All Topics / General Property / To live off equity or not to?

Viewing 20 posts - 61 through 80 (of 127 total)
  • Profile photo of vicgirlvicgirl
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    Robert,

    The banks won’t let me have less than 20-30% equity so with a portfolio of 2 million now and 4 or 6 million in 15 years time I’ll have about one million left in the bank. That’s if I stop investing and developing now.

    Profile photo of marsdenmarsden
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    Living off equity depends on continued and sustained capital growth. It assumes that while capital growth may decline and grow these factors will in the long run average out to a growth factor of about 5%. As proof, proponents refer to growth figures from around 1965 on. Again, this positive growth has to be sustained or you are just eating your property. There is no need for property to continue to grow in value forever. In fact there are many reasons to suggest that we may experience many years of decline.

    Profile photo of stargazerstargazer
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    Hi all

    Interesting views there seems to be two camps.
    The yes its great
    The No its a a recipe for disaster.

    Steve Navra has been a strong advocate of this strategy. No i haven’t done his course or met with him.

    From other posts i have read he does advocate
    1/3 Proeprty 1/3 shares 1/3 cash but most important keep your equity working.

    From what i have read it appears to me that living off equity requires a reasonable asset base.
    80% LVR is ok in the property providing you mix in the other two.
    What i have difficulty with is the shares part as if you got the money in there the shares could go down and you are buying with borrowings.

    The cashbond is for servicibility issues.

    So to live off equity takes a bit more balancing and juggling than straight out living off income.

    If you get the LOE right the tax paid is less vs greater income. Leaving more money in your pocket.

    Do others see it this way?

    regards
    SG

    Profile photo of IbuycashflowIbuycashflow
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    It is a balancing act SG, and sometimes you have to go backwards in order to go forwards.

    Cheers
    Jeff

    Profile photo of Robbie BRobbie B
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    I just wish those supporting this ‘strategy’ actually took the time to ANSWER the many questions put to them regarding this. They seem to ignore the questions they cannot answer.

    The Mortgage Adviser


    http://www.themortgageadviser.com.au
    [email protected]


    Profile photo of IbuycashflowIbuycashflow
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    Originally posted by The Mortgage Adviser:

    I just wish those supporting this ‘strategy’ actually took the time to ask the many questions put to them regarding this. They seem to ignore the questions they cannot answer.

    While I am not fussed on the strategy I have applied it in order to free up my time so that I could concentrate specifically on property investment. This is not unsimilar to taking out a student loan to study due to better prospects when qualified.

    The strategy relies on being active in capital growth and I would not recommend it for a passive investor.

    It works well if growth rates are in excess of interest rates and it also works well if your portfolio is large enough so that the “actual growth (not percentage growth) is greater than your living expense.

    Your query that if growth was 5% and funding 7% then you would eventually run out of money. As I stated earlier $1.0m would take you 14 years based on those rates. I however read the example you referred to as 10% growth on a $2.0m portfolio giving a capital gain of $200k, less living expense of $100k, less $7k interest. This would leave $93k increase in net equity or 5% to $2.093m – can’t you see that?

    I suppose the next debate is whether or not these rates are achievable. The point is, that you only extract a portion of whatever growth you have.

    While one strategy is right for one it may not be right for another. Different scenarios will require different strategies and as your investments reach differnt levels you will adopt different strategies.

    Do not keep a closed mind on this sort of thing. It has its place, all methods have their pros and cons.

    Cheers
    Jeff

    Profile photo of Robbie BRobbie B
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    I corrected my previous post due to the typo. Sorry about that.

    Originally posted by Ibuycashflow:

    Your query that if growth was 5% and funding 7% then you would eventually run out of money. As I stated earlier $1.0m would take you 14 years based on those rates. I however read the example you referred to as 10% growth on a $2.0m portfolio giving a capital gain of $200k, less living expense of $100k, less $7k interest. This would leave $93k increase in net equity or 5% to $2.093m – can’t you see that?

    Everyone keeps asking this question to me. Either they do not read the previous posts or consider me to be a pretty stupid person. I know I am not stupid so I will assume the earlier posts were not read.

    Can YOU see that in the second year using the same interest rate and capital growth rate, the 93k you asked me if I could see would be less due to the interest expense from year 1 which is now capitalising? You even said it yourself that you would run out of equity in about 14 years in this example.

    I suppose the next debate is whether or not these rates are achievable. The point is, that you only extract a portion of whatever growth you have.

    My opinion on this is very simple. These rates are NOT consistently achievable so 14 years in the example we have been using is way over what it would actually be.

    Do not keep a closed mind on this sort of thing. It has its place, all methods have their pros and cons.

