LOR, 10yrs, how to?

MTR · 20th Sep, 2016

mcarthur said: ↑

I understand buy and hold and the benefits (and disadvantages).
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?
Click to expand...

Buy in USA much easier, and cut the timeframe to zip

Jingo · 21st Sep, 2016

mcarthur said: ↑

I understand buy and hold and the benefits (and disadvantages).
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?
Click to expand...

Another strategy could be to buy IP's first and rent. Then when you can, buy a PPOR in an area with strong capital growth. When you want to stop work, sell the PPOR capital gains tax free and pay down the IP's. You could either rent, or move into one of the IP's.

There are many examples lately in Sydney and Melbourne of people holding PPOR's in high growth areas and these increasing substantially in value.

Other strategies are to build equity in IP's then venture off into shares/commercial property for higher yields. Gradually sell down the IP's or keep a couple of the better ones.

I think Superannuation shouldn't be ignored either for the icing on the cake in later years.

dabbler · 21st Sep, 2016

Rolf Latham said: ↑

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

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

Many can't afford 2 min noodles, must make own from scratch and mix in some dirt

The OP is thinking, one way or another you have to generate cash, either by selling or by working and paying down or offset loans.

Not easy, and in between lot's of agro & lot of misery if things stay flat and your NG from the start.

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LOR, 10yrs, how to?

MTR Well-Known Member

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LOR, 10yrs, how to?

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