Go to bed each night wondering whether you will have any more equity to dig you out of the debt hole when your cash runs out.

Property is a great wealth creation device, however the retirement funding does become unhinged when you are reliant on continued strong market conditions for sustain living costs.

Consider if you took up this strategy and entered the current market with falling prices and or price stagnation.

IB margin 4.46%, buy well into Index Funds and or LICs. Keep your yields above interest. Post tax, highly liquid, comes twice a year (that's more frequent than Santa!). SANF by the wheelbarrow load in comparison to the aforementioned LOE scenario....

Hi CJay,

could you show me a mathematical example of how I could borrow $560k at say 7% interest and then generate $40k pa to support my lifestyle via the Index Funds / LICs etc?

thanks

 

[D Money]

Is there any way you can take an extended break from work but still be able to go back?
We packed everything in a few years ago to LOE and trade shares. It was AWESOME for the first year and then quite a few things went to custard. We had walked away from a very profitable business and were then stuck. Our portfolio of properties had dropped by about 20% so we had no servicability and and no equity for a refi/LOC. We are actually living the disaster that can happen when you jump too early
We are only now (3 years in) starting to make a comeback but our properties are still way below their last bank vals when things were good.
I am not trying to scare you and you may not make the mistakes we made BUT the reason we jumped when we did was sheer exhaustion from the business clouded our judgement. If there had been a way to take 6 months off maybe we would have done things differently.
Good luck with whatever you decide.

Sorry to hear about your experience, were you properties all in Queensland?
My properties in queensland declined /stagnated recently but others located elsewhere in other states have appreciated. I guess its good to diversify in different areas.

regarding taking an extended break, I think it would be very hard to come back after quitting. Besides we only live once!! and I really dont want to be spending 50+hours per week at a "job" if there is another way.

thanks

 

[D Money]

ok, but don't try this at home.

based on the ops situation, roughly
Current Assets: $2.31M (incl PPOR)
Current Liabilities: $1.298M
LVR: 56%
Income required to cover annual expenses: $40k
I assume living expenses really $30k because of the $10k negative cashflow with property - correct!

Apply for a LOC for as large as possible while you still qualify. Lets assume it is $300,000. - could do $560k

Based on 4% yield these properties should be bringing in around $92,000 pa. $84k because ($700k of my $2.31M assets is PPOR, $1.6M are IPs so 5.3% gross yield)

Based on 6% interest rate the interest would be $78,000 so I assume the op's figures don't include renting out his PPOR which he could do if travelling long term. - correct!

But there would also be costs such as rates, insurances etc. These may be around 25% of rents all up. So about $24,000. Close $22k! So there would still be a negative cashflow in the first year. About $8k or so. about $10k

So how he could proceed is to get the rents paid into a 100% offset account and live on this. He would pay for all expenses with the LOC, ie borrow. The interest would be deductible as it is an investment expense. He could also borrow from the LOC to pay some of the interest on the other loans. Ok but how is this advantageous because LOE is also tax free?.

This way instead of living off the LOC and not being able to claim the interest he is living off the rent and borrowing to pay the expenses. Since he is not doing this to pay off his home loan sooner he would have a strong argument if that it is not a scheme and the ATO, if they came looking, would probably not deny the deduction (depending on many things).

One problem is that if travelling then he won't have an income so no tax will actually be saved. But he may be able to carry forward any losses which could be used in future years and the LOC would be increasing so future deductions would be larger.

He may only need to draw a relatively small amount anyway and a small increase in rents will greatly assist. eg. 5% increase would be about $5k per year.

Im a little bit lost....

 

[D Money]

And, the main thing is to to able to get away from his job. Using MMM principals he wouldn't be laying on the lounge but would probably develop some sort of hobby which may end up making more money than he did at his last job.

The op would also have super available at some time in the future which could help pay down the loans so he has more rent to live on or which would give him more income to live on.

Hi Terry,

I definitely wont be sitting on the lounge all 9 years!, would plan to generate some income somewhere (If not I could ask the wife to go back to work and support us while I stay at home )

Yes super should kick in about 28 years to pay off some loans and then maybe live off rent.

Note I havent factored in any rental increases on my spreadsheet calcs they are just a bonus.

cheers

 

[D Money]

Please don't take this as criticism, but my numbers are better than yours and there is now way I would go down that path right now. And I really, really would love to quit the day job

Thought about it few years back, GFC sorted out those fantasies.

You are either brave or dumb, in time maybe neither good luck!

Ps with shares, investing may get you 6%, but you can do much better than buy and hold.

Yes I am probably a mixture of brave and dumb but these attributes are currently outweighing my dislike of a J.O.B.

Would be good to as a minimum take a year off and see what happens.

Can you show me an example of a strategy of how I could do better with shares, ie sustainably support $40k of living costs?

thanks

 

[Peter_Tersteeg]

Note I have more equity than $500k but I am using this up in the first phase which would last 9 years if me and the missus generated absolutely no income, 12 years if we worked part time and generated $20k per year (easily achievable) and obviously infinite number of years if we generated our living expenses of $40k through more hours of working through the year

All the equity in the the world is unlikely to help you if you want to borrow against it, but don't have an income to demonstrate that you can afford the loan. There was a time where it could be made to work, even a few loan products that accommodated it - anyone remember Bill Zheng's 'property investor' loan? That one turned into a train wreck.

