- Originally posted by Michael Whyte:
Michael,
I subscribe to your newsletter and I think you actually have quite a lot of good information to share and do so willingly and with little vested interest……
One quick question around the draw equity to live approach that you described if I may:If I’m drawing out my equity growth to live on, then in effect my net equity is not increasing. i.e. As my net worth increases, I draw it out and live off it. Now, if I’m neutral or slightly -ve, then I don’t have any passive income on these assets and my equity is being “consumed”.
How then do you build your net worth? IMO, its your net worth that allows you to retire from the 9-5 grind and live off the passive income. Either that or cash in the equity and buy an annuity stream or some such.
Just can’t get my head around how drawing and living off your equity growth on a neutral or negative structure gets you ahead. Unless of course you’ve got so much equity that you only draw a small portion of it and the rest still gets you ahead.
If this is the case, then the approach is really only of any use once your equity growth exceeds your cost of living by a decent degree. If it doesn’t, then there’s nothing left to re-invest for compounded growth.
Thanks,
Michael.Michael
I can understand where you are coming from, because I left out one critical point.
That is – this process only works when you have large amounts of equity and it should probably not have been discussed in this context without lots of explanation. That’s why I have said in previous posts that we spend over an hour explaining this at our workshop.
Anyway lets have a try….
There tend to be 3 stages of investors.
Income Stage – We work for our money
*Here we finance investment with our personal contribution.
*We are concerned with the efficiency of our physical body (we need it to earn income)
* We are concerned about cashflowSome investors progress to the next stage (most never do) …
Capital Stage – Money works for us
*We finance investment without our personal contribution because we use our equity to finance new aquisitions
*We are more concerned with the efficiency of our capital rather than with our physical excertionVery, very few invetsors move to the last stage…
Active Stage – Everything works for us
*We finance our investment the way we choose to
*We are more concerned with the efficiency of everything that we can influence
(Do you think Kerry Packer worries about his cashflow or even his equity. He sees the banks money or the money market’s money as his money. He does deals without putting in money or equity or cashflow)OK so back to living off equity….
You’can’t do this until you reach stage 2 – the capital stage of your investment career.
Imagine you have $3million dollars in properties and $2million in loans.
That leaves you with $1million in net equity.
You borrow $100,000 against this equity to live off. You allocate $7,000 of this to pay interest, leaving you $93,000 to live off. (better than paying 50% tax on earned income).
At the end of the year you have eaten up your money and have to go and borrow more.
But on average your properties have gone up $300,000 over that year (10% per annum)
Lets say it was a bad year. They only went up $200K. At the end of the year you are still $100,000 ahead – in other words $100,000 more equity than you started the year with to invets again or do whatever you want.
So Michael, this strategy is definately not for beginning investors. You need at least $1 million nett equity or more for it to work.
But hang in there. You will achieve this.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auMichael, I just read that you give away 2 free spots and 2 half price. How many people actually attend the $3,500 per head workshop or were you referring to the $55 seminar with 1,200 people? Surely you could run a totally FREE workshop one weekend a year for young investors.
I agree with your comment about learning something at every seminar, course, discussion attended but I have stopped going to seminars as it seems to be the same old stuff recycled in different ways. $3,500 is a bit steep in my opinion for information that is available for free.
My comments are not intended to offend as I read parts of your Newsletter and consider it very informative and a good ‘summary’. I have yet to read a new concept or strategy in it though.
Robert Bou-Hamdan
Mortgage AdviserMichael I have to say this advise and strategy of drawing on equity is dubious to say the least, and is just another form of highly leveraging property which is another strategy I don`t go along with.
Do you draw this equity AFTER youve made the 10%/$200,000, this would be a more reasonable plan, but then again if they DON`T go up at all and in fact go down, you better have a high paying day job no matter how many properties you own.
You say you hope your properties will go up 10% but at least they would have gone up $200,000????, this sounds to me like something a novice would say and to spend money before you earn it is breaking what I believe to be a golden rule in R/E.Originally posted by The Mortgage Adviser:Michael, I just read that you give away 2 free spots and 2 half price. How many people actually attend the $3,500 per head workshop or were you referring to the $55 seminar with 1,200 people? Surely you could run a totally FREE workshop one weekend a year for young investors.
