SIS, I do not dispute using equity for investments when serviceability is evident. My issue is with using it for lifestyle, income and to make repayments on other loans. If anyone has to do this, they could not service the loans so they should not be borrowing more. The biggest problem is with capitalising interest which is just ridiculous.
Whoever uses these strategies, in my opinion, should sack their advisers.
Robert Bou-Hamdan
Mortgage AdviserHi all,
It seems as if ‘steady’ has opened up a can of worms.
There are a few qualification required here.
Steve Navra is not participating in a scheme of tax avoidance – he has a private ruling from the ATO verifying the legitimacy of the approach he uses. Steve will also, as part of his service, arrange for a similar ruling on your behalf as part of his service.
Steve cashbond approach utilises equity that may otherwise be locked away to buy a cashbond which then in turn is used to increase serviceability. This is something he does for his clients – people who as a rule of thumb are very financial savvy and can see the benefits of this type of approach.
Steve is also the first to admit that living off equity approach requires a tighthening of the belt in low growth periods.
As for The Investors Club – we have moved on from the 7 properties scenario. That figure was initiated when properties were $150K each – we now suggest a higher (equity) valued property portfolio in proven areas to reflect the changed nature of the property market.
We also have in-house software to model the effect of the ‘living off equity’ approach. The modelling includes, if you wish, some additional borrowings to pay the additional interest.
Using reverse modelling for my portfolio using past 30, 20 and 10 years suburbs statistics and average wages the system does work. And my LVR, using this approach, will be considerably (and I mean considerably) less than 80%.
The approach is not dependent upon doubling every seven years – individuals can play with the doubling rates to their hearts content – and see what effect this has on their portfolio.
For those who do not believe it I suggest you go back 10 years and ‘buy’ a median priced Brisbane house and then a further 5/6 median priced units – then do some maths and regularly draw out an average wage (as a starting point) and see how you go. Quite simply it works.
We also have access to statistical information about rental increases and the part that this plays in assisting with portfolio management.
Additionally some (not all) of the draw downs are legally tax deductible. See an accountant to determine which ones.
As previously stated do not dimiss the concept – sure it is not for everyone but (generally speaking) individuals also bring other assets and income sources to the ‘retirement table’ when they arrive there.
Besides you can always focus on acumulating a high valued growth portfolio and explore the options when you choose to leave the workforce………you could always do a Jan Somers and sell a couple to payout loans and live off rent, or sell the lot and lose half in CGT or get a guaranteed income and rely on the pension which is $21K/annum provided you have no income or assets.
The only point I agree with Rob on is ‘it is about quality not quantity’ it is what we tell people all the time.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Originally posted by The Mortgage Adviser:
If anyone actually had a property portfolion consistently returning 10% per annumIt is quite feasible to average over 10% per annum over a period of time however, as property cycles move in waves it cannot be consistently relied upon each year.
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!Just an example Rob
1 property, value $100k
Equity 80% 80k
Loan 20% 20k
Interest risk at say 7% 1400pa
Growth rate say 10% 10k (100k x 10%)or
4 properties, value $400k
Equity 20% 80k
Loan 80% 320k
Interest risk at 7% 22400pa
Growth rate 10% 40k (400k x 10%)In the second example your interest risk is higher but spread over 4 properties. To achieve the same $value of growth as in the first example you would only need quarter the growth rate or 2.5%
Neither strategy is right nor wrong. Is is a numbers game, as with items with lower margins you need to carry a lot more stock.
The biggest problem is with capitalising interest which is just ridiculous.Many developers use this strategy of capitalising interest. Their projects tend not to produce income especially in the early stages. Funding costs have to be pre-calculated into the price to determine the feasibility.
Regarding redrawing equity to fund lifestyle – while I do not agree with it I am guilty of the process. Doing this allowed me to leave the workforce to become a fulltime property investor. This does require a degree of discipline however.
Everyone has their own comfort zones and what is ludicrous for one may be lucrative for another.
Cheers
JeffHi Derek, thanks for very informative post.
Do the Investors Club provide details on amount of equity required for this system to work today. I would be interested in this info.
Regards, M
Derek,
What you are outlining is very different to what Terry described. Also, there was no mention of ATO private rulings or cash bonds. This changes a lot and is certainly not something for mum and dad investors to be able to do without paying large fees to someone like The Investor’s Club for the support they need to pull it off.
I would be interested in seeing the contents of the ATO private ruling to see what it actually covers. I doubt that capitalising interest would be deductible when non-deductible expenses are funded or a non-deductible loan is paid down.
As for going back ten years to check if this ‘system’ works, there is no point. The last ten years are no indication of the next ten years and as you outlined yourself, the 7 property ‘system’ is no longer used. I would guess because this no longer works or investors lost a lot of money or equity in the last two years.
Just about having other assets and income sources, this is important. To achieve the type of capital growth required (in most cases) would often see properties purchased with low yields. To be able to live off equity and continue borrowing would require consistent capital growth and fairly low LVRs.
