When LOE goes wrong

Call me old fashioned but I'd rather pay for basic living expenses from the income produced from the assets and only delve into the equity for rare expenses when absolutely necessary ... like for a new car or that flight to Europe to housesit. :

However - using the above figures supplied by Agent007 - why would you not sell a few items to pay down the 30% debt ... using today's dollars ...

Leaves you an asset base of $5.6mil

The say you PPOR cost you $1mil - asset base of $4.6mil

Even at a miserly 5% return (bank deposit) you have an income of around $230,000 ... or $160,000+ (after tax).

Why would you bother drawing down equity?
 
lizzie said:
Call me old fashioned but I'd rather pay for basic living expenses from the income produced from the assets and only delve into the equity for rare expenses when absolutely necessary ... like for a new car or that flight to Europe to housesit. :

However - using the above figures supplied by Agent007 - why would you not sell a few items to pay down the 30% debt ... using today's dollars ...

Leaves you an asset base of $5.6mil

The say you PPOR cost you $1mil - asset base of $4.6mil

Even at a miserly 5% return (bank deposit) you have an income of around $230,000 ... or $160,000+ (after tax).

Why would you bother drawing down equity?
Click to expand...

To have more ?

Cause you only live once, can't take it with you,and all that stuff

I mean $160k after tacx, is more money than I expect to earn per annum, but that's not what we're talking about

??
 
lizzie said:
Even at a miserly 5% return (bank deposit) you have an income of around $230,000 ... or $160,000+ (after tax).

Why would you bother drawing down equity?
Click to expand...

Because all is relative :) Different people want/need different things. e.g. I'm sure that $30k pa will buy a great life style in some Asian or African countries. I know of a British fellow that retired to the Philippines (he never lived there before). However, we all don't want that. Do we? :cool:
 
Fair enough ... I still think $3k a week, with no debt/mortgage, is still a good chunk to wade thru each and every year. But I guess it's just chump change at the gambling tables for others.
 
lizzie said:
Fair enough ... I still think $3k a week, with no debt/mortgage, is still a good chunk to wade thru each and every year. But I guess it's just chump change at the gambling tables for others.
Click to expand...

Yes lizzie for the vast majority of people that woud be sufficient. For me it would be much more than enough!
 
Yes, thats more than I need now. And I have loads of property debt! I might need (I mean want) $900 after tax per week if I were debt free, that would most probably place me in the top-5 percent of retired Aussies. I could live ok on $400

Another thing I forgot to mention with living off rents is: Having all that money/capital sit there doing nothing.. I personally find that a waste because it's yours, you have it but you're not planning to use it for anything. You could have MILLIONS of dollars sitting there doing nothing.. I don't understand that, but on the other hand, my Father doesn't understand my way of thinking. He has retired on 50 acres, up on a mountain in NSW where he is living off rents of 3x paid out properties, they have a small mortgage on the place they're in now (1 is commercial, one is a cheap unit and one is his old home) They live okay, except he has told me that he wants to get rid of the unit because even though it's paid out (owned outright) the body corporate/repairs/maintenance etc etc is eating in-to half of the profit(s) So I assume my olds are receiving around $1,100 p/w in rents after management fees and rates/repairs etc. I'm unsure if this income is taxed. They have access to loads of equity if they ever need it but Dad looks at it like he has spent his entire life paying it out and does not want to go back in-to debt.

So theres a real life story of someone LOR.
My Dad has also gone back to part time work picking fruit a few days a week just to keep the momentum, and cash up I believe. They love the new place that much that he doesn't like to leave the house :D
 
$900/week (post mortgage repayments + interest) LOR is not a lot.

But the main thing about it is it can buy you some time (depending on what family commitments you have) and a safety net to take some serious risks and make $h!tloads of money somewhere else.
 
It's not 'alot' but thats what I receive now, working full time, with loads of property debt and it's a struggle for the mean-time I'll tell you. But, I still feel I'm on a decent wage and if I had no debts, and the same income retired, then that IS a good position to be in.

Of-course, everyone 'wants' the most the can possibly get their hands on, thats understandable but in reality, even working extremely hard as an Investor, it's hard to achieve in a short time.