I agree with your comment about learning something at every seminar, course, discussion attended but I have stopped going to seminars as it seems to be the same old stuff recycled in different ways. $3,500 is a bit steep in my opinion for information that is available for free.
My comments are not intended to offend as I read parts of your Newsletter and consider it very informative and a good ‘summary’. I have yet to read a new concept or strategy in it though.
Robert Bou-Hamdan
Mortgage AdviserRobert
The free places are for my $3,500 workshop.
It is my way of giving something back to the community that has made me successful.I have not finalised the selection yet, but I am pretty sure that one will go to a lady from Queensland with a retarded 23 year old child and who’s husbnad had a stroke 4 years ago, leaving her as the bread winner.
She’s had a hard life and I would love to help her.
You are correct that there is very few new concepts in my newsletter. Remember its free ánd of course it is a form of marketing.
If I gave what took me 30 years to learn for free, why would people pay for my services.
The workshop is limited to 100 people and I reinterate the comment made to markpatrick. I have comments form EVERY attendee on tape (OK…CD) from the last 2 workshops and each and everyone of them got much, much more than their money’s worth.
And remember these are almost all experineced investors owning multiple properties. They have sort of self selected themselves by being prepared to pay this amount of money.
Again I am not saying all this to advertise my services, I don’t need to, we have very few spots left. I am just responding to your question.
I agree that most seminars are the same. I have been to most. That’s why I know mine is different.
If you like, send me a private message with your contact details and I would be happy to send you a copy of last years CD of comments.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auOriginally posted by markpatrick:Michael I have to say this advise and strategy of drawing on equity is dubious to say the least, and is just another form of highly leveraging property which is another strategy I don`t go along with.
Do you draw this equity AFTER youve made the 10%/$200,000, this would be a more reasonable plan, but then again if they DON`T go up at all and in fact go down, you better have a high paying day job no matter how many properties you own.
You say you hope your properties will go up 10% but at least they would have gone up $200,000????, this sounds to me like something a novice would say and to spend money before you earn it is breaking what I believe to be a golden rule in R/E.It may sound like what a novice would say, but I’m far from that. I am 52 old and have been involved in property for over 30 years.
I am regularly quoted in many magazines including A.P.I., The Bulletin and Personal Investor as an authority on property. I regularly asked to speak at property conferences aorund Australia and SE Asia. In fact I have presented at 35 seminars in the last 12 months
In the last 12 months I have added over $3 million of properties to my portfolio using this strategy which I have been using for 10 years now.
But I understand that it is NOT for most people, and those stuck in the cashflow phase of their investing (as outlined in my post above) will not “get it”
That’s OK -most of Australia is stuck at this cashflow phase.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auOriginally posted by MichaelYardney:OK so back to living off equity….
You’can’t do this until you reach stage 2 – the capital stage of your investment career.
Imagine you have $3million dollars in properties and $2million in loans.
That leaves you with $1million in net equity.
You borrow $100,000 against this equity to live off. You allocate $7,000 of this to pay interest, leaving you $93,000 to live off. (better than paying 50% tax on earned income).
At the end of the year you have eaten up your money and have to go and borrow more.
But on average your properties have gone up $300,000 over that year (10% per annum)
Michael,
Thanks. This is exactly as I thought it would work out. Basically your capital growth exceeds your capital consumption. This being the case you’re still going forwards even though you are now living off your capital. And as you rightly point out you’re doing this in after tax dollars at a cost of only 7% interest on the drawdown.
This is exactly as Steve Navra also described his approach at his structure course yesterday for ultimately funding retirement, but you need to get there first. He also uses cashflow elements in his structure to fund the holding costs of his highly leveraged growth assets. e.g. Shares returning 5% CG and 5% dividend pa to fund borrowings on highly leveraged IPs. His particular fund has an income focus.
Its not too complex, but for a lot of people it is well beyond their current level of thinking and certainly their current comfort zone. This being a +ve CF site you’re more likely to get the view that gearing is a bad thing and leverage is risky. That’s a mindset that a lot of people are locked in to and won’t be easily swayed.
