My intention to LOE

If your portfolio has equity of $3m, I'm guessing that would be positively geared at about $120k. Could you live on that?

 

same
except primary residence included? no income on this

 

I agree with this but I think his issue was that he would have to pay tax on that, therefore it was a lot less.

At the end of the day a combination of the 2 might be the answer for you for awhile.
For example LOR up to a certain value that is tax effective - maybe $30k each then increase the equity in your places to fund the rest of the funds you want.

You will need to do a lot of modelling to work out the best scenario. The main stumbling block is that you somehow want to get rid of/transfer $900k of debt so that you can live in one of your properties instead of renting. That is a HUGE amount of money that you suddenly want to be deductable.

 

I couldn't agree more! Plus you can time when you sell something, so that you don't have any income coming in. All of a sudden that tax hit isn't all that large. For example, you've got a property that is worth, say, $1m and has, say, $500k equity that you want to sell. It's in both names, & you've held it for over 12 months. For tax purposes, $125k will be added to you & your wife's income ($0). This will reduce the tax that you pay considerably.

Now, you have $500k less in loans. If they are costing you 4%, that frees up $20k in cashflow AND if you put the proceeds into offsets against other properties, after all expenses you will still have more than $400k, so that would free up at least another $16k. You could put THAT against an offset on your PPOR.

This is also a concern to me.

Before Hubby retired, I did up a huge spreadsheet with the figures for all the properties. The outstanding loans, interest rates and all the expenses, I put a conservative value against each property, working out the equity in each one.

After this I played with the figures. What happens if I sell A? Well, of course you loose the rental income on this property, but you also loose the debt. Where then do you put the proceeds? What is the change in the overall income by doing that? Which properties give you the greatest benefit?

Another thing that hasn't been touched here, which could cause concern at a later stage, is interest rate rises. Play around on your spreadsheet what happens to your figures, should interest rates rise. We have extremely low interest rates right now, and although they may stay low for some time, there are no guarantees. You want to make sure you can withstand changes, and unforeseen events.

We knew, years ago, that we would have enough when the next Sydney boom came along. We also knew that we would have other properties that hadn't gone through enough of a rise, that they would be kept & some of the Sydney properties would be sacrificed.

 

skater - you have confused equity with capital gains. These are two different things and will be different figures.

 

This is a potentially yes question. I am grappling with this also.

The real issue is the stability of this income month to month...but also year to year. This is because the rental amounts can vary..I see this in my portfolio.

From my perspective...it is also important to put some of you assets into more stable income stream like the top dividend payers on the ASX. So when you do sell properties also have a share portfolio which can return this.

The other 64k question for people holding older properties have people worked out how much it will cost for renos or maintenance? This can be large over time...and may need deep pockets.

 

It may come as a shock to some but the portfolio is currently negative to the tune of about $50K pa. I'll be spending the next 18 months trying to close the gap so the portfolio is cashflow neutral. This is based on my calculations factoring repairs, PM fees, council rates, interest etc etc. Being an excel guru and a fairly anal modeller helps as I find my forecasts are usually only +/-5% out at the end of the yr.

Sash, my rent returns and collection is fairly stable. Most of my props are located in mid-inner suburbs. Generally finding tenants, and tenants that pay the rent on time is not a major problem for me.

TerryW, gross rentals ex salary are between $450-500K pa.

So the basic scenario will be that at the point of pulling the pin, the properties will (just) fully sustain themselves and the only cost I'll be left with will be the mortgage and living expenses. However, and despite the fact that I know things don't go as planned, I should expect that LT, rents on my properties will gradually increase and therefore begin to defray the yearly LOE drawdown throughout the LOE term.

Whilst I'll admit it's slightly risky, the mix of properties I have based on the last 20 yrs at least suggests that I won't ever get into a negative equity situation.

 

Wow. You mentioned that the loan on the new PPOR will be $900k so that would be a huge expense of about $40k pa plus your existing properties are negative by about $50k plus you will need living expenses. of about $100k I think you mentioned.

A $1mil LOC will be eaten up in about 5 years doing this.

 

I realise they are two different things, however when doing up my spreadsheet, it was the EQUITY I looked at, not the CG, because it's not really a CG until you sell it.

