LOE anyone ?

Michael Yardney (Jan 2015)

DOES THIS REALLY WORK?

In the old days living off equity was easy.

You just had to go to the bank and get a low doc loan and as long as your properties increased in value it was smooth sailing.

Sure it’s harder today, but it’s definitely do-able. You just have to lower your LVR to show serviceability to the banks.

Needless to say, you can’t achieve this overnight. It takes time to build a substantial asset base and a comfortable loan-to-value ratio. But if you take advantage of the magic of leverage, compounding and time, it happens.

 

Note that the solution is to lower your LVR to show serviceability to the banks, but there's no mention on what LVR you need to lower it too.

There's no simple answer to that question because by lowering the LVR, you're probably reducing the debt to the point where the rental income is high enough to service the remaining debts, plus your lifestyle costs.

This isn't living off equity, it's living off rental income.

 

Not quite true...the real issue is that banks have reduced serviceability for investors by up to 40% or more by disallowing neg gearing deductions and increasing the assessment rate from 4.5% (or actuals) to 7.25%....

With that in place..unless you set-up LOE a couple of years ago...this strategy is less viable.

 

Certainly possible, but won't be easy to set up unless you have a well paying job at the time of the application and are prepared to sell a property down the track when your money runs out - or go back to work.

 

Yes..I believe that would be accurate.

I remember there was a gentlemen by the handle Landlubber..he had over 30 properties and I believe he retired on LOE...have always wondered how he is going and if he is still successfully using LOE or has he had to sell down.

Mind you with 30 properties...selling 1 a year would not be such an issue...

 

Yes would love to hear from your Landlubber if you are out there?

 

And that's exactly what we have done.

It's not LOE, it's LOR.

 

Terry and Sash
Just review LL posts on SS as he did elaborate on this.

In a nut shell he did retire all good then he realised he needed to tweak the LOE strategy as not working to plan, **** happens, GFC etc etc.

LL then started diversifying into shares and I think he also sold down some properties.

At the end of the day I guess its all about your net worth/income as to who will be able to swim or sink with this strategy.

MTR

 

My feeling on LOE is that it can work in the right circumstances. However, to get to the stage where you have enough equity so that you are comfortable enough to LOE I think you'd also be able to retire by utilising the equity in other higher yielding assets. I think this is essentially what a lot of people like Keith and ll have done, move their equity into shares which have a higher yield than resi properties and then retire of the dividend. Same for people like Daz who moved into cip (albeit he pulled the trigger much later).

 

Like Mike Tyson said, everyone has a plan until they get punched in the face

 

Exactly, look at the current financial environment for example...... and it appears 60% home loans who are buying in Syd market are investors, how is this plan working now moving forward... ouch, double ouch. .

Not to mention how on earth can this LOE work now that there is a layer of complexity and hoops to jump, seriously you can not be foolish enough to be so vulnerable/at the banks mercy, that's not a good retirement plan, its not even a good plan, just my opinion, feel free to ignore this

MTR

 

The problem with that is " the right circumstances " .....

I know people who's retirement plans were crucified when the GFC decimated their share portfolio . Maybe be they had them in the wrong shares ....

With my retirement plans I want a bullet proof , no qualifications plan .

Since I first saw steve navra there have been two major rejigs of serviceability .

I'm with the LOR brigade on this , and if it means I have to build up a bigger nest egg I'm happy to do that . Buying at the right time of cycles also enables you to buy at higher returns.

I suppose if I had a job I hated and couldn't wait to get out off I might think differently .

Cliff

 

LOR for me
LOE would always worry me and in retirement I want no worries.

 

All the way.....and that's what we're doing.

 

I'm with the start selling everything bit by bit when im 55 and stuff worrying about all this brigade.

 

Ah....but when you start selling stuff (so long as you've got a heap of it), you will find that you can LOR, and only sell a portion of it.

 

Yeah, but you still have to deal with beloved tenants Shaz, Daz and their staffy X.

 

Those people had margin loans on their share portfolio. If you had held a diversified portfolio of the major LICs for example you would have sailed right through the GFC (and if you had spare cash to average down even better). There was a slight drop in dividend but nothing drastic and in retirement, that's the main important thing. I don't see it as that much more risky than properties being vacant or requiring lots of maintenance at the same time.

 

Good to know....i am sure he would not have to worry...his portfolio was huge so even if he had to sell it would have taken a very long time.

You are correct about net wealth.....

 

I've got a vague plan which includes a mix of mini retirements, living off rent and at 50 starting to sell everything off. I've just about bought ip number 8, have a couple of those paid off and I'm just using depreciation schedules for the first time so not sure of the exact rental return but I think about $40k per year net currently. So the plan is to work half of the year for the next few years and live off the rental income and half salary. Then when the time comes the plan is to start selling the ones that are paid off (living off their income plus rent from the remaining). The paid off properties should give a modest but doable income for 20years and I'm expecting by that time the others will either have gained some equity through tenants paying the mortgage, and a bonus would be any value gains. All a bit fluid but definitely a better option for me than LOE. Having said that we've got revolving credit of $50k so the other possibility is to make a big hole in that during a few months holiday and then pay it back with a few months of locum work.