I already have over $500K in net equity and am locking this in with an LOC at present before the market slides further. I’ll then draw it down as deposits on IPs and shares, both leveraged to the max.
Thanks for the clarification.
Regards,
Michael.PS Markpatrick, Steve Navra advocates spending the equity “after” it is earnt. Basically, draw your gains a year in arrears of their earning. In this way if you have a mediocre year then you draw less, if it was a good one then there’s more to draw. Once your asset base is big enough, there’s always enough to cover living expenses its just some years are really good. [biggrin]
but to summarise: the key point is leverage/gearing though right? so you are still betting on prices rises on average? and if prices don’t rise for say 7 years you are stuck, as you will need to draw equity from somewhere to cover your losses. I think this strategy would be fine in Perth, but judging from comments about the eastern states it would seem a risky stage of the cycle to be gearing up at i.e. if prices fall for 3 or 4 years. Am I missing the point ?
In fact to draw equity and use the funds to gear into shares seems even riskier again with the sharemarket topped out as it is. You have leveraged highly into 2 different asset classes that are at a high.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Ausprop,
You need to spread your investments across multiple asset classes to mitigate the risk of any one category stalling. Even if property stalls, you can still make 5% dividend and 5% CG on shares YOY. Steve Navra’s income focussed share fund is a trading fund and makes its money on volatility not on the trend. He makes money even when the trend is backwards, and he consistently outperforms the index.
You also need to make sure you have cash in your structure too. This can take the form of your personal income, or a cash bond if you don’t have the servicability in your own right, but have a lot of spare equity. This is the point about drawing in arrears. If the whole big portfolio underperforms for the year then you don’t draw but live off your own income, if it performs then you draw in arrears to supplement your income.
At some point in time the structure is fat enough that even if you have no capital growth you can still live off your surplus cash flow components such as shares and at this point you no longer require that personal income to supplement the structure.
Cheers,
Michael.Hi!
While doing developments, I find it is easier and probably more profitable to subdivide land and sell and move on.
If I think of building by employing a builder, I find profits come down.
Is this correct or am I missing something?
Thanks
Originally posted by MichaelYardney:
If I gave what took me 30 years to learn for free, why would people pay for my services.If you like, send me a private message with your contact details and I would be happy to send you a copy of last years CD of comments.
The information you have learned over the years came from your own research and enquiry correct? Surely that was free and just cost you some time.
Do you ‘guarantee’ that people are going to succeed copying your teachings? (This would be a first!) Do you provide ongoing support or is that additional to the $3,500 fee for the seminar?
Regarding the CD, I appreciate the offer but I think earning a nice house ($350,000) from each seminar of 100 people tells me enough. The attendees are crazy!
Robert Bou-Hamdan
Mortgage AdviserOriginally posted by The Mortgage Adviser:The information you have learned over the years came from your own research and enquiry correct? Surely that was free and just cost you some time.
Do you ‘guarantee’ that people are going to succeed copying your teachings? (This would be a first!) Do you provide ongoing support or is that additional to the $3,500 fee for the seminar?
Regarding the CD, I appreciate the offer but I think earning a nice house ($350,000) from each seminar of 100 people tells me enough. The attendees are crazy!
Robert Bou-Hamdan
Mortgage AdviserRobert
You are welcome to your opinion.It is interesting that over the years I found the main differences between the rich and the poor are.
1. Their mindset.
2. The way the invest
3. The rich have great advisors and are happy to pay for them.You are welcome to stay in your your paradigm.
If I could make you $150,000 why would you not pay me a fee. That’s the way my main business (www.metropoleprojects.com.au) works.
I’m suprised at your attitude if you are in business.
Don’t you think you add value to your clients? Isn’t your time and knowledge worth something? Don’t you expect to get paid for it?
Or don’t you think you deserve it?
I have not learned my knowledge for free. My time is worth heaps and I have spent a fortune on eductaion including post graduate education. My business partner is an architect and has an MBA in property law and finance.Is his time and efforts at the workshop worthless?
