My intention to LOE

After a couple of months of heavy contemplation, I've decided that our portfolio is big enough to put a freeze on investing further, and to subsequently go down the LOE path by 31 Dec 2017.

Whilst I understand the risks and perils of LOE vs LOR, I'm not prepared to wait the 10-15 yrs to retire 'safely'...life's too short and I'm now approaching my mid 40s.

The plan of action from where we are right now :

1. move to one of my IPs (permanently) by mid 2017
2. recycle the debt on that IP so the (then) non-deductible mortgage is effectively zero
3. simultaneously reval the IPs and top up all the loans to facilitate a large LOC/cashout in November 2017
4. quit my job in Dec 2017 (or perhaps stay in the job for another 12 months to trial LOE)
5. live off the extracted funds - should theoretically get us through the next 20 yrs depending on economic conditions. I guesstimate by the end of that period I may be able to fully LOR. I don't intend to sell any properties now or then.

I'd greatly appreciate any comments or questions, critiques etc as the concept of LOE does scare me a little. Happy for the forum to rip into me. I know the consensus is that LOE doesn't work but as mentioned, I'm impatient and feel ready to roll the dice.

Some of the questions I have are:

1. is it definite that without a job or business income in say 20 years, will it be impossible to access more cash IF I need to?
2. we currently rent. How do I reduce the loan on the IP we're moving into to zero and recycle the debt to other IP's? The loan on the IP we're moving into is just under $900K!
3. how to structure the top ups to minimise tax and avoid mixing deductible and non-deductible debt.

I have a general idea but the numbers are big and I can't afford to f things up - my gut tells me that if I don't get it all right by Dec 2017, I won't have an opportunity to right any wrongs once the JOB income is gone.

Thanks all

 

Do you mind sharing the numbers?

 

I have a few concerns about what you are trying to do. Of course, without any information in regards to your living expenses, rental returns & outstanding loans, there really isn't a lot of advice, or critique that can be given, but with an IP that has a debt of around $900k that you intend to make your PPOR, I am feeling that maybe you haven't done enough research to see if you are ready for this. I also think that you may be a bit naive if you are asking if you need income to access more cash.

Seeing as Hubby retired recently, so we can LOR, I do have a little experience.

 

You may want to read this.
5 Living Off Equity Strategies to Speed up Retirement

This topic has been raised here many time and also on Somersoft forum, I would do a search on the subject, sure you will find lots of useful info.

 

Loe generally relies on "properties double every 10 years" which is a tenouous provision to base retirement off

 

Don't borrow to live on as the interest won't be deducitble. Borrow to pay interest instead and live on the rents. (after getting tax advice).

Be careful how you structure your loans. Make sure no crossing as this is vital on retirement.

Extend IO terms and loan terms to as long as possible before you give notice.

Watch out for LOC products which are often at call. A term IO loan may be preferrable but watch out for the tax issues.

Assume you will never qualify for a loan top up again (you still might!).

be prepared to sell a property in the future if need be.

factor in any shares and superannuation as well.

 

Good advice

 

Thanks for the opinions thus far. Rather not divulge too much on a public forum numbers wise but living expenses of $130K pa in today's dollars including a mortgage and accessible equity of circa $3mill prior to pulling the pin would be a good approximation. And just to reiterate, I'm not relying on future growth to get more cash out - the intent is to do it once prior to retirement.

TerryW
thanks for that quick summary - have seen your previous posts. Your advice on this subject is always food for thought.

Where I'm coming unstuck is HOW to recycle the debt on the intended PPOR. To be completely honest and despite being fairly experienced, am not sure what recycling in context actually means. Is it for example, shifting/increasing the loans on 3 other IP's by $300K (total $900K) and having $0 on the PPOR??

Skater, am not being naive about the coming back for more cash. I shouldn't have to but it's more of a s*** happens scenario.

I get that LOR is a superior strategy but the 2 drawbacks that I can see (in general) are that the excess rent you're relying on will be taxed, and the length of time one has to wait to be able to fully LOR. There has to be a middle ground and that's where LOE may make sense provided you have the requisite assets, cashflow now and future etc.

 

I suggest you immediately uncross because if you sell one the bank will take the proceeds and use it to reduce the existing debt.

How to recycle existing debt? Maybe you will be stuck here as there is no quick fix. You would probably want to set up a few LOCs and use one to pay for the expenses on each property freeing up cash to use to pay down the new PPOR. You cannot simply increase investment loans and use the cash to pay off the PPOR loan as the interest wouldn't be be deductible.

You might also be able to employ some strategies such as selling to a trust or spousal transfers to increase the loans on the investments and use the cash to pay down the nondeductible.

Before you pull the pin increase the loans to the max - using separate splits.

How much big a LOC do you think you could set up before you were to stop work. $3mil would require a huge income to service. Don't forget there is no income counted for releasing equity as opposed to buying a property which will generate rent.

When you stop working do you have any idea of what your taxable income would be?

 

Yes being able to access the $3m will be a huge challenge ie to get past serviceability calculators. I don't know if it helps but I'm spread across quite a few lenders so its not like I have to ask one for $1m dollars.

Assume my taxable income post retirement is $0 - which is probably where it'll be.

 

That would be a waste of a tax free threshold x 2!
I have some future tax tips coming up on this.

As for lending you will have to overcome the 'cash out' risk aversion of lenders too. They generally don't like letting people have access to large sums of borrowed cash.

Have you considered the benefits of franked dividends? Maybe have a read of Austing's post here Peter Thornhill

 

This is basically coming at it from a different angle, however could you improve your scenario by just selling down and increasing cash flow???? Simplifying, without knowing all the details I am guessing??

 

There aren't any dogs in my portfolio - they're all metro based in good, quiet streets in good suburbs. Guess my attitude is why kill the goose that lays the golden eggs. I agree selling down is simpler and gets rid of a few unknowns but it also comes with a few nasties, like a giant CG tax bill, selling fees, etc.

TerryW, yes it is a bit of a waste saying no to two $19K tax free thresholds - maybe me and the wife should go get some low paying job that we love or start a business or something to reduce the cashout burden. But that's a good problem to have - problem number 1 is getting the funds in the first place and getting the structure right.

 

When you're considering LOE, consider that it was mostly made popular by 2 people:
1) A financial planner who has been bankrupt and has multiple suitors now chasing him for money
2) An ex member of these forums who was banned for setting up other accounts to back up his opinion on the matter.

 

Because its about strategizing, you do not have cash flow, you can not live on bricks and mortar. If I never rationalised debt and increased cash flow and built income streams I would still be in a day job

Review your portfolio, what has already peaked? what is about to peak etc etc.


Holding and growing a portfolio is fine, but to reach an end goal means you need income/cashflow

 

Pray tell. Not Rixter, I hope!!

 

Wow... Rixter? Massive news to me!

 

What if you borrow to the hilt and equity values drop? Do you have any back up plans?

Could you change career, or start a business in a field you are passionate about, or could you do property deals that will create chunks of cash that you could live off instead while your portfolio matures? Cash is king. Cashflow, even better. Negative cashflow, not good. Living off debt, not necessarily the best strategy.

 

Values dropping doesn't really effect LOE - until you need to borrow more or sell. Rents dropping may.

Lacrim can you tell us what your cashflow from property is now, pretax and what would the position be if you had no taxable income?

 

...or Queen