So whats next?

[Jandnat]

Well I am sure I am not the only one thinking "well whats next?". We have built up our portfolio to just under 5mil in value and not far off them being positive (Lvr is at 59%). Still have some debt on our PPOR, but should have most paid off by the end of the year as we are selling a business.
My ultimate goal is to quit work to have a baby early to mid next year. Is it unrealistic to think we will ever be able to live soley off our rental income??

 

[PrimeCommercial]

Well with a portfolio like that I wouldn't presume to tell you how it is, but in my opinion we are headed for a couple of 'consecutive quarters of negative growth', notice I didn't mention the 'R' word. I'm not trying to be all D & G, quite the opposite actually, I'm excited at the possibility of all the buying opportunities that will be around for the next few years.

I dare say that its not unrealistic to live soley off your rental income but you might be able to live better the income of shares or commercial property.

 

[Rockstar]

Well I am sure I am not the only one thinking "well whats next?". We have built up our portfolio to just under 5mil in value and not far off them being positive (Lvr is at 59%). Still have some debt on our PPOR, but should have most paid off by the end of the year as we are selling a business.
My ultimate goal is to quit work to have a baby early to mid next year. Is it unrealistic to think we will ever be able to live soley off our rental income??

Hi Jandnat,

Nice question to be asking. Have been a few articles in API over the past year about the various ways of retiring on property. Dec 2007 has a good one by Michael Carman which I have in front of me. Maybe you've read them?

I guess it's a bit hard for anyone to give any suggestions without knowing the characteristics of your portfolio. ie: how many properties, location, etc?

I like the refinancing to live off equity strategy that people like Yardney, Chan and Co. advocate. You may well be close to being able to utilise this method especially with equity of around the 2mill. mark however, again, would depend on the characteristics of your properties.

Maybe a bit more info would help to give a clearer picture and extract some specific advice from forumites who have "been there done that".

I'm just "getting there doing that" - so would also be interested to hear opinions/advice from others.

Ian

 

[stumunro]

even at 5% growth you are appreciating at 250,000 a year.

LOE & Capitalising Interest

Assuming interest rates are 10%, and you have NO growth in your portfolio. If you capitalised 100k (tax free) a year you would have used

1.35M after 9 years.

This does not include any rental increases that would help with the cashflow as well.

Personally I feel you have room to go down this track, especially if you concentrated on using some of your equity to increase your assett base even further during this period. What you want to keep an eye on is your equity buffer, i.e how long will your money last, and what the likely rates that your portfolio is growing.

What are your loan structures? You could set up a personal and investment LOC against each property, so you can keep the deductibility for anything relating to property. Best to speak to a MB about this!

 

[Jandnat]

Thanks for your reply. I am worried that if I go down the track of LOE it would not be sustainable long term, (we are 23/28). Among other structures we have a NAB portfolio facitity , it is a line of credit which can be split numerous ways. Is it possible to have a split of 100k as LOE with more than one property attached.
eg our Portfolio Facilty has 4 secured properties split into 4 LOC, could i add a 5th as a LOE.??? would the interest be deductable?? I am confused!

 

[Jandnat]

BTW Most properties are in the caboolture area, but we also have 3 on the SC, 3 in Glenwood, 5 x 2 bed units outside Ayr, 4 x retail (commercial) spaces in Ayr and 2 sets of duplexes rural area outside Cairns( might sell these in next few months).

 

[stumunro]

LOE is Not deductible, which is why its important to have 2 LOC's, one for personal use and one for investment. Its very important not to mix them up!

Perhaps you will find that if you can become full time investors you will be able to put your money to even better use, even while living on equity. You might find you have alot more time to research good deals, learn to do some developing or something like that.

Perhaps you could try it for a year or two, and if you find it's not working you can then always go back to work?

There's also the ability to put some of your equity into managed income funds, even while you are LOE. This can provide some income to offset the interest repayments.

Obviously its a strategy that has a risk to it, but I think getting a grip on your portfolio numbers should allow for you to do it with control.

Remember LOE allows you to access your equity without having to sell your assetts. The fee you pay to do that is the interest. It allows you to enjoy your hard work, while still maintaining your wealth base, and if you keep the amount you draw out to a minimum, you should find your wealth still continues to grow.

P.S The only way LOE would be unsustainable, is if you drew out more then it was growing each year. Which on a 5M portfolio, even at 5% is 250k a year on average. If you give yourself a buffer of 10 years (which you easily have in equity) you will allow yourself enough time to find that average if not MORE!

 

[lizzie]

i would say - it entirely depends on what the rental income is.

say, returns on average are 5% - that gives you $250,000/yr.

then say debt outstanding is around $2.95mil - at 10% interest the repayments would be $295,000 (interest only) - so i would say "no, you can't live off the rents".

however, if average returns are 10% - $500,000 - less int payment of $295,000 - less ongoing costs (rates, land tax, pm etc) $50,000 - then that would give you an income of around $155,000 ... so why not?

i'm not a big fan of living of equity ... i like the idea of the rent paying for the bread and butter of life, and the equity for the luxury extras.

 

[s_t]

You've done extremely well for you age! Are the IP's positive or neutral cash flow?

If so I'd suggest stopping work, having the baby, whilst he just does a bit of part time work/reno whatever around the place - just enough to feed ya - and spend the rest of the time with you and bub.

In your position, you can afford to relax a bit and focus on something else (bub) for a while.

 

[Jandnat]

You've done extremely well for you age! Are the IP's positive or neutral cash flow?

If so I'd suggest stopping work, having the baby, whilst he just does a bit of part time work/reno whatever around the place - just enough to feed ya - and spend the rest of the time with you and bub.

