Retirement at 55 - Line of Credit

Issue: $70k income v $120k expenditure.

Problem: $120k expenditure.

Time: Income v Expenditure disparity unlikely to have occurred overnight.

Possible solution: Get to grips with $120k expenditure. The "I want..." concept just don't cut it.

 

The problem here is you taking on debt banking on asset to go up and if asset tanks you have a real problem while your debt increase and in retirement you don't have any other source of income.

no issue if you hold asset and it tanks, you can hold it and dont have to deal with the debt issue.

This got nothing to do with shares vs properties it just a prudent question about down side

 

I think someone wanting 120K net from $4million in unencumbered assets is a perfectly reasonable expectation... It's 3% net - quite a conservative expectation , really.

 

I did.

I think you should read what I wrote again. For your convenience here it is:

The OP is aiming for $4M of unencumbered investments plus a debt-free PPOR.

For a lot/most Australians, that would NOT be a problem; they would consider it retirement paradise.

If it is a problem for the OP, I am open to donations .

 

I didn't say it wasn't.

Apparently my post may not have been understood in the manner I meant it but I can't be bothered to expand on it.

 

But you are saying that spending 120K per annum is a problem , and they should get to grips with that being the problem. I'm saying, I don't see why spending 120K a year is a problem if you can afford it..... and $4 million unencumbered should make it easily affordable. Really easily affordable, actually.

 

The OP can do two things:

• Increase the income over and above the expenditure as Income equaling Expenditure isn't going to work long term; or
• Reduce the expenditure where possible.

Both may require asset sales at some stage but examining and reducing expenditure may assist now.

 

Unless they are flat out unwilling to sell any of their properties or add higher yielding properties into the portfolio, the 120K income should be pretty easily achieved... 160-200K should be achievable ( ie 4-5% net) , if we are being realistic. Perhaps more...

The idea of using a LOC to provide the 120K income seems silly to me, given the income can be easily achieved without taking on debt. If you cant get the 120K you want from the resi properties without taking on a LOC, either add granny flats ( if the properties are suitable to do so) or add a cash cow or two , or sell and reinvest the money where you can get the 120K ( or better) You'll be debt free... and you'll have the income you want . No need to curtail your lifestyle/reduce spending. Job done.... people here focusing on the $4million rather than the 120K are missing the point . Equity doesn't pay for stuff. Cash does. What good is 4,5, 6,7 or 8 million of equity if it's delivering miserly returns and you aren't enjoying /affording the lifestyle you want ? would you rather a net worth of $1Million and 150K income or a net worth of 3 million and 50K income ?

 

Many ways to skin a cat without reducing your networth if you only need a 3% annual return on a $4m+ asset base!

 

Beejesus man......I am agree with you lad....yet again....

 

@Chotu, I have a number of guiding principles regarding investing. Two that are applicable for this thread are:

1. Buy high growth investments and never sell them (if one is "forced" to sell, delay the sale as long as possible).
2. Use debt and aim to never pay it back (if one is "forced" to pay it back, delay the repayment as long as possible).

Why?

For me, the name of game in retirement is to always/continually grow one's Net Worth. While one's Net Worth continues to grow, one always has flexibility/options. Assets and Debt work together to create Net Worth as described by this formula:

Net Worth = Assets - Liabilities (Debt)​

If one has purchased good, high growth, investment assets while they are in accumulation phase (like you have done), one can reasonably expect those assets to continue to grow in value when one is in retirement phase. The good news is that (in most cases) debt does not increase.

So, if the asset is increasing in value BUT the debt is not, then (using the above formula) Net Worth automatically increases.

Let's compare two retirees, A and B. Retiree A has $4M of investment assets but no debt; Retiree B has $8M of investment assets and $4M of debt. So, today both retirees have the same Net Worth, $4M. Both have the same flexibility/options.

Say these good, high growth investment assets grow 50% in value over a period of time (it could be 2 years, 5 years, ...), Retiree A's Net Worth is now $6M and Retiree B's Net Worth is now $8M (or 33% higher than A's).

As a personal example of the above two guiding principles, we bought an high growth investment (an IP) and borrowed the full purchase price via a bank loan.