    I certainly do not have a closed mind on ‘USING’ equity. You said you have used it in the past to focus on ‘INVESTING’. This is totally different to my challenge to this ‘structure’. My challenge to using this structure ONLY applies to ‘living off equity’. My definition of ‘living off equity’ is spending on personal non-deductible expenditure without further investment. It is NOT viable.

    The Mortgage Adviser


    http://www.themortgageadviser.com.au
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    Profile photo of IbuycashflowIbuycashflow
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    Year 2 $2.093m at 10% is $209.3k, less $100k less 7k funding less another 7k for previous year

    So $2.093 plus 209.3k = $2.3023
    Less $114k = $2.1883m

    Can you see that?

    Where you are going wrong with this example is the growth rate applied is 10% not 5%. The funding is 7% so you are actually capitalising just under 5% and living off just over 5%.

    It doesn’t matter what the growth rate is, 5%, or 10%, the point being you only draw a portion of the capital gain and not the lot. Some has to be reinvested to account for the additional interest.

    This was only an example given to show how it works. No-one can guarantee what growth rates will be achieved over the years nor what the interest rates will be. By the same token, what is the magic in the figure of $100k to live. Everything changes.

    You said you have used it in the past to focus on ‘INVESTING’. This is totally different to my challenge to this ‘structure’. My challenge to using this structure ONLY applies to ‘living off equity’. My definition of ‘living off equity’ is spending on personal non-deductible expenditure without further investment. It is NOT viable.

    I focused my time on investing. I lived off the equity for almost 2 years and no longer needed to when the rent reviews from some commercial properties provided sufficient cash flow. The growth in equity over that time far exceeded what I drew on anyway.

    Cheers
    Jeff

    Profile photo of TerrywTerryw
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    If someone had a large enough property base, then if they were only to use a portion of the growth (after it happens), as Jeff has shown, then I cannot see how this could not be viable.

    In reality, most people at this level would have a few sources of income (which would also be growing), and would only be drawing equity to supplement their lifestyle. Often only temporarily.

    Living off equity would not be suitable long term for someone with only a couple of properties with a highish LVR.

    Terryw
    Discover Home Loans
    North Sydney
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    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Robbie BRobbie B
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    Terry, I agree with your most recent comments.

    Jeff, obviously you just try to torment people. Anyway, come back to me when you include the compounding effect of the interest on the interest and do a few more years to see the turn-around.

    The Mortgage Adviser


    http://www.themortgageadviser.com.au
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    Profile photo of IbuycashflowIbuycashflow
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    Yes you’re right. Year 2 should have been 114.49k (being 7% of $207k) leaving $2.18781m.

    Sorry, but I am not trying to torment you. If you don’t agree with my figures perhaps you could prepare your own and post them so we all can see otherwise.

    You asked someone to ANSWER some questions perhaps this is why you don’t get any answers – you ridicule every comment someone makes but don’t post any evidence to the contrary.

    I for one understand the concept. Whether I agree with it depends on the circumstances. There are many variables that cannot be pre-determined and hence the example given was only to show people the workings of the concept. By all means, set up a spreadsheet and put any rates you like in it.
    The turn around figure will differ depending on initial capital, the rates you use and the amount of drawings.

    Cheers
    Jeff

    Profile photo of Robbie BRobbie B
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    I have posted the figures for year by year… TWICE! Check the other thread.

    The Mortgage Adviser


    http://www.themortgageadviser.com.au
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    Profile photo of DazzlingDazzling
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    OK, I’m going to have another crack at this ;

    Investor : Mr Joe Bloggs
    Assets : $ 6 MM
    Debts : $ 3.5 MM
    Income : $ 300 K (5% avg…some 3% res and some 8% comm)
    Interest : $ 245 K
    Outgoings : $ 55 K

    Lifestyle : $ 55 K p.a. (I reckon $ 1,000 p.w. is plenty)…god knows what these people do that need $ 2 K p.w. to live on.

    OK, so here is Mr Bloggs, mid life, having built up a pretty good portfolio but still has considerable debt (LVR of 58%).

    His cashlfow position on his props. is completely nuetral. Rents cover his interest and outgoings. This won’t change over the years.

    His only intention is to pull the pin (quit) at his place of work and live off his equity.

    He’s pretty conservative, so he’s fixed all his loans in at 7%. He’s also asked his Bank Manager to pull out $ 55 K per annum to live off. Some tax, plus a grand a week to live off.

    Here goes;

    Starting possy;
    Assets $ 6.0 MM
    Debts $ 3.5 MM
    Equity $ 2.5 MM

    After yr 1 (Cap growth of 8%…a good yr)
    Assets $ 6.48 MM
    Debts $ 3.555 MM
    Equity $ 2.925 MM he’s happy so far

    After yr 2 (Cap growth of 3%…a bad yr)
    Assets $ 6.68 MM
    Debts $ 3.618 MM
    Equity $ 3.062 MM he’s stressing a bit

    After yr 3 (Cap growth of -4%…a shocker of a yr)
    Assets $ 6.41 MM
    Debts $ 3.685 MM
    Equity $ 2.725 MM he’s just about to have a heart attack – but loves the lifestyle.

