# LOR, 10yrs, how to?

Discussion in 'Property Finance' started by mcarthur, 18th Jan, 2016.

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1. ### mcarthurWell-Known Member

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I've started down this strategy, but the endgame is confusing me - I don't quite get how to LOR (live off rent).
I'll give an example:

Let's say I purchase an existing (fairly old, not new) \$500,000 property, 80% LVR, 4.6% interest.
Rent for \$500/wk. Yield is thus 5.2%.

My calculations show it's negatively geared slightly, perhaps about \$50/wk
- income 500x52 = \$26,000
- expenses total about 40% of rent = \$10,400
- repayments \$18,400

Let's say I've only got 10 years to set up for LOR.

Long term rental growth averages about 3% pa.
So rent in 10 years = \$672pw = \$35,000 approx.

Expenses have gone up too - admin fees, rates, etc. So 40% is still valid = \$14,000.
If interest rates haven't increased (!), then repayments are still \$18,400.
Income \$35,000 - expenditure \$32,400 = \$2,600.
So the property is now positively geared - yay.

But \$2,600 / 52 = \$50pw income from this property.
That's nowhere enough to LOR! Even 10 properties like this - pretty close to impossible to someone starting today with serviceability - would only be \$500pw income.

So how does someone LOR?
It appears that CG doesn't seem to enter into the matter - CG could have been zero or huge, but doesn't change the equation. Of course huge CG could suggest rental growth of 3% is low, but as a 10yr average it's pretty close to the longer term average (which is also based on income growth).

The only options for 10yrs are
- to pay down the loan, lowering the repayments.
- increase the rents way above average (unlikely to be substantially different)
- lower expenses (very unlikely to be able to substantially alter this)

Paying down the loan by \$100,000 would increase the income from the property from \$50pw to \$138pw - still needing 7-8 of these properties to get to \$52,000 of income. But costing \$100,000x7 in loan reductions!

So how do people reduce their loans soooo much?

Or, is a buy-and-hold strategy really only good for initial high-yield (say 7%+) and thus more likely in areas of lower CG?
As far as I can see, an initial mid-yield (5%) property with likely higher CG isn't really suitable as a basis for 10yr LOR.
Have I got something wrong with that thinking?

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To live off rents the theory is to have 5 median value family homes mortgage free. The rent from one pays for the costs on the others. They each rent for about 25% of median income so you get 100% of median income from the rents.

How to get there is another matter. Many suggest buying ten, then selling five once the capital growth is enough to payout all the loans.
There's Reno and develop options too.

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3. ### albangaWell-Known Member

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There are many ways to skin a cat and this should all form part of a strategy and end goal.

As you have suggested and Tobe has said the only way you are LOR is paying down debt, so how does 1 achieve this?

- You can pay down your debt with additional payments from salary

- You can sell your high CG properties to pay down the debt.

- My personal choice is being creative and manufacturing am your gains. This could be a renovation, subdivison, decelopment if your keen. You then use the profits to pay down the debt.

I would suggest methods focused on high yielding are becoming much harder to pull off if not impossible these days. Creative cashflow strategies like vendor financing is very niche and buying regional with no CG won't work with changes to lender calculators.

4. ### Corey BattFinance StrategistBusiness Plus Member

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Living off Rent (LOR) is certainly one of the more difficult routes for passive income in todays environment, considering average gross yields are low, especially when you then factor in ongoing costs. I don't consider a pay down strategy as a magic bullet to create LOR, as this is just using capital to create income - this could be done with a multitude of other ways (chuck it into an index fund, direct shares etc)

Always look at what your capital is returning you in any scenario - if you had the choice of a live off rent strategy - would you choose a 3% gross yielding freehold \$1mil property, or a basket of shares yielding 8% gross?

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5. ### FullysickbroWell-Known Member

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Paying down the loans always helps or sit it in the offset.

Try changing your figures also, what happens if you purchase a house at around 300k and receive 350/week rent. Or 250k and get 300k a week.
Also I've always found expenses closer to 30% and just under, not 40%, unless I have major damages which fortunately doesn't happen often.

6. ### mrdobalinaWell-Known Member

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Are you referring to a share market that has plummeted 20% in the past 6 months? You'll have to be pretty confident or an astute contrarian investor to catch this falling knife.

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7. ### TonibellWell-Known Member

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Lie @tobe has said - you need to work backwards. If you need \$100k p.a. gross. Then you need \$2M of equity earning 5%.

To go from \$100K equity to \$2M in 10 years you will need to do a lot more than your scenario.