Where do the deposits for additional purchases come from if an investor needs to borrow to fund their lifestyle, income and to pay interest expenses. This means they are going backwards (from a cashflow perspective) and borrowing further to fund the next property needs some pretty strong capital growth and a high LVR on the next property and the existing property used to fund the new purchase. What lender will continue lending to someone who is consistently going backwards and is totally reliant on rental income?
Jeff,
So what do you do when your returns drop off for a few years? How does your family eat and how do you fund your lifestyle or pay an interest expense you clearly cannot service without strong capital growth?
In your example, there is a huge difference between servicing $14,000 a year and $22,400 a year in tough times. An investor should not purchase additional properties just to speed up the rate of capital growth so they can tap into equity. This is a recipe for disaster. Equity can also go backwards and I am sure every investor knows someone who this has happened to in the current market. Serviceability is the most important factor. Without it, you should not borrow more until your position improves.
As for your comments on capitalising interest, it is common for developers to do this but we are not talking about developers. We are talking about your every day investor.
Also, in the situation where you tapped into equity ton fund lifestyle, I am certain this was a short term thing as a result of a huge change in your plan. This is also different to what we are discussing. You cannot tell me that it was part of your plan to regularly tap into the equity because you could not afford to live or repay interest.
Robert Bou-Hamdan
Mortgage AdviserAs for going back ten years to check if this ‘system’ works, there is no point. The last ten years are no indication of the next ten yearsCorrect. In fact all my research indicates that the next ten years (give or take) will simply see a reversion to the values of ten years ago.
I can’t wait to see how the banks react to the strategy of ‘living off negative equity’…It seems I’m not the only one with a similar outlook. Try this article from the chairman of GMO, who I’m told manage some 80 billion odd dollars…
Cheers, F.[cowboy2]
Hi Guys
Rob, I can see your warming to the idea!
Derek, I beleive Steve Navra has a private ruling concerning his deductibility of interest for his cashbonds. Because the cashbonds return only about 4%, and it will cost you about 7% to borrow the money to buy them, there is a shortfall. The ruling is about the deductibility of this shortfall. The purpose of getting the bond is to increase serviceability, so deductibility is allowable.
But the neither cashbond or the ruling are not necessary for living off equity.
It has been about 4 years since I did the Navra course, so he may have modified his approach.
From memory, he says something like this:
Build up a large portfolio of good property while working. When you reach a certain level, you can ease off work, or stop completely. You can then draw down part of the growth of the portfolio afer it has occurred, taking now more than 80% of the growth.
eg. $2,000,000 worth of property. If the portfolio grew at 5%, that is $100,000 growth for the year. In this case, the investor could take a max of $80,000 out for use (lifestyle etc).
The next year, you portfolio does not grow at all. That means you cannot take out any extra funds. You may have to get a job! or you may have some money left over from the previous year.
Part of the money you take out would need to be used to pay for the additional interest incurred.
Steve Navra is a licenced Financial Planner, and he also runs cheap weekend courses a few times a year. He also incorporates shares into his program as well and suggests building up a good portfolio of shares which will add to your income.
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 The Mortgage Adviser:
Jeff,So what do you do when your returns drop off for a few years?
I now have a very strong commpercial property portfolio with longterm leases to national and international tenants and regular rent reviews. I endeavour to protect the cashflows derived from my properties.
How does your family eat and how do you fund your lifestyle or pay an interest expense you clearly cannot service without strong capital growth?Rob, I clearly can afford to service my commitments by purchasing cashflow properties. Because we are talking about the concept of capital appreciation and compounding growth does not mean we ignore the income part of the equation. My use of equity to enable me to leave the workforce is not dissimilar to starting up in business or even taking out a student loan to educate oneself.
My example showed the worst case scenario for interest risk. It assumed 100% vacancy in both examples. With 4 properties there is less risk of 100% vacancy
No, I did not intend to draw on my equity to fund lifestyle regularly and forever. As I said, I don’t agree with it but took a disciplined approach in order to achieve a “researched goal” within specified time constraints. I achieved that and now draw from the surplus income. There will however, come a time when I will “spend the kid’s inheritance” (for want of a better expression) – they can earn their own living.
Cheers
JeffTerry, I am certainly not warming to the idea. I still think it is ridiculous. For someone starting out, this is a recipe for disaster.
Regarding deductibility on the cash bonds which you say return 4% but cost 7% to hold, what is the point? After tax, you are still losing more than half of the gap in interest expenses. How on earth does this improve serviceability????
I also noticed you changed your structure to include building up a large portfolio WHILE WORKING. This, again, is totally different to buying properties from scratch at the rate of one a year and living off the equity. Living off the equity is not much different to getting a reverse mortgage when you are older. This is not a strategy to increase property holdings but to enjoy retirement.
