Have read steves lattest news letter can someone explain how this system works(Questionable practice of equity redraws to fund wealth).
I have not read the newsletter but it sounds like it means that Steve does not favour redrawing funds from equity held in properties to fund your lifestyle. If this is what he meant, I agree.
Robert Bou-Hamdan
Mortgage AdviserI beleive it is a sound practice if done properly.
One idea promoted by the investors club is to buy seven properties, one per year for seven years. In year 8, the first proeprty would be worth approximately double what you paid for it.
You then take some funds out of this by increasing the loan. The funds can be used to live on or to supplement income. Some of the funds can also be used to be the extra interest incurred.
In year 9, you then access the funds in property 2.
In year 10, property 3, and so on….at the end of the cycle, you go back to property one, and it has doubled again so you can take out more funds.
Sounds good in theory, and it can work in practice if you are only taking a small amount of any growth. Having at least 7 properties will help in this regard.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, no offence intended but that plan is the most ridiculous thing I have ever heard!!!!!!!!
Two main issues arise…
1. What if the property prices do not “double” in value over the 7 years?
2. Never paying down any debt or not covering the interest expense results in negative equity each year and would prevent you buying the 7 properties required in your example. How do you get around this?
And another problem…
What happens when you retire and no longer qualify for loans and all your equity is used up so you cannot take advantage of a reverse mortgage and property prices have slumped resulting in losses if you sell in the current market?
Robert Bou-Hamdan
Mortgage AdviserIf there is not growth, then you do not borrow any money to live on. You only can increase your loans at a portion of the growth. you would also only do this strategy with high growth property.
If your properties are continuously growing, then you will have equity. If you have enough equity, you can always get loans.
Steve Navra is another who advocates living off equity. His strategy is slightly different to the investors club. There are a few articles on his website http://www.navra.com.au
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, do you not think it is important to only borrow what you can service comfortably?
Unless you are always taking the more expensive asset lends (that do not require an income declaration and are usually restricted to 60% LVR) which would not be enough to live on the equity if you never pay down the debt, then you are doing 80% LVR low docs which require an income declaration.
If you don’t declare an income that can service the debt, you cannot get the loan. If you make the declaration because you need the equity to fund your lifestyle or make your repayments, then you are committing fraud.
What if tenants move out?
If Steve Navra and The Investor’s Club advocate buying property when you cannot afford to by eating up your equity, then I have just become an opponent to these two entities.
I almost forgot, if there is no growth and you do not borrow, as you stated, how do you live? You were borrowing to pay your bills remember? The plan was to pay bills from equity.
There is not point having seven houses when you own less of them each year or risk losing the lot!
Robert Bou-Hamdan
Mortgage AdviserOriginally posted by The Mortgage Adviser:that plan is the most ridiculous thing I have ever heard!!!!!!!!
I agree entirely.
‘Redrawing equity’ is a misnomer. Acquiring additional asset-secured debt is what you are actually doing. Acquiring debt to ‘fund wealth’ by purchasing growth assets can work well if you’re fully aware of the market in which you are investing. Acquiring debt to fund living expenses, on the other hand effectively sacrifices future prosperity for the illusion of wealth in the present.
Out of curiousity Terry, for house prices to sustain a doubling over the next 7 years, then double again over the following 7, what level of inflation would be required and what would the corresponding interest rates be? Roughly?
In your plan, you ‘draw down’ when house prices increase and notably borrow nothing further when they do not. I take it then you repay additional capital when house prices fall?
Cheers, F.[cowboy2]
Hi Rob
Maybe I haven’t explained it properly.
Neither Navra nor the IC advocate buying property when you cannot afford to. They merely advocate getting yourself into a position, while you are working, of purchasing good quality high growth property. During years of growth, part of this growth can be borrowed to live on or to supplement living. Of course interest will accrue, and this would generally not be deductible (but could be with planning). However there would be no tax payable on borrowed funds.
By borrowing against a property instead of selling to access the funds, you can also save costs and still have access to future growth.
Have a look at their websites for some more information, and you may be pleasantly surprised.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Originally posted by Terryw:Neither Navra nor the IC advocate buying property when you cannot afford to.
If you need to borrow for living expenses, then you cannot afford to buy more property.
They merely advocate getting yourself into a position, while you are working, of purchasing good quality high growth property. During years of growth, part of this growth can be borrowed to live on or to supplement living.And how do you know for certain that there will be high growth for 7 years or rental demand highly consistent in any area?
