澳洲Australia property When LOE goes wrong | Sydney


在澳大利亚 The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m


From my observations, many property investors seem to build negatively geared residential property portfolios in the hope that they will someday be able to provide for them later in life and they can implement a living off equity strategy.

Many property spruikers use the same tired model where they assume 10% capital growth on average or something along the lines of "property doubles every 7 to 10 years"

My question is, what happens if you do throw your lot in hoping to live off equity and you experience no capital growth over 7-10 years? What do you do if you have little to no equity to draw down on or even worse, are in negative equity?

I ask because the prolonged flat growth of the Perth residential market has got me thinking, many would have seen little to no capital growth of their portfolios for 4 to 5 years.  

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Hiya

Well..............some places like the Gold Coast have gone well and truly BACKWARDS (like Mandurah)

Any investment strategy that relies on hope and organic growth, is to ensure you dont need to draw on that hope when it has not eventuated.

Id hope no one buys a bunch of resi stock when they are 58 to hope to draw an income at 65 /..........................

ta
rolf  

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I think the trick is to buy one property - or 2 - per yer over an extended period.
That was the growth of theprtfolio s averaged out across say a 10 year time period and any prolonged flat period is avoided. I believe Rixter has done this, or similar.  

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charttv said: ↑
I ask because the prolonged flat growth of the Perth residential market has got me thinking, many would have seen little to no capital growth of their portfolios for 4 to 5 years.Click to expand...
You need to have a well thought out plan and be prepared to stick it out for the long term. LOE is not easily achieved quickly unless you strike some great timing and conditions.

Buy only when you can afford it
Maintain healthy cashflows
Buy well
Buy property where you can add value or develop
Add value intelligently
Have patience
Don't expect miracle wealth and early retirement from a long term investment strategy.
Have you finger on the property pulse - don't just buy, shut your eyes and wish for the best.
Learn from mistakes and evaluate your results objectively
Have a vision for your future

That'll do for now. :)

We are currently LOE but it is because we have been developing over a number of years and selling off some property here and there which refills our offset accounts every now and then. One of the issues at present is that finance has tightened up which makes it harder to refinance and get cash out. I rekon this one of the factors that has had a bearing on the poor CG of late.  

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charttv said: ↑
From my observations, many property investors seem to build negatively geared residential property portfolios in the hope that they will someday be able to provide for them later in life and they can implement a living off equity strategy.Click to expand...
Initially, I started buying -ve geared property - mainly because that was all I knew. Everything I had read - including Jan Somer's books promoted the concept of -ve gearing. I have changed my thinking since though.

Having said that - there are many approaches to property investing and many 'end games' so to speak. LOE being one of them. Rixter explains LOE very well and his strategy works well for him.

charttv said: ↑
Many property spruikers use the same tired model where they assume 10% capital growth on average or something along the lines of "property doubles every 7 to 10 years"Click to expand...
Historically, the spruikers can be proven correct in this regard. We are going through a period of lower and even negative growth at the moment which leads people to question whether there will be future capital gains available in property.


charttv said: ↑
My question is, what happens if you do throw your lot in hoping to live off equity and you experience no capital growth over 7-10 years? What do you do if you have little to no equity to draw down on or even worse, are in negative equity?Click to expand...
In the good times (ie loose credit) Lines of credit are topped up in preparation for the lean times. Meaning that it would be possible to survive a period of 10 yrs on LOE before needing to refinance.

charttv said: ↑
I ask because the prolonged flat growth of the Perth residential market has got me thinking, many would have seen little to no capital growth of their portfolios for 4 to 5 years.Click to expand...
I guess this is where diversification could help. Had an investor had IP's in Perth, Melbourne and Sydney they would have seen growth in Melb and Sydney over this period of time and been able to use those IP's to draw funds from.

Regards Jason.  

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jingo said: ↑
Historically, the spruikers can be proven correct in this regard. We are going through a period of lower and even negative growth at the moment which leads people to question whether there will be future capital gains available in property.Click to expand...
I think you've hit a nail straight on the head here.

