Rob,
Having read your very long spiel tearing Michael’s thread to pieces, I’ve got to say I totally disagree with you, and agree fully with what Michael has put forth.
This might upset you as well, but despite my opposition to the IC club – which you know about – many of the senior IC members also use this strategy to good effect – big Kev calls it “harvesting equity”.
The numbers do add up correctly if big enough…trust me [biggrin] (Never trust a man who says ‘trust me’)
Enough, I’m buggin’ out of this thread.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
A fascinating train of thought from Michael, Robert, Mark and so on…
I’m in a position where I could live off the equity, in fact I did for the last year while at the same time started a new job(business) and bought an IP with the intention to develop it.A few questions to Robert…
In 10-15 years what will happen to the cashflow (rents) from the IPs? Do you expect that they remain at the same levels or will increase with inflation?Do you recall that Michael suggests using part of the equity to fund new projects? The simple 2 lot subdivision I’m trying to do should create a block worth at least $150K while the value of the existing house on subdivided land would not be much lower than what I paid in the first place. Then I’ll have the option to sell and pay tax or build and hold so I can borrow against the newly created equity….does it bother me if the prices remain a bit flat?
By the way, historically property prices (more than)double in every ten years and if you recognise the cyclical nature of the market then you won’t panic when prices start to fall….quite the opposite, you will see opportunities everywhere you look…
I’ve only been in this game for 3 years and the money I invested in education is under $2,000…maybe I’m a quick learner
….BUT…Michael doesn’t need these seminars to live off the fees, he’s doing them probably because he is keen to pass on knowledge and enjoys this type of work, the interaction and challenges so I say, good on him….everybody has a choice to pay him or ignore him….Originally posted by Dazzling:Having read your very long spiel tearing Michael’s thread to pieces, I’ve got to say I totally disagree with you, and agree fully with what Michael has put forth.
No problem. I hope it works for you.
This might upset you as well, but despite my opposition to the IC club – which you know about – many of the senior IC members also use this strategy to good effect – big Kev calls it “harvesting equity”.I don’t think the true way in which it is used is portrayed accurately. If you just borrow to spend on non-deductible lifestyle expenses, you will go backwards quickly. Each to their own. I would ask to see their figures before believing it worked to “good effect”.
The numbers do add up correctly if big enough…trust me [biggrin] (Never trust a man who says ‘trust me’)That is my point! It is only effective if you are “big enough”. When you are “big enough” to use it effectively, you do not need it.
Originally posted by vicgirl:I’m in a position where I could live off the equity, in fact I did for the last year while at the same time started a new job(business) and bought an IP with the intention to develop it.
Sounds like you used it as a short term remedy to a cash flow problem and also used it for further investment. This also supports my comments.
In 10-15 years what will happen to the cashflow (rents) from the IPs? Do you expect that they remain at the same levels or will increase with inflation?Again, supporting my arguments… I expect the rents to increase sufficiently to increase the positive nature of the investments and decrease the requirement to tap into equity.
The figures used in my earlier response did not consider this increase as there were no changes in interest rates included and a horrendously high consistent capital growth rate was offered as an example by Michael.
Do you recall that Michael suggests using part of the equity to fund new projects?We are discussing the example offered by Michael of borrowing 100k per annum to fund lifestyle. Using the money for further investment is a totally different thing to ‘living off equity’. I totally support using equity for further investment but think it is ridiculous to use it all to ‘live on’. I thought that was made clear by my Kerry Packer comments.
The simple 2 lot subdivision I’m trying to do should create a block worth at least $150K while the value of the existing house on subdivided land would not be much lower than what I paid in the first place. Then I’ll have the option to sell and pay tax or build and hold so I can borrow against the newly created equity….does it bother me if the prices remain a bit flat?What you have done here is something I would definately recommend to clients. This is not ‘living off the equity’. It is using it for further investment and spending ‘SOME’ on yourself. Your investment expenditure will bring you additional income and capital growth if invested wisely. I don’t believe that you spent all of it or even the larger portion of it on non-deductible lifestyle expenditure.
By the way, historically property prices (more than)double in every ten years and if you recognise the cyclical nature of the market then you won’t panic when prices start to fall….quite the opposite, you will see opportunities everywhere you look…I agree totally. I have no issue regarding property prices growing but to suggest 10% net year in and year out is just outrageous. This is a doubling portfolio in just over every 7 years. What about the stamp duty, other closing costs, land tax, etc. AND INFLATION. This must be considered somewhere.
