living off equity

Lenders would not like to hear that you will be borrowing to pay interest. They probably wouldn't like to hear you will be using the money for personal use either – such as a holiday etc. Once you spend it it is gone. Whereas if you were to buy shares you would be increasing your net worth.

Things have changed to a huge extent.

Most lenders will not even give you a LOC, with undrawn equity. You can purchase something and have the LOC as a product, but not generally get a LOC with more than $10,000 undrawn.

Remember you will only get one crack at it, so be careful.

LOC'S (cash out) and Capitalising interest are done presently and very well.

http://www.birchcorp.com.au

Wow this is a huge thread, it is almost not even worth posting.

I am about to buy a property with $0 down (a vendor finance deal), and subdivide it and sell the land. Then live off the proceeds from the land a keep the property. Technically this is not living off equity, but it is a good way to draw out cash to live off while still building your investment portfolio.

Ryan

Hi Linda

A combination of equity structures and debt recyling in the mid term is the way to go forward.

I assume neither if your current IP's are cross collateralised as if so this could stop you in your tracks quicker than you think.

Takes time admitedly but can be done.

I think we all hope to get here Richard, I know I do.  A few people are saying that the original posters theory depends on continued capital growth but isn't that how you got where you are Richard? Your properties would not have been worth as much 10 years ago and your rents would have been alot lower.  But because of the capital growth of your properties your rents have increased and increased your CF.  I think the original poster is just accessing his wealth earlier in his wealth cycle than you are Richard and because of this he will need to draw into the equity rather than drawing into the CF.  I know it doesn't seem like "drawing into the CF" because it is cash and you don't draw back but realistically every one of those dollars could go into another IP and be creating more wealth.  There really is no difference between LOE or LOCF except that with LOE you are moving closer to the line of creating more debt than wealth.

It makes sense in my head, I'll try and explain.

Your wealth (Just in terms of property) = Equity + Cash (+ Debtors but we don't need to complicate it with them). 

Now lets assume I have 2mil in property 1mil equity and CF of 100k pa. (Actual figures dont matter just an eg)
Also ignoring CG on the PI and Int earned on cash for now.

Day 0 I have 1mil equity, Total Wealth = 1 000 000
Day 28 I have 1mil equity, with $7692 Cash, Total Wealth = 1 007 692
Day 365 I have 1mil equity, with $100k Cash, Total Wealth = 1 100 000

Now If I am living off purely the CF then there is almost zero possibility of running into Neg Equi or CF because I should always have that 1mil equity or more as time goes on. However by using that CF on living expenses you are still spending your total wealth.

This 100k could have gone into another property and then be looked at as equity.  Cash is merely unrealized equity.  So by spending only the Cash Flow you will be safe into retirement but at the same time you are realistically still living off your equity, just unrealized equity. By Drawing into that 1mil you have saved up there is then less and less buffer zone to counter market swings IR rises etc but as I said, no difference between drawing into LOE or LOCF except that you have a more guaranteed risk management if you only ever LOCF.

Hope this makes more sense

I live off $500 a year in Australia, and there is nothing wrong with my lifestyle………. join me on a bike ride or run one day and I can reveal all.

Paddyomail, there are lots of ways to provide an income, live off equity etc . Yes you are correct!
Thinking outside the square is the difference.

http://www.birchcorp.com.au

P.S does anyone think the banks will repeat the same mistakes one day and credit will once again become easy to get? Even if thats years down the track?[/quote]

Shanematt- the short answer is NO for the next few years at least.  Cost and Supply and investor appetite will combine to put a lid on the availability of money/credit for the next few years.  Risk will be a dirty word with banks ( in relation to mortgages at least) for the next few years at least. 3 years at least , and probably more like 5 years.  People dont generally understand that mortgages are funded with borrowed money. If you were to ask a person on the street where money for mortgages come from, they wouldnt know that our banks don't have anywhere near enough money of their own to lend for all the mortgages they write.  Australia's big banks get almost all their money ( probably about 80%) from two places- retail deposits and long term funding ( 3,4 and 5 year bonds)   and they get a small amount ( about 20%)  from other sources such as securitisation and short term funding ( 90 days). It varies from lender to lender but thats the basic idea.   Second tier banks/building societies and credit unions – such as Suncorp, ING, AMP, IMB, Adelaide Bendigo, Members Equity and so on, are similar, but usually have less retail deposits so tend to get a higher percentage of their money from securitisation and non banks are almost 100% reliant on securitisation. At the end of the day its all money, but different organisations raise their money differently before lending it out for mortgages. Whichever of the 4 sources you look at,  the costs for all of them has increased significantly.  Why do you think banks are competing so aggressively for term deposits ? Also, the GFC is only 2 years old. Major banks have lots of old loans from before the GFC  funded on 4 and 5 year bonds at ":cheap" margins, which will have to be rolled over to  post GFC margins over the coming 2-3 years. The gap between pre and post GFC money is debatable, but is anywhere from 90-120bpts higher than pre GFC, so nomatter what the RBA does with cash rates, rates are going to continue to creep up as the major banks increase their margins to cover their costs in coming years.  So thats the first part of the equation- cost

