Hi all
I have read varying opinions on the Live off equity argument.
On one hand i have heard this is not such a good strategy. Increasing debt/Values going down etc.
So living off equity you pay no tax as you are not selling you are borrowing.
To pay down debt and live off rent incurs substantial tax if you have a few properties with low debt and rents are good and produce a good income.
To sell a few properties incurs CGT so you lose a reasonable amount to the govt. Then you would pay down debt on the others making them postive or creating a greater income incurring more tax at a hight rate.
So whats the answer for a a person in there 10-20 years to retirement starting out in the Ip investing world.
What have some of you that have reached your investment goals. Would you have done things a bit different if you knew now waht you know now.
Would you have structured things differently and if you did would have saved alot on tax?
I’d be interested to hear those that have actually done it and how they have found the end result?
Of course anyone with ideas is also great.
regards
SGHi Star,
Just a quick comment regarding tax…
If people invest to avoid paying more tax, I think they are destined for disaster. The more tax you pay, the more you are earning. This is a very good thing.
There are various strategies available that can decrease the tax you pay while not increasing your liabilities. I think paying out $1 (which increases over time) and losing equity to get nothing back (or 48 cents if this expense is deductible) is not the best idea.
Accountants opinions would be very much appreciated!
Robert Bou-Hamdan
Mortgage AdviserThe biggest problem I have personally with borrowing to live is the psychological effect of carrying possibly millions of dollars in debt. I have lain awake at night worrying about what little debt I have (in comparison to what it would be if I lived off it) even though my income (from all sources) covers it easily with enough to spare for more investment.
The thought of being 75 and carrying $1 million in mortgage doesn’t sound like stress free life.
1,000,000 * 6.5% interest = 65,000/year to pay
use 70,000 to live on for the year I can keep going indefinetly (in theory) so long as my equity doubled every 7 years (which in theory is the long term average).
So, sounds good. But if I wait an extra 3 years and sell all my IPs to get $1million post CGT and invest that wisely I could fairly comfortably get 7% return on my cash (through a managed diversified portfolio) which = $70k / year, but I’d have to pay tax on it so I’d end up with something like $50k afterwards. I’d have to wait those 3 extra years and live on $20k /year less but I’d never have to worry about debt collectors.
Of course if I figure it right I can spend $70k each year (just like living on equity) and the diminishing lump sum would run out after about 25 years. So if I figure I’ll die within 25 years and also that I spend the entire $70k each year on non-saleable assests (like just eat top food, grog, go on holidays, get hookers and burn it at the casino). Of course on $70k net a year I would end up with some assets after 25 years so if I lived a bit longer I’d still have money.I think that is a less stressful life. Though in truth I can’t see myself ever not investing, even just for fun as I find it a worthy challenge.
Originally posted by surreyhughes19905:… my income (from all sources) covers it easily with enough to spare for more investment.
This is the main point against the living off equity strategy. This is what investors aim for. If your income easily covers with enough spare, why tap into equity?
A few other things people forget…
1. The interest rates can quickly go up eating into your equity much quicker.
2. An ongoing tax liability can be reduced much quicker and easier than a large debt.
3. Your borrowing capacity diminishes as you borrow more and more.
4. Any pension benefits are lost with large amounts of cash available also eating into more equity.
5. When you retire, you can only use reverse mortgages as you can not service any debt without an income.Considering the above, is there anyone that really still thinks that living off equity is a better strategy to aim for than achieving a higher income and paying more tax?
Robert Bou-Hamdan
Mortgage AdviserI am a fan of living off equity. I am not doing it, and haven’t done it, but it sounds good in theory.
They way I would suggest you look at is to build up a large portfolio of property while working, then after a few years you could ‘retire’ by living off a percentage of your capital growth.
Terryw
Discover Home Loans
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, did you read my points above?
How do you expect to tap into your equity when you retire excluding reverse mortgages which only allow minimum LVRs (maximum 50%) at the lower end of retirement age and your loans would already be more than this???
It is great to say it sounds good, but please explain how it is viable?
Robert Bou-Hamdan
Mortgage AdviserI agree with Terry. I’m not doing it just yet, but I know people who are, and apparently it’s a fantastic life.
The key to it all is big numbers.
Rob – you need to pop a zero or two onto the end of your thinking and all of your issues will disappear with this concept.
For example;
Port. of say $ 10 MM.
Conservative rise of say 5%….better years are obviously much better – think of them as a bonus to bank for the not so good years if you are feeling squeamish.
Asset rises by 500K p.a.Living expenses 100K p.a. Tax of 7, nett 93.
Your equity is growing by 400K p.a.
I’ve found your personal living expenses do not go up commensurately with the expenses and income of the big port. and…more importantly…the growth of your port., and hence that %age differential is where the happy days and low stresses of the wealthy are funded from.
Clear as mud ??
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Originally posted by Dazzling:The key to it all is big numbers.
Rob – you need to pop a zero or two onto the end of your thinking and all of your issues will disappear with this concept.
If you have big numbers, you do not need this strategy. The rental return would be significant. You will still have to pay tax on it anyway.
