5 Living Off Equity Strategies to Speed up Retirement

Maybe he should've bought cheaper properties with better yields and put the rest into shares or even -heaven forbid - started paying down the loans. Then he could have a mini retirement on a budget before early retirement and enjoy life in a flat market with the knowledge that one day there'll be capital gain too.

Edit: grammar

 

This is just a made up example, but the majority would be interest on the loans and the rest property management fees, insurances, rates etc.

Don't get hang up on the costs for this example, but look at the broader LOE strategies.

 

If he bought higher yielding properties he would probably have gotten less capital growth. I know Tom and he wouldn't borrow to buy shares so he would have missed out on the leverage if he did.

 

That is not necessarily true.

 

LOE means borrowing for living costs, or selling for living costs. Scenario 2, living off rents is better known as debt recycling, and id guess a fair about of investors do this to some extent.
Scenario 3 and 4, borrowing available equity when possible rather than paying down loans, is also done by a lot of investors. Even if the new borrowing are stored in an offset or similar, many investors borrow before they need it, so they haven't got 'lazy' equity (although Bill in this example seems fine with it).

Traditional LOE is difficult. In the example, Bill would need to borrow another $400k, interest only or LOC, and also convert all his existing loans to I/O for at least 10 years. To qualify for a total loan of $1.4mill over 20 years means his income is closer to $200k than $80k, is he really going to be happy living on less than half his usual wage?

If the loans start to convert to P&I at 5 years or earlier, or if they are variable loans and interest rates move up, Bill is in danger of getting caught out.

If he does last 10 years, and his properties do double in value, the 4% net rental yield is now $240ky, less P&I payments over 20 years on 1.4mil at 6% is $120ky, less his living costs of $100,000 (inflation) leaves him $20ky to start reducing his loans (or live a little!). Seems like a lot of trouble to go to for a little reward.

I think in practice if there were such an example of having heaps of equity and borrowing capacity Bill would simply take his loans to 80%, quit his job and start self managing and improving the properties, which might increase his net yield to closer to 4.5% leaving him with less of a shortfall. He might use the new borrowings to get some cash flow positive investments, or develop one of his existing properties or buy a business.

 

Not necessarily, but for someone buying a $1mil property in Sydney they may get $650 per week rent which is only a 3.38% yield.

 

Just saw this after a long break from PC. Excellent post Terry. Opened up my perspective. Thanks a lot for sharing.

I think you have helped people retire earlier by posting this.

 

Strategy 6: Keeping longer before Selling

Imagine Tom is planning on selling so he can retire, but he thinks there are a few more years of growth coming up. He can delay his retirement, or he can retire now and borrow to live or or pay rents and do this for a few years and then sell. Gets him there quicker and he gets some more capital growth.

 

Thanks for sharing Terry.

You mentioned the $80k was before tax. Assuming all the properties are all in his name, then he would pay about $18k in tax, leaving him with $62k after tax.

If he structured more tax effectively (e.g. in trust and if distributions flowed to a partner) and his portfolio contained properties that could be fully depreciated, he could pay very little tax on his $50k net.

 

Good point Mrdobalina

Tom may not need as much income as he thinks if he can reduce tax payable. He may not have had them in a trust so may not be able to do much, but there may be some other small ways he may be able to shift income to a non owner spouse (who may be on a lower income).

 

Strategy 7: Borrow to Pay non-interest Expenses

a variation of borrowing to pay interest is for Tom to just borrow to pay the non-interest related expenses such as insurances, rates, repairs, etc. Since he is close to his goal this may get him over the line and is less complex from a tax perspective.

 

While this is true, that is something that I would NEVER buy. I don't think I've EVER bought anything with less than 7% yield, and although the yield on today's valuation is a lot lower than that now, on our Sydney properties, it is definately something that I take into consideration when purchasing.

 

Great post Terry. I assume the $50K net of expenses is also subject to a bit of tax, so his gap is wider than $30K. Understand if you wanted to keep the example simple but just wanted to confirm for my understanding.

 

yes, that was taking into account any tax payable by Tom.

 

Terry, great post as always. one thing i noticed is that no mention of Super in Tom's calculation at all. Surely some part of the retirement funding will be funded by Super money. that all adds up....

 

Yes, there are 2 ways to factor it in.
1. ignore it for now as Tom may be retiring at 40 when he won't be able to access for another 20 to 100 years.

or

2. Factor any income in from Super. For example he may retire even earlier and draw down more capital because he knows at some point he will be getting access to his $XXX in super.

 

@Terry_w so in This case can I use the Equity Release Loan from one of my investment property for daily expenses ?

Assuming that I'm not claiming the interest for tax deduction. Because the Interest on this loan is far cheaper than credit card

 

you could, but see post one. It may be better to use cash and borrow for expenses.

 

Or,,,,
When Tom retires, he could sell a property, pay CGT and then buy another to replace it. Tom could then place the remaining proceeds into an annuity which banks accept as income to service new loan. If tom had 6 properties and did this every 2 years he gets 12 years capitol growth every 2 years, it works out to be very adequate.

 

How does this work?