I have paid a lot in time money and stress learning from my mistakes. That must also be worth something.
There are lots of ways to pay for one’s education. Obviously some people are prpared to spend money and time improving and educating themselves and others are not.
I would suggest that a larger proportion of the first group are likley to well, but I accept that not everyone will.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auOriginally posted by MichaelYardney:You are welcome to your opinion.
You are so diplomatic!!!
Definately a trait I need to work on. I would love to be your assistant. I would work on 10% commission only as long as you ran at least four seminars a year. $140,000 a year would be very nice.
Kidding aside….
It is interesting that over the years I found the main differences between the rich and the poor are.1. Their mindset.
2. The way the invest
3. The rich have great advisors and are happy to pay for them.I could not agree more!
You are welcome to stay in your your paradigm.Nicely put. Unfortunately, I rarely share a similar view to the majority so I think you are way off the mark.
I just feel $3,500 to sit in a room with 99 others is over the top. I would certainly have no problem if it was a one on one session and the attendee was obtaining a benefit which I believe they would following reading your newsletters. You never answered if you provide ongoing free support. This may be of more value than a group meeting for 3.5k.
If I could make you $150,000 why would you not pay me a fee. That’s the way my main business (www.metropoleprojects.com.au) works.I don’t require your services. I am content with my own abilities. I wish others would be more confident or be courageous enough to ask for help instead of paying top dollar in search of the ‘ANSWERS’.
I’m suprised at your attitude if you are in business.Why are you surprised? Should I be over-charging people to obtain a benefit? Most of the information I see presented at seminars, I have provided free of charge to individuals. Not everyone is driven by money!
Don’t you think you add value to your clients? Isn’t your time and knowledge worth something? Don’t you expect to get paid for it?Or don’t you think you deserve it?
Of course I think I add value. I would not have any clients otherwise! Regarding how much my time and knowledge is worth, I think it is invaluable but I don’t get off on receiving a dollar reward. I get off much more on a sincere “Thank You!”. What I get paid I consider a bonus. Different strokes for different folks.
I have not learned my knowledge for free. My time is worth heaps and I have spent a fortune on eductaion including post graduate education. My business partner is an architect and has an MBA in property law and finance.Is his time and efforts at the workshop worthless?We all spend money and time. You just charge more for yours than most. Good for you!
I have paid a lot in time money and stress learning from my mistakes. That must also be worth something.Nothing new here. We have all made them.
There are lots of ways to pay for one’s education. Obviously some people are prpared to spend money and time improving and educating themselves and others are not.Totally agree.
I would suggest that a larger proportion of the first group are likley to well, but I accept that not everyone will.So there is no guarantee of success. What if your ideas are beyond an attendees risk profile (comfort zone). Is this not money wasted for them? Should they not be made aware of your methods prior to committing such a large sum of money?
Michael, as much as I consider you one of the more respected seminar guys in the market, I think $3,500 is a bit steep. The $55 dollar seminar sounds like a pretty good deal and I hope you outline your methods there before hitting people up for the big 3.5k. This would certainly be a far more equitable deal for all.
When is your next $55 seminar? I would be interested in attending (I promise I will sit silent!) I can only afford this one seeing I do not charge big dollars for my help.
PS: Mortgage Brokers are not allowed to charge for their services. A dodgy broker gets paid exactly the same as a top of the range broker. This is definately unequitable and another of the reasons behind my getting out.
Robert Bou-Hamdan
Mortgage AdviserOriginally posted by MichaelYardney:Quote:Until you are in the right paradigm/headspace to accept that you can learn things from others and it is worth paying for this you will stay where you are.But you have to be careful who you listen to.
Every year I spend thousands attending seminars and each year I learn something new. At one seminar (Brad Sugars) Pam and I paid $7,000 each to attend and I only got one really good idea. But that idea made me millions.
You will find most welathy people invest (not spend) thousands on their education each year and are happy to have high paid advisors.
The poor in general cannot see the benefit of ongoing education, especially after they have left school.
Again the problem lies in whom are you going to pay to educate you.
