Hi all,
I seek to test two exit strategy theories on my fellow SS members. Which of these should one use when converting their buy and hold property portfolio into a passive income stream;
Assumtions: 50% LVR on 10 million worth of property (5 million equity).
Goal: 200k pa income stream.
Strategy 1 - live off income
Sell half of your properties to end up with 5 million of property debt free.
Assuming approx 4% net yield this gives 200k pa income. The drawback on this is that it would be taxable.
Strategy 2 - live off equity
Keep all properties. Each year borrow 200K from the bank to cover your living expenses. I assume this would be tax free because it is not income.
Rough workings:
After 1 year;
- Loan is 5.2m after the 200k increase.
- Difference in market exposure between the two strategies is 5m .
- Assuming a conservative average 4% price growth, the difference in equity gain between strategy 1 and 2 would be 200k.
- Equity:
> Strategy 1; 5.2m
> Strategy 2; 10.4m portfolio value minus 5.2m loan = 5.2m (at 4% growth both strategies produce equal equity gain).
- Cashflow (4% net yield):
> Strategy 1; 200k taxable from rental income
> Strategy 2; 200k equity pull from 200k extra equity gain over strategy 1, non taxable. Plus rental income 100k taxable (400k - loan interest [avg 6%] 300k).
So for an equal equity outcome between the two strategies the cashflow benefit of the 'live off equity' strategy is an extra 100k taxable income per year plus the tax free saving from the 200k equity pull. This is based on 4%pa growth and 4% net yield. A higher average growth would significantly increase the benefit of the 'live off equity' strategy 2.
The only drawback of strategy 2 that I can think of would be the extra CGT liability should you decide to sell the lot.
Am I missing anything? Any thoughts?
Ps. the usual disclaimers - this is not financial advice of any kind. I know that I should be talking to an accountant for such advice. Just thought I would put it out there first to see peoples thoughts.
I seek to test two exit strategy theories on my fellow SS members. Which of these should one use when converting their buy and hold property portfolio into a passive income stream;
Assumtions: 50% LVR on 10 million worth of property (5 million equity).
Goal: 200k pa income stream.
Strategy 1 - live off income
Sell half of your properties to end up with 5 million of property debt free.
Assuming approx 4% net yield this gives 200k pa income. The drawback on this is that it would be taxable.
Strategy 2 - live off equity
Keep all properties. Each year borrow 200K from the bank to cover your living expenses. I assume this would be tax free because it is not income.
Rough workings:
After 1 year;
- Loan is 5.2m after the 200k increase.
- Difference in market exposure between the two strategies is 5m .
- Assuming a conservative average 4% price growth, the difference in equity gain between strategy 1 and 2 would be 200k.
- Equity:
> Strategy 1; 5.2m
> Strategy 2; 10.4m portfolio value minus 5.2m loan = 5.2m (at 4% growth both strategies produce equal equity gain).
- Cashflow (4% net yield):
> Strategy 1; 200k taxable from rental income
> Strategy 2; 200k equity pull from 200k extra equity gain over strategy 1, non taxable. Plus rental income 100k taxable (400k - loan interest [avg 6%] 300k).
So for an equal equity outcome between the two strategies the cashflow benefit of the 'live off equity' strategy is an extra 100k taxable income per year plus the tax free saving from the 200k equity pull. This is based on 4%pa growth and 4% net yield. A higher average growth would significantly increase the benefit of the 'live off equity' strategy 2.
The only drawback of strategy 2 that I can think of would be the extra CGT liability should you decide to sell the lot.
Am I missing anything? Any thoughts?
Ps. the usual disclaimers - this is not financial advice of any kind. I know that I should be talking to an accountant for such advice. Just thought I would put it out there first to see peoples thoughts.