Thats why I plan on LOE for some years until I have more options. LOR simply is not an option for me and I knew this from the start so tailored my investment plan on equity growth.

Why LOE?
1. It is not taxed. This is my main deciding factor for adopting a LOE strategy to begin with. Although please remember: It IS taxed if you ever sell the asset. Depending on your profit and current income of-course. You are taxed on the purchase price and 'profit' so this is where you are hit because you've leveraged the loan higher (if there is one)
2. It's a faster way than waiting for rents to cath up and paying off enough property to be able to live off. Giving me optional financial freedom (to a budget) within a 10-15 year period from start to finish.
3. Capital growth usually outpaces what can be earned in resi rents (yes, I said 'usually'..)

If you're going to LOE there are three things you need for a basic recipe.
1. Time for growth to occur
2. A large enough portfolio value to offer you the desired income stream
3. You must be prepared to use as little as your profit as possible until you feel confident that you can spend up big. Even then, you really can't go overboard and probably should always live frugally.

If this trade off is worth it to you then go for it.
As long as the Banks are lending at the time. Otherwise you may have to think of other ideas. The cash-bond may be of help. If not then selling may be the only option but even then it's not so bad. I know of a guy who builds up a portfolio of ten properties, sells one each year or two, buys another and then lives off the profits until he's out again. Sounds like a good life. I like that because it gives at least 10 years of growth for each property.

Bottom line is: Once you have the capital, the money's there for you. The hardest part is getting there. There will be many bumps along the way but if you have the drive to hold on, you will be rewarded.
 
lizzie said:
Fair enough ... I still think $3k a week, with no debt/mortgage, is still a good chunk to wade thru each and every year. But I guess it's just chump change at the gambling tables for others.
Click to expand...

that's a lot of money!. 3K a week.
i think that's how nathan does it.

i always see my repayments as coming back when i sell my place. in terms of PPOR you add in say 30K for 2 years and then get it back after it has been sold + the capital gain.
 
On the flipside, relying on capital growth and living off equity is inherently riskier.

Eg if you were American and bought in the 2000s and hoping to live off equity, you're either back at work now or actually living off your initial capital.
 
Deltaberry said:
On the flipside, relying on capital growth and living off equity is inherently riskier.

Eg if you were American and bought in the 2000s and hoping to live off equity, you're either back at work now or actually living off your initial capital.
Click to expand...

Taking into account total returns, LVR, etc- What about if the same Americans bought in the 70's?
 
Gremlin, I think you've misinterpreted what agent007 said.

He was getting at "letting the properties grow for 40 years, not 10 years".

That is, start the accumulation phase early enough, let a few decades pass to allow time for sufficient growth....and then start looking at drawing some down and the LOE concept becomes feasible.

They weren't getting at actually starting to LOE in the 70's.
 
Dazz said:
Gremlin, I think you've misinterpreted what agent007 said.

He was getting at "letting the properties grow for 40 years, not 10 years".

That is, start the accumulation phase early enough, let a few decades pass to allow time for sufficient growth....and then start looking at drawing some down and the LOE concept becomes feasible.

They weren't getting at actually starting to LOE in the 70's.
Click to expand...

Not entirely. Maybe I wasn't quite clear in what I meant.

In forty years a lot has changed which has meant that maybe LOE is feasible now. But LOE would not have been a viable end point for someone starting to invest forty years ago.

So if we fast forward to someone starting to think about LOE today with a forty year time horizon, they can see a framework exists today which would be useful to exploit in forty years time. But it will only be useful to exploit in that timeframe if in forty years time:

  • Property CGs are sufficient
  • The lending environment is conducive to equity release products
  • Taxation laws of the day allow for the conversion of equity to the income (from a providing the LOE'er cashflow) that's not income (from a taxation perspective) stream in such a manner that makes LOE tax effective

Given the timeframe, I suspect the first should be a non-issue, but it's not clear to me that over the next forty years the status quo will remain with the other two. I don't know what the lending environment and the taxation laws will look like in forty years time, but I suspect they're likely to be as different to today as what today is to forty years ago.

In comparison, someone looking at working towards an LOR strategy needs only to have sufficient rental growth over the long term. There's far less outside influence on the future viability of the investment strategy and it's a strategy that's as equally valid now as it might have been 10, 20, 40 or 100 years ago.

