The end game

Hi all,

I'm thinking about what my end game is going to be. The time where you quit the daily job and spend your time how you wish. Hopefully 10 years from now.

In time, my properties are going to grow and there will be equity to use. I understand the LOE technique however, how does someone draw down equity on a portfolio if you don't have an income to pass the serviceability test?

Surely the bank isn't going allow you to access your equity without proving serviceability?


3M
 
Surely the bank isn't going allow you to access your equity without proving serviceability?

Well that's true for a full-doc loan. Other ways you can get equity out without proving serviceability though are things like reverse mortgages (which are more expensive), pledging your property as security for your childrens' loans etc.
 
In time, my properties are going to grow and there will be equity to use. I understand the LOE technique however, how does someone draw down equity on a portfolio if you don't have an income to pass the serviceability test?

The short answer is you don't. Lenders cannot legally lend money if you can't demonstrate the capaity to pay it back.

A better strategy might be to sell and pay down debt and live off the rental income. Or it might be to simply build up sufficent cashflow to live off. A third is to realise your capital gains (again selling) and direct the money into cashflow oriented investments.
 
I can see the power of property to generate significant equity.

I am sure I will be an equity millionaire in ten years time.

I don't think I will be buying a squillion properties. Just 3 or 4. The banks will see to that based on DSR. So, living off rents isn't going to get me there.

I can see the sense of not selling your asset base and letting it grow.

But, as my father would say, how do you eat it?

3M
 
I can see the power of property to generate significant equity.

I am sure I will be an equity millionaire in ten years time.

I don't think I will be buying a squillion properties. Just 3 or 4. The banks will see to that based on DSR. So, living off rents isn't going to get me there.

I can see the sense of not selling your asset base and letting it grow.

But, as my father would say, how do you eat it?

3M

look at other stock thats maybe lower growth but higher rtn ?

dont let your "perceived" DSR hold you bck if your ACTUAL serviceability is fine

Proper finance /lender structuring of a portfolio can typically get you 1.8 to 2.5 x times more rope than a poorly structured one.

I use the word rope, because gearing can serve you, or you can become the servant of gearing. How that pans out is how you manage the risks along the way, and obviously things that are beyond your control, like a new tax etc.

ta
rolf
 
Hi, based on your current rate, how much realised net worth will you have in 10 years' time?

That's what you can live on. The equity is just a guess, it's not something you can bank on.

Unfortunately, there's no easy answer.

KY
 
A better strategy might be to sell and pay down debt and live off the rental income. Or it might be to simply build up sufficent cashflow to live off. A third is to realise your capital gains (again selling) and direct the money into cashflow oriented investments.

Or a combinations of all three ... Sell some IP's over time to pay off other loans and provide extra cash. Use the extra cash to buy term deposits, high dividend shares etc. This should be achievable well before retirement age - get some part time work when required to suppliment. You will get extra cashflow via a Superannuation annuity when you are 65 to top up your cashflow.
A mixture of rental income, cash investments and super annuity will provide you with continual capital and income growth
 
Or a combinations of all three ... Sell some IP's over time to pay off other loans and provide extra cash. Use the extra cash to buy term deposits, high dividend shares etc. This should be achievable well before retirement age - get some part time work when required to suppliment. You will get extra cashflow via a Superannuation annuity when you are 65 to top up your cashflow.
A mixture of rental income, cash investments and super annuity will provide you with continual capital and income growth

I agree. One single strategy is going to have inherent risks and may not provide the flexibility needed to adapt to changes in the financial, political and legal landscape.

I like the idea of a hybrid strategy, maybe along the lines of generating cash flow to pay for day to day living expenses with a bit of equity release thrown in to fund big ticket items such as new car purchases, overseas holidays and the like.
 
Good on you having some fore thought.

I always say, "begin with the end in mind", a quote from the late Stephen Covey.

All part of putting a strategy togeter and then a plan and then your actions.
 
The short answer is you don't. Lenders cannot legally lend money if you can't demonstrate the capaity to pay it back.

only when they want to....remember they wrote the rules for the govt to mandate.

my accounts were hacked recently and to my surprise, i was given a $2000 overdraft.

no capacity to pay, no credit application - nothing. effectively a $2000 line of credit that was stolen.

now, i got it all back, but that's not the point - this conduct is in direct breach of the NCCC and yet no penalty?

got to wonder.
 
Hi MMM,

Great post - and definitely worth thinking about the bigger picture.

This topic has been discussed numerous times here, and is also covered extensively on T-interwebs.

Proponents for LARGE numbers of CF+ props to provide you with rental income,
Proponents for high CG props to fund you.

Others are heading down the commercial property path.

Plenty of food for thought - and ways to eat it :)
 
If the banks wont give you a LOC you could sell and put that money in an interest account.

So instead of them making money off you, you would be making money off them, you do lose any rental income and future capital growth though.

Wouldnt the banks look at this and do the LOC ?
 