In your position, you can afford to relax a bit and focus on something else (bub) for a while.

Yes we have worked really (really) hard, I think thats why it is so scary to think of LOE. The thought of "undoing" what we have created. I suppose we just need to learn more about it to feel comfortable.

 

[Ross]

Jandnat
I think you summed it up perfectly.........the more you learn about LOE strategies and the more people you speak to who are already doing it, the more comfortable you'll feel with putting it into practice yourselves.
Definately read Yardney and Chan recent books on this.
I attended Yardneys 4 day seminar last year and had the opportunity to meet people LOE. It made me so much more comfortable with the concept and motivated to work towards doing it myself......hopefully in the not too distant future

Ross

 

[Dazz]

Yes we have worked really (really) hard, I think thats why it is so scary to think of LOE. The thought of "undoing" what we have created. I suppose we just need to learn more about it to feel comfortable.

J,

Firstly congratulations and well done. Regardless of the work you have put into gathering the chestnuts, or your tender young age, you have the runs on the board....and that's the only thing that counts. Great stuff indeed.

You have the potential to really go through the stratosphere with a base like that. Maybe it's not time to back off just yet ?? if the one income and family committments come along, sometimes there are tactics one can employ to skirt those issues and carry on.....only if you wish to of course.

I'm grappling the same issue as yourself at the moment. It does feel a bit weird pulling back after going so hard along a track. We've found one of the things is knowing internally when "enough is enough". or everyone that limit is different. I know mine was different to the wife, but I must admit I've probably hit my limit, and other things are starting to float to the top of my priority list.....and chasing the next big real estate deal ain't up there any more.

I reckon Lizzie was pretty close to the mark, most of this LOE seems to revolve around income, how much is coming in and how much you realistically need to get by comfortably.

Getting comfortable with the concept is the hardest thing, I agree, but the bigger numbers make you feel more comfortable along the way, as the necessary growth % p.a. to stay afloat commensurately drops away.

A very nice problem to have at 28. At that age I had 3 little houses worth bugger all.

You are in a truly marvellous position. Enjoy the fruits of your hard yards.

 

[redwing]

Congratulations Jandnat

There's a few Forum members LOE and a couple progressing to that goal fwd Rixter and Dazzling come to mind, plus a few dreamers like me with LOE as an end goal

LOE always an interesting subject here..look fwd to replies from some of the knowledgeable members

 

[asdf]

Well done! You guys have managed to accumulate a decent portfolio in Qld. Whar was your strategy? Did you start when you were 12 or just caught the Qld boom at the right time in the last 5 years?

 

[Apocalypse]

BTW Most properties are in the caboolture area, but we also have 3 on the SC, 3 in Glenwood, 5 x 2 bed units outside Ayr, 4 x retail (commercial) spaces in Ayr and 2 sets of duplexes rural area outside Cairns( might sell these in next few months).

Sounds like you have done spectacularly well - I would hazard that there are few on this board positioned better than you. Purely objectively you have about 2million in equity, and the portfolio is practically looking after itself. With little or no PPOR debt is there any reason you can't live on your partners wage? I see no obvious barrier to doing as you propose without having to resort to more innovative approaches.

If you were concerned you could always capitalise interest for a while. But otherwise, if you did little else but raise rents as appropriate you could probably live off the rent in pretty short time (relatively).

 

[keithj]

Well I am sure I am not the only one thinking "well whats next?". We have built up our portfolio to just under 5mil in value and not far off them being positive (Lvr is at 59%). Still have some debt on our PPOR, but should have most paid off by the end of the year as we are selling a business.
My ultimate goal is to quit work to have a baby early to mid next year. Is it unrealistic to think we will ever be able to live soley off our rental income??

Well done. Have a read of this v. similar thread and then I'd suggest you plug your figures into the spreadsheet attached to post #6.

I've done a form of LOE for a 4-5 years now. The recent IP stagnation & ASX falls haven't really affected my strategy.

A few points -

• My view is that pure LOE (ie <$0 +ve c/f) is v. risky - eg Japan RE has been going down for 25 years now.
• I MUCH prefer sufficent +ve c/f for essentials (eg $50Kpa), and then use LOE for luxuries ONLY IF it's prudent (eg $100Kpa+). You'll pay v. little tax & have hugely reduced risk.
• Rents grow slower than prices appreciate, (4%ish as opposed to 7.2%), so you'll probably never ever go c/f +ve using solely an IP approach.
• If I was in your position, I'd consider drawing down IP equity (to 80% LVR) & investing in higher yielding assets. You pay low resi rates & invest in higher risk/reward assets, so it's a relatively good payoff. How I did it is posted elsewhere.
• Since you're so young & appear to have a hard work ethic, I v. much doubt if you'll be able to avoid making other investments/business/something else work equally successful .
• If you invest in other asset classes where the income grows faster than rents then you could get the whole portfolio c/f +ve enough to pay your outgoings (eg $150K+pa) a lot quicker. This obviously reduces the risk significantly & makes LOE redundant after a while. See this thread & spreadsheet.
• LOE needs a different mindset. Try to imagine how you'd feel after 5 years of -ve growth, LVRs approaching SANF levels, IRs high, high unemployment, conservative bank managers with small children, outdated skills & unable to find a job.
• I don't think $2M equity is quite enough for LOE, but it obviously depends on a lot of things - your level of outgoings, future growth, rental growth, portfolio c/f, asset mix, etc
• Risk management becomes a lot more important than growth when you start LOE. It's likely you took (fairly) big risks to get where you are now so quickly (or maybe just got lucky). Regardless, you need to refocus on keeping it, rather than growing it.

Well done & good luck.....