Property does not always increase in value, anyone will tell you that right now. The interesting part is that a lot of people currently think the sky is falling and property prices can not possibly increase every again.

Right now property is going through a 'downturn' and is falling (but not crashing) in value. Eventually things will stabalise and property will increase in value again. Different locations will have various rates of increase and some places will start to go up in value before others.

For those with a long term wealth creation plan, this is good news. If you buy good properties in good areas for good prices and stick with it, you'll do fine over 10 to 20 years. If you're looking to make a quick buck, I'd say it's possible, but a lot more risky so you could loose money too.

Downturns don't help a LOE strategy. It's one that's very reliant on capital growth and also bank sentinent. If you've got lots of equity, you might be able get through downturns. If you run out of equity you're in trouble.

The other problem with the strategy is if the banks decide to stop lending you money, eventually you'll run out of it and the strategy will collapse. Right now the law states that in most cases, lenders need to see evidence that you can afford the loan or line of credit. Having lots of equity is not proof of affordability, only cashflow is.

My suggestion for a long term retirement strategy is build up lots of equity. At some point, take steps to point your investment portfolio towards one of cashflow generation, instead of wealth creation. Then live of the cashflow.

Examples of cashflow generation might be:
* Invest in cashflow positive property (not particulary easy).
* Liquidate some proeprties to pay down debt and get cashflow from rental income (you still get long term growth in remaining portfolio value and 3-4% yield depending on the properties you hold).
* Sell off properties and live off the cash and the interest (very conservative and overall poor yield strategy as cash is erroded by inflation).
* Sell off properties and diversify into a cashflow oriented share portfolio (will have varying results depending on the portfolio but can work extremely well).  

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charttv said: ↑
My question is, what happens if you do throw your lot in hoping to live off equity and you experience no capital growth over 7-10 years?Click to expand...
Very bad things...all starting with the word Bank.


charttv said: ↑
What do you do if you have little to no equity to draw down on or even worse, are in negative equity?Click to expand...
Panic. Run away. Go to Mexico.


No no - seriously.  

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Dazz said: ↑
Go to Mexico.


No no - seriously.Click to expand...
Considering this one. As daughter is there. And a comfortable lifestyle can be had for a much lower cost than here.

Except it's a bit close to the inlaws.  

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Throwing your lot in to one property hoping it'd one day appreciate enough so you can retire while in the mean time having a $20k negative cashflow per year is not a particularly well thought out strategy. The 400 million Americans will tell you that too.  

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Deltaberry said: ↑
Throwing your lot in to one property hoping it'd one day appreciate enough so you can retire while in the mean time having a $20k negative cashflow per year is not a particularly well thought out strategy. The 400 million Americans will tell you that too.Click to expand...
I thought you were big on the High Growth, Low Cashflow IP's DB..maybe i'm confusing you with another poster though :confused:  

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This should explain it:
Steve Navra

Member





Join Date: May 2001

Location: Sydney / Canberra / Melbourne / Brisbane

Posts: 994







A LENGTHY reply





Quote:



Originally posted by Tim & A.L.
Interesting question:

How many properties, or more accurately, what level of gross income, do people think that is a to comfortable to high level to retire on?

Now I’m 35 and want to retire in 10 years on approximately my post-tax income

My goal was/is to use buy and hold IP, and in 10 years generate a net 3% profit

thus if I want to retire on $150K Aussie/year I would need to own a whopping $4.5M worth of property . . . unfortunately difficult to execute



Hi Everyone,

Firstly let us establish the required retirement income:

A.L. would like $150,000 pa in 10 years time and with inflation at say 3% the future dollar amount would need to be: $201,587 pa

I will assume that this is Gross Income, so the net of tax income required will be $105,832 (Reduced by 47.5%)

Two points to digest:

Firstly it is twice as difficult if you are trying to create your income out of a taxable income source, example of this is the rental income you might receive from your properties after expenses. (Strangely enough though this is what most of the books teach you to do.) The result of course is the Whopping $4.5M required, which clearly is very difficult.

Positive income from an asset source, is unfortunately fully taxed. (Hence the difficulty.)

