We've done it!

[Rixter]

Hi Rixter,

I've been meaning to ask you. What is the difference between LOE and a reverse mortgage? I understand what they both are but aren't they effectively the same thing?

Im sure there are as many variations as there are lenders so if you are looking for specific details, best run your situation past one of the mortgage brokers who frequent this forum.

In the mean time here's a quick cut n paste from the Your Mortgage Website.

Line of credit/equity line

A line of credit is similar to having a big chequebook, however with interest accruing on the balance. A line of credit, or equity line as they're sometimes called, is an approved limit of borrowings that you can use a piece-at-a-time, or all at once.

Lets say you have a line of credit of $200,000. This means that you can use up to a total of $200,000 all at once or perhaps invest $50,000 in the share market. If you did the latter, you would only pay interest on $50,000, as the remaining $150,000 would be untouched. If you were to use a further $70,000 for house renovations, for example, then you would be paying interest calculated on $120,000 ($50,000 for shares + $70,000 for investment), leaving $80,000 to use at a later date if required.

A line of credit loan facility can be a great way to access the equity in your home and can be used for things like home renovations, investments or other personal purchases. It acts as a loan, but, unlike a loan, a line of credit doesn't require you to pay interest on the credit you don't use.


Reverse mortgages

The reverse mortgage loan was introduced to the market to cater for retirees wanting to take advantage of the equity they have in their home and use it to supplement their retirement income. Basically, retirees can use this type of loan to borrow money against the equity they have in their property, and have it paid to them in either a lump sum or in instalments, depending on the lending institution involved.

Generally all repayments, fees and charges will be added to the loan balance each month so that the borrower/s don't have to make any payments whatsoever. The lender recoups the repayments and fees when the borrower/s pass away, the property is sold or the borrower/s no longer live in the property. Having said this, generally the borrower/s may make payments at any stage if they wish to reduce the loan balance.

There will normally be a minimum amount of around $10,000 and quite often a maximum allowed that will be expressed as a dollar figure, or as a percentage of the value of the property. To qualify, the borrowers will generally need to be over 65 years of age. Some lenders will wear the risk if the end debt amount is more than the property is worth, however this will vary from lender to lender.

These loans are obviously great for older people who may be doing it a little tough financially after retirement, or who may need a large amount of money in a relatively short time for a dream project such as a caravan trip to the Outback or a luxury cruise.

One thing to be wary of is the all care, no responsibility method of repayment. Basically, the debt is left to the beneficiaries of the borrower/s to pay, which might come as a nasty surprise to beneficiaries expecting a clean inheritance.

Hodge, I hope this helped.

 

[Catalyst]

Brilliant, brilliant, brilliant thread Rixter!

Thank you for your inspiring updates, strategy and positiveness

2. Not enough for our desired lifestyle. Its all about maximising by preserving portfolio cash flows. Rental income is for offsetting the prevailing interest rate on LOC used for funding lifestyle. ie 6% interest on $100k lifestyle is 94% less than 100% of rent on $100k lifestyle.

I've read through the whole thread. Lots of excellent info, and bits that I can't comprehend. Hope to gain more clarity once I get going on my first IP.

Rixter, could you please elaborate on this post. Have read it 3 times but still not getting it

 

[Hodge]

Thanks Rixter for the explanation.

I like the idea of LOE and makes more sense to LOE than sell the property. I would probably use it in conjunction with part time work rather than full retirement.

 

[aussieB]

Well ppl just thought Id post to let you all know we are 7 years into our 10 year CGA Strategy plan and settlement has just gone through this afternoon to now complete the property acquisition stage of our portfolio.

The property is a townhouse located in Cleveland Qld on a peninsula 300m to bay in one direction & overlooking canal living 170m in the other direction. In a complex of 6 others (2nd from the front) all owner occupied, and runs down the block between two streets.

The plan now is to let time weave its magical powers over the portfolio's compounding capital growth up until year 10.

Then its review time looking towards rat race exit, stage left!

Time for a couple celebration drinkies tonight

Good stuff. I have gone through your CGA Strategy and have a question. From what little I understand, an equity withdrawal is a loan, correct?
Then what are your plans on how to repay this ?

 

[aussieB]

Well ppl just thought Id post to let you all know we are 7 years into our 10 year CGA Strategy ..

Hey Rixter, I have read about the CGA strategy. I wanted to ask you a question : When you draw out the equity, it still is akin to taking a loan, isn't it ? What would be your plan to repay this loan ?

 

[Rixter]

Good stuff. I have gone through your CGA Strategy and have a question. From what little I understand, an equity withdrawal is a loan, correct?
Then what are your plans on how to repay this ?

Hey Rixter, I have read about the CGA strategy. I wanted to ask you a question : When you draw out the equity, it still is akin to taking a loan, isn't it ? What would be your plan to repay this loan ?

