Rob, I don’t recall you being so critical against Michael Yardney’s use of this approach in the developing Forum. I will go and have a look but it would be interesting to hear his comments as he has stuck it all on the line for this method.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
I rarely go in the developing topics. Do you have a link or remember the title?
Robert Bou-Hamdan
Mortgage Adviserhttps://www.propertyinvesting.com/forum/topic/16349.html
my understanding of the streategy is, in a nutshell, build a complex of units, use the 20% profit as your equity component, so refinance the whole lot and move to your next one. they will still be neg geared but you use your capital growth i.e. redraw equity, to live on and fund your living expenses.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Yes, Terry, there are some costs aassociated with selling, but there are also costs in keeping and paying off properties. Why not sell off some property at the peak of the boom and use that money elsewhere or even pay down debt to push up rental income?
I thought the whole purpose of investing in real estate is to have, for example, a million cash, instead of an ongoing million debt. Property CAN go down- just look at prices now in some parts of sydney, for example, as opposed to say, june 2003. I know some investors jump up and down and say this is a great time to buy… but for our existing properties, it means they too, have lost equity. How many people on here say they have just lost 100k in wealth due to the property turndown?
kay henry
Thanks John,
I found it and wrote a very long response to the living off equity idea which I am just about to post. I do not get involved much with the developing side of things.
Robert Bou-Hamdan
Mortgage AdviserI agree with Surrey’s summation.
Living off equity doesn’t make sense to me. If you look at the way big companies were rated by (for example) Standard & Poor in the last year, capital management & in particular, debt reduction, was a key focus.
I think the comment made was something like, “…in terms of capital management, nothing beats debt reduction..”
I guess if this is what “the big boys” are focused on, maybe it’s an indication that debt reduction (rather than trying to cover a higher level of debt with a higher rental income) should be the focus for a little guy like me too.
Cheers,
Jason.I have been living off the increasing equity of my properties for over 10 years now. The strategy definitely works for me and some of my friends.
Let me explain……
Imagine I went and got a real job and earned $100,000 After tax and medicare levy I would have $50,000 left to live on and even less after super.
If I have a property portfolio worth say $3million in good capital growth areas my properties go up by say $300,000 per annum (on average).
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.
When you own enough equity; cashflow is not important.
Equity = cashflow.
Banks will lend against the equity of your properties ,and you don’t need income (lo or no doc)
Having debt is not risky, not being able to have it is
Living off your equity only works when you have large amounts of equity and you have a certain mindset.
So returning to my example 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 this strategy is definitely not for beginning investors. You need at least $1 million nett equity or more for it to work.
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.
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, this is an exact copy of a post you made in the development thread…
https://www.propertyinvesting.com/forum/topic/16349/6.html
I suggest you go take a look as I posted a rather long response to this post and some of your others regarding living off equity.
Robert Bou-Hamdan
Mortgage AdviserMichael,
On your “real job”, I calculate (on a vanilla taxable income of 100k with NO deductions- this would be unlikely for RE investors, as all would have deductions unless pozz geared…) that the tax to be paid for 2004 earnings would be $33,807 plus 1500 for medicare allowance. The figure paid for tax would be even less for the 2005 year and less for future years if the Govt gets through the taxation cuts mooted in the budget. So basically, all up, tax paid would be about 35,300- and that’s with NO deductions. Superannuation on a “real job” would be paid by the employer- not oneself in a PAYE situation.
I’ve seen you use the 50k figure in another thread- but it’s not quite the case. It would be better if your example was based on the remaining 64,700 net actually received, rather than the figures you have used.
kay henry
Originally posted by kay henry:Michael,
On your “real job”, I calculate (on a vanilla taxable income of 100k with NO deductions- this would be unlikely for RE investors, as all would have deductions unless pozz geared…) that the tax to be paid for 2004 earnings would be $33,807 plus 1500 for medicare allowance. The figure paid for tax would be even less for the 2005 year and less for future years if the Govt gets through the taxation cuts mooted in the budget. So basically, all up, tax paid would be about 35,300- and that’s with NO deductions. Superannuation on a “real job” would be paid by the employer- not oneself in a PAYE situation.
I’ve seen you use the 50k figure in another thread- but it’s not quite the case. It would be better if your example was based on the remaining 64,700 net actually received, rather than the figures you have used.
kay henry
Kay Henry
You are correct.
