Stategies - What is your strategy?

Wicked plan Ricter!

One question, when you draw down the equity, you cannot then claim that extra amount you have drawn from the property as a tax deduction as it has not been used for investment purposes... is that right?

So from the $250k mortgage, in 10 years when you draw $250k equity, you can still only claim $250k mortgage as an expense.

Great question Melissa, but thats not going to be a problem.

Interest on funds borrowed for income producing purposes is tax deductible.

Interest on funds borrowed for lifestyle funding is not tax deductible.

CGA is a LOE (Living on Equity) strategy and as such you do not pay income tax in the first instance to write deductions off against.

With LOE you are already funding your lifestyle and existence without any need for tax relief which is your worst case scenario from a cash flow perspective anyway.

In other words, the interest on the loans used for living isn't tax deductible, however the growth in your portfolio is far greater.

Some times we as investors can become too focussed with whats tax deductible and whats not , that we lose sight of the forest for the trees.

LOE is a complete paradijm shift in thinking away from the conventional cash flow model most poor & middle class people learn from an early age and are accustomed to all of their lives, over to a capital based model that the rich / wealthy effectively utilise.

Food for thought.

Melissa I hope this helps.
 
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Excellent explanation thanks. I figured that was the case - just wanted clarification.

So your strategy model "should" work over any ten year period?
 
Excellent explanation thanks. I figured that was the case - just wanted clarification.

So your strategy model "should" work over any ten year period?

Thats the plan Melissa, provided one has acquired good growth properties conducive to the CGA plan.

Hope this helps.
 
Thats the plan Melissa, provided one has acquired good growth properties conducive to the CGA plan.

Hope this helps.

Hi Rixter,

I've read this CGA strategy a couple of times now and I agree, it looks great. Thanks for sharing.

I have a question though, It seems to me that for this strategy to work you need to have not used the accumulated equity in each property along the way to help fund new purchases (as you need this to live off down the track). Is this correct? If so, how have you funded the deposits for each property? Just through savings? It seems to me you would have to have a high paying job to be able to save up a new deposit every year as well as presumably funding the initial negative cash flow from your previous properties.

I guess a related question is, were the properties initially cash flow negative? How long until they have started paying for themselves?

Thanks again for sharing your insights.
Cheers,
poyner
 
Hi Rixter,

I've read this CGA strategy a couple of times now and I agree, it looks great. Thanks for sharing.

I have a question though, It seems to me that for this strategy to work you need to have not used the accumulated equity in each property along the way to help fund new purchases (as you need this to live off down the track). Is this correct? If so, how have you funded the deposits for each property? Just through savings? It seems to me you would have to have a high paying job to be able to save up a new deposit every year as well as presumably funding the initial negative cash flow from your previous properties.

I guess a related question is, were the properties initially cash flow negative? How long until they have started paying for themselves?

Thanks again for sharing your insights.
Cheers,
poyner

Hi Poyner,

Initially I used 105-106% (of purchase price) OPM borrowed against existing equity. I borrowed this all in one loan x-colled secured by PPOR, then as that purchased property grew in value so that the loan had become 80% LVR I got the bank to un-x-coll. I was able to do this for the first few properties due to my purchasing criteria that exposed me to good short to mid term CG.

Later on I started funding my property deposits and purchasing costs from an Investment LOC, then financed the remaining 80% of the purchase via a new IP loan. As your portfolio grows with each subsequent purchase (providing you bought good growth properties) your compounding CG across your portfolio provides ample equity to continue purchasing.

Its like a snowball rolling down a mountain - starts off small and slow but as it grows the frequency of its growth intensifies.

I have always looked to maximise my yields initially either at purchase and/or manufactured via value adding after purchase. As such any cash flow short fall is minimised and either funded via available disposable income or capitalised in investment LOC.

My investment LOC has a 80% LVR credit limit with around 60% LVR balance which provides me ample buffer for SANF. I have never exceeded 80% LVR in my purchases and as such never incurred LMI.

As per my purchasing criteria I have found my properties becomes +ve anywhere from 3-5 years from purchase.

I hope this helps.
 