The second point is that structure can allow your dollar to work multiple times simultaneously.

Example: Assume A.L. has over the next ten years managed to build up a property portfolio of $2,200,000 gross value (Less than half of the whopping 4.5M) with an LVR of 63% (Net equity of $814,000)

This is all that is required to give A.L. his $105,832 pa after tax; suddenly NOT so difficult.

So HOW to achieve this???

Buy a property today for $450,000 (Ah YES 25% above the median of the city say Melburne)

Now we know that Melbourne has averaged in excess of 7% capital growth over the last 10 years, BUT hey these are uncertain times and maybe we are at the top of a cycle etc, etc. I am suggesting that if you apply rental reality, you will NOT overpay for the asset and if you follow the correct criteria you will very likely achieve the 7% irrespective of the current cycle position. HOWEVER, for the cynics out there, I will assume that you refuse to follow my criteria, so let us assume a capital growth pa of 5% (If you get a lesser return than this, you are definitely doing something very wrong!)

So at 5% pa growth, this Property will be worth $733,000 at the end of 10 years.

Better than this, is the fact that at the end of 3 years the property will be worth $520,000 (Also at 5% pa growth) which means that you have gained $70,000 in equity, which is enough to cover the deposit and costs to buy property number two for $520,000.

It gets even better, because two years later both these properties should be worth $574,000 (still at 5% pa growth) which is an equity gain of $54,000 X 2 = $108,000:

So with a very self satisfied smile go out and buy property number 3 for $574,000.

Note: This occurs at the end of year 5: Now all you have to do is hold the three properties for the next 5 years and if they continue to grow at 5% pa, you are home and dusted.

3 properties each worth $733,000 = $2,199,000

Total DEBT = 90% of each purchase price: $450,000 + $520,000 + $574,000 X 90% = $1,389,600 (LVR of 63%)

SOLUTION: Approach reputable bank and ask for an 80% LOC facility against your total equity: $2,199,000 X 80% = $1,759,200 Less of course the existing debt of $1,389,600 = $369,600.

Buy an income stream (Cashbond) with the $369,600 for three years:
Will provide an income of $123,200 pa (Capital return tax free)
And interest portion of $3,499 pa interest ( which is taxable) X 47.5% = $1,811 after tax.

Total tax free income: $125,011 (You smiling yet A.L. ??)

However, let us not forget that there is a cost for using the $369,600 at say 6.5% = $23,998 pa

So your net of tax living income will be $125,011 - $23,998 = $101,013
Which is equivalent to $212,658 taxable = $158,23 in today’s dollars (3% inflation)

See it is soooooo EASY!

NOTES:

1) You might be asking what happens at the end of the three years, when you have spent the money?? Well $2,200,000 of property growing at 5% pa = $110,000, which is MORE than you are spending each year, so at the end of the three years your properties will have grown by more than you have spent. You can then draw down the equity and buy yourself a further income stream . . . and eventually it goes to your kids.
2) What about serviceability? The cashbond creates serviceability beyond what you will need to continue this process.
3) What happens if my property grows at less than the 5%: Spend less!
4) What if my properties grow at greater than the 5%: Spend more, or save the extra for a year when it might be lower.
5) If the projected property growth is 7% (Yes you got all the selection criteria correct) your income level will be nearly DOUBLE!!
6) If you ‘Value Add’ with shares for example your income will be nearly TRIPLE!
7) Can you do this?? ONLY if you want to . . .

Hope this is of interest,

Regards,

Steve  

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Looks absolutely fabbo in theory.....maths projections are so easy when everything is constant.

Anyway, back to reality, as we've seen, 10 year goals put out there have a funny way of not hitting the mark.

We saw a few high profile posters of yesteryear take some major detours, with their current real estate positions being completely different to their stated goals at the time.

I'd be interested to see where Always Learning is at, and more to the point, where Steve Navra is at with his techniques ??

Maybe I'm looking at things too simply...dunno.

I chose a strategy that involved buying low maintenance +CF properties that I collect the excess rents off and eventually it builds up to Live off Rent (LOR). That's it.