When we bought the IP, the loan bought the whole 100% property
Today, that loan would only buy 20% of the property
In 10 to 15 years time, that loan may only buy 10% of the property​

The other thing about buying/keeping high growth investments is that their income increases over time but the debt doesn't. Using the same personal example above:

• When we first bought the IP, the annual gross rent equated to 6.84% of the loan. In other words, the loan is equal to just over 14.6 years rent.
• Today, the annual gross rent equates to 18.72 % of the loan. In other words, the loan Is less than 5.4 years rent.

We have been retired for 10 years (later this year). Our Net Worth is considerably higher today than it was 10 years ago (I know because I track it every Quarter for the last 16 years). We have more flexibility/options in retirement now than we did 10 years ago.

I would not be rushing out and selling your what seems to be good, high growth investments assets. Selling investment property destroys Net Worth through CGT, commissions, legal costs, etc.

One final word:- when one increases their Net Worth, it is tax-free (until they sell). When one increase their income, it is typically taxable each and every FY.

 

Interestingly, one recent update from mailing list of M Yardney :

"...

And today my living off equity strategy won't work for most investors any more.

So what do you do?
..."

LOL

 

That's my philosophy as well to a T.

In my case however (without stealing the OP's thunder, but relevant to the conversation), I'm at a point where I can't hold on to (all) my 'ok yield, good CG' assets. I can't access the equity due to serviceability constraints and rent increases, unless they're > 20%, won't do the job.

What the hell do you do? The only choice available it seems is selling to deleverage or chase a higher yield in the stockmarket to assist in meeting repayments.

The OP doesn't have the exact same problem thankfully, but apart from being content with $70K or waiting till rents grow enough (might be dead by the time that happens), or getting a large LOC and living off that for a while ie living off equity, think the only option is perhaps to sell one of them and dump the proceeds in the stockmarket at an opportune time to net 4.5-5%. Plus the franking benefits of stocks will help reduce the income tax paid on the rents received.

 

If I was the OP, I would seriously explore this option first before selling any IP:

Net rent is $70K. So gross rent would be approx $105K

This is only $15K short of the OP’s target of $120K (BTW, this is double what they say a couple requires for a comfortable retirement). So, either

or borrow the additional $15K.

This would mean that the $35K of investment expenses would need to be borrowed as well (and kept separate from $15K living expenses).

So, on the negative side, debt would accumulate at $50K per year + interest.

The OP has $4M + PPOR (let’s assume $2M for this exercise). If the $6M property portfolio increases in value at say 5%, that means Capital Growth of $300K per year.

By delaying any sales and taking on some debt, the OP’s Net Worth could increase by $250,000 in the first year. As interest accrues, the increases in Net Worth could get smaller in subsequent years. The OP might be “forced” to sell an IP down the track.

We just don’t know enough about the OP situation to make a definitive call on this.

I believe this is worth investigating as the OP’s Net Worth could increase for years. I would rather this than destroying Net Worth now by selling one or all IPs (as some are suggesting).

 

Could the OP not just withdraw equity from the $4M of 0% LVR property just before 'Retirement', while they still have serviciability and invest that in some higher yield property? Resi, or commercial? I guess it depends what interest rates are at the time...... Why do they have to sell.....

 

Thanks @kierank , that was very helpful advice. I've made the mistake of not investing in high growth and high yielding properties, but still feel holding onto them will be good for me. My borrowing capacity has hit a ceiling, how can I increase my borrowing capacity? Would love to add more properties to my portfolio

 

Say the OP takes a loan of $2M just before retirement secured against the existing unencumbered houses for arguments sake; then uses this to purchase higher yielding assets. The current assets (The original $4M worth) return $70K p.a. and the OP wants to get to $120K so needs another $50K. So they need a net yield of 2.5% against the $2M of borrowed funds. This seems doeable enough to me, especially since they dont need additional loan funds against the new purchases. I realise I havent taken into account tax, but you get my drift.....

 

You can't redraw equity. It would need to be a loan and to get the loan servicing needs to be met plus quality for other restrictions such as the cash out requirements. It should be considered though

 

As I keep posting, the OP has many, many options.

Selling IPs as some are suggesting is way, way down the list.

 

I have no idea as we don’t have enough details about your situation.

PM me and and I am happy to give you my opinion.

Have you considered/thought about shares?