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8. ### Corey BattFinance StrategistBusiness Plus Member

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And has the dividend payout figures dropped to the same level? (this is a discussion on passive income, not capital appreciation). Mr Market is an irrational beast - but return figures are a lot more solid.

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9. ### Terry_wStructuring Lawyer and Finance Broker - all statesBusiness Member

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There are many more options. Did you see my recent thread on this topic 5 Living Off Equity Strategies to Speed up Retirement

The traditional approach is to sell one property and pay down the remaining loans. Ideally you would sell the main residence CGT free and then move into your favourite investment property. But there may be better strategies.

Also keep in mind that you will still be saving money during the 10 years to retirement and you would be storing this in offset accounts and saving interest on the loans so it may be easier than you expect (or not as bad).

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10. ### FCANew Member

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Agree with all the above, and will add that you will need to do your homework on the locations of the properties you buy. Some locations are great for CG and some are great for Yields (rents). In some areas the return (rental) yield will be lower due to the higher initial cost of purchase.. in other areas the rental yields are higher. I have a few clients with multiple low cost properties earning above average rental yields who manage to live off some of the rentals.
So, look carefully at the initial purchase price PLUS costs.. look at the cost of the loan, look at the potential rental and positively gear the property where possible (higher rental income than costs). This 'positive gearing' will help you reduce the debt more quickly by using the excess funds to reduce the loan more quickly.
And... then also look at capital growth, as many high yielding locations often offer lower capital growth.
This will also all depend on your time horizon.. in how long do you need or wish to start living off rental income? Plan with all this in mind and remember to seek the correct advice from suitably qualified people for each of the facets of your strategy, including how CGT would impact on your financial situation or strategy should you wish to sell a property.
Hope this helps
Joe

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11. ### Rolf LathamInciteful (sic)Staff MemberBusiness Plus Member

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The model is fine, but the timing isnt realistic in my experience.

2 property cycles for most peops to achieve a moderate LOR outcome with medium high levels of exposure is the norm.

Much comes down to if living off 2 min noodles or............

ta

rolf

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12. ### mcarthurWell-Known Member

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Thanks - I don't see the benefit of the bigger subdivision/development though - by the time you've paid for the devt you essentially have to sell a large share/proportion. Indeed, many developers have to sell their developments in order to afford the next one (apart from the smart cookies on here )

13. ### mcarthurWell-Known Member

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Thanks Corey - that's exactly what I was feeling!

Time to,mat least, revisit my strategy I think. Having 10, maybe 15 years before "enforced retirement" I've left my run quite late.

14. ### mcarthurWell-Known Member

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Ok, thanks. I'll see how I can get expenses down. 8.5% admin fee isn't too bad (though I know some have 5-6%). Maybe if I'm at a lower point in the market (I'm in 450-600k now) the expenses are less?

15. ### mcarthurWell-Known Member

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I do like the idea of selling the PPOR and moving into an IP as the PPOR is appreciating faster right now than the IP (only one so far, hence working what to do next).

As to saving money, the teenager and upcoming teenagers are going to soak up the next 10yrs savings I think . Of course, that's my choice too .

16. ### mcarthurWell-Known Member

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Excellent point Rolf, thanks.
I could spend the first years of retirement using the smallish super payout, then move to LOR. This would get me 20yrs before LOR hits. I'll do some modelling on that scenario...

17. ### BizWell-Known Member

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Agree strongly with Rolf.

This is why I always have a bit of a chuckle when a 20 something swans in here and announces they want to retire by the time they are 30. Good luck! Maybe you can move to Uganda and pull it off but not here.

Minimum 2 cycles and even then you really need to pull your finger out and come up with ways to manufacture equity and cash flow if you are in an average job. There are probably examples off the odd person who did it in less time but they either hit an absolute home run, had a high paying job to smash the debt or just accepted a lower standard of living.

From my experience it happens something like this:

First cycle when you are young - "wow, wish I got in on that"

Third cycle - "Smashed it. Done"

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18. ### albangaWell-Known Member

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My point was more it is a way to manufacture good capital gains which is then used to pay down debt. Subdivisions and developments can be very rewarding! I just completed a subdivison/renovation and knocked a huge chunk of my mortgage.

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19. ### FullysickbroWell-Known Member

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Depends were and what the property is but overall roughly 30% in expenses which includes agents fees, water, etc etc etc.
Even if you purchase a higher yield property, (which will definitely help)as others have said, the time frame is a little short. Only way I can see it happening is with a very high paying job to pay off debt, or create the equity by building/subdividing/create equity then selling part off.
Unfortunately that is also more risk especially if it's your first time doing. But doable it is.

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20. ### Daniel007Well-Known Member

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What would you consider high paying, 150k or even higher than this?