If the argument to rebut this is 10% a year on the initial portfolio value (ie: not compounding growth), you will run out of the ability to borrow more very quickly.
everybody has a choice to pay him or ignore him….I have absolutely no problem with Michael whatsoever. I actually admire his commitment to publishing a very long and informative regular newsletter which I receive. My issue is with THIS ‘structure’ only which I believe I am qualified to voice an informed opinion.
I am happy to get into a discussion regarding the viability of such a ‘structure’ from a financing perspective for someone who is retired and trying to do it. It just does not make sense to do it and will be very difficult for those operating honestly. You would need to lie to borrow more funds.
If everyone ignores all the commentary on this topic and thinks about two questions, I think it will support my comments:
1. Do you agree you need a strong net equity position to be able to use the ‘living of equity strategy’?
2. Do you agree that someone with a strong net equity position would not need to use the ‘living off equity strategy’?
Answer these questions honestly and then tell me where, besides as a short-term get out of trouble plan, someone would actually plan to use this ‘strategy’.
Robert Bou-Hamdan
Mortgage AdviserHi
I have just come across this thread. It is great to see someone actually living off equity.
Rob, you say someone big enough for this should be able to live on their rents. But someone going for a high growth strategy will usually have low yielding properties, so they may have a lot of equity, but the rents would not necessarily be enough to live on.
I agree that compounding interest on the money lived off each year will be freightening, but the compoudning growth on a large asset base should be more than enough to cover this.
I still can’t see a problem with living off equity if done sensibly (ie only taking a portion of each year’s 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
Originally posted by Terryw:It is great to see someone actually living off equity.
Who is living off equity? I saw a person who used it for one year and used most of the funds to invest in additional income producing assets. I do not consider this ‘living’ off equity.
Rob, you say someone big enough for this should be able to live on their rents. But someone going for a high growth strategy will usually have low yielding properties, so they may have a lot of equity, but the rents would not necessarily be enough to live on.I totally agree with this.
I agree that compounding interest on the money lived off each year will be freightening, but the compoudning growth on a large asset base should be more than enough to cover this.I also agree with this.
I still can’t see a problem with living off equity if done sensibly (ie only taking a portion of each year’s growth).Looking at the finance side of things Terry, with low rental yields and no income from employment, how do you expect to get the loans required to live on?
Please note that if rental yields were not enough to live on, it can be safely assumed that the LVR regarding exist debts would be out of the No Doc range. Also, the lenders will use less than the actual rental income and load the rates further compounding the serviceability problem. If you can answer this for me, you have my support for ‘living’ off equity.
Please note, I define ‘living’ off equity to be using equity for non-deductible and non income or asset producing expenditure – ie: living the high life!
The Mortgage Adviserhttp://www.themortgageadviser.com.au
It seems this topic is being debated on two threads at the same time.
https://www.propertyinvesting.com/forum/topic/17535/3.htmlTerryw
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
That is right Terry. You started the other one didn’t you?
I posted my lengthy response here to Michael’s comments after being asked in your thread by John why I didn’t respond to Micahel in the same manner that I did to you. I had not read Michael’s earlier comments about living off equity so I went back, read them and responded.
I hope you, and everyone else, realise that I have no problem with you or Michael on a personal level whatsoever. I am merely trying to debate the issue – and maybe convince people as to my point of view on the subject of living off equity.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
or thrash out the Intricate details at the least..
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow Calculator[u]Originally posted by The Mortgage Advisor:[/u]
“I saw a person who used it for one year and used most of the funds to invest in additional income producing assets. I do not consider this ‘living’ off equity.”Let me be a nitpicker…I did not say what proportion I used to invest…I might be leading an expensive lifestyle…[biggrin]
And I’m not saying this was the only time I’ve “harvested”….my bank manager tells me he can give me 60K per annum no questions asked…wow…let that be an inspiration for beginners….and if I stuff up bad in 15 years? ….hmmm…that could mean I have to sell up at the age of 65…
Vic, it is clear from your post that used equity short-term and much of it for investment, albeit we do not know how much.
Why don’t you confirm it for us now?