Robert Bou-Hamdan
Mortgage AdviserHi Rob again
I was talking about two different strategies. The one above by me was concerning the Navra method.
The other one by the investors club (which is now no longer current) involved buying one property per year and then living off equity in year 8. Of course one would be working during the period when you would be buying proeprties – otherwise how could you proceed?
If you don’t know how a cashbond (annuity) can improve serviceability, then I can explain.
Yes living off equity is just like a reverse mortgage. Don’t you agree that these are good? Someone can retain their asset , which will still grow, and get some money out.
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, there is a huge difference between what you initially said and what you are saying now. Doing your scenario is not effect at the start of an investing life. It is only towards the end where it might come in useful but it would be assumed that positive gearing would well and truly have kicked in by then so there would be no need to draw on equity. That is, if you invested intelligently during your working life.
Regarding the cash bond, I would love to hear your explanation as to how serviceability is increased USING YOUR EXAMPLE ABOVE!
Robert Bou-Hamdan
Mortgage AdviserRob, I Don’t beleive there is any difference to what I initially wrote. Maybe your perception of the concept has improved.
Of course this strategy would not work at the start of someone’s investing life. That’s why the investors club were saying to wait until year 8 to withdraw equity, that way the property would have had 7 years of growth behind it before you increased the loan.
Unfortunately it can take longer than 7 years for many properties to become positively geared, so increasing rents would help, but probably would not be enough. Therefore this could be supplemented by equity draw downs.
Rob, what do you think of reverse mortgages?
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 had better start a new topic for the cashbond ‘debate’
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, I think my perception is fine and believe that you have tried to adjust your information to appear more suitable and expand on your initial post to include scenarios which I allowed as exceptions in my responses. I have included your initial post which I had issue with…
Originally posted by Terryw:I 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.
This does not state at the start of an investment career. It does not indicate what sort of income would be required to achieve this or where deposits will come from for all the usually more expensive properties that provide strong capital growth. It certainly does not outline that the first property may also be worth what you paid for it or less in 7 years as many investors have experienced in recent times.
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.This assumes that the property has grown and you take the money out to use for living expenses as income is insufficient to live on. It also suggests paying interest from borrowed funds. It does not address the problem of not being able to borrow any more if you cannot service all loans from your current income which, if you could, you would not need to do this. It also discards the issue of non-deductible expenses accumulating at an exponential pace through capitalising interest.
In year 9, you then access the funds in property 2.
In year 10, property 3, and so on….Makes it sound so simple but, in fact, this is highly unlikely to occur.
at the end of the cycle, you go back to property one, and it has doubled again so you can take out more funds.YOU WISH!!! If this is needed, can you imagine how much non-deductible debt has accumulated. No way would any lender give you more money with your ever increasing level of negative equity and negative serviceability.
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]Sounds terrible in theory and I don’t see why the magic number is 7. This crazy investment idea can be done with 1 or 20 properties. Again I must emphasise that anyone who actually sits down and plans to do this (UNLESS FOR RETIREMENT) should have their head read.
Your most recent post is now outlining additional weaknesses in this scheme. Regarding increasing rent, you can’t just wake up one day and increase rent. There are leases and there is market demand. You also mention using the equity again. If there is a problem with the properties turning positive, does it not follow that the capital growth is not occurring as you planned? Where will the equity draw down come from.
I think that when you outline a scheme in a forum like this, you should outline positives and negatives so people can be made aware of the pitfalls. If this was such an easy way of property investing, why are the former advocates no longer teaching this method?
I don’t think anything else needs to be said as their decision to cease teaching this ridiculous method speaks for itself.
As for your question about reverse mortgages, I am not a huge fan but beleve they are a good way for a retiree to access funds. I believe that the whole family should be involved though so the beficiaries may offer an alternative to the retirees seeking to access some funds instead of loss of the property when the borrowers die or move into full time care.
Also, before you try and compare a reverse mortgage to your example of an investment idea, a retiree cannot borrow money to access equity under a standard loan so they cannot enjoy this fantastic investment idea of yours.
Robert Bou-Hamdan
Mortgage AdviserI don’t understand what that post was about.
It appears you just try to attack anything I write.
You still don’t seem to be able to understand this idea of investors club. There are no fixed time rules, seven years is just the time it takes for the average proeprty to double (their figures). BTW, I wouldn’t say year 8 is the start of someone’s investing career.
They have not abandoned it, but have modified it in some way. I am not a member so am not sure how they have modified it.
And it is possible to keep on getting loans, even if you do not have an income or cannot substantiate an income.
You also wrote:
Again I must emphasise that anyone who actually sits down and plans to do this (UNLESS FOR RETIREMENT) should have their head read.Unless for retirement? So it is a good idea it is it for retirement? Isn’t that the goal, to give up work?
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:I had better start a new topic for the cashbond ‘debate’
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]I have made a new thread at:
https://www.propertyinvesting.com/forum/topic/17263.htmlTerryw
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
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