Of course interest will accrue, and this would generally not be deductible (but could be with planning). However there would be no tax payable on borrowed funds.Terry, if the money is for living expenses or lifestyle, it is NOT DEDUCTIBLE. The only planning available to make it deductible is commonly referred to as TAX EVASION. Of course there would be no tax payable on borrowed funds – this is increasing your liability.
By borrowing against a property instead of selling to access the funds, you can also save costs and still have access to future growth.You also get access to paying more interest on current rates, potential increases in rates, possible negative equity and, most notably, bankruptcy if you need to keep borrowing to pay your bills. You will eventually run out of equity if things go a little bad as we have seen in the last 2 years.
Have a look at their websites for some more information, and you may be pleasantly surprised.I don’t think I need to. Your summary of their ideas is enough for me to stick them in the recycle bin (for immediate deletion).
Robert Bou-Hamdan
Mortgage AdviserWhat’s wrong with you Rob? Do you just like to argue?
I will put up an example tomorrow. Don’t dismiss it just yet.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I agree with rob, bad idea in these times.
Well it is a valid theory in my book. With a changing portfolio and trying to stick to our goal of buy 4 sell one each year, it would be great to be able to hit the loan for a redraw or additional funds should(and this is vital) the new borrowings can still be serviced by rent recieved.
Say rent was $150/wk and services $100k loan, rent goes to $250/wk then an extra $30-40k can be serviced from the same property. In this case, should the new equity level support it a loan extension would be easily possible.
As this, due to its nature and price would be an entry level property, with all the benifits of lower vacancy rates and usually no downside in prices as the top of the market experiences whenever there is a slight downturn, would be the best vehicle to use for the example Terry is putting forward.
Again the usual questions based on not all property goes up uniformly, vacancies in a specific area may be worth noticing, and even if the IP’s need the odd paintjob to access the equity, this is quite a feasable possibility.
Why should a ‘reverse mortgage’ ever be only available to feeble old farts on their last legs. If managed properly these loans coupled with a well thought out and researched plan could work like a dream.
Good on ya Terry, keep em thinking.
DD
Buyers Agent (Dip Financial Services(FP)
Don’t sweat the small stuff,and it’s all small stuff!!Terry, I actually hate arguing. However, I love a good debate or discussion about a topic. Just because I do not agree with things you say or advice you give does not mean I am trying to argue with you. I am merely trying to put my point of view across supported with examples (and whatever other information I can find) so readers can make an informed decision. If you find it rude because someone disagrees with your comments, I apologise.
I look forward to your example.
DD, I think you missed the point that Terry was advising us to borrow against equity BECAUSE the rent or other income could not service the loans. In your example, if you keep borrowing and using the funds to the maximum of rental income, what do you do if one or two tenants move out of your properties?
Also, regarding your paint job comments, I don’t think a fresh coat of paint is going to do much to the property value. If you ran out of money and were looking to paint the house to increase equity to borrow against to fund your lifestyle, how would you pay for the paint anyway?
Robert Bou-Hamdan
Mortgage AdviserSorry DD, but I had to deal with the following comment seperately as it is the second most ridiculous thing I have heard in this forum…
Originally posted by DD:Why should a ‘reverse mortgage’ ever be only available to feeble old farts on their last legs. If managed properly these loans coupled with a well thought out and researched plan could work like a dream.
DD
Buyers Agent (Dip Financial Services(FP)
Equating Terry’s advice to a reverse mortgage is so off the mark. It seems you have no concept of how a reverse mortgage actually works.
People who borrow against their equity to fund their lifestyle or supplement income usually borrow to the maximum LVR. Let us assume that is 80% LVR. Have you ever sat down and thought about what would happen if your property stopped growing at a faster pace than the applicable interest rate? I am sure your family would appreciate being left with nothing!
Even if the properties manage to maintain a positive equity position, what happens when you need to sell a few investment properties to reduce your interest expenses? Have you thought about Capital Gains Tax? You do realise that the capitalising interest is not deductible and that interest on funds used to supplement lifestyle or income are also not deductible don’t you? Your CGT bill would be more than your available equity in many cases especially if you were doing this for 7, 14 or 21 years as Terry suggests.
There is nothing about capitalising interest or drawing on equity to fund lifestyle or supplement income that makes sense unless you do it ONLY when you are in some trouble and rectify the problem as soon as you are in a better position. I am talking short-term. If you cannot afford the debt, do not borrow!!!
