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LOE anyone ?

Discussion in 'General Property Chat' started by keithj, 28th Jun, 2015.

  1. keithj

    keithj Moderator Staff Member

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    I cannot believe some people are still advocating LOE. I & others have posted extensively about the risks over at SS for around 10 years.

    Many posters know what LOE is - if you don't then search SS for details.

    Overview of LOE Risks
    • Banks. The fundamental flaw in LOE that when you've exhausted your LOC & you ask your bankers for another one, the 1st thing they'll do is ask you for your income.... oops - you've had none for 10 yrs, so Computer says NO This was true 10 yrs ago, and APRAs recent moves have put the final nail in the coffin. You are not in control of your retirement, your bankers are.
    • True Retirement. It's not a set & forget retirement - you cannot sail off into the sunset & never visit a bank again. It's probable that you'll need to take action again in 10 ys (& 10 yrs after that ?). Will you (or your heirs) be capable of doing whatever is necessary ?
    • Psychology. The psychological aspect of LOE is rarely considered. You may have to wait 10+ yrs before you know if your plan is going to work. If you get little or no growth for a few years, yet you see your LOC ever increasing & interest building up on that, you will feel as though you're going backwards. It makes it hard to sleep at night wondering if the bears are right after all and it's all about to come crashing down. Contrast this to retiring on rental and/or dividend income - every month/quarter you get reassurance that your plan is working.
    • Partner. Either your partner is 100% on board with ALL these risks or they are unconsciously incompetent and accept your plan without question. I hope you're not both unconsciously incompetent :eek:
    • Change in Risk Profile. Sure... you may have supreme confidence today that it will all work, but will you feel the same way in 10 or 20 years ? I know my risk profile has changed during my investing life. And what about your partners ?
    • Long Term. The likelihood that the long term future (ie your 50 yrs of retirement) will be very different to the last (exceptional) 25 years is not insignificant. The events of the last 25 yrs in the housing market didn't happen in the previous 200 yrs. LOE bets the farm that it will continue for the next 50.
    • Flexibility. LOE forces you to lock yourself into a plan that you may not know is working & cannot easily change until a cycle completes. It removes considerable flexibility.
    • Unforeseen events. Divorce anyone ? Try untangling it all before the equity fairy has had a chance to visit - you may be a forced seller with little equity at the end of it.
    • Assumptions. You need to make lots of assumptions in your spreadsheet about the future based on your expectations of the economic environment over the next N years (eg inflation, rental growth, house price growth). If any of these change by even a small amount, then that small amount compounded over many years can have a significant impact on your lifestyle bottom line.
    • No 2nd chances. If you get it a little bit wrong (through bad luck, bad advice, your own incompetence or otherwise), you've lost the lot. This is the antithesis of Property Investing which is very forgiving of almost all mistakes.

    There are ways of mitigating some of the above risks.

    Some may consider some of these risks to be low probability, however, the impact in every case is significant. And all these risks are over & above the 'normal' IP risks.

    I've mentioned elsewhere that IMO if you have enough equity to do LOE, then there are other ways of achieving a similar result with far less risk.

    If you are absolutely sure that ALL these risks are trivially insignificant or that you can mitigate them AND you've considered the alternatives, then pure LOE might be for you.... let me know how you've slept in 10 yrs time....

    I've also mentioned elsewhere that either Short Term LOE or Partial LOE can sometimes be a good alternative for particular circumstances and usually has far less risk.
     
    Last edited: 28th Jun, 2015
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  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    diff idealogy, but almost all self funded, or self funded retirees LOE, so much so that Gov gives tax breaks for allocated pensions.

    With the impending changes of the assets test inc the home for places > 1 millish.............. there will be a lot more LOE,, and likely use of Reverse mortgages

    ta
    rolf
     
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  3. Mitesh Dedhia

    Mitesh Dedhia Well-Known Member Business Member

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    Isn't rental income an income?
     
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    yes indeed

    LOE isnt about rental income

    LOE is about living off a capital ration just like retirees have done for decades, the diff here is that we are looking to borrow against growth assets v "selling them down"

    ta
    rolf
     
  5. sash

    sash Well-Known Member

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    I have always stated LOE by itseld is a very dangerous strategy....in particular now......to me LOE=**** Whooping....I have never seen anyone implement this successfully by itself.

    I have however seen it used where LOE is used to supplement income here and there successfully. For you newbies pay heed!! Not all that glitters is gold!

