4% Rule - what is it.....and how does it work...

1. Please provide an example of the drawing mechanics?

2. Also, what can the drawing be used for?

 

Rixter,

Have a look at my threat start....it is pretty simple. The drawing can be used for any living expenses as it is income from returns...there is not limitation. On an LOE you cannto make it deductible as it is investment debt used for personal day to day living expenses.

While we are on mechanics...a couple of people asked on your LOE strategy in particular...we have had not responses from you. Care to share?

 

Tonibell...no selling....yes you may need a small cash buffer when you start but assuming no debt easy to get this.

Know some people who have NO debt on property and just live off the rents....they live comfortably off a 4.0% (net of expenses) return ..though they have about 3m in property so that generates aobut $120k per annum. They only need about 85k for their lifestyle...due to depreciation and income splitting between husband and wife I believe they only pay about 12k in tax on the 120k from memory. Having said that they have sold on property just recently and their portfolio return will fall to 95k....but the sold asset will be put into shares averaging dividends of 5%...that will given then about another 30k odd.

 

Can you please provide an example how the returns are derived and drawn down?

In relation to LOE and in particular deductibility, have you thought about directing rent for lifestyle and LOC funds for portfolio expenses?

 

Net rental income / dividends / interest (cash or bonds).

if you are having to sell stock to fund your living expenses you are doing it wrong.

 

Isn't Living of Rent a completely different concept ?

Of course if you have enough assets you can just live off their yield and not touch the asset base.

The alternative idea is that you dip in to the capital base each year to supplement the yield and then have the asset growth replenish it.

This is easy to do with shares - but not so easy with houses (unless you have 25+ houses and sell one each year). Otherwise you look at Living of Equity by refinancing.

 

This sort information interests me. I want to retire early and with passive income

 

Rixter

There is a failure to communicate here...there is not mystery here.....when you own say $2m in property no debt and lets say worst case you have 3.5% pa net return after property expenses that is 70k in your hands a year. This is being ultra conservative as my returns net of expenses across my portfolio more like 4%....why would you need extra cash?

Also....you have never answered any detailed questions in relation to LOE...I feel there is a duck and weave...n'est pas?

The reason I say LOE has limited lifespan is due to a creature called APRA...believe me they are causing me headaches...I am glad I set up my Offsets/LOCs early in the current environment it is difficult at best...and this is coming from a bloke who has a massive cash reserve...so yes...I do have cash as a back-up in life...and most of this cash can be used for personal puposes as it comes from savings ploughed back into offsets as excess from rents.

So again please answer the question ...as I feel I have answered yours...

 

All debt completely paid off?
Would you rather have $8m of assets with $3m debt.... Or $5m of assets and no debt?

 

Thanks sash, the falcon answered my question a few posts above.

What are you want to know about the LOE strategy?

 

Nope.....if you are coming tonight I can explain....people are doing this today. They simply are living off rents. Most of them are pretty conservative as rents can go up and down...this is why they spend less than the total rents they take.

By the way you don't need 25 houses...and don't need to sell. The person I know does it with only 5 properties most in the 500k-700k range all debt free. Gross rents collected is about 150k...net is abou 110-120k depending on the year. So their expenses across 5 properties is 30k-40k per year. Their asset quality is solid Sydney suburbs nothing fancy but solid. Their mixture is mostly T/H built less than 15 years ago...they also self manage. This is a model in addition to shares I want to emulate. I might have 25 places now...but the plan is to reduce this via the 2 for 1 sell model I have refered to previously...where you sell two smaller properties with less CG and buy one solid one with go rents. A plan better done when I am not on as high a income.

Tonibell...you have a nice issue as you have bought larger more expensive properties but the ATO will always get their fair share. With properties say 300-350k...if they grow to say 550k after buy/sell costs the CG is 200k. Less 50%...you have 100k added to income. If you are not working and can income split as well as pay forward Interest in June. The you can technically with depreciation reduce your tax liability significantly. However, if you bought a house for 600k..and it went up to $1.2m and the net CG is $550k. Will be very hard to minimise tax even if you are not working...something to ponder. The net result is going to be the same ...

 

Great question....always better to have $8m with $3m debt than $5m net.....why?

The gross asset value add more bang on growth. On $8m even a small growth of 4% pa is $320k in capital gains..on $5m it is 200k.....add to this the power of compounding and voila?

Now I know some people will isn't that what LOE is about ...well yes technically yes. But the people who control money will always take a more conservative view and it is only paper money. Even though we know if it sold it would probably get the true value in most instances. It is a case of don't count the chickens will they hatch.

 

Bar this one - Are hard cg assets with low debt a bad thing when everyone else is paying its way?

 

I think you are one of the few people who have pulled off this LOE strategy.

So a couple of questions:

1. Are you reliant only LOE income for day to day expenses?
2. What sort of portfolio size and LVR do you need to generate say 50k per annum?
3. Do you have any other supplementary income to support you life - i.e. part-time work, spousal income, share portfolio, pension scheme, etc.?

 

Ah...yes...I get you...yes that is good thing. The real issue...is financiers will always assume the asset is worth less when they leverage...so trying to hit them up for more money is always going to be on knife's edge. That's all...but in the end it might come to your negotiating abilities...I might not be as good as you.

 

Current annual household income is generated from rent, LOC/s, spouse 10 hour /week part time and centrelink. LOC supplements rents for deductibility. A minimum of 20 times in net CG assets to generate income requirement.

 

Why would banks/lenders assume the asset is worthless when you meet their LVR & DSR requirements?

 

Living Off Rent I get - thought the 4% Rule was something else.

Plan A was to sell the PPOR, move into an IP, pay off a lot of debt and then LOR.

Might not work now as we are too settled in the neighbourhood.

Need to look at Plan B - as you note, it could involve a lot of tax.

 

Great thanks....that looks very realistic...

Do you have an approximate split in % of how that income is derived? I only guessing here but lets say you derive 60k net per annum, does you income source look anything like this:

1. Rents $12k pa (17% of income)
2. Spousal Income $15k pa (25%)
3. Centrelink Payments $8k pa (13%)
4. LOC drawdown $25k pa (45%)

However, every year the interest bill on LOC drawdown will grow but will not be deductible. So in the first year it will cost 1k...then 2k...etc.so that needs to be considered also.

The 20 times net CG...is the 5% rule. .....that will at some point eat into your assert base...though I get the point if property does grow at 7% per annum it is a non-issue.

The question is when will you need to top again for LOE?

I note that this is a blended model and it is not a fully LOE...I will use a variation of this ...but only in emergencies when there is shortfall in a month. Because I am pulling out of offsets..the interest deductibility is not a consequence.

 

MrM, I think this question has been asked before?? I don't believe one shoe fits all because there are so many other considerations to look at and this should determine the best strategy for you ie income, age, asset base/class, location/do you invest in Australia wide, returns/current yields etc etc.

At the moment for me personally I would be much more comfortable sitting on $5M assets no debts, because the economy/financial scene is changing and property has been running for some time now, bring the money home before it tanks just my opinion.

MTR