Good luck to those who find it successful, but I personally sleep much easier with LOR than I ever would with LOE.
 
Dazz said:
Gremlin, I think you've misinterpreted what agent007 said.

He was getting at "letting the properties grow for 40 years, not 10 years".

That is, start the accumulation phase early enough, let a few decades pass to allow time for sufficient growth....and then start looking at drawing some down and the LOE concept becomes feasible.

They weren't getting at actually starting to LOE in the 70's.
Click to expand...

Thanks Dazz. You got my point. I believe that focusing on a strategy of LOE or LOR per se is a waste of time (in general). Both strategies only focus on the short run. In the long run one can elect to implement LOR, LOE or a combination of both. I believe that the most negative of the portfolios today will be more than positive in 40 years time. Any one with a "reasonable" size portfolio and with a LVR of 20% - 30% can either do LOR or LOE or both. To the example I used before some people said that they could easily LOR. I tend to think that I'd do a combination of both.

I agree that no one knows what will happen in 40 years or so time however, I prefer to arrive there with a large asset base and a low LVR than without it.:cool:

10 - 15 years IMO is not enough time to build a decent portfolio with a low LVR from scratch (for main stream middle class) and, since we don't leave much we need to start early and enjoy the journey.
 
LOE is alive and well

I haven't visited SS in quite a while. So Happy New Year to all. I see mostly the same debates are going on ...phew !! We're now 5 years pure LOE, still neg geared, still neg cash flow, no income, still owe the banks "millions" and still collect cars and have beer in the refrig. It works just fine as far as we're concerned and, having seen friends "demolished" by the GFC and shares and financial planners, we're very satisfied with our choice of retirement funding with dumb ol' houses and flats. Wifey & me turn 60 this year, retired at 55.
The first trick to LOE is you have to have plenty of the "E". No free lunch. So we just accumulate our tax losses for a while, and then we sell an IP in which we have a lot of equity. The tax losses negate the CG. The bank takes it's share of the sale price to pay down the % the LOC and leaves us with the rest...which is lovely tax paid money ;). We've still got about 30 IPs, some growing slowly, some gone back a bit, overall I don't worry about it. I still think our capital cities have a solid future as we ride on the Asian powered future. There's billions of people to the North, and the wealthy ones a few want to live here. That'll do me anyday! Cheers LL
 
I retired 5 years ago and now 61 only 4 Ips but bought 15 years ago all positive geared
My PPOR was bought 20 years ago and my wife and I love it the children are hoping we never sell
I have a SMSF which is quite healthy and use this as a income but havent reduced any capital so far
So my SMSF is growing in value
Have been trading shares for 10 years and starting to get good at it even in a difficult market I never hold on to shares.Trading in SMSF.
So LOE is working but I have my eggs in other baskets as well
Income comes from Ips, SMSF,Share Trading. Note. Pay no tax on SMSF and Share Trading as I am over 60
Maybe I have been lucky but I did have a dream and a plan and now I am living the dream
Bonus is my good health lost 12k and go to gym 5 days a week
 
landlubber said:
I haven't visited SS in quite a while. So Happy New Year to all. I see mostly the same debates are going on ...phew !! We're now 5 years pure LOE, still neg geared, still neg cash flow, no income, still owe the banks "millions" and still collect cars and have beer in the refrig. It works just fine as far as we're concerned and, having seen friends "demolished" by the GFC and shares and financial planners, we're very satisfied with our choice of retirement funding with dumb ol' houses and flats. Wifey & me turn 60 this year, retired at 55.
The first trick to LOE is you have to have plenty of the "E". No free lunch. So we just accumulate our tax losses for a while, and then we sell an IP in which we have a lot of equity. The tax losses negate the CG. The bank takes it's share of the sale price to pay down the % the LOC and leaves us with the rest...which is lovely tax paid money ;). We've still got about 30 IPs, some growing slowly, some gone back a bit, overall I don't worry about it. I still think our capital cities have a solid future as we ride on the Asian powered future. There's billions of people to the North, and the wealthy ones a few want to live here. That'll do me anyday! Cheers LL
Click to expand...

May I ask how long it took to accumulate your portfolio and what LVR it was when you retired?
Thanks
 
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