     
  6. Mitesh Dedhia

    Mitesh Dedhia Well-Known Member Business Member

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    I was responding to point 1 of Keith's points where he said there is no income as per bank's computer and I'm thinking what do bank treat rental income as?
     
  7. Mitesh Dedhia

    Mitesh Dedhia Well-Known Member Business Member

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    I'm also assuming your net rental income is positive substantially.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    If your rental income is high to cover existing mortgages, your cost of living and then still borrow more, you probably don't need a LOE strategy.


    In about 2006 or 2007 a particular broker group got into a nice cozy relationship with a lender and came up with a loan product that essentially allowed people to implement a LOE strategy. The promoted the product heavily and signed up hundreds (perhaps thousands) of investors. In 2008 the GFC came along, nobody wanted to fund these loans and the whole thing collapsed - both the broker group and the lender along with most of the borrowers.
     
  9. D.T.

    D.T. Adelaide Property Manager Business Member

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    And if it is, why not live off that?
     
  10. skater

    skater Capitalist Premium Member

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    I have never been comfortable with Living on Equity. All you need is one small hic-cup along the way, and the whole house of cards will come tumbling down.

    Mind you, if you have a partner that is still working, can you honestly say that you are LOE?
     
  11. skater

    skater Capitalist Premium Member

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    There's a few acronyms floating around this thread, so I'll just clarify for the newbies.

    LOR - Living on Rent
    LOE - Living on Equity
    LOC - Line of Credit
    LOP - Living off Partner (courtesy of BIZ)
     
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  12. WattleIdo

    WattleIdo renovating Premium Member

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    There are clearly a couple of investors who employed this strategy at the critical point in time - late nineties early noughties. Fair enough, they've made it work for themselves with a lot of determination, planning and mindset.
    Unfortunately, the mindset might be what causes their lack of consciousness about the change in conditions. It was probably only a suitable strategy for very few even in it's heyday. If everybody did it, it just would bring the banks to their knees.
    So many things have changed since the early noughties.

    With the impending changes of the assets test inc the home for places > 1 millish.............. there will be a lot more LOE,, and likely use of Reverse mortgages
    ta
    rolf


    Not necessarily. The banks might not be interested in coming to that party. The retirees might have to sell. Who's going to cry? The pollie's kids can now buy their dream houses.
     
    Last edited: 28th Jun, 2015
  13. Mitesh Dedhia

    Mitesh Dedhia Well-Known Member Business Member

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    You could. The way I see it for LOE to work you need to have lower LVR to show serviceability to the banks.
     
  14. ZachAnsel

    ZachAnsel Well-Known Member

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    LOG - Living on Government aka Centrelink. Sorry just being cheeky
     
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  15. sash

    sash Well-Known Member

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    You also forgot LAW= Living off Ar$se whooping. :D:p

     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think a limited LOE strategy can assist in many cases. I wouldn't want to rely on it for permanent 'retirement' though.

    e.g. say your strategy is the old Jan Somers one of buy 10 properties and then gradually sell say 5 to retire on the rents of 5 fully paid off properties. Instead of selling 5 geese that are laying golden eggs why no borrow as much as possible as a LOC and then live off the rents while borrowing to pay interest. Without any other income the interest on interest will be deductible. This squeezes are few, many maybe, years out of holding 5 more properties than you would have been left with. It might just be enough to get 50% more growth out of them before having to sell.
     
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  17. MTR

    MTR Well-Known Member Premium Member

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    What about adding another

    LOG - living off growth
     
  18. Beelzebub

    Beelzebub Well-Known Member

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    I tried the LOG strategy while I was at uni, was actually pretty fun. I had a crack at the LOP strategy, worked for a couple years while I was at uni; combining LOG and LOP worked very well for a while. But I chose poorly and got hit with this thing called a dependant. The income stream from the P suddenly dried up and now I'm the LOP and that decision is actually costing me money.

    LOE doesn't really make sense to me so that leaves LOR. I'm hoping LOR can one day cover the consequences from my failed LOP strategy.

    Beelzebub
     
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  19. Be Developer

    Be Developer Property Developer Business Member

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    @keithj

    Thanks for providing detailed info!

    got really confused with all this "L" stuff... i m more of "M" Person.. Make money and/or Manufacturer Growth..
    :):):):)
     
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  20. Redwing

    Redwing Well-Known Member

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    Isn't that Equity?
     
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