5 Living Off Equity Strategies to Speed up Retirement

Terry/brokers on forum

I believe gurus like Michael Yardney continue to maintain that LOE is possible if :

1. the LVR is low enough...circa 50% or less
2. the portfolio is large enough, say > $7 million (gross)
3. rents at very least cover the interest, property expenses, etc., with a 'little bit of cash left over'
4. the bank can see that the investor is not reliant on PAYG/business income to make repayments (see point 2)

Assuming that these 4 criteria are met but serviceability still doesn't meet today's stringent post APRA criteria, can I safely assume that LOE is still a pipe dream? Or is there truth to guidance above in relation to achieving LOE.

 

If you can't borrow then you can't live off equity - unless you already had unused loans set up.

For an individual to be able to borrow they will need to meet servicing criteria. If your only income is rent then you will need to overcome the old too rent reliant worry of the lenders.

If you have set up other entities it would be much easier as the income can be disguised to a certain extent and the NCCP won't apply to a company borrower

 

MY been preaching this for years, yet he LOB, lives off his business.

I am yet to meet an investor who has been able to LOE successfully.

Met a few who tried this and eventually had to go back to their day job and the other lost everything because they did not have a large enough asset base. They also did their numbers on property doubling and did not account for some bust cycles lasting as long as 10 years.

Not a fan of this model LOE, unless you are an active investor and using equity/cash to make more money, but that is a different beast.

Another option if you have servicing issues and no day job, is low doc product ie RAMS low doc, you could access 80% of $1M, $800K but you would need an ABN number, I started a thread on this

MTR

 

I'm not a fan of LOE at all.

 

I have seen many do it for short periods in the past. It can work for short time frames. But using the strategies outlined above will be much better than purely borrowing to pay living expenses.

 

Notwithstanding TerryW's excellent illustration of using fully franked divs up to $94K tax free (which I'm still considering), I'd be ok with tapping into equity to supplement my lifestyle.

I think there is a sweet spot to LOE-ing (for early retirement and income tax minimisation) where its used in combination with other forms of passive income - rents, dividends etc. That sweet spot for me is LOE-ing approx. $50K pa.

However, the requirement is to get my hands on the equity first (a large balloon payment if you will), rather than relying on the traditional LOE model which necessitates one to go cap in hand to the bank every yr. The intent is not to (ever) go back to the bank for additional funds.

The balloon (for me) has to be a minimum of $1mill on top of a cash buffer of $1 mill.....so $2m in total.

 

Do you know what their asset base was at the time when they attempted to do it (gross and net)?

 

Around $3m gross

 

Yes, far too soon/too little. I don't even think $3m net is enough.

 

I agree, compounding debt is a killer

Creating income streams is liberating

 

I know. To use your example, just one of those commercial props with 27% gross yield would be almost enough to retire on provided the rents are sustainable. Just don't have the stomach for something like that - inexperience or fear, not sure which.

On a side note, I wonder how Dazz is going with all his CIP's. There were going gangbusters during the mining boom and it seemed at the time that the music would go on forever.

 

I think a LOE variation could work with mini-retirements. Set up LOC while working, use that to capitalise interest while living on rents and then go back to work every X years to keep extending. As long as it is only a minor part - supplementing the income instead of selling a property.

 

More than one way to skin a cat a they say.

I was looking at CIP in Australia but yields have been woeful around 5-6%.

Here is our latest commercial deal in Atlanta, 27% net yield
Commercial Property 2 - Atlanta

This is one of our strategies, quality commercial properties, in A/B grade locations, good tenants in place, and buy under market value. Comparable sales about 40% higher than purchase price.



MTR

 

very true we are all different. Mind you once you start creating income streams its kind of addictive, just keep growing it, nothing wrong with this if its a hobby, not a job.

 

Hi @Terry_w , Is Tom's income being considered as 50k, the net rental income in this case? Or are you considering his job/work income? Would Tom get the LOC based just on his rental income or rental plus his normal work income? I'm assuming once the LOC is secured, he doesn't have to work anymore?

 

Tom is in his 4th year of retirement by now...

Times have changed if Tom is trying to get a LOC now

He will need to overcome the cash out restrictions and demonstrate serviceability. He would need enough income to service and generally rent is not enough on its own.

 

would it be better for him to get the Line of credit whilst still working showing servicability and once it is secured, retire if he is confident he can repay the accured interest and principal on the LOC eventually in 7-10 years by selling a property which should have sufficient capital gains by now?

 

It would probably only be possible if he still working. he should also consider not using a LOC product as these can be cancelled by the lender.

He should seek credit and tax and legal advice...

 

Hey Terry! This post was great and definitely an awesome ready.

Though this was applicable probably years ago when the bank serviceability was easier and 10 times our income (when it's less than 7) and all banks (even third and fourth tier) are having the same lending criteria. What would be the updated property strategy and what would you do if you were to start from scratch from today?

Also what's your end goal and exit strategy? Really love your input

 

I can't remember the details of the post and would need to go through it again to answer properly but would think they all would still apply.

My end goal is to die with zero!