Michael Yardney
Michael… Fair enough- you probably have a wealth of knowledge about property development. But what you have written above sounds exactly like kiyosaki- the kind of “if you don’t enrol in my course, you are ignorant beyond belief and will die a poor and unhappy person” kind of spiel- I just don’t understand it!
I doubt most rich people do spend thousands per year on seminars as “education”- in fact, I think a lot of people who go to seminars are probably the same people, and therefore think everyone else does it.
Some property investors are the most anti-education people I have ever met. Threy sneer at University (many did not attend themselves), and yet will pay thousands to be told how to think by seminar spruikers- who often work on guilt and fear to get people to pay- something that will NOT happen at University.
I hope seminar leaders are “educating” people to think for themselves, because a lot of seminar “graduates” seem to repeat over and over the same old tired kiyosaki phrases, and I wonder if they are learning to think for themselves, or are comfortable being told how to think by seminar leaders. I guess then, when the tools become outdated from one seminar (eg flipping, deposit bonds on OTP’s etc), the seminar attendee will just go to another seminar to be told what to do again. I am hoping this is not the case, but I am wondering why so many seminar attendees (and indeed, some of the seminar presenters, say EXACTLY the same phrases, like some mantra.
Yes, I educate myself also- but my form of education has forced me to work things out for myself- either agree or disagree- rather than come out to repeat cloches over and over- I think that’s a bit stepford wife-ish.
I am sure your seminars are really interesting, Michael… but some people just want info- because the hypey “you can do it if you think you can, but maybe you’re just not ready to be rich [if you haven’t enrolled in my seminars]” salesperson stuff, gets to sound a little scarey after a while.
kay henry
The crux of this argument is will I be a high acheiver if I pay thousands and continue to attend seminars, maybe I will run my own seminars, write books get the money streams happening, this is the road we travel on the seminar curcuit.
Can we all be make a significant amount out of developments?, out of running seminars?, out of writing books?, ie the big question is can we all have financial freedom? etc etc, the answer is a big fat NO…..why, simply because imo it all runs on the law of averages or the natural process of supply and demand, like the pyramid schemes it runs out of puff, sometimes for no reason we can understand it just does, the trick to it all is find your own idea, get in early and work hard, and forget the big dollar seminar curcuit, unless you absolutely positively want to follow through on this concept with complete disregard for all other things important or not.
Just an opinion.[buz2]One post to answer a few separate questions.
Do we provide ongoing follow up
Definately– ongoing lifetime follow up by phone and email plus two free seminars a year with private small group meetings afterwards.Attendees become part of the inner circle.
Do I make money out of presenting seminars?
Sure I do buts its sort of irrelevant to my overall position.
Remember I started these annual Real World workshops to counter the BS get rich quick seminars. To bring some facts and experience into to picture.
I don’t make $350,000 out of the seminars. There are huge costs and I provide experienced presenters I also pay interstate airfares and accomodation.
I still make lots of money but thes etake montsh and months of preparation.
The market has moved on so what I speak about this year is VERY different to last year.
But the money from seminars is not why I do it. I enjoy presenting and I love the positive feedback from attendees .
My property portfolio probably made me 20 times what my seminars did last year.Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auOriginally posted by MichaelYardney:
Do we provide ongoing follow up
Definately– ongoing lifetime follow up by phone and email plus two free seminars a year with private small group meetings afterwards.Attendees become part of the inner circle.
I knew you would. Good for you! There are too many churn and burn type seminars out there.
Do I make money out of presenting seminars?Sure I do buts its sort of irrelevant to my overall position.
I don’t make $350,000 out of the seminars. There are huge costs
I know how much it costs to run these things and set them up. I would still expect you gross before tax in excess of $250,000. I am jealous!!!
So when is the next $55 special in Sydney? I seriously want to check it out!
Robert Bou-Hamdan
Mortgage AdviserOriginally posted by The Mortgage Adviser:
So when is the next $55 special in Sydney? I seriously want to check it out!Robert Bou-Hamdan
Mortgage AdviserRobert
Its a pity you missed my annual briefing which was held last month. Next one is next year.Despite all this talk about my seminars I really don’t do so many. My business is property not eductaion.