They would only accept the interest as income.
The way to do it is sell a property and buy an annuity. Then the full amount would be considered income, so the bank would lend you more money to buy another property.
 
Thanks all for your comments.

The reason I am focusing on the end game is because if I am to use residential property to build a passive income, it is going to take at least 15 years. At 45 I have only one shot at it.

The easiest thing it seems is to sell a property or two, use the realized capital to buy an passive income generating asset such as shares, and use the income to prove serviceability.

However, my rough calcs tell me I would need to realize about 4M gross.

ie. 4M -tax = approx 2.7M
Invest this nett in a conservative 5% return fund to generate 100K gross income.

To generate the 4M would mean selling pretty much all your portfolio.

Isn't the idea to farm your properties and milk them not slaughter them? I am looking to nurture the portfolio so that my children can benefit when I am long gone from this world.

Are there any books I can read which go beyond talking about how to build a portfolio but actually talk about how to use that portfolio to fund your lifestyle. In detail.

I have all of Michael Yardney's books and his LOE explanation and Steve Navra's Cash bond technique.

What else is there?
 
I prefer the idea of living off rent, which necessitates paying down the loans at some stage.
My mother did this and had a comfortable retirement. She was not a big spender though.
She had 2 IPs (one was dual income) and PPOR. She had to move into a nursing home at the end, but we never managed to rent out her PPOR. (needed permission from the Public trustee, which after a 6 month fight, they granted........ the day after she died :mad: )
her income from the IPs was probably 60-70 K and would have been over 100k if we'd rented out the PPOR.
I want to structure our finances to pay off PPOR first, and then gradually pay off the other properties.
 
Thanks all for your comments.

The reason I am focusing on the end game is because if I am to use residential property to build a passive income, it is going to take at least 15 years. At 45 I have only one shot at it.

The easiest thing it seems is to sell a property or two, use the realized capital to buy an passive income generating asset such as shares, and use the income to prove serviceability.

However, my rough calcs tell me I would need to realize about 4M gross.

ie. 4M -tax = approx 2.7M
Invest this nett in a conservative 5% return fund to generate 100K gross income.

To generate the 4M would mean selling pretty much all your portfolio.

Isn't the idea to farm your properties and milk them not slaughter them? I am looking to nurture the portfolio so that my children can benefit when I am long gone from this world.

Are there any books I can read which go beyond talking about how to build a portfolio but actually talk about how to use that portfolio to fund your lifestyle. In detail.

I have all of Michael Yardney's books and his LOE explanation and Steve Navra's Cash bond technique.

What else is there?
Try this book by Stuart Moore,How to start with no savings and get rich safely,first published in 1991,i still have the copy i bought off him 23 years ago,if you bought the book on the night you could stay back and have a quick talk to him,priceless book and over the years i have seen his penmanship copies line per line by others in the game.
http://www.nla.gov.au/our-collectio...hudson-institute.com/membership/cycle.htm#fic
 
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My mother lives off the rent from one paid-off IP and interest from cash in the bank. She leads a pretty comfortable and, just as importantly, uncomplicated life.
 
it is going to take at least 15 years. At 45 I have only one shot at it.

However, my rough calcs tell me I would need to realize about 4M gross.

ie. 4M -tax = approx 2.7M
Invest this nett in a conservative 5% return fund to generate 100K gross income.

To generate the 4M would mean selling pretty much all your portfolio.

Your calcs seem very rough. Can I suggest you get a spreadsheet and play with some scenarios such as buying 4 or 5 IP's over the next 15 years. Assume you will be saving at least 10 to 20% of your take home income.

You should have at least 1 IP fully paid off within the 15 years without needing to sell any properties. You might then choose to sell a property to pay off 1 or 2 of the other properties

CGT can be minimised by staggering the sale of any properties. CGT can be further minimised if the property you sell is jointly owned thus capital gain is split.
The first years income after retirement can be funded by prepaying interest in the previous financial year. This also allows an extra year for capital growth
 
I can see the power of property to generate significant equity.

I am sure I will be an equity millionaire in ten years time.

I don't think I will be buying a squillion properties. Just 3 or 4. The banks will see to that based on DSR. So, living off rents isn't going to get me there.

I can see the sense of not selling your asset base and letting it grow.

But, as my father would say, how do you eat it?

3M

There are ways around running out of serviciability issues (DSR), simply opt for properties that have a higher rental yield.

You don't necessarily need to buy a squillion properties to do that.
I am currently negotiating on one that will bring in $90-$100pw passive income after tax adjustment. 10 or those = $52,000 passive and, there is still equity there to touch at a later stage if desired.

The extra cash flow now, can also be used to reduce mortgages, which at a later stage will increase the passive income.

Depending on which state you are investing in, and your risk comfort zone, there are good options out there for increasing rental return -ie) Adding a GF, looking in regional areas, chasing areas linked to mining, renovating existing properties to increase rental return

Explore your options, you may find a great strategy that makes sense, is a great fit for your current lifestyle and financial circumstances.

Regards Lisa
 
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