To live off equity or not to?

No, not at all F.

I was merely defending the example as it was given in Michael Whyte’s post from Steve Navra’s course. This was the same example used in the property developing thread. The variables were already given.

Before you can discount the method you must first understand the methodology. What I am seeing in this discussion is a lot of miscalculations which is all I am trying to clarify. Perhaps you might actually like to answer my 3 questions.

BTW, by persisiting to use averages and medians I suspect you will only ever get averages and medians. As an investor you attempt to beat the averages.

Cheers
Jeff

Foundation, I have to concede on the turning point for a 7% difference between HPI and Floating interest rates. I applied a 3% growth rate to 10% interest rates and the turning point is around Year 7. At this stage the portfolio was worth $2.388m and debt was approx $310k. (This of course assumes absolutely NO rental growth and whether or not more competitive fixed rates were available.) At this stage you would have to sell part of your portfolio ($310k) to eliminate the debt and interest bill. This would then leave you with the original $2.0m to start again.

On that I’ll have to take back my Yeehaa but must stress that given different interest rates and growth rates then different amounts of capital and different configurations of the strategy maybe required.

I’ll have to leave you on that note. The skies have darkened and the lights are flickering and I’m sensing the storm might send a few power lines down in this neck of the woods.

Cheers
Jeff

The question put to you had changed to tougher times and I found your “I am good and pick investments that will continue to grow at sustainable levels” response as inadequate.

And how are you supposed to know what to save for a rainy day? What if it was negative straight away because you made a mistake or got ripped off (eg: bought through The Investors Club)?

But this ‘strategy’ is your plan. You have nothing else to live on and no equity to draw down. What do you do?

There is that response again. Some people make mistakes. This ‘strategy’ does not allow for any error whatsoever. You need to invest with the equity, not live off it!

How do you think you can sell only the growth you obtained? You have to sell the property or properties that that growth is linked to. If you are lucky to still be left with 2M worth of property, you would still have your initial debt and less property to utilise. Your options are getting tighter.

You can’t say this ‘strategy’ works if you use this rate and that rate. Things move and you have no control over them. To remedy an unexpected problem using this ‘strategy’ can result in disaster. There are many more ‘cons’ than ‘pros’.

Why is everyone assuming you can just keep borrowing 50% of capital growth when you have a negative rental income position and no job while you still have substantial debts on your properties???

The Mortgage Adviser

I have done various calculated scenarios. It only works with large equity positions and low LVRs unless the funds are for investment. You won’t live long if you ‘live off equity’.

The Mortgage Adviser

Do you know something that you would like to share???

The Mortgage Adviser

Yeah, it is an old ‘strategy’ that has no place for mum and dad investors. I do not see professionals using The Investors Club any time soon due to the off-the-plan crap they are selling right now.

The Mortgage Adviser

Does this comment not support exactly what I have been saying about a strong equity position?

This is where I would support such a ‘strategy’ as funds are being used for investment purposes.

It seems you think that they should use this ‘strategy’ to live. As a mortgage adviser, I can assure you that the above individual will not be able to get a loan unless they use no doc or lie. To be negatively geared, that would mean that they are either out of or borderline for the no doc loans. That leaves lying.

How would they live??? They can lie to get a loan and ‘live off equity’ and risk all their assets or SELL a property, reduce their levels of debt and access the cash. They would certainly need to invest in income producing assets if they only had the one property.

I just can’t see how saying a comment is ‘inadequate’ in my own opinion is some sort of personal attack. You are way too sensitive!

My calculations are very accurate as they were simplified for ease of reading. Regarding the constraints, the question put was about ‘living off equity’ for the 100th time. It is not ‘investing off equity’ which you keep speaking about. There is a huge difference.

As for this comment about me having the last say, it is a very common tactic for poor debaters to use to try and prove a point or win some browny points. Of course I will respond when you provide inaccurate information as I am certain you will respond yet again which I would welcome.

That is the nature of discussing or debating a topic. Just because you don’t like what the other person is saying does not mean you should spit the dummy and run.

I look forward to your further responses Jeff.

The Mortgage Adviser

I am still out on an opinion on this interesting discussion, but some of my thoughts would be:

“$100K (5% capital growth on share). The shares are liquid so you can use the growth as an income.”

if you use the growth that means your real value of the shares is declining. I also wouldn’t want to rely on shares to consistently grow 5% per annum. maybe I have just had some bad picks in my time, but DJ’s for example went from $2.20 to $1.60 and have only recently climbed back to $1.90. I paid about $1.20 for annaconda and sold for 38c before they became worthless. telstra have been under water for years. ERG collpased on me as well, despite having some promising projects on the go. i had a few wins on the way as well but to average it at 5% is a very big assumption IMO.

Just some poitns off the top of my head:

– I note you have no allowance for property costs, which at 80% gearing there would typically be negatively geared.

– I see you are also banking on a steady 5% cap growth on your properties, which according to many on this forum, there is unlikley to be growth for a decade or so.

– how will you draw the LOC out of the growth (if any) without any job or income to support it? the income is already committed to supporting the loans (I couldn’t see the bank accepting projected grwoth to cover your ongoing loan commitments).

If I had more time it would be interesting to model all this on a spreadsheet with tax rates and cPI adjustments etc to see if it were possible.. .there must be a definitive answer

John Carroll

I am skeptical of that approach. the exposure to the cyclical nature of the economy is huge. it works great at the moment as the housing boom is funding the consumer spending that is boosting business activity and resulting in great LPT returns, but if/when the boom eases you will have a double edged sword of easing cap growth and lower LPT returns. not being an expert in commercial property it may be that I just don’t understnad how LPT returns fare in a cooling economy.

John Carroll

The other day I was pondering living off equity and had a thought. What would happen if one was to continue to increase the loan on an investment property year after year and then died. The person’s estate would have to pay CGT on the property, but with the loan up high, there could be a shortfall after paying CGT and the loan back. ie you could possibly leave a mess for your children.

This could possibly be avoided if you had a large enough portfolio and were only looking at low LVRs, but still must be considered nevertheless.

Terryw
Discover Home Loans
North Sydney
[email protected]