Funding Retirement - Live On Equity VS Rent as Passive Income

Hey PC members, I am contemplating what would be a more effective retirement funding strategy for property investors. If someone have say accumulated 8 properties with 80% LVR and wish to retire in 10 years. Say if those properties doubled in 10 years, the original LVR would be come 30 ~ 35% when the focus was to just paying off interest and keep the rest as a buffer. Now fast forward to 10 years in the future. I am thinking there would be 3 options.

1. Sell off 1 off every 3-5 years as you need, keep the proceeding money in the bank offset and live on that with 30-50% subsidies from rent, and sell more as you go.

2. Sell off 3 properties in 3 financial years to pay off the all the loans keep some funds in the buffer and live on rent.

3. Buying other asset types using equity and property sale(i am not familar with).

The 1st option would have a bigger growth protential but option 2 would be a more stable and trouble free way.

I am leaning to the 1st option, since it has a greater capital growth protential. would be great if you guys can share what your thoughts and plans are if you have retirement plans or have already in that stage. I am keen to learn.

 

there are many more options too
5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement

 

Have a chat with @peastman (Phil). He's mapped out a detailed retirement strategy of selling a property periodically to support a comfortable retirement.

 

I have been doing this for some years. By selling properties periodically it means you reap the benefit of the increase in prices plus obtaining the rental income in the meantime. I have an extremely comfortable lifestyle which will see me through the rest of my days I have had 4 overseas trips in the past 8 months and am off to New York with my son next month. It gives me plenty of freedom to do as I want.

 

LOR is not the way I would go.

Is it primarily the windfall when you sell that gives you the comfort, or the residual rent?

 

I think the key is properties doubling in 10 years?? I would be focusing on how you can achieve this, it will come down to product, and timing the market which will improve your chances significantly. Could be diversification into many States.

I would also look at structure as part of your plan, this is important? Trust/SMSF/personal name... a good accountant can make a massive difference.

 

Just checking - do you mean you wouldn't ever choose LOR, or just not in the OP's scenario? And if the former, what way would you go?

 

Sorry this was an incomplete post. Didn't have the time to respond at the time. In short what I was trying to say is I would personally opt for :

1. using IPs to generate wealth (equity) then sell down as many as possible to divert funds into the stockmarket and get a recurrent, dividend income stream to fund retirement, OR
2. Use IPs to generate wealth (equity) then when the nest egg is large enough, and the LVR is low eg 35/40%, make a large equity withdrawal and then retire. Takes at least 2 or 3 property cycles (20 to 30 years) and a massive portfolio to do this. Can be quicker if it involves selling down.

I just think the LOR model from IPs is too heavily burdened with outgoings - rates, repairs, agents commish, land tax (which is a killer if it applies), etc. Then income tax on the remaining rental income.

My calcs suggest I lose almost HALF of my gross income if I go down the LOR route.

 

Thanks for the clarification, @Lacrim. I guess I was thinking only in the context of comparing property-related options so wasn't thinking about other asset classes / dividends, which definitely also factor in our plans.

For me, LOE / equity extract to live on isn't something that appeals at all so when you mentioned not wanting to LOR I couldn't work out what your other options would be. Clear now, thanks.

 

Say they flatlined for 10 years as well....

Anyway. Every long term plan will change. You can have a concept of what will happen but getting bogged down in detail for an event in the distant future, with three political cycles invetwern, is more of an academic exercise.

One option is to have the properties at 100% gearing and then a 100% offset. Slowly chew into the offset to release capital.

As you chew into the offset the newly incurred interest is tax deductible.

You could also look at a smsf to acquire properties from you and cycle contributions tax effectively in your smsf - this will probably require the houses to be bought in a unit trust to start with.

You have so many options to go with but what is discussed below if the crux of it

 

Thanks for the suggestion guys.

Great one, you are my role model! One day, one day. I wouldn't not hesitate to sell if that means to achive my ideal live style. Not that I don't love my kids, but my success as a father is determined by the inverse of how much they will need my inheritance when I leave this place. Assuming I can live to the average life expectancy. I will try give them a good start earlier on in life and hopefully they thrive after.

Very good idea, How could be be done? isn't the max is 80%? Even that, the 80% in the offset needs to be saved up or sell up. Please elaborate, I am keen to learn.

 

We did this. Deposited saved money until the offset equalled the loan amount. Each month payment was taken from offset and put into loan. Balances remained equal and the loan and offset decreased evenly.
Marg

 

We've been LOR for about 2 years now. We started out with many more than the above scenario &, like Crispy have sold a few, spreading them out into different financial years where possible. Moneys have so far been deposited into offset accounts, leaving a very modest LVR, but we've also recycled a few too.....sold ones that have had recent growth & invested into areas that haven't.

 

@Ross Forrester I suppose that %100 loan can be achived by cross collateralization. Is that what you were thinking?

 

Nice one! as in many more than 8? Did you use the Buy cheapie strategy that appears in magazines and news? Another question, for your new investment, is it still possible to leverage even after retirement? or just that your rent income is sufficient to satisfy the approval process? Thanks!

 

You can have loans between associated entities.

So the entity could be the financier of the principal repayments to the bank. Later on you could refinance the entity loan.

 

Many more than 8, yes. As for leverage, well it all depends on income, but we haven't had to obtain finance.

 

As @Peter_Tersteeg said, I am basically doing option 1. Happy to discuss if you like. @Chrispy and @skater really know how their stuff too, they are further down the track than me.

 

No need to cross collateralise - can be over 100% let without crossing.

 

Thanks Phil, I just read up on your awesome 15 yr plan @ The 15 year plan. one thing I would love to know is how you manage to leverage to buy property 7 and property 8 after your retirement? How can you borrow any money after retiring for 3 years? Are you suggesting that you can use your profit on the sale of you 1st property to prove that your income is sustainable to borrow more? I throught that banks would only lend to PAYG or business owners with track record of positve and consistant income.