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LOE

Discussion in 'Investing Strategies' started by Redwing, 26th Sep, 2006.

  1. Redwing

    Redwing Well-Known Member

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    Just thinking about the LOE Strategy, say someone has a $1M property (unencumbered)-(example only), they then go to the bank and get a 50% LOC against the IP and pay either

    • 5 years interest up front
    • 1 years interest each year for 5 years
    they then live off the remainder

    Say they then go back to the bank in 5 years and the property has gone up 10% in value each year they then get another loan at 50% and continue on

    what would be the best way to pay the interest and what would be the best structure/strategy

    The actual figure is for a $3M property ; $1m is just the example here
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would have thought just capitalising the interest on a monthly or fortnightly basis would be the more cost effective way to do it.

    If you pay up front, you need to take into account the time-value-of-money in your calculations because you are effectively paying tomorrow's costs in todays money, which makes them quite expensive. Basically, you would need to ensure you get a pre-payment discount of more than the expected rate of inflation over the next 1 or 5 years to ensure you are better off - otherwise you should just pay it as it comes.

    There is also the opportunity cost to take into consideration ... especially if considering paying more than one year up front.

    Why wouldn't you just have the interest capitalised to the loan each month ?
     
  3. Redwing

    Redwing Well-Known Member

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    Is there anyway I can go to work this out (i.e Calculator section)?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'll eventually build some stuff for the InvestEd Toolkit, but in the meantime, some of our members put some calculators together in this thread. Be sure to read through the entire thread - there are several calculators there (or updated versions) ... might be better to start at the end of the thread and work backwards :D

    Not sure if it actually answers your question though.
     
  5. Redwing

    Redwing Well-Known Member

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    You're right Sim, this is probably the most effective way to do it.

    I'll look at that link as well.

    Many Thanks