Regardless of your response, I have come to the final conclusion, supported by advocates of this strategy (excluding Terry), that ‘living off equity’ is very restrictive in its use and requires a substantial NET equity position (in excess of $1,000,000) to even consider this as a ‘strategy’. It is certainly not to be used by the majority.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
…so if I have to sell up at 60 or 65 I’ll be left with a certain amount of cash, now you tell the rest of the story…
Rob,
I think you missed the point on how this would actually pan out. Terry is correct in assuming a neutral position on the portfolio, so living of your portfolio income is not an option. Let me work one through using some simple numbers:
Year1 opening: Net asset worth $2M, total assets employed $4M (50% borrowings neutral gearing)
LOC: $100K to live on plus costs of $7K interest = $107K reduction in net worth.
Year1 conservative asset growth at 5% = $200K CG(0.05 x $4M) increase in net worth.
Year1 closing: Net asset worth $2.093MYear2 opening: Net asset worth $2.093M etc.
In this example, your asset base (which is neutral) has accumulated growth of $200K of which you spent $107K for the year. You’re still ahead by $93K net! This is about a 5% return on capital employed and exceeds inflation.
So, in summary, your closing net asset worth has increased greater than the inflation rate so you are AHEAD. At the same time, you’ve lived off your equity on a comfortable NET income of $100K for the year. You pay no tax as your structure is neutral, and the “cost” of your $100K income is only the 7% interest charge from the financial institution.
Remember, I’ve already said that you spend that growth in ARREARS so there is little risk of you over spending in a bad growth year. Of course, the portfolio is spread across asset classes to mitigate exposure to any one class and reduce downside risk.
Hope this helps spell it out.
Cheers,
Michael.PS At the same time as outstripping inflation with growth, your rents are going up so your gearing is improving. So you’re actually going even further ahead and will soon be better than neutral too.
I think Michael Yardney was advocating 20% equity, i.e. the profit component of the development, so there’s none of your own cash left in the deal.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Hey guys, this is getting to be a hassle posting about ‘living off equity’ in two threads. My responses are in the more appropriately named thread over at https://www.propertyinvesting.com/forum/topic/17535/4.html and I hope all responses stay over there. This is too much typing!
By the way Vicgirl, what is your point?
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Robert, mate, my point exactly … welcome to my world, i love this forum site BUT it needs tweeking to prevent repeating posts.
resiwealth
It happens when a discussion diverges. I think this site just needs stronger moderation from a content perspective to tidy things up but, seeing moderation is voluntary, this is difficult to expect due to the time requirement.
I still like it here and just ignore posts of which I do not like the title or find do not interest me.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Did anybody go to michaels seminar?
If so how was it?w
Hi,
Yes, my husband and I went to Michael’s Sydney property briefing. We got far more value out of it than the $55 we spent. And my husband will be going to the workshop in June. By the way, there were substantial discounts for early bookings and our expense will be far less than $3.5K. I would love to go to the workshop and would except for the complex logistics of interstate childcare for two very young children.
We’ve been to a few seminars, some of great value, some I wished I hadn’t bothered with. However, one thing I can say is that by pursuing education (not just through seminars), we have challenged ourselves, broadened our worldview, and built the confidence to take the plunge and invest in multiple properties. And in that ‘getting our hands dirty’ we have learnt even more, both positive and negative.
I’m really looking forward to what my husband will bring back from the workshop, as some of its content is the next step in our property investing career and I want to be as well informed as I can be.
I guess I just want to say that education is neither good nor bad, it just ‘is’. What an individual does with it is up to them. Yes, some people will come away from Michael’s workshop and make their million from what was in it. Others won’t make a cent. That’s not about the quality of the education, that’s about the individual, their mindset and their circumstances.
Happy investing!
JennyI think the biggest problem with most seminar presenters is that they will not outline the content sufficiently until after they have been paid. What is the point of attending a seminar if you already now what they will teach you.
I know when picking a course, I look closely at the course outline, subject descriptions and qualification that results. Even then, I still ask questions to the course administrators.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksRobert, ditto – Phil
….BUT…Michael doesn’t need these seminars to live off the fees, he’s doing them probably because he is keen to pass on knowledge and enjoys this type of work, the interaction and challenges so I say, good on him….everybody has a choice to pay him or ignore him….
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