    After yr 4 (Cap growth of 13%…a cracker of a yr)
    Assets $ 7.24 MM
    Debts $ 3.757 MM
    Equity $ 3.48 MM he’s over the moon and getting richer

    I’ll stop there….playing around with the figures helps alot…I also think needing $ 100 K p.a. to live off is complete twaddle and comes close to wrecking the scenario. If you do need that much, you’re either living in the wrong place or your consumption habits are way over the top – IMHO of course.

    Cheers,

    Dazzling

    “No point having a cake if you can’t eat it.”

    Profile photo of IbuycashflowIbuycashflow
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    @ibuycashflow
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    Your figures are wrong Rob

    Formula is: Equity plus CGain -L/E -Ann Int =Closing Equity
    Year 1 2.000m plus 200000 -100k -7000 =2093000
    Year 2 2.093m plus 209300 -100k -14490 =2187810
    Year 3 2.1878 plus 218781 -100k -22504 =2284087
    Year 4 2.284m plus 228409 -100k -31080 =2381416

    etc etc
    Year 15 3247358 plus 324736-100k -175903 =3296190

    The example given used a 10% growth rate and 7% funding rate. See how the net equity figure is still rising. At year 15 you are borrowing $100k to live on and 176k to pay the interest. Your portfolio will be worth $5.8m with loans of 2.513m.

    The other points you raised regarding risk are valid, but then nobody is denying this.

    So much for healthy discussion Rob

    Cheers
    Jeff

    Profile photo of MichaelYardneyMichaelYardney
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    Originally posted by marsden:

    Living off equity depends on continued and sustained capital growth. It assumes that while capital growth may decline and grow these factors will in the long run average out to a growth factor of about 5%. As proof, proponents refer to growth figures from around 1965 on. Again, this positive growth has to be sustained or you are just eating your property. There is no need for property to continue to grow in value forever. In fact there are many reasons to suggest that we may experience many years of decline.

    You are correct that there is no need for property values to grow forever, but the best predictor of the future is the past.

    I have a graph from Residex going back to 1860 showing how property prices have grown and grown and grown and grown.

    Since then we have had 2 world wars, a great depression, Federation, all sorts of governments, September 11th etc etc

    And property prices have grown and grown and grown and grown.

    I know where I would bet my money. I know where I have bet my money for 30 years now.

    Michael Yardney
    METROPOLE PROPERTIES
    Author of Australia’s leading property e-magazine.
    Join over 10,000 readers each month.
    FREE subscription http://www.metropole.com.au

    Profile photo of vicgirlvicgirl
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    Michael, you’re spot on!

    :-)

    vicgirl

    Profile photo of Robbie BRobbie B
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    Jeff, there is no healthy discussion when you use the demeaning “Can you see that?” comments even after asked not to. I think I have proven my point that this ‘strategy’ is extremely restrictive in it’s use. No more repetition is needed.

    The Mortgage Adviser


    http://www.themortgageadviser.com.au
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    Profile photo of foundationfoundation
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    @foundation
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    I have a graph… going back to 1860 showing how property prices have grown and grown and grown and grown.

    …and I have a graph from Commsec showing that from 1900 to the mid 1980s house prices fluctuated around a trend of around 4 times household income. A graph showing only $ with no real-world reference is next to meaningless. Also worth noting – any VCE stats student worth their salt could make mincemeat of the ‘statistical analysis’ found on most real-estate websites, and one (to remain un-named) in particular.

    Back on topic, living off equity is a fine idea. Unfortunately in the financial world very little appreciates at 5%+inflation continuously and indefinitely. If life was so certain, surely 90% of the workforce would buy a few houses and retire to live off their equity…

    Cheers, F.[cowboy2]

    Profile photo of marsdenmarsden
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    Exactly Foundation and well put! The ‘vested interest’ brigade are relentless in the production of meaningless statistics but their ‘job’ is to sell not provide sensible arguement.

    Profile photo of surreyhughes19905surreyhughes19905
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    Hi,
    To keep it simple (assume sufficient growth in equity each year):
    year loan interest pay
    1 $100k $7k $93k
    2 $200k $14k $86k
    3 $300k $21k $79k

    After each year you are still liable for the previous years loans. Each year therefore your money availble for living is decreased by the previous years interest.

    When do you pay out the loan and recover your “income”? Eventually you’ll be borrowing purely to pay interest.

    End of story?

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