Equity to Income

Hi All. I'm new to this site so I'll firstly say hello to all and trust all is going well. Not complaining but my professional career came to a sudden jolt just on 3 years ago with a brain aneurysm and tumour. The recovery process and rectifying surgery is ongoing .....and I'm very pleased to join you in these seemingly interesting forums. Most of my heaped up savings have dried up as a consequence especially being a single father with children at Uni....and thankfully my youngest one finished this year. My net income after property costs is just ok at 30k....though it would be better for me to have more given that my savings will run out in about 3 -4 years. Over the past 3 years I sold off 2 investment properties that had high debt to relieve most of the servicing pressure on my savings. I'm still in a very good situation though in terms of property equity. I actually have my home property unencumbered at $1.2m and 2 investment properties worth 1.1m with debt of 423k. So capital of 2.3m and debt of 423k = $1.877m in equity. They are all good properties on land in an inner city locations and 2 of them are in high density development areas so growth in all 3 is guaranteed. So I don't want to sell at this stage yet on the other hand I would like to have a better income than I currently have. Borrowing to live off this equity has been suggested but not sure whether this is a right step to take especially at this point. Does anyone have any ideas about the sensibility of taking this kind of action or can suggest other ways I might deal with this....or something worth reading? I'm a cautious rather conservative investor so it's always been bricks and mortar investments in prime locations for me.....I don't have a cent in the stock market. I sometimes wonder why I'm bothering with this kind of thinking given the life threatening jolt I had .....perhaps I should just sell up and invest in something that ensures a good cash flow for life. But in some ways it seems like it would be a betrayal of the careful investing I did for years up to this point. Cheers Graham

 

As a quick, rough calc:

Redraw 1,000,000 in equity at 8% and chuck in Navra (for example). Conservative return of 10%.

100k income minus 80k interest costs = 20k income

That's a very conservative estimate. You could of course redraw all the equity, and get a ML on top of that, and invest in a wide range of funds.

Regardless - I'm sure some of the more experienced members can give you some more exact figures - but I think there's plenty of potential there.

 

Hi Graham, glad to hear you are on the road to recovery.

I can see some logic in the post above, however for someone who has faced a life threatening illness, who is facing some uncertaintity around the reocmmencement of their career, I don't think such a person should borrow $1m and put it all in one fund to generate just $20k in income.

There are so many issues to consider ....
Are you likely to start earning an income again at some stage in the future?
Do you have super & are you over 55?
How much money p.a. do you need to live on?
With grown up kids are you planning to downsize your PPOR?

I normally have a strong aversion to financial planners, but I suspect in your situation it would be wise to consider going to one (obviously a good one who knows how to generate income and protect your asset base).

 

Wouldnt matter if he was. Id imagine he would qualify for early release given his circumstances. (however tax would apply)

 

I agree that having $1M at risk for $20k a year is probably not the most efficient way of doing things.
Granted that by doing this you will still have your properties growing for you as well, and not be paying rent, at the end of the day if you dont get your 2% over and above inflation for 1 year then all of a sudden your income takes a hit. Having put in the hard yards investing and getting yourself into your financial position, I think that you are doing yourself a disservice living on such a knife edge as $20k a year subject to market volatility.

First of all, dont think that you are betraying anything by doing this - you didnt invest for the sake of investing you did it to give yourself options later in life. Your investments are there to serve you, not the other way around!
You obviously do have some good and varied options available to you now which is great.
A lot of it will really come down to your own needs and desires now.
Do you want to keep living in your current house?
With the kids leaving the roost, what are your residence plans? Move to a smaller apartment, get a hobby farm and live on acreage, move to the beach, move to the mountains, wander the world living at train stations??
This is probably your first decision you need to look at, seeing as the bulk of your portfolio is your own home. This is great as it is nice & tax effective if you do choose to sell.
Other things you might want to look at are:
Do you want a certain income level to be maintained along with inflation, or do you want to start out on a slightly lower income level and continue to grow your asset base to continually increase your available income?
Does the $30k income you currently get come from employment or some other sort of payment (ie will that $30k remain intact regardless of your future plans)?
Are there any other things you really want to do - go travelling for a few years R & R, hunt down and buy back your first car and "pimp your ride", etc?

With your portfolio you could quite easily sell up with very little tax liability, and have a $60k p.a. income indexed for inflation forever with almost zero risk - without ever diminishing your starting capital. Not massively exciting, but I would think that anything you decide to do would have to outperform the zero risk option to the degree of risk involved.
A strategy really comes down to your goals - what you employ if you want to live in your current house and maintain your current lifestyle may be completely different to the one you employ if you want to travel the world backpacking for the next 40 years.

 

Thanks for your generosity guys with your time and ideas. You have given me much to think about. However I have to say that Coopranos' thought provoking idea of "Wandering the world living at railway stations" has certainly hit the highest "of interest" chord in me. I do now have 30k net a year to live on mostly from property and I could increase this by another 25k if I am bold enough to rent my house out so perhaps a year or more of floating around the world might be good for me and help me forget the troubles I create for myself and get back to life. Re learning Spanish again as I did in my 20's (I'm now 52) and doing voluntary conservation work (I do this now locally) throughout Europe has been in the back of my mind for awhile but as we do we (at least I do) find blockers to stop me (eg my feeling of betrayal if I stop thinking of investing and other blockers). So you're right Coopranos I've done enough investing at this stage to give myself options on what is best for me.....so it's up to me now to eliminate all the blockers and catch the next train. Carpe

 

Sounds good mate!
Dont underestimate the sort of life $55k a year could get you travelling throughout Asia as well.
If you can do this without even touching your existing asset base, you are doing amazingly well!
The longer you leave the existing structure intact the better off you will be (assuming the future of real estate in australia is similar to history). If your properties double in value in the next 10 years, and you have spent that 10 years travelling and enjoying life and soaking up all the experiences you can, all of a sudden you now have over $3m net assets to play with. Not to mention your annual income has been ratcheting up each year with rental increases.
Honestly, I think you have done so well so far with a simple property plan, there is no point throwing it away by playing with shares etc (I have seen a lot of instances where people spent their whole lives building their business, sell it and have a nice super nest egg, then proceed to start share trading their super fund losing 5 times the amount of pension they draw each year).