Hi Rixter,

Just a quick question. How would a change in the lending criteria affect the plan down the track? Not being a doom and gloomer but with the end of no-docs and the cut back in lo-docs we have found that this strategy is getting really tough. Our last lo-loc ended up being more like a full-doc, but when you have given up the *day job* and rents are the only income banks take into account (plus interest earned and dividends etc) how do you meet their serviceability criteria? We had to ramp up 'earnings' in the end, despite equity not being an issue. Are we doing something in this strategy wrong?

Looking for inspiration :)
 
Just a quick question. How would a change in the lending criteria affect the plan down the track? Not being a doom and gloomer but with the end of no-docs and the cut back in lo-docs we have found that this strategy is getting really tough. Our last lo-loc ended up being more like a full-doc, but when you have given up the *day job* and rents are the only income banks take into account (plus interest earned and dividends etc) how do you meet their serviceability criteria? We had to ramp up 'earnings' in the end, despite equity not being an issue. Are we doing something in this strategy wrong?
Hi Real-istic,

This was a big issue I had with LOE - what if the loan source dries up.... My solution was to use equity from IP growth to invest in listed shares. Then get a margin loan (with v. sensible, v. low gearing of course) against them. The margin loan is effectively a no-doc LOC. You mentioned you had dividend income, are the shares marginable & margined & is a risk you'd consider ?

Cheers Keith
 
Hi Poyner,

Initially I used 105-106% (of purchase price) OPM borrowed against existing equity. I borrowed this all in one loan x-colled secured by PPOR, then as that purchased property grew in value so that the loan had become 80% LVR I got the bank to un-x-coll. I was able to do this for the first few properties due to my purchasing criteria that exposed me to good short to mid term CG.

Later on I started funding my property deposits and purchasing costs from an Investment LOC, then financed the remaining 80% of the purchase via a new IP loan. As your portfolio grows with each subsequent purchase (providing you bought good growth properties) your compounding CG across your portfolio provides ample equity to continue purchasing.

Its like a snowball rolling down a mountain - starts off small and slow but as it grows the frequency of its growth intensifies.

I have always looked to maximise my yields initially either at purchase and/or manufactured via value adding after purchase. As such any cash flow short fall is minimised and either funded via available disposable income or capitalised in investment LOC.

My investment LOC has a 80% LVR credit limit with around 60% LVR balance which provides me ample buffer for SANF. I have never exceeded 80% LVR in my purchases and as such never incurred LMI.

As per my purchasing criteria I have found my properties becomes +ve anywhere from 3-5 years from purchase.

I hope this helps.

So your primary place of residence provides the funds for your investment LOC?

My investment LOC has a 80% LVR credit limit with around 60% LVR balance which provides me ample buffer for SANF

The investment LOC is the L in LVR but what is the V (the PPOR)?
 
Hi Real-istic,

This was a big issue I had with LOE - what if the loan source dries up.... My solution was to use equity from IP growth to invest in listed shares. Then get a margin loan (with v. sensible, v. low gearing of course) against them. The margin loan is effectively a no-doc LOC. You mentioned you had dividend income, are the shares marginable & margined & is a risk you'd consider ?

Cheers Keith

With the Sharemarket of late has your plan been affected in any way other than the values now being lower and Margin Loan higher?

Are dividends dropping?

Have any of your shares taken a really bad hit in price of late as there's been some big moves?

I like the idea but the volatility of the sharemarket would see us greying earlier than planned
 
Hi Keith,

I dont know what dividend yields the banks will accept but if maybe you have been lucky enough to achieve better results than we have seen, with returns of average around 1.25%, and a margin loan to service we were more concerned that this would adversely effect our serviceability calculations as the margin loans are still assessable by the banks as borrowings and the income is once again only calculated on their return. We are looking into instalment warrants to see if this is a way of avoiding the 'loan' issue (and therefore serviceability issues) however I am pretty sure that the fact the dividends cycle back into the deal they would be excluded as well.

Problem is the banks are unlikely to go "hey, this is what we allow and dissallow", you only know by trial and error (and it could all change at the drop of a hat). Some of the second tier lenders are more flexible, but you pay for that in charges and interest rates and it does tend to up your risk and profitability.

