Living off equity

Hi Linar

I think that living off equity was only a minor component of those 2 companies with the major aim being to buy as many properties as quick as possible and then to wait for the growth to kick in.

There was another financial planner, Steve Navra, who was a big fan of LOE and he used to say you should only access up to 80% of the growth after it happens – so in times like now where there is no or little growth, there should be no draw down for living expenses.

Things should get easier with finance once this financial crisis is over. Might be a while though.

It seems that what is happening now has put a hold on drawing down equity. BUT things will change and equity growth will return. We are in a bad few years i would think but it does not mean put the whole LOE draw down system in the trash.

Hi Daniel

The deductibility of interest depends on what the funds borrowed are used for. So if you take out a LOC and use part of it as deposit on an IP, the interest on this portion would be claimable. But if you then took some money for a holiday, then the interest on this wouldn't be claimable. If you have one LOC and mix it like this it would be very messy at tax time and you would be hurting yourself financially if you paid off part of the principle as this would need to go towards both portions of the loan in proportion. ie, you cannot chose to pay off the loan for the holiday first.

A way around this is to have 2 LOCs, one for personal expenses and one for investments.

It doesn't matter what the loan is secured by. Whatever property has equity will do – this doesn't affect deductibility at all.

Living off equity means you can borrow money to live off tax free – but the downside is you will have interest accumulating which you cannot claim. A partial way around this is to live on your rents and other money and to borrow for all investment expenses where possible. This may make at least part of the drawdown deductible.

A scary story of stupidity appeared in the Australian Property Investor in Nov 2008. They are a couple in their mid-twenties who have "retired" on their property portfolio using an amazing strategy.

From page 51 "While the interest payments on their loans eat up the rental income, Rob and Kylie use their equity to fund any shortfall, as well as their living expenses, refinancing their properties up to 82% loan to value ratio and using low-doc equity loans. These loans may not be around for much longer, but for now the strategy is working."

LOL!! Couldn't believe that this was their amazing strategy, especially in the current environment. Retire and live on our 18% equity in our portfolio, based on our property continuing to increase in value, faster than we can spend the money.

I hope Geoff Doidge does a follow-up article on them in a year's time, "Bankrupt and stupid". An experienced person like him should know better.

GMH

If you structure it right, you will leave that problem to your estate – which may be bankrupt

Yes, very interesting isn't it. It is hard to get money out of a dead person!

I disagree Banks and lenders do ask on most applications whether you have any other liabilities such as Taxation or Contigent liabilities and if answered YES this will be considered in assessing the credit risk.

the ATO will wake up one day………nah only of it makes the 7.00 TV or the front page of the paper…