I hold one expensive workshop in Melbourne each year in June and a round of annual briefing sessions in March/April. We just had these and they were literally sold out in each state – over 1,100 attendees in 4 states.
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auI guess I will just have to wait. I am sure I will find plenty of info about you and your teachings by searching.
I might see you next year.
Good luck with it all.
Robert Bou-Hamdan
Mortgage AdviserMichael, nothing personal, but I was asked why I was not so critical of your comments pertaining to living off equity. To be honest, I did not read the earlier pages of this thread.
As a result, I have written an extensive response to a few of your comments on this subject to be fair to poor Terry!
Nothing personal guys… I just think this ‘strategy’ is ridiculous and should not even be called a ‘strategy’.
Sorry for the length.
Enjoy!
Originally posted by MichaelYardney:Theer is no stamp duty on mortages any more and my bank (NAB) does not usually charge me establishment fees, and even if they did, it would be irrelevant.
I am just wondering, when was stamp duty on mortgages abolished?
If you mean once you initially borrow, are you forgetting upstamping to tap into more equity?
Imagine I went and got a real job and earned $100,000 After tax and medicare levy I would have $50,000 and even less after super.Let’s make this a little more realistic. You do NOT pay tax on super so take it off before tax. That would mean you earn a taxable income of approximately $91,000 based on minimum super. In the highest bracket (and neglecting the fact that you have a stack of deductions from your properties you want to use to tap into equity), this would leave you, at worst, at least $46,865. You also still have the $9,000 super which should be growing for you.
If I have a property portfolio worth say $2million in good capital growth areas my properties go up by say $200,000 per annum (on average).It is a BIG IF assuming consistent 10% per annum growth in any area over a long period but I will leave it for another discussion.
The bank will lend me against this extra equity and I borrow $100k at 7%. (I could borrow more)This would cost me $7,000 interest and I would be left with $93,000 to live off or invest, or pay off other loans.
If I worked for the $100k and paid tax I would only have half that.
A true breakdown of this ‘strategy’ using your example and assuming all money is used to fund lifestyle will see the following happen…
Year 1
$100,000 Borrowed – $7,000 CostYear 2
$100,000 Borrowed – $14,000 Cost…..
Year 14
$100,000 Borrowed – $98,000 CostYear 15
$100,000 Borrowed – $105,000 CostOH NO!!!!! I cannot afford to live any more!!! Oh well, I lived well for 15 years – BANKRUPTCY!!!
The above figures assumes at least 5% NET growth (Highly unlikely) per annum for 15 years and that you could borrow at 100% (Won’t happen). It also assumes that you could service the ever increasing level of debt with a decreasing income and that maximum loan exposure limits will not kick in.
When you own enough equity; cashflow is not important.Equity = cashflow.
This is correct. If you have enough equity, you will have a huge cash flow and not need this ‘strategy’ of tapping into equity!
Banks will lend against the equity of your properties,and you don’t need income (lo or no doc)Low Doc requires an income figure to be stated in most cases and LVRs are restricted. Mortgage insurance usually applies over 60% LVR. Stating an untrue income figure will see an audit and possible charges of fraud. Also, the money you are borrowing from equity is not deductible and cannot be called income as it is a DEBT.
No Doc is easier to get but the LVRs and maximum exposure limits are even lower. At least you don’t have to lie on the application to get the loan but you will run out of borrowing capacity much sooner.
Having debt is not risky, not being able to have it isDebt in the wrong hands is the riskiest thing ever! This blanket statement cannot apply.
Now at the end of the year you would need to find more money to pay the interest again for another year, but your properties should have gone up in value once more.This will be clearly explained as the seminar.
The big secret answer!
The crust of it is that you will either need to borrow more exponentially each year to cover previous years interest, live on less money each year or BANKRUPTCY!
Here are the figures if you borrowed additional funds each year to keep the same amount for personal expenditure using the same assumptions above…
Year 1
$100,000 Borrowed – $7,000 CostYear 2
$107,000 Borrowed – $14,490 Cost…..
Year 10
$100,000 Borrowed – $96,715.12 CostYear 11
$100,000 Borrowed – $110,485.18 CostAt least you will live ok for 11 years (notice the sarcasm).