For us it is not a risk issue as much as we are possibly not so sure that shares will provide an answer to the problem... but we are ready and willing to be convinced otherwise!

Thanks
 
With the Sharemarket of late has your plan been affected in any way other than the values now being lower and Margin Loan higher?

Are dividends dropping?

Have any of your shares taken a really bad hit in price of late as there's been some big moves?

I like the idea but the volatility of the sharemarket would see us greying earlier than planned
Answered here.

.... and a margin loan to service we were more concerned that this would adversely effect our serviceability calculations as the margin loans are still assessable by the banks as borrowings and the income is once again only calculated on their return.
Oops... forgot to mention that capitalising the margin loan interest means it doesn't need servicing. I use my margin loan like a LOC, I never repay interest & dip into it whenever I need. Dividends go into it. Obviously the LVR needs careful monitoring.

So the bottom line is - I don't use residential loans ATM (due to perceived poor servicability) I use the margin loan. That may work for you as a short term solution until the banks perceive your developments to be a better risk.

Alternatively, sell your shares to get you past this short term finance issue.
 
So your primary place of residence provides the funds for your investment LOC?

The investment LOC is the L in LVR but what is the V (the PPOR)?

Hi Wasp,

Initially I borrowed against the equity in my PPOR for the first few IP's, and later using an LOC (used purely for investng) secured from those earlier purchased IPs.

As your portfolio grows with each subsequent purchase (providing you bought good growth properties) your compounding CG across your portfolio provides ample equity to continue purchasing.

LVR is the acronym for Loan to Value Ratio.

I hope this helps.
 
Hi Rixter,

Just a quick question. How would a change in the lending criteria affect the plan down the track? Not being a doom and gloomer but with the end of no-docs and the cut back in lo-docs we have found that this strategy is getting really tough. Our last lo-loc ended up being more like a full-doc, but when you have given up the *day job* and rents are the only income banks take into account (plus interest earned and dividends etc) how do you meet their serviceability criteria? We had to ramp up 'earnings' in the end, despite equity not being an issue. Are we doing something in this strategy wrong?

Looking for inspiration :)

Hi Real,

Due to the current world credit squeeze they (the banks & non bank lenders) have tightened their lending criteria however credit is still available - I have just topped up our credit limits.

I also used Cashbonds to increase serviceability for attaining further full doc lending and continue on with acquiring more property.

I hope this helps.
 
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To those of you have bought apartments in the inner city how have you done re: your capital growth?

I have also read that if you buy an apartment or unit, you should

1. Buy in a small complex, not high rise
2. Dont buy where there is likely to be future redevelopment - new units built because there will be an oversupply.

1. Strata fees are generally higher in high rises due to lifts etc.

2. It depends.
I have a unit near a massive new complex. It's on the water and the units in the complex are 3 times plus what the ones in the surrounding area are. Hence my unit is doing quite nicely thank you very much. The developers are also beautifying the area which is another bonus and adding to the infrastructure.
 
Hi Wasp,

Initially I borrowed against the equity in my PPOR for the first few IP's, and later using an LOC (used purely for investng) secured from those earlier purchased IPs.

As your portfolio grows with each subsequent purchase (providing you bought good growth properties) your compounding CG across your portfolio provides ample equity to continue purchasing.

LVR is the acronym for Loan to Value Ratio.

I hope this helps.
Thanks for your answers so far Rixter. Hopefully nobody minds Wasp and me slightly hijacking this thread.... I'm still a little confused about this bit 'and later using an LOC (used purely for investng) secured from those earlier purchased IPs.' If you're using the built up equity of the earlier purchases to help purchase the later properties then the equity will be much reduced at year 10 when you need to live off it.

I'm sure there''s something very simple I've missed, like maybe you're relying on the CGT increasing fast enough that you can continue to fund the IPs as well as fund the initial loan shortfalls whilst also leaving enough left over to live off later. This may have been possible over the last couple of years but do you think it will continue into the future?

