Early Retirement using Line of Credit on Investment Portfolio

Hi Experts

I was at a XMas BBQ and overheard a few ppl discussing an early retirement strategy using LOC on their investment portfolio. Can't remember the exact details but vaguely remember someone mentioning that if at about 55 you have a 4 mil portfolio with only about 1mil or under outstanding on the loan balance, one can basically live off easily for at least 10 years by borrowing from LOC, and use rental income as repayment cashflow. Then at the end of next 10 years because of capital growth, sell one asset and pay off the loan or something like this.

If anyone has knowledge of this can you please provide some reading or a case study with numbers etc? I only eavesdropped on the conversation but sounded very mouth watering and would love to see if i can plan for it (it it's true and possible)

 

LOE/LOR was the buzz words a few years ago, It can work but I think most people make it sound too easy and too guaranteed (thats my personal opinion)

too many variables to say it will be a straight fwd equation, is what I always tell people

 

Is there some reading or case studies you can recommend?

 

It's a flawed strategy that won't work. Quite a few people went after this strategy about 13 years ago, when the GFC came along they were all wiped out and many found themselves back in the job market without a lot of the assets or with a lot more debt than they should have had.

Don't kid yourself, there will be another GFC, or a recession, or something else will come along that will derail this sort of plan. There are a number of other reasons why it won't work though...


For starters, there isn't a reputable lender in this country that's going to drop a $1M+ LOC on a person 55+ where the strategy is to live off it.

The other problem is that the LOC won't last 10 years and the rent won't cover the repayments. I've seen this happen. People see this as a shortcut and they take other shortcuts. Even if the math stacks up, human nature will spend the money a lot faster.


If you find yourself at 55 with only $1M in debt against a $4M investment portfolio the solution to your retirement is easy. Keep working long enough to pay of the remaining $1M. Between your income, the rent and possibly your super, you'd kick that over in less than 5 years. By 60 you'd be in a position to retire debt free with a post-expense rental income of probably between $100k - $150k.

Going into debt to retire is a terrible strategy. A good retirement strategy includes finding a way to be debt free.

 

You mean access my super at 60?

 

Also is 100-150k post expense rental income based off a 2.5-3% net yield?

 

I dont have any case studies except a few people who did it, but their plans had other income as well, so this strategy was just to assist their retirement, plus they used some of the $$ to buy other things

but as Peter says, a lot of other things to consider /address

 

5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement

 

I have to disagree with Peter. It certainly can work and it can be done with careful structuring of loans. But it doesn't work like everyone imagines it might.

It is a great strategy to significantly speed up retirement where it is realised that you are eating into capital.

 

From 55 onwards there are a number of strategies you can employ to use your superannuation creatively.

$150,000 / $4,000,000 = 3.75%

 

When I first heard of it (LOE/LOC), it took me all of 5 seconds to conclude overall it's a terrible strategy. Anything that has a level of risk which can be totally devestating when your most vulnerable is insane to me.

 

Any examples you have Terry? I don't mind considering it if from 55-60ish i'm borrowing 100k a year, then repaying minimum payment using rental income (which I estimate to be about 50-60k a year). Then at 60 I get access to my super, live off it for another 4-5 years. At 65, sell one asset and pay off the LOC balance. This is what i was imaging after listening (partially) to the conversation

 

Been doing that for 7 years. Using a million debt to get 4 million in assets is a good aim getting the first 2m is the hardest the rest is easy. Not sure what age has got to do with it but anybody should be able to achieve this by 55, a little bit of observation of what is going on is all it takes. With a 4 million portflolio and $ 1m LOC you should have more than enough to last forever. When banks stopped lending it wasn't possible to live of LOC. But my strategy was to sell a property every 5 years invest and live off that but after selling 3 properties and buying 2 by transferring securities to improve yields. Getting 30 to 250% gross rent increases, which translated to much higher net rent. ( getting to keep 50-70%+ of rent instead of about 5%) I now net 150k+ in rent don't need to use the LOC of $1.2m for living but use it for investing in growth shares of which I sell some of when they get too overweight and top up LOC. With the properties gaining an average of about 70% in the seven years and selling down 20% my capital in property is still growing. Some of the proceeds of one property were used to buy shares $250 k has become $1m. So in a nutshell LOC coming down fully offset by value of shares and capital still growing.

 

Ditto...LOC/LOR can work...but you are better combining with other strategies.

The way @Fargo has done it is very smart. But here are some tips ...

1. Start with the LOC/LOR but ensure some investment is going into things like Super/Shares. Try to maximize super so you can get this tax free when you are 60,

2. If you have quite a few investment selling places...is a great idea. I am doing this...and like Fargo transferring securities.

Good luck!

 

In our case we've been selling 1-2 a year that have had good growth, and are now likely to flatline for years (plus cost more in maintenance as getting old) and using funds to buy something that can be rehabbed and subdivided. So creating about $100k net on top of other rents when the new subdivision is sold.

Like the guy in @Terry_w 's example even with lots of equity the net cash flow is modest (and I think my gross rental yields are better than average). Luckily there are definitely other ways of making it work in retirement other than LOR.

 

And there it is... the smartest thing you will read on the internet today .

It's not that it can't work. Others who say it can work aren't absolutely wrong... it's just that it relies on lender policies providing you with large amounts of credit serviced only by rental income... and that is a very fragile house of cards, more now than ever - especially when responsible lending is what ASIC is betting it's relevance and ultimately its survival on . The fragile house of cards may serve you well and it may never blow over...but that's probably going to be good luck rather than good management. Why would anyone need to take that chance ? Either sell $1Million of assets off to clear all debt and live off the rents from the $3Million or reinvest it , or keep working , retire the remaining $1Million and use the $4million to retire.

This is all you should be taking away from the entire thread there isn't a reputable lender in this country that's going to drop a $1M+ LOC on a person 55+ where the strategy is to live off it.

 

on top of that before you even get there you have to consider
- vacancies
- higher/lower interest rates
- property cycles not being 10 years
- maintenance
- rent cycles

 

Like I said... a house of cards. It may or may not blow over, but it probably will.

 

Retirement means different things to different folk.
Removing as many financial problems is key to most, so that your free time is exactly that, free of worry.
Downturns, which many on here have experienced aren't to be considered lightly.
One may be just around the corner. Who really knows?

 

So many people like to calculate their journey on a best case scenario. If risk is not taken into account, or not adequately taken into account, it's high risk stakes which could leave you stuck at a cliff without a paddle in sight.


How on earth does increasing debt more and more, relying on growth plus banks to fund your aged living even factor into acceptable risk at 70...

Each to their own. But it's just plain silly imo.

Getting a favourable outcome doesn't necessarily mean the right decision was made.