Dazzling, I am not a stupid guy. I have done the numbers. I just wish you guys would address the numbered points I presented earlier one by one and I think the “mud” will clear up.
For example;Port. of say $ 10 MM.
Conservative rise of say 5%….better years are obviously much better – think of them as a bonus to bank for the not so good years if you are feeling squeamish.
Asset rises by 500K p.a.So what is the outstanding loan amount on this $10,000,000 portfolio when you want to tap into equity and what is your income from work (zero if retired) and rental income?
Living expenses 100K p.a. Tax of 7, nett 93.How will you get this loan when you are retired?
Clear as mud ??Crystal to me!!!
I always say (excluding reverse mortgages when over 60 years old or lying on your loan application) – “You can have a 10 million dollar property portfolio and not be able to borrow one cent if you have no income!”.
Back to you guys.
Robert Bou-Hamdan
Mortgage AdviserBy ‘retired’ I don’t mean living on a pension.
Having a large property portfolio would mean one would be a professional investor. There are various loans that would suit an investor. Including the many No Doc loans. A person self employed for one day could also qualify.
Hopefully the overall LVR would not be that high, so getting loans should not be a problem.
Terryw
Discover Home Loans
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:By ‘retired’ I don’t mean living on a pension.
Either do I. Retired means no income from paid employment. You are now reliant solely on rental income.
Having a large property portfolio would mean one would be a professional investor.This is a huge assumption that anyone would have a ‘large’ (however you define large) portfolio. It is certainly required to live off equity. You still have not clearly answered how much would be owing on this ‘large’ portfolio. I cannot see a professional investor, and I certainly don’t know any, having zero debt or low LVRs at any time.
There are various loans that would suit an investor. Including the many No Doc loans. A person self employed for one day could also qualify.I knew you would throw this one out. I won’t respond to this as you should know better and it is why I said the following…
Originally posted by The Mortgage Adviser:I always say (excluding reverse mortgages when over 60 years old or lying on your loan application) – “You can have a 10 million dollar property portfolio and not be able to borrow one cent if you have no income!”.
Hopefully the overall LVR would not be that high, so getting loans should not be a problem.It is interesting that anyone would base their overall investment strategy on “hopefully” and “should not be a problem”. I know I would never do this. There is way too much doubt in that ‘strategy’ and there is absolutely NO CERTAINTY that:
1. You could ‘legitimately’ get a loan.
2. You would have sufficient equity based on LVR available.
3. Low (Lie) Doc and No Doc loans will still even be around or they will be as easy to obtain with increasing industry regulation and ATO scrutiny.Tell me something else – why would someone with a $10,000,000 portfolio at a Low LVR need to live off equity when their rental income would be at least $200,000 per annum assuming they invested terribly and only return 2% per annum net.
If the bigger investors don’t need it and the smaller investors can’t use it, where does this ‘strategy’ fit in?
I would much rather hear from someone who actually uses this strategy!
In my opinion, this ‘living off equity’ idea is NOT a strategy but a ‘hope for the best’ get out of trouble plan!!!
Robert Bou-Hamdan
Mortgage AdviserIf it doesn’t work out, there’ll be a few people who will become bankrupt- at 70, and in the twilight of their lives. Of course, there will be those who can do it- but not everyone will be able to- the more vulnerable people (grandma and grandpa investors) will go broke- as is the way with most of these things. Some of them will have too little capital, and when one is older… well, one can sometimes find htings can go wrong- and it is not like one can go back to work when one is 80 (well, not most people).
There will be lots of managers, advisers and seminars on this subject- the baby bomers are getting older- there’ll be lots of 70 year olds in seminars being taught how to live off equity- I just hope they can get to keep it.
kay henry
I agree that living on equity will not be for everybody and will be a dangerous strategy for some people.
Having a small portfolio of property is sometimes enough for someone to argue they are self employed – without the need for an ABN. I have personally helped a client get a few no doc loans (without lying), when they were in a situation like this.
On No doc loans there is not need to list an income. These are basically asset lends, where the lender is mainly concerned with the security, rather than the borrower.
We cannot predict the future, all we can do is base our assumptions on what can be done at present, and assume this will always be the case. But you are right, things can and will change. These products may not be around, but then again there may be even better products around then.
A person with a large portfoli may be getting a lot of money in rent, but they may still be paying a lot in interest and have not much left over. Plenty of people are asset rich and income poor.
What about someone on the pension with a $1mil home fully paid off. Surely drawing a small amount each year to improve lifestyle would not be such a bad thing if it is done correctly and the property is growing, on average, at a faster rate than consumption.
I, too, would love to hear from anyone actually living off equity.
Terryw
Discover Home Loans
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 think my point has been proven by the discussion:
If you’ve got enough clear equity to live off, you’ve either got enough rental income to live off or you could cash in your huge gains and put it in an annuity retirement fund with a diminishing base and live like a king for more than long enough.
Equity cashed in (assuming you’ve held for 12 months) will only be taxed at about 24%, and only once. A $10 M gain = $7.5 M net. I can’t speak for anyone else, but I know it would take me somewhere in the realm of 150 years to earn that much after tax on my current working salary! So lets say I expect to live for another 50 years, that means even without earning interest on that lump sum I will be livin on 3x my current salary until the day I die without working or worrying or even thinking about it.