It appears the machinations that some folk need to go thru (with the Banks continual blessing of course) seem highly complicated. The other techniques usually involve selling down so much to get rid of the Banks that it doesn't really look like an investment property portfolio any more ??

I'm still unconvinced that a LOE strategy is sustainable long term, as the person in control of the long term decisions that dictate whether it will continue or not, is not the investor. This for me is the fundamental fatal flaw of the technique.  

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Me too Dazz, I'm sceptical it would work long term, but people are doing it.
My main gripe with LOR is the massive taxes you pay on cash. But cash is king, also.

Ideally it would be nice to LOR but the property maintenance/upkeep/taxes and bills are so high that it eats alot of that rent and one requires a large portfolio before it's even possible to live comfortably from that rent.

I am also drawn to the concept of LOE because it can generally be had sooner, rather than later, and there are always back-up ways of simply selling down a little if the banks refuse to lend. Or, you could always go back to work.. Mind you I'm 31 years old/young and I don't expect to be LOE in 30 years time. I would have a totally new approach by that stage but at this point in time, I can always just get another job once it's all underway (LOE that is)

I am still quite peeved at the extremely long time it takes for the majority of property to become positive in it's cash-flow, this can take 10 years just to become neutral.. if one keeps ripping money out of existing property to purchase more property. Ideally, this would never happen and you'd pay cash deposits for any new property but in relaity, this would take much longer to achieve.

All-in-all, property is a long term investment. People can get lucky and strike it rich within a few short years but it rarely happens and true wealth takes time and effort. I keep slogging on, 7 years in-to my investment journey. I know it will take another 7 or so to be in a nice position where I could actually give away my day job (my wife do the same) and live however we want (to a budget) but I'm also guessing that we would just want a nicer house etc etc. I dunno but whatever it is we want at that stage, we're slogging it out now so that we can maximise our chances later on.  

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Well investor2009 Dazz was referring to commercial property where it is quite feasible to live off rent because the tenant pays for everything...although the entry price is quite high compared to your average purchase price around here.  

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charttv said: ↑
My question is, what happens if you do throw your lot in hoping to live off equity and you experience no capital growth over 7-10 years? What do you do if you have little to no equity to draw down on or even worse, are in negative equity?Click to expand...
Pretty simple really, u don't get to live off equity  

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Dazz said: ↑
Looks absolutely fabbo in theory.....maths projections are so easy when everything is constant.

Anyway, back to reality, as we've seen, 10 year goals put out there have a funny way of not hitting the mark.

We saw a few high profile posters of yesteryear take some major detours, with their current real estate positions being completely different to their stated goals at the time.

I'd be interested to see where Always Learning is at, and more to the point, where Steve Navra is at with his techniques ??

Maybe I'm looking at things too simply...dunno.

I chose a strategy that involved buying low maintenance +CF properties that I collect the excess rents off and eventually it builds up to Live off Rent (LOR). That's it.

It appears the machinations that some folk need to go thru (with the Banks continual blessing of course) seem highly complicated. The other techniques usually involve selling down so much to get rid of the Banks that it doesn't really look like an investment property portfolio any more ??

I'm still unconvinced that a LOE strategy is sustainable long term, as the person in control of the long term decisions that dictate whether it will continue or not, is not the investor. This for me is the fundamental fatal flaw of the technique.Click to expand...
do you pay any principal or offset it?, or pile into a buffer or just spend it?
if you had no tenants for a year in a few could you continue to LOR quite easily?  

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BMan said: ↑
do you pay any principal or offset it?, or pile into a buffer or just spend it?
if you had no tenants for a year in a few could you continue to LOR quite easily?Click to expand...
The commercial property area doesn't have 'offset' accounts as such.

Obviously without a tenant you can't LOR because there's no rental. But usually with CIPs, the tenant has to pay a security deposit (aka bond) worth 6+ months rent at the beginning of the lease so that will cover you for a while if they leave. Also if a tenant leaves after a set time they have to make a payment to 'make good' on the premises for any wear and tear on it.  