As previously stated, you can't get a lo doc loan. (1) You're not actually self employed. (2) You still need evidence of income with a lo doc loan. (3) Very few lo doc lenders will give you access to cash unless you're willing to pay 2-3% more than you normally would.

In order to capitalist interest, you need to qualify for a loan first. That's not a borrowing strategy.

In isolation, a cashbond won't help. A cashbond might optimistically return 4-5%. If you borrow money at 5.5% you're not demonstrating affordability, you're still in deficit.

I've seen quite a few people try to retire on a LOE strategy. Those who implement it purely on the equity they've got at some point in time eventually run out of equity and find themselves in a situation where they can't borrow more. At this point they start selling assets and often end up worse off then when they started.

Those that implement it successfully generally have other investments and income streams complementing the strategy. The property sprukers who promote the strategy don't start with $500k, they have millions in equity. They also have businesses behind them for cashflow to pay for the money they're lending. Others who do it are buying and selling over time to generate an income.

A very simple strategy to live of your wealth in property is as already suggested. Build up $1.5-$2.0M in equity in your portfolio. Over a couple of years, sell properties to reduce or eliminate the debt. Either live of the rent, or move the cash realized into a fully franked share portfolio. Very straight forward, safe and sustainable.

In the meantime, if you don't like what you do for a living, review your options. Perhaps start a business or shift towards something you enjoy. I've discovered that one of the best investments possible is to be your own boss (if you can make it work).

 

[D Money]

Hi Sheryn

Need more details please...

What are the IPs (houses units shops) individual rental income and their loans and their individual leverage?

• IP1 Worth $300k, Loan $295k, Rent $300pw, LVR 98%!, IR 5.99%
• IP2 Worth $370k, Loan $288, Rent $390pw, LVR 78%, IR 5.99%
• IP 3 Worth $360k, Loan $319k, Rent $370pw, LVR 89%, IR 5.09%
• IP 4 Worth $360k, Loan $235k, Rent $375pw, LVR 65%, IR 4.99%
• IP 5 Worth $200k Loan $160k, Rent $175pw, LVR80%, IR 4.99%
• PPOR Worth $700k, Loan $0 by 2014, $0 rent,

Wow I am really airing my financial underwear out for all to see!!

What would your house rent out for a week? $700pw furnished

Would you sell your house if the rental income is a poor amount?
possibly but then would either have to rent or buy another house. Really love where we live its close to the beach and I could see myself spending a lot of time at the beach if not working!!



You are over work maybe you need to a) reduce hours, b) change jobs and c) work out a slightly different plan.
Would definitely take at least a year off, do some travelling whilst renting house out and then see what happens......

cheers

 

[D Money]

Hi Virgo, thanks for the suggestions:

Hiya

How about:

1) downsize from your 700K PPOR...to a 300 one (plenty of those in Western Sydney ...ok i will not suggest Wilmot but hey there's always Penrith?; if you say u are intending to finish paying it off next year, this would leave you with 400K which you can stuff it into high interest rate deposits...

Yep have thought about this but $400k doesnt generate $40k in earnings, plus I have worked in Penrith, its pretty far from the beach.... and not a whole lot to do there. Suppose its close to the mountains and its got a river.

or

2) create a granny flat behind your PPOR or one of your IPs; if you are in Sydney the cash flow would be good; check out also what Travelbug did recently with her PPOR /grannyflat...plus you can live in that granny flat and
then rent out your PPOR


yep will look into this - how much to build a granny flat?. In sydney depending on area could probably generate $300 to $400 wk? rent. In queensland maybe $150 to $200k

or if you are up to it


3) retire to Thailand or Cambodia or Vietnam where the rents are 300 a month and you can eat for less than 10 a day and there are jobs teaching English on a part time basis...

Yep I have often sat in the office daydreaming about quitting work and doing exactly that. I dont think I could live there long term, I love Australia and think its the best country out there!

It all depends how determined you are; follow your dreams

 

[Rixter]

.

In isolation, a cashbond won't help. A cashbond might optimistically return 4-5%. If you borrow money at 5.5% you're not demonstrating affordability, you're still in deficit.

If you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 odd income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing serviceability because you have an extra $20,000 odd income in the eyes of the banks.

 

[John_]

100k invest 20k per year return sounds out of this world

 

[oc1]

100k invest 20k per year return sounds out of this world

The 20k is your capital returned each year for 5 years (= $100k) plus interest.

 

[Terry_w]

Im a little bit lost....

Ok, so if you were to rent your PPOR out you would have another $35k coming in, less the $10k loss that would give you $25k pa to live on while 'travelling'. This is positive cash flow just like income. Rents less expenses.

You could then supplement this with some rent money while using the LOC to pay for some of the expenses.

It would be better to live off rent rather than the LOC because the interest on the LOC wouldn't be deductible. Borrowing to invest is where as borrowing to live isn't. Overall effect is similar, but you may have larger deductions which pay save you tax or allow you to carry forward losses to the next year.

So if you need $30k pa to live on then you may have to borrow just $5k from the LOC in year 1. In year 2 rents would have increased so this figure may be nil.

But, I am guessing your living expenses may be higher than $30k if you wish to travel?

BTW, one of my mates has 'retired' and is living in Thailand on $12k AUD pa. He is into his 3rd year there and is only 35ish. So you may even need less than $30k pa.