5 Living Off Equity Strategies to Speed up Retirement

Tom has built a portfolio over the last 12 years, he now has 6 properties
He sells the first property for $400K, it cost him $200k in 2004.
from that $200k equity he has to pay say $10k selling costs and say $50k CGT. This leaves him $140k to put into an annuity.
The banks accept the annuity as income which enables him to purchase another property.
In 2 years he sells his second property and does it all again.
This gives tom an ongoing income.
All loans are tax deductible as they are for investment properties, unlike borrowing equity to live on.
Some will say paying CGT is the flaw to this system, but if you accept that if you earn money, you should pay your fair share to help keep this country great, it's OK. After all, most people pay tax when they work.
Others will have trouble grasping why to sell and buy another. It's all about how to access the equity. By doing it this way the portfolio continues to grow giving renewable future income.
It's working for me.
Happy to chat to anyone about this concept at the Melbourne east get togethers.

 

Can you explain how the annuity works? What annuity could you buy for $140k and how much does it pay each year?

 

Well, the max CGT payable would be less than 25% so not a bad tax rate. Even this could possibly be reduced to nil with some planning.

Nice strategy Peastman

 

An annuity is like giving the bank a lump sum of money, then they give you a pension each month for a designated period of time. So if you give them $140k they would give you about $3k per month for 4 years. While this may not be enough to retire on comfortably, remember you will be selling another property in 2 years which will approx. double this figure.
While a bank does not accept money in an account for serviceability, it does accept an annuity.

 

Peastman,

Not sure I fully understand your strategy, but is one underpinning assumption that the second property sold after two years must provide a certain level of capital growth for the model to be workable? For example, if that second property decreased in sales value, is the model disrupted?

 

If your annuity returns your capital throughout its duration, does the bank also accept that as income for serviceability?

 

I haven't checked for about 8 years now, but some lenders used to if the annuity was greater than 5 years in length.

 

Similar to Cash Bonds there is a good thread How I've utilised Cashbonds for Increasing Serviceability

It is the most common form of pension in other countries with a less developed super/pension system. Often post offices backed up by governments dispense the annuities and you can choose from a range (term deposit to complete cash back) as well as the time frames.

 

The second property to be sold would have been purchased 12 years earlier, so it really should have increased significantly. If it has not increased in value, then yes, the system wont work. But buying reasonably mainstream property reduces the risk.

 

The first property won't have that much equity, cause tom used some of it to purchase numbers 2 and 3.

 

Hi Terry,

This is the route I plan on taking. I audibly laughed at who this strategy is ideal for!

I have no children and plan to spend all of my money before death of old age.

Lets say one has aged to (hypothetically) 70 years of age, still has PPOR and half a dozen properties that are around 65% LVR, in todays times (and for the foreseeable future), is selling the only real strategy to extract the remaining money, or can one refinance back to a higher LVR when retired?

Example figures (selling one house per year or two from 70yo as the equity has been extracted)
Bought house in 2015 for 500k
Sell in 2045 for 2m (weekly rent at $2,000! )
Loan debt is 1.3m (due to refinancing to live off equity)
Capital gains are 1.5m
Taxable figure is 750k
Using $0.40c tax bracket for round numbers, that's $300k owing to the tax office, leaving a lump sum of $400k (after inflation in todays dollars, perhaps $150k)

Quite reasonable I think. If the LVR is 80%, lump sum would be approx $100k (much more probably, I'm using a flat tax rate for calcs), therefore you'd be better off from the spent equity being higher, resulting in a lower tax bill in the year of sale.

When one is 70 and only has passive income like described here, will a bank refinance at 80%?

Are there any different (better?) strategies to burn up most of your capital by the time you've reached 80? What contingencies could one plan for if they were to live to 100?

Surely most of this can't be answered with any certainty today, but I like brainstorming.

 

It would be very hard, but not impossible, for a 70 year old that is retired to get a loan increase.
Reverse mortgages may work, but they tend to have low LVRs.

 

Hey @Terry_w, let's say someone is starting anew right now at 50. There's 10 years until super access at 60. What are the strategies for integrating super into the outcome?

For example, one could use the 10 years to build a portfolio of, say, 3/4 IPs and have a still highly-leveraged PPOR.
Then at 60 take an annuity from super for 10 years to pay living expenses; this would allow another 10 years of CG on the properties before trying to LoR (it would likely not be enough income to pay down the PPOR at all; but hopefully increases in the IPs rents could by then be taking out some of the PPOR debt if interest rates are still low enough).
Assuming you've done well and CG trumps interest rates, there's 20 years of CG for 4xIPs and a partly paid down PPOR. Likely enough to start using another of your strategies as a 70yo.

Is that a feasible AND sensible use of super though!?

Or is super possibly better put to use in this situation at 60 in an index fund at 4.5% and supplementing with a IP sale + paydown remaining debt and LoR?

While the above isn't exactly my numbers, it's close and I'm unsure how to get the best out of a meagre super so as to supplement property investment in retirement.

 

I am not licenced to advise on super so will leave that side of things to others. But there are many strategies which could be employed.

 

OK, @Terry_w . You've sufficiently got me worried about my strategy. I already was concerned, but following through on what you've written - which I knew but hadn't really done the hard yards - makes me even more worried especially after doing more detailed endpoint analysis.

How much can I extract from property to put into counselling?

 

Thanks Terry, great post. I joined PC today and this is exactly the sort of knowledge I was hoping to begin learning. No IP's yet, but we're ready and that's why I'm here.
Cheers

 

I think I understand this Tom is using sales proceeds to service debt in the form of annuity this gives him the ability to grow the portfolio.

However, how is Tom increasing cash flow so he can give away the day job? His selling and replacing, so there would also be buying costs associated with all new purchases ie stamp duty costs etc.

I am all for selling to reduce debt to increase cash flow, without this you are stuck???

MTR

 

@Terry_w

Regarding Strategy 2 - Living off rents, will it work if you are paying off P&I repayments using LOC? If for example, you paid $30k in P&I repayments via LOC in one year, is the interest on the $30k tax deductible?

 

BTW..the reason I'm asking this is so that I can keep building up my offset account which is linked to another IP loan.

 

It could be - but you would need to get some tax advice.