Talk about big numbers! Now if you put that lump sum in an internet account at 5% you’re talking about $375,000 a year! Sure you’ve got to pay tax on that (oh boo hoo) but in anyone’s language that equates to big bucks AND no mortgages to service. Mind you at that sort of income, unless you are a gambling addicted fool, you can’t help but make more money which means each year your income would go up.
Why the F would I want the hassle of talking to banks and arranging finance to live off my equity when I’m a multi-multi-millionaire earning hundreds of thousands of dollars each year on bank interest alone?
Gak!
[blink]Nice summation Surrey!!!
Originally posted by Terryw:I agree that living on equity will not be for everybody and will be a dangerous strategy for some people.
It is dangerous for everyone who would actually need to use such a ‘strategy’.
On No doc loans there is not need to list an income. These are basically asset lends, where the lender is mainly concerned with the security, rather than the borrower.LVR restrictions are low and maximum exposure levels are low. You would need to have a debt-free portfolio for it to be of any use. This is highly unlikely.
A person with a large portfoli may be getting a lot of money in rent, but they may still be paying a lot in interest and have not much left over. Plenty of people are asset rich and income poor.So in this situation, you assume they have debt remaining on their portfolio. If paying the interest is a problem, low doc and no doc loans will not help. Remember the lower LVR and exposure restrictions. You can’t have it both ways. Either have a debt-free or low debt portfolio where you won’t need to live off equity or have a high debt portfolio where you need it but cannot access it unless you can service the increased borrowings through full doc loans – HIGHLY UNLIKELY.
What about someone on the pension with a $1mil home fully paid off. Surely drawing a small amount each year to improve lifestyle would not be such a bad thing if it is done correctly and the property is growing, on average, at a faster rate than consumption.This would reduce their pension and possibly worsen their cash-flow position. Also, how does a pensioner show serviceability for any loan without lying? Pension payments go into the bank account remember? A broker signing off on such a loan is assisting and committing fraud even if they register an ABN!
I am still yet to here a single valid argument in support of living off equity besides when you are in trouble and use it as a SHORT-TERM ‘strategy’ – ie: This ‘living off equity’ idea is NOT a strategy but a ‘hope for the best’ get out of trouble plan!!!
Robert Bou-Hamdan
Mortgage AdviserI agree with Surrey,
Who wants to be in their 70s or 80s and have to deal with banks, pm’s and tenants. To me thats not retirement. People forget property investing is a business, even if you own 100 houses outright there is more to it than just sitting back and living off the rent.
I will take the 5% of my cashed up equity anyday, and my penthouse on the beach.
RoboThis sounds very similar to a story in one of Jan Somers books – think it was the 101 story one – where one of the elder gentlemen had bought up about 30 props and was travelling really nicely.
In 1970 (I think he was 40 then) he decided to sell the lot and cash in his chips – think he cleared $ 300K, and subsequently lived like a king. Over the years, the twin ravages of inflation and taxation ate away at his savings to the point that he was as poor as a church mouse.
When he looked back on what he’d sold, it was worth something like $ 4 MM back in the mid 90’s and was producing over $ 200 K p.a. in rent.
I learnt alot when I read that story and whenever I hear about “cashing in your chips and living like a king” I think of that story.
I for one don’t need to experience that “pothole” in the road to wealth – reading about it is enough for me.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Originally posted by Dazzling:In 1970 (I think he was 40 then) he decided to sell the lot and cash in his chips – think he cleared $ 300K, and subsequently lived like a king.
This guys must be an absolute moron. If he honestly believed he could live like a “king” on $300,000, even in the 70’s, from age 40 until he died, he was on drugs. Then again, it was the 70’s!!!
He should have at least allowed for inflation and taxation and invested accordingly.
I still see no support or practical use for living off equity other than short-term to get out of trouble!
Does anyone have something solid????
Robert Bou-Hamdan
Mortgage AdviserThe trouble with selling property is the costs and taxed invovled not to mention the loss of any future capital gains.
For anyone wanting to research this further, there is a licenced financial planner, Steve Navra, who could possibly help. see: http://www.navra.com.au
Terryw
Discover Home Loans
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 am not sure what Dazlling wanted to point out. Is it good to live on equity or live on cash. He mentioned if he did not sell the lots, it would be worth $4m (is it same idea like you withdraw equity but keep the lots?).
Originally posted by Terryw:The trouble with selling property is the costs and taxed invovled not to mention the loss
of any future capital gains.I am not suggesting selling anything. I am suggesting that the only people who could use this ‘strategy’ effectively will not need it due to the high rental income they will be receiving. They will still pay tax on the rental income whether they draw down equity or not. What is the point?
For anyone wanting to research this further, there is a licenced financial planner, Steve Navra, who could possibly help.Are you affiliated with Steve Navra? I notice you promote him a lot. There is a fully qualified Accountant who I would much rather here comments regarding this ‘structure’ from… Steve McKnight!
Robert Bou-Hamdan
Mortgage Adviser
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