Where is the old LOC explanation ?

Hi all,
lookinging at rejigging finances. I remember that some time ago, maybe 3 years, ( I did copy and save it , I'm SURE I did ) there was a very good explanation of living on equity/LOC, I seem to remember it was PTBEAR but am probably mistaken.

If anyone could point me towards either the original article or some other resources it would be appreciated,

cheers,
Ray
 
I'll be honest, living off equity isn't a strategy I'm an advocate of either now or in the past. In the current market it's a very difficult strategy to implement. I don't think it was me that wrote this post.

I beleive Michael Yardney wrote a book which goes into great detail about the subject. I'm not a fan of the book either.

I've had a number of clients who have read Michaels book. Whilst the strategies were certainly valid at the time and in the examples given were reasonable, LoE is not something just anyone with a property portfolio can implement.

Essentially my understanding is of LoE is you regularly increase your borrowings against your equity to fund your lifestyle. In the current market, lenders (and the law) simply won't allow you to borrow money without reasonable evidence that you can repay the loan.

Up until as recent as mid 2010 you could have probably done constant loan increases against your equity up to about 60% of the property value without too much trouble with a few lenders. New legislation has effectively shut this down and lenders now require BAS statements and trading account statements for almost all lo doc loans. If you're not legitimately self employed, you can't get a lo doc loan (and even then it's tough).

The other problem with the LoE strategy is it does rely on constant capital growth to generate equity to support it. I had a few people ask me to implement the strategy with a portfolio of 3-5 properties and a few hundred k in equity. This sort of portfolio isn't large enough to support continual increases through good and bad markets even if the banks would fund them.

The LoE strategy required literally millions in equity to work. If you've got that sort of equity and would like to retire, I can think of several stategies to acheive this, but LoE isn't one of them. :(

I'd be happy to have a chat about your specific circumstances to give you an idea of what you can acheive, but LoE isn't a stategy that would be easily implemented for most investors in the current lending environment.
 
Pete, assuming sufficient size portfolio & equity generated, what about LoE via a cashbond structure? Can use the CB to continually show DSR and also utilise the funds from CB for lifestyle costs. Kill 2 birds with the one stone.
 
I'll be honest, living off equity isn't a strategy I'm an advocate of either now or in the past. In the current market it's a very difficult strategy to implement. I don't think it was me that wrote this post.

I believe Michael Yardney wrote a book which goes into great detail about the subject. I'm not a fan of the book either.

I've had a number of clients who have read Michaels book. Whilst the strategies were certainly valid at the time and in the examples given were reasonable, LoE is not something just anyone with a property portfolio can implement.

Peter

I think you've given a fair assessment that the strategy of living off equity is much more difficult to implement today with the new lending criteria.

And you are right, you need much, much more equity than the average property investor ever accumulates.

But I have quite a number of clients who use this strategy very successfully in today's market.

They have accumulated a substantial asset base and then lowered their LVR to around 50% to 60%. This gives them positive cash flow and serviceability and the banks seem happy to support their loans.

That's one strategy...of course the other is CF+ve properties. I've just found very few people who can replace their income with a large portfolio of these.
But clearly some have been successful this way also.

The problem is that most investors never become financially independent through their portfolios, whichever method they use, because they don't treat their property investments like a business.
 
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Hilarious.

Buying cashpositive propoerty is not living off equity, thats living off rents, or LOR.

Reducing your LVR so the portfolio is also LOR, not living off equity.

If the lenders could verify enough income to borrow extra for living expences, its obvious there is some kind of legitimate verifiable income they have assessed.

LOE is borrowing for consumption/living expences. Its taking out non deductable debt.

Lets not muddy the waters here, many people came unstuck after the adjustment to credit after the GFC, at least Peter is good enough to recognise the obvious.

Cashbonds I think can still have a role to play for people in between a small and a large portfolio, to suppliment 'assessable' income to aide new purchases without compromising lifestyle.
 
Cash bonds

Pete, assuming sufficient size portfolio & equity generated, what about LoE via a cashbond structure? Can use the CB to continually show DSR and also utilise the funds from CB for lifestyle costs. Kill 2 birds with the one stone.

Hiya Rixter

Very, very interesting...

Care to share which financial instituition is still doing this cashbond thingy? What is the official name? Surely i can't rock up and say i want a cashbond:)

Thanks!
 
Surely i can't rock up and say i want a cashbond:)

You would be correct. Cashbond is a financial structure using a LOC & an Annuity as its components.

On their own each component is known to your banker, however if you mention the term cashbond they will look at you with blank faces.

Bankers are employed to fit round pegs into round holes in relation to their banking policy/s.

They are not paid to think outside the square as required behind the thinking that cashbonds fall into.

If you would like to know more about cashbonds and the how, when & why I've used them, I've posted extensively on the topic previously over the years.

You can Read more about Cashbonds here.

I hope this helps.
 
Hi Michael,

Perhaps I should clarify my stance on not being a fan of your book. That statement isn't really accurate on the whole.

I found the book to be informative and quite relevant; in general a good read. What I didn't like was that I saw a lot of young investors come to my self (and Rolf) with stars in their eyes thinking that because they had two hundred thousand in equity across 3 properties, they were in a position to implement a LoE strategy.

I've also seen people go backwards because they took out a line of credit and used it to pay for investment costs, but at the same time I'm a big advocate of a well managed debt recycling strategy.

Books, seminars, even this forum have a lot of great information. What a lot of people don't understand is that they're getting general advice without any consideration to their circumstances.

I've enjoyed many of Michael's seminars where the information is eye opening and informative. Keep in mind that all of Michaels seminars include a disclaimer that the advice given is of general nature and may not be suited to the indivicual circumstances of everyone in the audience.

I also look forward to Rolf Schaefer's upcoming book. Rolf has and continues to be an incredible colleague, mentor and friend.
 
Hi Michael,

Perhaps I should clarify my stance on not being a fan of your book. That statement isn't really accurate on the whole.

I found the book to be informative and quite relevant; in general a good read. What I didn't like was that I saw a lot of young investors come to my self (and Rolf) with stars in their eyes thinking that because they had two hundred thousand in equity across 3 properties, they were in a position to implement a LoE strategy.

Thanks Peter

I wholeheartedly agree.

The biggest issue I've seen with Line of Credits is lack of discipline. Inexperienced investors set aside money for buffers and then spend it on the "next shiny toy" They trade CFDs of forex or shares and think to themselves I'll repay my buffer out of the profits but the don't make a profit and theire goes their buffers.

I also agree that you need very substantial assets to live of equity.

That's why I advocate building your asset base through buying high growth properties. But that takes time, discipline and delayed gratification
 
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