Add in inflation and the strong possibility of interest rate increases during the term of this ‘strategy’, you won’t be able to sustain this for very long!
Wouldn’t it be nice to get a tax deduction for the personal items also. That is live and enjoy your life on before tax dollars.Well you can.[biggrin]
Rich people earn money, live and spend and pay tax on what’s left.
The majority of people earn money, pay tax and live on what’s left and have little left over for investment.
The first group have twice as much money to live on.
How do you do this?
You can, but I really can’t describe it here in this public forum, but it will be the subject of Dale Gatherum-Goss’s presentation at our “Real World” real estate workshop in June
I am disappointed Michael. Great sucker marketing though! Just tell them it is done through structuring your entities and holding assets in a particular way which any good accountant can help them with. There is no need to pay fees to attend a seminar which will tell them to go and see their accountant where they will pay more fees. A clever marketer would offer accounting services as well at such a seminar. Do you offer accounting services?
That is – this process only works when you have large amounts of equity and it should probably not have been discussed in this context without lots of explanation.This is why this sort of information should not be posted with the many qualifications to its use that apply. The only time you can use this is when you don’t need it.
Michael, please explain to all of us why someone with a lot of equity would need to supplement their income when considering the return off that equity and how reducing that return when you borrow to fund lifestyle for a few years will not lead to bankruptcy?
There tend to be 3 stages of investors.Income Stage – We work for our money
*Here we finance investment with our personal contribution.
*We are concerned with the efficiency of our physical body (we need it to earn income)
* We are concerned about cashflowSome investors progress to the next stage (most never do) …
Your last point is correct. Everyone still needs to fund their current lifestyle and most will never achieve the NET equity position required to live off equity!
Capital Stage – Money works for us
*We finance investment without our personal contribution because we use our equity to finance new aquisitions
*We are more concerned with the efficiency of our capital rather than with our physical excertionVery, very few invetsors move to the last stage…
As a result of getting through this stage, you have clearly funded your lifestyle and DO NOT NEED to live off equity!
Active Stage – Everything works for us
*We finance our investment the way we choose to
*We are more concerned with the efficiency of everything that we can influence
(Do you think Kerry Packer worries about his cashflow or even his equity. He sees the banks money or the money market’s money as his money. He does deals without putting in money or equity or cashflow)Not everyone is Kerry Packer who CERTAINLY DOES NOT NEED to live off equity!!!
By the way, Kerry Packer uses alternate funding sources to fund investment which returns a positive income which attracts additional taxes. Living off equity is going backwards and very different to funding further investment.
OK so back to living off equity….You’can’t do this until you reach stage 2 – the capital stage of your investment career.
…and you no longer need to live off equity.
Imagine you have $3million dollars in properties and $2million in loans.That leaves you with $1million in net equity.
It actually leaves you with far less USEABLE equity when considering LVRs.
You borrow $100,000 against this equity to live off. You allocate $7,000 of this to pay interest, leaving you $93,000 to live off. (better than paying 50% tax on earned income).At the end of the year you have eaten up your money and have to go and borrow more.
But on average your properties have gone up $300,000 over that year (10% per annum)
Lets say it was a bad year. They only went up $200K. At the end of the year you are still $100,000 ahead – in other words $100,000 more equity than you started the year with to invets again or do whatever you want.
This involves a lot of imagination, assumption and hope. Don’t forget, the interest on the $2 million also has to be paid and a few little economic changes can destroy you. Look at the current market… correction in property prices downwards, a few interest rate increases, rental returns dropping and lenders tightening their lending policies further. What do you do now Michael???
So Michael, this strategy is definately not for beginning investors. You need at least $1 million nett equity or more for it to work.I don’t believe any half decent investor with $1,000,000 in NET equity would need to tap into equity to live better. This is a ‘strategy’ in difficult times ONLY!
Robert Bou-Hamdan
Mortgage AdviserAnd as Kay so clearly pointed out in another thread, the tax on $100,000, even after taking super out, would be much less than the figure used as tax in both Michael’s and my examples.
Robert Bou-Hamdan
Mortgage Adviser
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