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Dazz said: ↑
Looks absolutely fabbo in theory.....maths projections are so easy when everything is constant.Click to expand...
I think the three (3) years quoted is a bit ambitious as we've seen of late with hindsight; from memory Rixters strategy looks at ten (10) years and may have even extended slightly beyond that with a safety buffer?

1) You might be asking what happens at the end of the three years, when you have spent the money??

Well $2,200,000 of property growing at 5% pa = $110,000, which is MORE than you are spending each year, so at the end of the three years your properties will have grown by more than you have spent. You can then draw down the equity and buy yourself a further income streamClick to expand...
Everything is theory until proven by practical experience

Dazz said: ↑
I'd be interested to see where Always Learning is at, and more to the point, where Steve Navra is at with his techniques ??Click to expand...
The last update from Steve NAVRA was on Guru or Ghost thread which gave a good update

Steve Navra - Guru or Ghost?

As for Always Learning, a quick look suggest he's not posted in a long time but visited in 2010..hopefully he drops in again as Brenda recently did:D

Goals were for the below for 2013, so here's hoping he's there or close; though that was a pre-GFC

always_learning said:
Proposed to 2013

$10M of IP (or other investment class)
At least $5M in equity
High 6 figure income by combination of passive or capital gainsClick to expand...
He did detail some dramas with a managed development and his lessons learnt on SS early in the piece also which was a good read for anyone going down that path.

He also responded to Steve's post above including this gem

always_learning said:
I have very much come to the conclusion that ignoring the rental returns a simply focussing on growth could be dangerous. Investments made on simple hope that prices will keep going up and up independant of the ability to achieve earnings (dividends or rental returns) is doomed to failClick to expand...
Well worth anyone reading the whole thread, if they are interested at...

How many properties to retire?  

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charttv said: ↑
From my observations, many property investors seem to build negatively geared residential property portfolios in the hope that they will someday be able to provide for them later in life and they can implement a living off equity strategy.

Many property spruikers use the same tired model where they assume 10% capital growth on average or something along the lines of "property doubles every 7 to 10 years"

My question is, what happens if you do throw your lot in hoping to live off equity and you experience no capital growth over 7-10 years? What do you do if you have little to no equity to draw down on or even worse, are in negative equity?

I ask because the prolonged flat growth of the Perth residential market has got me thinking, many would have seen little to no capital growth of their portfolios for 4 to 5 years.Click to expand...
I decided to put some numbers (assumptions) to a possible LOE future. I believe that talking about possible scenarios without having a specific set of numbers and assumption may not be of much help. The conversation can go either way and one can be right or wrong depending of the assumptions made.

Let's say one have a portfolio as per below:

Portfolio = $8M
LVR = 30%
Avg Interest = 8% pa
Net avg yield before Int= 4% pa
Net avg yield after Int= 1.6% pa
Portfolio avg growth = 5% pa
Rent avg growth = 2% pa

Under above assumptions, I don't see any issues in using LOE techniques to supplement cash flow needs for personal requirements. Of course, building such portfolio would take (I believe since I have no stat support), 20 years in avg. So, before discussing LOE I suggest we should first start discussing where we are at. I don't think that for an avg worker, LOE is possible neither sustainable after 10y of solid investment assuming he/she wants to live at the same standard level. There are always exceptions and exceptional people that can achieve that and much more but, they are the minority.

The early we start the better. As someone mentioned here, don't expect to start investing at 58 to LOE at 65. And I will add, unless you are planning to leave this world at 68.  

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LOE is a great dream, and for some it even comes true.

My main concern with LOE is the significant risk of a long period of no (or limited) growth.

That said, LOE seems like a good strategy for topping up your income from time to time, if need be.

I've long had a plan of building up a large base in property, then withdrawing a substantial chunk of equity for investment into other asset classes, with the long term plan being to tune to overall portfolio to achieve a net return of 5%pa. I'm currently on track to hold an investment portfolio of about $5M in 10 or so years time, at which point my 5% target return equals about $250k per year. I can keep doing some part time consulting work to top that up as and when I choose also.  

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