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Living on Equity: How much net worth reqd?

Discussion in 'Investing Strategies' started by Glebe, 20th Feb, 2007.

  1. Glebe

    Glebe Well-Known Member

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    Hi there,

    For those currently LOE, or contemplating going down the LOE path, I was wondering what you believe:

    * your required net worth would be
    * subsequently, your recapital gain required
    * subsequently, your required annual income

    I was doing some Excel today (thanks to Michael Whyte's LOE spreadsheet) and if I get behind me assets of $2.5m, debts of $1.3m and net worth of $1.2m (all approx numbers), then my expected capital gain each year is $110 000. Taking 65% and adding passive income and I have an income of about $85 000.

    Anyway, all this got me thinking that I could be retiring in 5 years time via LOE... what a great thought...
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

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    So assuming 2.5m gross assets and capital growth of $110k then you're assuming growth rate of 4.4% in that first year? Mate, whilst we should always be conservative in our forecasts, perhaps you can aim a bit higher than that? :D Or am I missing something?
     
  3. Glebe

    Glebe Well-Known Member

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    heh :)

    My assumptions:

    Capital Growth from Income Shares - 2%
    Capital Growth from Growth Shares - 5%
    Capital Growth from Property - 5%

    Share Income from Income Portfolio - 9.0%
    Share Income from Growth Portfolio - 4.0%
    Rental Income - 3.0%
     
  4. MrDarcy

    MrDarcy Well-Known Member

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    I'm somehere about this, like a lot of others here I guess, but that's nowhere near safe enough for me to give up the day job yet.
     
  5. bundy1964

    bundy1964 Well-Known Member

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    I did work on a magic number of 4 mil with a lvr of 60% and not suck out equiety apart from the dream home. Change of partner time :(

    New partner I think I can drop back a mil and do away with the cost of a horse or two and their dodads, can live without a tree change and if I don't mind not living in a trendy suburb passive income will do us.
     
  6. coopranos

    coopranos Well-Known Member

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    Couple of things to think about:
    - Even if this were all in property, you may be running things a little tight. You need to keep your LVR below 60% if you have no income to use for lending purposes, at this level a 10% drop in asset value would mean bad luck no income that year. slumps tend to last a few years as well, so if you cant borrow more this year, chances are you will be in the same boat for at least 2 or 3 more years.

    - I am assuming you are not talking about 100% property, which makes it a little dicier again. I dont know if you can borrow against capital growth in shares like you can with property. I stand to be corrected on this, but the only way you can really use shares/managed funds to live off is by selling them or living of the dividends/distributions. Given that the premise behind LOE is to continually borrow money to live of against growing equity in existing assets, I would think the only real vehicle to accomplish this from a lenders point of view would be to have the bulk of the assets in property.

    Personally, I think LOE may be useful for say taking a year off and going travelling or something similar, but if you plan to do it long term I would want a heck of a lot more safety net in there than relying on the current years growth to fund the current years income. I would think something in the vicinity of having enough equity available to live for 5 or more years without having any borrowing issues (eg you need $100k per year to live, you would want to be able to draw out at least $500k + interest repayments before your LVR even touches the 60% mark). This would give you enough time to see potential disasters a few years in advance and allow you to adjust accordingly. If you are at 52% LVR with the asset values you are talking about, a flat year while taking an income pretty much puts you out of the ball game after that year. Again this is all assuming 100% property assets, if some of the assets are shares, this would be even harder to achieve.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It's called a margin loan, and it's a lot more effective for this type of thing than property (in my opinion) - since the availability to draw on extra equity from capital growth is automatic - no need to refinance and prove income.
     
  8. coopranos

    coopranos Well-Known Member

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    The difference of course being that you can get margin called on a margin loan which would pretty much put you in the hole if you are living on the equity, whereas once you have your line of credit set up as long as you have credit available it is pretty unlikely the bank will ask for any money, even if the property market crashes.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    A margin call is not the end of the world - but if your LVR is so high that you face a margin call in anything but the most extreme circumstances, then I think you're far too highly leveraged. This is also what cash buffers are for.

    If you use up your LOC and don't have enough servicability to extend it or get a new one, then you're in a pretty bad way too ... so it's all relative.
     
