Living on Equity - Part 3....now available

Hello, all,

Living on Equity Part 3 is now available under 'Education'.

15 pages....ENJOY !

Jayar

This is a good example of a quality article/series that makes InvestEd membership worthwhile.

Just finished reading Bryce Courtnay's Whitethorn, must I must admit I love this stuff too!

If one was starting from scratch using this theory to create wealth....

the idea is to start and continue buying investment properties (using the rental reality formula) until you reach your serviceability limit, use a cashbond to improve serviceability (from drawing down equity), then use excess equity to buy into the Share market, using a 60% margin loan and another IP?

Hello all...
I've read these documents many times already and followed all the forum posts on here and Somersoft but there's one thing thats still not quite clear to me...

The examples seem to show the investor using borrowed money (ie. LOC) all the way thru the process to cover the interest payments. I.e. your effectively using your equity not only for deposits but also to help cover the interest costs.... Am I getting this right? I have no problem with doing this, just want to know if thats what the actual strategy is or if I'm reading it wrong.

Any responses on the last question???

Steve can give you a definitive answer, but I think the ideal would be that you:

1) redraw equity from properties
2) invest that into high yielding shares/funds (eg Navrainvest)
2a) probably get a margin loan to gear the share/fund investment up a bit
3) the improved income from the share investment not only covers the interest on the margin loan and property LOC but funds the deposit and most/all of the interest costs on new borrowings and the increased income is what helps you get over the bank's servicability issues...

To a large extent it will probably depend on the yield you are getting from your properties plus how strong your personal (ie job) cashflow is. Certainly amounts held in the LOC as a BUFFER could be used to help you through periods of cashflow squeeze, but I don't think that's an ideal approach until you're truly at that stage where the portfolio growth far exceeds your total cashflow needs...

But Steve can give you a definitive response...assuming he's finally taken off the grass skirt !

Nigel,

Was wondering this myself the other day...

So, my "income" from my share investment that is over and above the costs of that investment (LOC plus Margin Loan) can be counted as income when applying for a loan? I don't think I'm at my servicability limits yet, but am looking to buy an IP soon that is above my pre-approval limit achieved via my mortgage broker. I thought I might have to sell off some of my shares to use as deposit and thereby reduce my LVR and increase my servicability. If I can hold that portfolio and just count the income in my servicability equation then I'd be better off.

Cheers,
Michael.

Michael

I haven't had to cross the bridge either, but I understand from Steve that once you have say 2 quarters distribution statements some of the banks will count some of that income towards servicability...

On page 12 of the LOE 3 article steve has used the funds from a LOC to cover interest expenses as part of the strategy to build up to truly living off equity.
The funds in the LOC are called the "buffer" which I originally thought would only be used in circumstances where you were out of work for a while or interest rates went up for a while or whatever, but I suppose there is nothing wrong with using it to cover interest for any period where there would be a shortfall.

Use of the distribution from the fund as income for servicibility seems to depend on the financial institution. Westpac were happy to view it as income after a couple of quarters whereas Adelaide Bank seem to want 2 years worth before accepting it as income.