Plus, we had a couple where they were bought for a low amount, and we had paid down some of the principal, so the CG was less than the actual cash out, if you know what I mean.

 

Example
$100,000 purchase, now valued at $900,000 a $100,000 loan = $800,000 equity

If it had a $100,000 loan still there equity would be $800,000
If it had a $500,000 loan now the equity would be $400,000

However CGT would be the same for both scenarios.

 

My thoughts exactly!

I would strongly suggest that you get the mortgage on the property you intend to use as your PPOR reduced significantly AND take a look at your living expenses BEFORE you go down this path.

In our situation we have no mortgage (PPOR), own our cars outright, and live very comfortably on well under $100k. It is much easier to pull the pin on the JOB when you have no expenses.

 

Putting together the above pieces of information.

Lets assume
Gross rent: $475k pa
Gross yield: 3.4%
-------------------------------
Portfolio size: $14 million (approx)

That is very impressive portfolio size in your mid 40s.

Congratulations on your achievements and we would love to hear your investment journey and how you got there.

I think you have a problem most of us would love to have.

Cheers,
Oracle.

 

Yes, I understand this BUT I was actually referring to what we would be left with as a CASH OUT!

So, Example.....$100k purchase, now valued at $200k with a $80k loan. Equity equals the CASH OUT proponent, so $120k, while CG is $100k.

 

As a Doom and Gloomer my concern with a LOE strategy is what happens if the market falls?

Assuming @oracle estimated the portfolio's size correctly, then it's worth around $14 million, with $11 million in debt. A 20% drop in the market would wipe out any equity, and anything more would leave you in a hole. @Kate Moloney could fill you in on what happens in that situation.

Sydney prices were up in the last quarter, so maybe we're not heading into a downturn just yet.

The other risk, as mentioned above, is interest rate rises. If the current mortgage cost is about $500K per year, then a 2% rise would take it to $700K, and the shortfall to around $250K per year. That's going to cut through your equity pretty quickly.

 

Terry W your numbers are about right ie Living + discretionary expenses = $90K, mortgage $40K, property cashflow shortfall $50K. But as mentioned, I'm looking to at least eradicate the $50K before considering LOE plus shifting the $900K debt to ensure it remains deductible once we move in.

In addition, I certainly wouldn't be able to get the $3m I'm seeking without additional and sustainable income. Even with $50K more pa, I'm unsure if I'll pass serviceability calcs. Will have to wait and see on that front.

Oracle
tx, the portfolio isn't quite that large but it is double figures. Have done nothing special - quite the opposite actually ie mostly buy, renovate, hold and sometimes without the renovation. Always bought older props, worst house/best street scenarios and always bought well/BMV in my mind at least. Haven't sold anything ever and don't intend to.

Whilst I've got the growth I sought to get, the cashflow has perennially been the victim - such is the case when buying in better suburbs. I'm surprised I've been able to hold on to the flock to be honest given that I don't earn a massive salary.

 

True Terry but don't forget that if/when rents increase they'll start to reduce the overall amount I need to LOE. Of course these are all hypotheticals ie interest rate rises could take place and eradicate the rent increases just as easily.

For me the ideal sweet spot is about $100K pa - if I can somehow get the overall outflows down to about $100K pa then I'd be in a safe-ish position.

 

You won't be able to make the $900k loan interest deductible as it would relate to an owner occupied place. You might be able to slowly recycle some debt though.

Even if you did have some good debt recycling in place you mentioned your taxable income would be $0 so there would be no immediate tax savings.

an annual 5% increase in rents would add a lot help, but this may be at the high end and don't forget living costs generally increase as well.

 

I've factored in CPI increases in (all) expenses of 3% and rent increases of 3% as well ie rent increases track inflation on average. Hopefully this is conservative enough.

 

As you said above somewhere this may result into having to sell a property eventually, but you will squeeze out many more years of golden eggs in the meantime.

 

Holy sheep ******....I know people think I was highly geared..but $11m with a $14m assey base.

Now @Lacrim how did you gear to that level ...I am 40-45% LVR on 8 figures..but the number of $11m in loans is mind blowing!

How did you get that much out...kudos ..how did you do it?