The second part is supply- APRA has proposed liquidity rules which will require the banks to hold more tier 1 capital than they've had to in the past. This is because the G20 is imposing these rules, and Australia wants to be seen to be in line with the G20 on a regulatory level.  What it means for the banks is that they will have to stockpile lots more money than previously to ensure liquiidty in case something like the GFC ever happens again and funding markets dry up.  Governments around the world will not pour trillions into keeping banks liquid if this happens again. Bottom line will be that  banks will have less money to lend.   Interestingly though, these rules wont apply to smaller lenders and non banks.. so maybe you'll see them relax credit rules sooner than the banks. Dont bet on it though. Securitisation markets are still pretty closed and its not as easy for non banks to raise new money to lend, either.

The third part is appetite. Basically, Australia is pretty much the only country on earth where 90 and 95% loans still exist. By sheer luck, our banks didnt buy into massive amounts of Lehmannesque toxic debt and have been able to continue to fund loans and raise new money thanks to the Govts Guarantee. But dont think for a moment that the same big investors ( pension funds, super funds, institutional investors etc) who fund British, Spanish, German, Irish, American, Portugese, Dutch banks etc  are going to forget about the huge beating they have been enduring for the last two years and for years to come, and suddenly lower their standards regarding the quality of loans and lenders they will invest in.  No one will be in a hurry to write risky loans again. This is why you're seeing restrictions on Lines Of Credit and cash out. This is why no docs disappeared, and why lo docs are barely available anymore. Its why every lender is cheery picking who they will and wont lend to. Its only going to be more of the same for the next few years. The banks have to make sure that they can raise money- and no one will invest in them if they are writing risky loans.

I wouldnt be surprised if credit gets even tighter throughout 2010. Its clear that even the two biggest lenders CBA and Westpac are pulling back. They need to slow down their lending. Its getting harder to attract retail deposits and they need to start provisioning for the new APRA requirements that take effect in 2011.   But, one day it will all open up again. There will be 100% loans, Lines Of Credit with unlimited cash out etc…. history always repeats!!!!

Thats still possible shamematt. You'll still have access to equity but its just stricter now.  No ones saying you cant get a Line Of Credit for legitimate purposes or access equity for legitimate purposes.  That hasnt changed.  The real difference now is that  banks will no longer give anyone money with a "no questions asked" kind of approach, just because they have lots of equity and can service the loan.   Banks want to know what the money will be used for and they want to be perceived as being more responsible in their lending practices. They'll give you the money but  will demand to see evidence/quotes for what you are spending the money on. So if you legitimately wanted to get money to do renovations or purchase a car, thats fine. You'll now have to make a declaration regarding the purpose of the funds in the loan application.If you were renovating they'd ask for quotes, building plans etc. If you were just doing an internal tidy up such as paint or tiles or new shower or kitchen they'd just ask for some quotes.  But be sure that you use the money for what you said you were going to use it for, because when you go back in 2 or 3 or 5 years looking to tap into equity again , they'll be taking a very close look at you assets and liabilities, and they'll expect to see some of the assets you said you were going to buy with the last money they gave you.  All in all, still possible, but its just stricter and you have to have a clear idea of what the money is for BEFORE asking the bank for it. 

As for the credit crunch you are referring to from a decade ago. There was a recession about 18 years ago, but there's never been a GFC like this. The Depression of the 30's was the closet thing from a perspective of scale and cost, but mortgages/lines of credit/equity loans werent really part of the picture then.  It was stockmarket related.  The difference  with this particular crisis has been the trillions of securitised funds being written off-  they're called RMBS  Residential Mortgage Backed Securities. As I outlined in my previous post, thats a big part of the reason why there will continue to be stricter control and tougher entry criteria for mortgages for several years yet.  

 We just need to realise that we arent exempt from the effects of  the northern hemisphere,  and its not going to be as easy as it was 3 or 4 years ago to get cash for anything we want.