Correct....the equity withdrawal is in the form of a loan.

I dont repay the loan. It's the interest on the loan that's paid, from rental income.

So I milk the CG (equity) income tax free, whilst the milking cost (loan interest) is covered by the tenants.

 

[new2this]

Hey Rixter,
Great strategy and one im looking to adapt to myself,a few questions though, after u have left your job are the rents going to be enough in the Lenders eyes to service this repeating cycle? Wont they catch on and work out you will never pay them off or that doesnt matter to them? and lastly will you teach your beneficiaries to keep repeating this cycle?
Thanks mate

 

[aussieB]

Correct....the equity withdrawal is in the form of a loan.

I dont repay the loan. It's the interest on the loan that's paid, from rental income.

So I milk the CG (equity) income tax free, whilst the milking cost (loan interest) is covered by the tenants.

Great. Thanks for replying.
There was some problem with my account hence the double post.

 

[Rixter]

Hey Rixter,
Great strategy and one im looking to adapt to myself,a few questions though, after u have left your job are the rents going to be enough in the Lenders eyes to service this repeating cycle? Wont they catch on and work out you will never pay them off or that doesnt matter to them? and lastly will you teach your beneficiaries to keep repeating this cycle?
Thanks mate

All portfolio cash flow is serviced via Wages in the acquisition stage, Rental income that also doubles every 7-10 years, the Tax man, LOC's and/or Cashbond structure, and any other forms of income you may have available.

All loan payments are automated via direct debit/credits.

One hopes the beneficiaries apply the strategy as set up

 

[aussieB]

Hey Rixter,

Something that will help me (and I am sure other noobies like me) is if you could please share how you were able to come up with the deposits for each of the IPs. For eg., I have purchased a PPOR and other than saving my wages for about 30k there is no other way for me to purchase another property. After the first one, it's going to be the same for the second, then the third and so on and so forth. Would you please share how you went about your purchases ?
for eg :
1) Bought first PPOR in year Z for about $X with $Y of deposit (& LMI).
2) Bought first IP in year Z+1 for about $A with $B of deposit and cross collateralized first PPOR.
3) un collateralized PPOR (how ?) and came with X amount of deposit.

I think all I am trying to know is, is there a way to purchase IPs other than saving up at least 10% of the asking price (5% for the property and the other 5 for the associated costs).

Cheers

 

[J_aco]

aussieB: I'm sure others will explain it in details for you later on, but 1 word: equity!

 

[Redom]

Hey Rixter,

Something that will help me (and I am sure other noobies like me) is if you could please share how you were able to come up with the deposits for each of the IPs. For eg., I have purchased a PPOR and other than saving my wages for about 30k there is no other way for me to purchase another property. After the first one, it's going to be the same for the second, then the third and so on and so forth. Would you please share how you went about your purchases ?
for eg :
1) Bought first PPOR in year Z for about $X with $Y of deposit (& LMI).
2) Bought first IP in year Z+1 for about $A with $B of deposit and cross collateralized first PPOR.
3) un collateralized PPOR (how ?) and came with X amount of deposit.

I think all I am trying to know is, is there a way to purchase IPs other than saving up at least 10% of the asking price (5% for the property and the other 5 for the associated costs).

Cheers

Hi AussieB,

You can borrow against any equity thats been created in from properties you own. For example, if you purchased your PPOR for say 300k, and it is now worth 500k, you have created 200k of equity. So long as your servicing permits, you can now borrow this 200k of equity (or 80-90% of it) and then use it to fund your next purchase (or next three purchases).

This is the most common way how investors grow their portfolio. In fact, with our tax system, its actually better to use 'borrowed equity' to fund IP's instead of cash.

In the above example, with the 200k of equity made from your PPOR, there are two ways to borrow it to fund an IP.

1. You can go purchase your IP without putting any cash down. The bank will simply take both the new IP and your existing PPOR as 'security' against the loan.

2. Alternatively, you can borrow most of the 200k from the PPOR as a separate split loan. You can then use this 200k as your deposit to purchase your IP (just like you would do with cash). The IP loan will only have the IP as its security.

Option 2 is much cleaner, more flexible and allows you to withdraw equity much more seamlessly in future.

How to uncross? The process is generally a refinance process, where the securities are 'uncrossed'. Its basically redoing the whole thing to set it up as it was supposed to (moving Option 1 to Option 2). It can get really messy and quite costly, but often, can be fixed easily if done early and outside of LMI territory.

I think there was another qn about how IO helps your serviceability - it is definitely a great way to IMPROVE your borrowing power. Its because your contracted repayments are LESS than P&I repayments. The way banks borrowing calculator works, having an I/O set up helps you borrow more over time.