  10. Nigel Ward

    Nigel Ward Team InvestEd

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    As Bundy has mentioned, the capital required depends not only on the earnings and growth assumptions but also on your lifestyle (i.e. cashflow) requirements.

    In lean years you either eat into the cash buffer or just eat less caviar and drink less bolly darhlings! :D
     
  11. iiinvestor

    iiinvestor Well-Known Member

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    As with most things, maybe diversification (between property and equities) is the answer. It would probably also be wise to have excess equity before going LOE. Knowing my luck, all markets would downturn as soon as I implemented LOE, so maybe I just need tonnes of equity first.

    Never thought I'd see the day when I had low LVRs :)
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    No maybe about it ... I absolutely think that both real estate and shares/funds should play a major part in your portfolio ... I really think that focussing on one at the exclusion of the other will limit your flexibility and growth potential.

    My rapidly growing fund portfolio is only possible because of the growth I've had in my real estate portfolio. The cashflow from my fund portfolio will fund more purchases in my real estate portfolio.
     
  13. Nigel Ward

    Nigel Ward Team InvestEd

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    Yes it's a virtuous circle! :D

    N.
     
  14. moonbeamzz

    moonbeamzz Member

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    LOE

    Reading this post with lots of interest; probably like many others am considering the LOE approach to fund our retirement. The numbers we are looking at a bit down track (alright maybe a medium bit down track, we are in very late 40s, looking to retire mid 50s) are: $4.5mill assets, $3mill net worth, breakup is projected at property 45%, MFs 45%, direct shares 5%, speculative 5%. Passive income from other sources of 25K. LVR projected at 40%.

    So from an LOE perspective will those numbers work, have read a bit on LOE (articles 1-4) but am not really sure on the numbers particularly what size safety net req'd. :confused:
     
  15. iiinvestor

    iiinvestor Well-Known Member

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    Sim:

    Do you mind me asking if property makes up the majority of your portfolio due to the difference in ideal gearing levels? I always think that to have similar asset allocations to property and equities, I'd need a lot of equity in the equities part to keep up. Or do you think that is just how it has to be?
     
  16. iiinvestor

    iiinvestor Well-Known Member

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    moonbeamzz

    It all depends on the cash flow that you're looking for (e.g. 100k per year) when you retire and the growth projections of your assets. I think Glebe came up with a good set of numbers in this thread, but the missing one is still what cash flow you want.

    Then it should be easy to work out. :)
     
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Depends on your goals I guess.

    I started off with practically 100% of my portfolio in real estate.

    Now, I leverage my real estate to 90% (refinancing every 18 - 24 months or whenever there is sufficient equity available to justify the effort and cost), and use that to build my managed fund portfolio (which is leveraged to somewhere above 60% in the short term, with a longer term goal of closer to 50%).

    Right now, the portfolio ratio is close to 66%/33% in favour of managed funds (we have twice as much in funds as we do in real estate) ... but that's because I'm building up the funds to a level where I feel comfortable we will have enough to cope with a partial retirement and to buy a new PPOR in Sydney. I expect once we've achieved that, the ratio will be about 50/50 ... which is probably where I'd see it staying - moving forward I'll tend to build up both the funds and property portfolios in tandem - depending on how the markets are moving.

    So yes, I guess it pretty much does mean that there will be more "equity" available in my managed fund/share portfolio due to the lower gearing levels.
     
  18. Glebe

    Glebe Well-Known Member

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    Moonbeamz,

    Michael Whyte uploaded a LOE spreadsheet to Invested a while back. It went through a few versions and progressively got better. I love it. I'm not sure where it's located.
     
  19. bundy1964

    bundy1964 Well-Known Member

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    I started with managed funds, added a few shares, then added property and began margins with shares and funds.

    Unless there is a large correction in Adelaides commercial market I will sit and leave it to the SMSF people and growth investors.

    Sharemarket even in bear conditions still has winners to be picked, just need more care in what you pick, being a bank, insurance co and retail junkie does have it's benifits in a defencive market.
     
  20. moonbeamzz

    moonbeamzz Member

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    Glebe thanks for that I'll hunt it up and check it out.

    My gut feel is the numbers will work ok (looking for an income of 100K) but would like to verify it.

    Cheers
    Moonbeamzz :)