Now, regarding your “feeble old farts on their last legs” comment, I am amazed to hear this come out of the mouth of someone who has studied Financial Planning or a “Buyer’s Agent”. Were you not taught that these “feeble old farts” may live another 20 – 40 years and receive a huge chunk of money when they retire? Did you know that 35% of the population will be “feeble old farts” in the not too distant future and will be your main customer base?
Even a buyer’s agent must realise that “feeble old farts” buy a lot of property when they receive their super to fund their retirement from rental income or to provide an estate to their family when they pass.
Please provide us with an example of how to manage Terry’s scenario properly to fund a lifestyle or supplement income as I am too stupid to see any situation where it would be a benefit. Also, please let me know who would need such a scenario if they held a “well thought out and researched plan”?
I will be waiting for your response.
Robert Bou-Hamdan
Mortgage AdviserSorry Rob but I have heard of the strategy Terry mentions as well, and about 20 years ago (ie buy 7 properties over 7 years etc)
The theory is based on 10% per annum compounding growth which assumes a property doubles in value in 7.2 years. We all know in reality this cant happen every 7 years on a consistent basis but it is an example of how compounding interest/growth works. Perhaps these days you have to buy 14 houses?
As far as redrawing equity to live on is concerned – you should never dip into your capital. Then of course when you retire, if you don’t spend it someone else will (kids, spouse etc)
“The questionable practice of using Equity Redraws to fund growth” – borrowing against the increased equity of one property so as to purchase another. Simple, as long as you are investing on the fundamentals and not speculating at this present point of time.
Cheers
JeffThere’s a bargain in every market
Thanks for the replies guys I have certainly opened a can worms here.
I recently was given advice regarding equity redraws and wanted to get other investors views on this, after reading everyones opinions will have to do more research before useing this strategyAny further feedback on equity redraws would be appreciated.
Please don’t confuse using equity for the next purchase with using equity to fund a lifestyle or subsidise income. I have no problem with using it for the next purchase if you can service all debts comfortably.
Robert Bou-Hamdan
Mortgage AdviserHi Guys,
i totally agree with Terry, ive been using this strategy, for a while, living and drawing down on equity to fund my life style, but to help me further purchase more properties..
this strategy, that Terry is explaining, is very straight forward, but also, your able to easily purchase more properties,
Peter Spann, doesnt say he uses this strategy, but how he explains, in similar terms about compound interest and property growth, you will understand, how people then go abouts using property draw down credit line facilities to fund there lifestyles.
– for example, i will use a very bland, but similar approach in the credit drawn down, in how i purchase so many properties, but how it also funds my lifestyle…
– lets say someone owns 10 properties all at $250k each, and has $2 mill in loans and $500k in equity (80% LVR)
they can either do a top up loan and increase there LVR to 90-95% and free themselves another $250k-$375k, with that money that can put some aside to pay back the interest owing..
or, let the properties go up in value, and have a LOC of 80% of the asset portfolio, depends what you want to do.
but if you have a portfolio of 2.5 million and its returning 10% growth yearly..
$250k a year.. and using a little of that equity.. to pay back interest.. you can easily still propel your property portfolio forward…
Cheers,
sisI wish people would make the distinction clearer between using equity for further investment property purchases and using equity to fund a lifestyle or income. One is good and one is just plain stupidity unless it is to get you out of trouble short-term.
Also, if you need to borrow money to repay interest, in my opinion, you should stop buying anything!!!
SIS, there is nothing straight forward about Terry’s strategy and I do not doubt that Peter Spann does NOT use this strategy himself. If I was trying to sell properties to suckers, I would advocate this strategy as well.
SIS, how about the mortgage insurance cost when refinancing above 80%??? Is that a ‘lifestyle’ cost?
I guess you also missed the discussion regarding the pointless use of a LOC.
If anyone actually had a property portfolion consistently returning 10% per annum, they would not need to borrow money from equity to pay back interest unless their interest rate was over 10% or they did not have a job and they spent the majority of rental income which would both be just plain stupid!
It is frustrating to see people buying more properties but going backwards and not even knowing it. I would rather have one property with 80% equity than 4 properties with 20% equity. A couple of tenants move out and it is tought times ahead. It is not about quantity – it is about quality!
Robert Bou-Hamdan
Mortgage AdviserHi Rob,
it varies from person to person, if your consistenly investing your equity as deposits for next property purchases, and your properties are going up invalue in growth, it doesnt hurt to much, when your portfolio, is growing at a substantial rate, to draw down some equity to fund your life style,
though it will depend on the investors, on how they go abouts there property portfolio and how they manage there income, but also selecting growth properties, for the future..
Cheers,
sis
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