Leaving taht aside, living off equity is still an appropriate strategy.
What do you do when you eventually own a significant protfolio of proeprties. Whether they are cash flow positive or not one day you may want to slow down and use your properties for the reason you bought them.
One way is to live off the cashflow. How many cashflow +ve proeprties giving you say $35 per week before tax do you need to own so you can live off them
Or you could sell a few properties and retire some of you debt and live off the other properties.
Or you could use the strategy I outlined. Many wealthy peolpe are doing this, but I concede that most peole can’t “get their heads around this”and that’s fine.
There is not one way to live off property and there is no right way. Its what suits YOU.
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:What do you do when you eventually own a significant protfolio of proeprties. Whether they are cash flow positive or not one day you may want to slow down and use your properties for the reason you bought them.
Use them on other investments that generate a positive cashflow and capital growth. Enjoy the money you are earning from the positive cashflow.
One way is to live off the cashflow. How many cashflow +ve proeprties giving you say $35 per week before tax do you need to own so you can live off themI would probably guess about $3,000,000 dollars worth. Remember, if property is appreciating in value, so is rental income. If you do not borrow more, the $35 per week per property turns into a lot more. Also, some clever structuring while accumulating properties will drastically reduce debt levels.
I might have to run some seminars to explain this to people.
Or you could sell a few properties and retire some of you debt and live off the other properties.This sounds a lot safer than the living off equity ‘strategy’. Alternatively, you could invest in more secure investments.
Or you could use the strategy I outlined. Many wealthy peolpe are doing this, but I concede that most peole can’t “get their heads around this”and that’s fine.It is not about getting their heads around it. It is that many people do not consider this a viable and sustainable medium to long-term ‘strategy.
There is not one way to live off property and there is no right way. Its what suits YOU.But there are many WRONG ways. I consider living off equity to be one of the worst.
Robert Bou-Hamdan
Mortgage AdviserAs I said with my post in the “Equity Lending Forum is a Disgrace” thread, living off equity is more dangerous for those people who don’t understand how to accurately calculate numbers like owners equity etc…and as is the case with some people in this thread, a simple thing like income tax.
I would like to introduce another aspect of reality to the discussion & that is the issue of loan term. Let’s say you have a portfolio of $3M with $2M owing and you have a 30-year loan term.
Even though you are lucky enough to live in a place where your portfolio appreciates by 10% every year (as suggested earlier), your are increasing your debt as well (eg, $300K growth – $100K to live off = $200K growth remaining). Only problem is that your $300K growth is on paper, whereas your $100K increase in debt is real (regardless of fluctuations in your $300K paper profit).
So yes, you could have $3.3M on paper, now owing $2.1M. But remember you originally borrowed $2M over 30 years…so if the lender was managing their risk appropriately they would re-asses your application to access more equity each year, based on the fact that the years are ticking by.
It seems as though your cash flow (rent) has to increase to compensate for the double whammy of increasing debt & decreasing loan term.
I have over $1M in equity in my property portfolio & nup, I can’t get my head around why I would ever engage in this strategy.
But I do hope some people continue to engage in living off equity so that in 20 years time we can have a more long term picutre of how the strategy works – I think we have the makings of a new reality TV show here. [biggrin]
Cheers,
Jason.Jason, one of my main objections to living off equity stems from financing it. For those who understand finance and how lenders operate, it is not reality to think that a retired person can continue borrowing while not working regardless of their rental income.
For most people with a portfolio large enough to be able to live off equity, they just won’t need to. For those that do need it, it must be assumed that most will have rather large debts existing.
Looking at serviceability and the only source of income being rent, most lenders will only use between 70-80% of the rantal income to calculate serviceability. Most of this income will most likely be used up to cover the existing debt so it is assumed there would be not much left, if any.
Still with financing, everyone keeps mentioning Low Doc and No Doc. What they fail to mention is that these products are restrictive.
Low Doc loans require an income figure to be stated. Granted, you will be able to write whatever you want, but you will hit a wall regarding maximum exposure limits very soon or run out of the ability to service unless you lie and state a higher income than that which you have. This has huge ATO repurcussions as is evident in recent media.
No Doc loans have a maximum LVR of around 65% (Most cases 60%). Looking at the example provided, ie: $3,000,000 portfolio and $2,000,000 debt, that is an LVR of 66.67%. You cannot borrow more until your property values increase and this is not certain every year especially in economic climates like the current one. Maximum exposure limits are also much lower than No Doc which is considerably lower than Full Doc.
