To live off equity or not to?

Old Skool Skata,

My example is really rough, but the thing to remember is that the total structure is “neutral” which means cash expenses is covered by cash income. You just live off the equity growth…

Its a rudimentary example, but if the assumptions are “bullish” just scale up your equity and down your leverage until they’re not so bullish. Just means you have to wait longer until you have sufficient “net equity” to retire on.

Cheers,
Michael.

Hi to All
This has been a most facinating topic as I’m about to enter into borrowing off equity to live. I raised my alarms of my poor cash flow but a fairly high level of equity on this site quite recently seeking help on what to do. My problem has been a quick exit out of the workforce because of a brain aneurysm operation and other complications some 18 months ago and the uncertainty of resuming work for the forseeable future…if at all. Advice came to me from quite a few on this site under my posting of “how can I live on 135k” that I should explore living off equity. I note under this topic I’m on now the different arguments for going down such a path. In my case I have 3 properties including my home worth 1800k and with loans on the 2 investment properties of 415k giving an estimated equity of 1385k. Hence the debt ratio is 23.06%. The debt of 415k is an interest only loans and is serviced by rental income and a bit from another small income. On top of that I have other income that gives me about 23k to live on plus I draw down on savings at this stage to survive ……however the savings are running out (and I’m a single father of two boys at uni). My home and one of the investment properties are in a redevelopment 3 and 2 storey areas in Canberra city and hence growth is probably guaranteed at the 10% level. The other property is also in a good area and growth will certainly continue on it albeit at probably 5%.
I have contacted my mortgage broker and discussed it and notwithstanding I’m not in employment its likely that I can simply get a line of credit of say 300k against my home which has no loan at present. I simply draw down what I require each year and pay interest on it as I go. On my calculations if I draw down 100k each year and pay the interest from it then at the beginning of the first year my debt ratio jumps to 515/1800 = 28.61%. On my calculations as below allowing for an 8% growth on all properties then in fact the debt ratio actually increases each year :
$K Value Debt Equity Debt/Ratio %
Current 1800 415 1385 23.06
Start Yr 1 1800 515 1285 28.61
End Yr 1 1944 515 1429 26.49
Start Yr 2 1944 615 1329 31.64
End Yr 2 2099 615 1484 29.30

Start Yr 9 (8%) 3618 1315 2303 36.35

…..and at 10% growth:
Start Yr 9 4245 1315 2930 30.98
Start Yr 10 4670 1415 3255 30.30
Start Yr 11 5137 1515 3622 29.49

Not that I’m expecting to spend 100k (say 93 after interest) each year but it certainly does indicate that you have to be in a much stronger position than I’m in to try to live off equity and keep the debt ratio low. Although at the expected growth of 10% the debt ratio does decline but of course how many properties maintain a consistent growth at that level over the long run? Anyway the impact of inflation and interest rate rises will require me to draw more down than 100k in a few years that’s for sure and of course it will raise the debt ratio. So I’m going to have to do something radical in the next couple of years at the latest.

So adding my bit to the argument for or against living totally off equity (based on what I’ve stated above unless I’m off the rails) you really do have to be in a state of constant low debt/ratio to maintain it for the long term.

Cheersj (‘[chill]’)
Carpe

Has anyone thought of using a family trust fund to unlock equity?

I’m not sure quite how they work but ive been told they are a good way to unlock large amounts of equity.