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Living off Equity conceptPropertySeeker [34 Posts] Hi everyone, I've been currently reading about this concept and sort of understand how it works. i.e. using property growth to constantly replenish the LOC. However if I were to execute this strategy, my LOC debt would grow and grow. How would I be able to reduce the debt? any ideas would be appreciated. Thanks Jamie M [2128 Posts]  Hi property seeker It's a dangerous strategy and given the new credit legislation it shouldn't be possible as you need to identify what the LOC will be used for and "living off equity" ain't going to cut it. You're assumption is correct. Your debt will continue to rise. Therefore, you're relying on your portfolio to continually grow in value. What happens when the market stagnates for a few years or goes backwards? Cheers Jamie Pass Go Home Loans Pty Ltd - Australia wide Mortgage Broker  Terryw [12327 Posts]  Living on equity means borrowing or living on borrowings. Borrowings will obviously increase. Any increased interest won't be deductible either. What if you lived on rents instead and capitalised loans? interest would probably be deductible if set up correctly Regards Terryw PropertySeeker [34 Posts] Hi all, thanks for the response. Terryw what do u mean by capitalised loans? I've been investing in properties for about 6 years now and not exactly sure how i can use these to retire. I could continue to buy more however it seems I would just have to continue to work to service them and never stop..... Thanks Terryw [12327 Posts] I mean, set up the appropriate loans, and not make any payments. Regards Terryw EPI_Den [71 Posts]  Ultimately this concept involves living off borrowings and hoping that your capital growth will exceed your living expenses (and by a fair bit). A tax implication of this is that your living expenses aren't tax-deductible so you slowly turn your investment (i.e. tax-deductible) loans into non-tax-deductible loans. Not necessarily a wise move. It's an extremely risky strategy! Capitalising interest involves paying the interest on your investment loans from the investment loans themselves. This strategy may mean you have to increase your investment loan limits (sometimes they end up greater in value than the property they secure). The advantage of doing this is that you can pay off your home loan faster. My experience is that you need to get a tax ruling to capitalise interest, and your primary reason given needs to be that you're paying off your home loan faster. If you say you want to capitalise interest so that you can reduce your tax debt, it'll be a miracle for the ATO to rule in your favour! I hope this helps. And good luck with your investing! www.everydaypropertyinvesting.com Terryw [12327 Posts] EPI_Den wrote:
My experience is that you need to get a tax ruling to capitalise interest, and your primary reason given needs to be that you're paying off your home loan faster. If you say you want to capitalise interest so that you can reduce your tax debt, it'll be a miracle for the ATO to rule in your favour! I hope this helps. And good luck with your investing! If you said the primary reason to capitalise interest was to pay off the home loan sooner then the ATO will likely deny the interest claimed. See the recent draft Regards Terryw Terryw [12327 Posts] Sorry, and the answer to that question: 1. No. A taxpayer's purpose of 'paying their home loan off sooner' does not mean that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)1 cannot apply to an 'investment loan interest payment arrangement' of the type described in paragraph 3 of this draft Determination. see http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2011D8%2FNAT%2FATO%2F00001%22 I should point out that I don't support living off equity in most circumstances, especially in these days of low growth. But doing it properly it can work - for a while at least. And rather than living off equity living off rents or dividends and letting loans capitalise may be a better way to proceed, especially if you have no other income and no outstanding private debt. Regards Terryw Derek [2835 Posts]  LOE needs property value increases and favourable lending conditions. If one of these is not present the whole concept falls in a heap. Neither of which are present in Australia at the moment (and may never return for a true LOE approach). The ultimate LOE approach is a reverse mortgage and speaking withssome from Police & Nurses today it would appear as if reverse mortgages are now severely constrained by NCCP, lending policies and credit availability. I might add LOE is not suitable in any way shape or form if you cannot manage a credit card. A 'big bucket LOC used in the LOE approach can be dangerous. ' Derek mattsta [287 Posts] it seems that many of the previous posters really dislike the LOE apprach. I wonder though if anyone in this forum, or anyone you know, actually lives via the LOE approach successfully? Terryw [12327 Posts] I knew some people who did - had to sell their properties in the end. Regards Terryw Derek [2835 Posts] Ditto Derek Derek [2835 Posts] You dag! Ooops - that comment is probably showing my age :) Derek PropertySeeker [34 Posts] Hi everyone, so it seems that LOE is off the table. I currently have 5 IPs with a bit of equity, what would people in this situation do now? what is their technique to retire? Selling seems abit wasteful and CGT isnt attractive. My goal is to retire Thanks Terryw [12327 Posts] You could look at borrowing some equity and investing into high yielding shares. Mst be careful tho. You could then possibly capitalise the interest on the LOC for hte shares and get some good dividends. give us some rough numbers? Regards Terryw Derek [2835 Posts] I recently participated in an online debate discussing this very issue. If your properties are paying their own way and you have some alternative income sources you can hang onto your properties pending a sale at the relevant time. A staged sell down is a reasonable option - if you have owned the properties for more than 12 months and you sell down in a low/no income year your exposure to CGT can be extremely low. Without knowing your exact situation it is hard to be more definitive - be careful of using LOC to fund shortfall. IN a flat market all you are doing is that you are erdoing your asset base. Derek PropertySeeker [34 Posts] Hi all, thanks for the responses. A rough number would be about 400k LOC. Only 2 IPs have positive cashflow the other 3 are still negative. I was hoping that I wouldnt have to enter the stock market as it seems too volatile and risky. Perhaps manage funds would be better suited for me hmmmmm Thanks Derek [2835 Posts] Hi Property Seeker, Numbers? What is your net cashflow position. What is the toal value of your properties? Derek SamAus74 [19 Posts] Property Seeker, what was the outcome on your question? I am not in your position but hope to be in. 5 -7 years.. Then what happens? As in how can one retire if the CG has not happened yet and some properties are still negative... Just wondering before I get there.. Wondering what you have decided.... Sam., Laury [34 Posts] Very interesting. I have bought a couple of properties but always been wary of the LOE concept. It appears that my gut feeling is supported by people with superior knowledge and experience! My wifes gut feeling is that we are not ready to by the next one - I wonder how can I change her mind...... |
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