Then there are the application fees, usually higher with no doc and low doc, additional stamp duty and other costs that must be considered.
To make things even more difficult, these loans usually attract higher interest rates. No Doc rates are considerably higher in most cases. You will be hard pressed to find any at 7% as allowed for in the example.
Add to this that lenders almost always load their interest rate by 1-3% (including on existing debts) when calculating serviceability, only take part of the rental income and make allowances for living expenses and it is even more difficult than most would lead you to believe. They will also be looking for an excuse to decline the loan if you are of mature age (because they cannot discriminate on age loan).
So far, I have heard people say that it is about calculating the numbers properly. I have provided a set of conservative numbers to demonstrate the effect of the example provided. I would like to see a set of numbers from somone showing how this will work effectively over the long-term.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Robert asks if I am affiated with Steve Navra. No I am not, but I did his course about 4 years ago, and I wish I had implemented his strategies. I have not had anything to do with him or his organisation since.
I really recommend his courses though. He covers shares as well as property, and goes into detail about his various strategies. The courses last for 2 days, but he only charges around $200, which is very reasonable.
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
Now that sounds reasonable to me. I just don’t see the value in paying thousands of dollars to hear ‘anyone’ speak!!!
What sort of strategies does he advocate? Please do not say ‘living off equity’!
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Robert
The No Doc loans insured by GE and PMI actually have a maximum exposure level of $500,000 each. This is not much and will be reached quickly. This can be extended with a couple by getting loans in one name only. So a couple could get up to $2mil in No Doc loans fairly easiy – if they had the equity and proper structure.
There are also other No Doc loans and asset lends. Yes the rates are higher.
People also have the option of increasing or obtaining LOCs while they are still working.
So all of this would give a person a good start.
And don’t forget, these people would not be retired. They would usually be classed as self employed. They may even find themselves able to qualify for full docs for a while.
BTW, in another post you asked when stamp duty on mortgages was abolished. Michael was referring to Vic where it was abolished in July last year (I think).
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:So a couple could get up to $2mil in No Doc loans fairly easiy – if they had the equity and proper structure.
So if they wanted $100,000 a year each to live well, are you suggesting they can only live for 10 years?
People also have the option of increasing or obtaining LOCs while they are still working.This would be the wisest thing to do as it will be very difficult continually obtaining finance when no longer working.
And don’t forget, these people would not be retired. They would usually be classed as self employed. They may even find themselves able to qualify for full docs for a while.But I thought the idea behind ‘living’ off equity was because you did not have enough positive cashflow to supplement your lifestyle. With low rental yields as you suggested for high capital growth, this would mean they were in a negative position each year and have no other income to deduct any expenses. The situation would get worse as time went on.
BTW, in another post you asked when stamp duty on mortgages was abolished. Michael was referring to Vic where it was abolished in July last year (I think).This is interesting. Is that just on upstamping or on all mortgages? I have not done a loan for a property in Victoria for well over a year.
The Mortgage Adviserhttp://www.themortgageadviser.com.au
Rob, Your couple want $200,000 per year!! I hope they don’t intend to live too long. If they only took $100,000 they could survive for 20 years (less actually due to interest). But there are other No Doc lenders out there too. Off the top of my head Peppers and La Trobe – yes both have high rates and are less than ideal.
But if the couple had other income, then they may not need $100,000, they could take much less to just supplement their incomes.
I beleive that all stamp duty (except on land transfers) was abolished in Vic. So no loan stamp duty at all. Also no stamp duty on businesses. So you could purchase a property in a company name and transfer the shares to someome without stamp duty – as long as it was under the land rich entity threashold which is about 2 mil.
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
There are actually a few posts over on the somersoft forum on the topic of living off equity. Steve Navra has made a few replies which I am going to print out and ponder over.:
http://www.somersoft.com/forums/showthread.php?t=14486&highlight=navra+bookhttp://www.somersoft.com/forums/showthread.php?t=19649&highlight=navra+book
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
Just had another brain wave. It may be possible to claim the interest on money borrowed if this was used to pay for expenses related to the vast IP portfolio that you would have if contemplating this strategy. You could then live on your rent money instead of the borrowed money.
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
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