 

Thanks for your encouraging support Coopranos..... I suppose I am lucky to have what I have accrued to move on in my life despite the serious illness taking me out of a professional work. Without the illness I would have kept working for many more years and not got myself into thinking of the interesting alternative options that I now have in front of me to choose from. It is definitely time for me to move away for awhile in a direction of my choosing so perhaps by mid year next I can have myself organised enough to just do it. It was interesting to get your responses that were outside just wealth creation on an 'investment' site like this so thanks for that..... and no doubt you have yourself focused on goals to satisfy your life's requirements. So I wish you, and all others on this site, great success in accruing what is necessary at an early time to give you the lifestyle you want. Regards Graham (Carpe)

 

Hey coopranos,

I just wanted to know how you arrived at the figure of 60k when the $1.877m was the starting capital. What vehicle was retuning such a low return?

 

net after selling costs/tax of $1,600,000.
Invested @ 7% in a high interest account, half reinvested to cover inflation at 3.5%, half taken as income.

 

For Total and Permanent Disability (TPD) claims to access funds two doctors need to sign a letter saying the patient is never going to work again. In my experience this is EXTREMELY DIFFICULT.

Aneurysm and tumour's would be classified under a trauma policy first and then potentially TPD depending on whether the claimant can do certain things. If a claimant is recovering from a trauma event there is little chance that they are NOT going to be able to go back to work.

This is an expensive way to access money (30% from memory) even if it could be done.

It's better off waiting until turning 55 then potentially starting an Allocated Pension.

Coopranos idea does sound pretty good, there is a window of opportunity of 6 years of being able to rent out your PPOR and not be liable for CGT when you sell the property.

Cheers,

Dan

PS This is general information. Before making an insurance or investment recommendation speak to your FPA registered Financial Planner.

 

I'd just like to say it's inspiring to watch this advice and support offered so openly - and to Carpe for asking in the first place. Who said community was dying? Maybe it's just moved online.

and best wishes, Carpe - talking time to smell the roses at this stage of your life (I'm 52 too) is pretty good advice, I reckon.

alanc

 

Cheers ;-)

 

Life Options

Hi Graham,

I too went through a life threatening experience 7 years ago (at 42) and have some understanding of the challenges you are facing. I think you have done a fantastic job accumulating a solid asset base and as your children are now approaching adulthood, should view this as an opportunity to enjoy your life and travel sounds like a fantastic way to do it!

Coopranos has brought up some good points. You really can live quite comfortably without taking on alot of debt. I am continuing to grow my investment portfolio so I too can begin travelling in another few years.

Solid investments in a diversified portfolio or direct property will see you through the rest of your life. Good luck with your plans.

 

The Navra Idea is not as silly as you guys make out. For two reasons.

1. The Navra fund has the potential to return anything btw 10-18%pa most years.

2. You are still getting the capital growth on the realestate.

So its an income plus growth senario. It needs to be viewed as a complete portfolio with an income component and a growth component.

Relatively low risk I would imagine.

If the fund returned 12% pa the income might be 120 - 80 interest = 40K plus 30k existing income = $70k plus 10% capital growth on property portfolio 230k

70k income
230k growth

If the fund returns 15% add another 30k income.

MJK

 

Unfortunately it is hard to eat IFs!
yes I agree it will be nice when the fund is returning income of 15% +. But you just cant rely on such a small window when that is all you have to rely on for income, for a number of issues:
1) $1M at risk for a return of $20k is unacceptable, particularly during a retirement phase.
2) You say that Navra will return "between 10-18% most years". Firstly, Navra hasnt been tested "most years" it has had a small run during the biggest bull market in history, and has underperformed the index. Maybe it will be great, but maybe it will be mediocre too.

When planning an actual funding of lifestyle for the rest of your days, you have to look at the range of possibilities, best case & worst case:
best case: 18% yield, 8% interest rate = $100,000: nice, but chances of Navra doing too many 18% years is probably low.

average case: 12% yield, 10% interest rate = $20,000: oh oh, not so nice. time to tighten the old purse strings a bit.

possible case: 10% yield, 12% interest rate = -$20,000: phew, lucky we have $30k coming in from property, and we live in a welfare country!!

bad case: -1.59%, 10% interest rate = -$115,900: cant happen? Check out the american fund. Now you are forced into trying to get some money, either through refinancing (not as likely seeing as you are losing money hand over fist) or sell some properties quick, which is never a good thing.

 

I take your point Coops.

My point is that you are still getting the capital growth on the property portfolio because you dont have to sell it.

If Navra returns are low for a year and it simply returns some of your own capital to you. You still have an income stream and you are simply eating some of your equity.

Note: equity is not an "IF" and it can be eaten, with sauce if you like.

My personal preference is to sell some assets so I have a mix of property for growth and income fund for income (geared and non geared).

MJK