Cheers,
 
Hi again,

Keith -Just trying to get my head around the margin loan thing again. So if as an example you have a property that went up from 400K to 500K and you were able to access 80% of the increase (80K) in this case you would take this cash an invest in shares? Then with the 80K in shares you then get a margin loan for say another 100K (lowish LVR) the you would use this as additional cashflow to assist with remaining portfolio serviceability? I thought that the margin lending loans we looked at specified the funds could only be used to purchase more shares (of a certain type and return even)? And the dividend returns would obviously not cover the margin loan interest, although as you pointed out if you dont use your limit then you can capitalise interest and leave a buffer for margin calls..just in case. So is this sustainable for LOE?

Rixter - I love the idea of further portfolio diversification and I don't really understand how you used cash bonds to help, are they a different type than the standard buy at face value now and redeem with interest later type? I am assuming it is the same as the above example except you would put the 80K into cash bonds not shares which then gives you a guaranteed return that the banks can use for serviceability (however surely the increase on the original loan to get the 80K would outweigh the cashflow benefit from the bonds?... or maybe not. I dont know enough about banks lending criteria to understand how they would calculated it... it is just that usually banks charge more interest on their loans than a cash bond would pay)

I really appreciate the feedback and your patience. This is all helping us a great deal!

Thanks
 
Keith -Just trying to get my head around the margin loan thing again. So if as an example you have a property that went up from 400K to 500K and you were able to access 80% of the increase (80K) in this case you would take this cash an invest in shares? Then with the 80K in shares you then get a margin loan for say another 100K (lowish LVR) the you would use this as additional cashflow to assist with remaining portfolio serviceability? I thought that the margin lending loans we looked at specified the funds could only be used to purchase more shares (of a certain type and return even)? And the dividend returns would obviously not cover the margin loan interest, although as you pointed out if you dont use your limit then you can capitalise interest and leave a buffer for margin calls..just in case. So is this sustainable for LOE?
Is it sustainable ? Yes, but with provisos. You need to monitor the LVR & keep sufficient buffers. It replies on capital growth & dividend income.
My margin lender allows me to withdraw cash, it doesn't care if I buy more shares or a boat or an IP provided the LVR is OK. So it's like a LOC.
One option you have is to reval your dev sites after approvals and pay out the margin loan. Borrowing against your shares may be a solution to get you past your short term finance issue.

Or read this. Of course there are significant risks, so do lots of DD.
 
Thanks Keith!

Very Very excited..... just checked the product disclosures on the macquarie product and it doesn't specify anything about what you use the margin loans for.. excellent!

Lots and Lots of reading to do now to see what all the varying loan %'s are about.

We are wayyyyy to overbalanced in the property sector so we had always planned to diversify as we got older, but it seems like the time might be now to do it. We had just started to purchase some shares and never dreamed of leveraging them.... doh! As I was discussing on another thread with another SSer, I think our developments are going to have to be put on hold for a while, or attempted piecemeal.

It would be great if our broker had an idea about margin lending and bonds but unfortunately only standard residential and some commercial stuff :-(. I am assuming the best way is for us to just knock on the doors of all the share based guys and see what they offer in the way of margin facilities?

How did you guys select where to access these loans from? and rate comparisons etc?

So much to learn.... so little time!
 
I'm sure there''s something very simple I've missed, like maybe you're relying on the CGT increasing fast enough that you can continue to fund the IPs as well as fund the initial loan shortfalls whilst also leaving enough left over to live off later. This may have been possible over the last couple of years but do you think it will continue into the future?

Yes the compounding CG across portfolio outstrips erosion from further purchase deposits, plus earlier properties become +ve.

Hope this helps.
 
Rixter - I love the idea of further portfolio diversification and I don't really understand how you used cash bonds to help, are they a different type than the standard buy at face value now and redeem with interest later type? I am assuming it is the same as the above example except you would put the 80K into cash bonds not shares which then gives you a guaranteed return that the banks can use for serviceability (however surely the increase on the original loan to get the 80K would outweigh the cashflow benefit from the bonds?... or maybe not. I dont know enough about banks lending criteria to understand how they would calculated it... it is just that usually banks charge more interest on their loans than a cash bond would pay)

I really appreciate the feedback and your patience. This is all helping us a great deal!

Heres a Cash bond Link .

Hope this helps.
 
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