All Topics / General Property / Living off equity

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  • Profile photo of LinarLinar
    Member
    @linar
    Join Date: 2004
    Post Count: 567

    From reading the posts from the mortgage brokers on this site recently, and from my own bitter experiences in trying to get finance, it seems that the days of refinancing to access equity to live off are pretty much over.  That being the case, what are investors who have subscribed to The Investors Club/Michael Yardney etc style of living off equity going to do?

    I have noticed that TIC is still advertising in the API this month so either they have changed their strategy or they are confident that people can still live off their equity.

    Does anyone know what will become of these investors/companies?

    Cheers

    K

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    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.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Linar

    I think one of the biggest issues is being unable to prove your income and wanting to live of equity.

    Lodoc loans to 80% with an unlimited amount of cash out have probably been and gone for the time being however full doc loans are still very much available to 90%.

    I think it will still be a year or two before the mortgage insurers go back to allowing unlimited amounts of "cash out".

    Richard Taylor | Australia's leading private lender

    Profile photo of devo76devo76
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    @devo76
    Join Date: 2007
    Post Count: 542

    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.

    Profile photo of danielleedaniellee
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    @daniellee
    Join Date: 2006
    Post Count: 197

    Hi

    I was actually looking for a topic like this. I read Michael Yardney's book about living off the equity. Was wondering:

    1 – Are you about to use the equity for both invesment and private use, and still be able to differentiate the purpose of the loan for tax deduction purpose?
    2 – What do you offer as security? PPOR or IP? Would that not affect how the LOC can be used?

    I am trying to work my head about this. It seems to me that if you use a LOC on your PPOR, that because the purpose of the non-investment nature of the PPOR, any usage of the LOC will not be tax-deductible.

    So, how does the LOC really work for tax deduction purpose? I have read about how investors use the LOC as a desposit for that IPs.

    Regards
    Daniel

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    daniellee wrote:
    Hi

    I was actually looking for a topic like this. I read Michael Yardney's book about living off the equity. Was wondering:

    1 – Are you about to use the equity for both invesment and private use, and still be able to differentiate the purpose of the loan for tax deduction purpose?
    2 – What do you offer as security? PPOR or IP? Would that not affect how the LOC can be used?

    I am trying to work my head about this. It seems to me that if you use a LOC on your PPOR, that because the purpose of the non-investment nature of the PPOR, any usage of the LOC will not be tax-deductible.

    So, how does the LOC really work for tax deduction purpose? I have read about how investors use the LOC as a desposit for that IPs.

    Regards
    Daniel

    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.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of danielleedaniellee
    Member
    @daniellee
    Join Date: 2006
    Post Count: 197

    Hi, Terry

    Thanks again. Have the LOC for investment only and live off the rental and personal income.

    Guess more investigating for me on this, not that I will have to deal with excess equity for years to come.

    Cheers
    Daniel

    mattnz
    Participant
    @mattnz
    Join Date: 2007
    Post Count: 574

    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.

    Profile photo of gmh454gmh454
    Member
    @gmh454
    Join Date: 2003
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    The elephant in the room on this is the unfunded Cap gain tax liability.

    Eg: Investor bought prop for 250K five years ago. Now worth 500k. Has drawn down additional debt to cover shortfall, and living expenses up to 400K.

    At this point the Cap gain liab yet to be paid is up to $ 62,5000 depending on marginal tax rates.

    Have seen a real life case of this where I think the individual has no equity left but is living off unpaid unrealised CGT.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    gmh454 wrote:

    The elephant in the room on this is the unfunded Cap gain tax liability.

    Eg: Investor bought prop for 250K five years ago. Now worth 500k. Has drawn down additional debt to cover shortfall, and living expenses up to 400K.

    At this point the Cap gain liab yet to be paid is up to $ 62,5000 depending on marginal tax rates.

    Have seen a real life case of this where I think the individual has no equity left but is living off unpaid unrealised CGT.

    GMH

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

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of gmh454gmh454
    Member
    @gmh454
    Join Date: 2003
    Post Count: 537
    Terryw wrote:
    gmh454 wrote:

    The elephant in the room on this is the unfunded Cap gain tax liability.

    Eg: Investor bought prop for 250K five years ago. Now worth 500k. Has drawn down additional debt to cover shortfall, and living expenses up to 400K.

    At this point the Cap gain liab yet to be paid is up to $ 62,5000 depending on marginal tax rates.

    Have seen a real life case of this where I think the individual has no equity left but is living off unpaid unrealised CGT.

    GMH

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

    Terry that is the direction I am seeing people heading towards.

    I guess as the financiers are secured by first mortgages then there is nothing the ATO can do.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

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

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of StumpCamStumpCam
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    @stumpcam
    Join Date: 2006
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    Strange how the banks don't even consider your CGT liability when assessing your net worth and LVR. I guess they don't care what happens to you after they sell you up and recover their principal. The ATO just has to pick over what's left.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    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.

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Remember, there is no CG until you sell.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of gmh454gmh454
    Member
    @gmh454
    Join Date: 2003
    Post Count: 537
    StumpCam wrote:

    Strange how the banks don't even consider your CGT liability when assessing your net worth and LVR. I guess they don't care what happens to you after they sell you up and recover their principal. The ATO just has to pick over what's left.

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

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