Cheers,
Redom

 

[new2this]

Hey again, another question
if you are continuously using the equity to buy more properties then you wouldnt have much equity to live off, as the yrs go by and property goes up you will be using more and more equity to go again and since timing the market isnt an important part of the strategy you may end up with some flat or even negative yrs on some purchases and use more equity from earlier purchases to keep going. Or am I missing something? Only asking because I want this strategy to work for me to, Thanks

 

[new2this]

Seems to me that timing the market to get good short term growth is a massive part of the success of this strategy. Or ofcourse instant equity adds, Reno or Dev.and then time in market, and another con I can see is if life circumstances dictate a need for sale especially in your later yrs then the profit you make from selling wouldn't cover the CGT so as a backup at you would leave atleast that amount in equity?

 

[aussieB]

Hi AussieB,

You can borrow against any equity thats been created in from properties you own. For example, if you purchased your PPOR for say 300k, and it is now worth 500k, you have created 200k of equity. So long as your servicing permits, you can now borrow this 200k of equity (or 80-90% of it) and then use it to fund your next purchase (or next three purchases).

This is the most common way how investors grow their portfolio. In fact, with our tax system, its actually better to use 'borrowed equity' to fund IP's instead of cash.

In the above example, with the 200k of equity made from your PPOR, there are two ways to borrow it to fund an IP.

1. You can go purchase your IP without putting any cash down. The bank will simply take both the new IP and your existing PPOR as 'security' against the loan.

2. Alternatively, you can borrow most of the 200k from the PPOR as a separate split loan. You can then use this 200k as your deposit to purchase your IP (just like you would do with cash). The IP loan will only have the IP as its security.

Option 2 is much cleaner, more flexible and allows you to withdraw equity much more seamlessly in future.

How to uncross? The process is generally a refinance process, where the securities are 'uncrossed'. Its basically redoing the whole thing to set it up as it was supposed to (moving Option 1 to Option 2). It can get really messy and quite costly, but often, can be fixed easily if done early and outside of LMI territory.

I think there was another qn about how IO helps your serviceability - it is definitely a great way to IMPROVE your borrowing power. Its because your contracted repayments are LESS than P&I repayments. The way banks borrowing calculator works, having an I/O set up helps you borrow more over time.

Cheers,
Redom

Redom, thanks for your reply mate. It helps me understand a few more things.
But, what you suggest about equity is a long wait unless - as new2this says - you time the market. For eg., If I purchase a new unit worth $400k, for me to make 200k of equity I need to either be able to pay 200k or wait till the unit values at 600k (which could take a very very long time). So, how do investors (like Rixter) who purchased one property every year come up with the monies required for the next property ? Unless of course there was a considerable gap or considerable payments (made towards the first property) between the first purchase and the second.

Also, another question on equity. Who decides what a unit is worth ? An evaluator who bases this off on the price other units selling in the vicinity?

I purchased a unit for $5k lesser than what the builder was asking (which I am told is akin to the builder giving away one of them kidneys!) and was thinking I immediately made 5k of equity. When I asked my broker to get me a copy of the banks val on my unit so I could see on paper the teeny weeny equity I thought I had made, I was told it doesn't matter. As neither the seller nor the buyer and not even the valuating agent defines the actual value of the property, at the current moment. It took me a while to write this down and understand it but then, I still wonder if I ever made 5k in equity.

 

[chindonly]

Hey again, another question
if you are continuously using the equity to buy more properties then you wouldnt have much equity to live off, as the yrs go by and property goes up you will be using more and more equity to go again and since timing the market isnt an important part of the strategy you may end up with some flat or even negative yrs on some purchases and use more equity from earlier purchases to keep going. Or am I missing something? Only asking because I want this strategy to work for me to, Thanks

You need to read the whole thread. It is fully explained earlier.

 

[Rixter]

You need to read the whole thread. It is fully explained earlier.

Thanks for the interest & questions from all.

As chindonly mentions above, I have posted extensively on my CGA Strategy. All the answers to eveyone's questions are contained early posts in this thread, as well as, we've done it again thread and cashbond for dummies threads.

Just use the SS search button and/or google to search for the above mentioned threads.

 

[WASP]

As you are all about maximising funds, what depreciation method do you use

 

[Rixter]

So, how do investors (like Rixter) who purchased one property every year come up with the monies required for the next property ? Unless of course there was a considerable gap or considerable payments (made towards the first property) between the first purchase and the second.

Sorry AussieB, I just stumbled across your question ...

I used the following Macro/Micro purchasing criteria to ID areas with good CG potential so as to leverage against sooner.

In doing so, quite a few of our properties doubled/tripled in value over the course of a decade.. Rents on those have doubled & some close to tripled also.

Over the coming decade Im looking for them to double yet again.

I believe we have attained that growth because early on in our investment journey we decided to target / purchase in areas that had recently been approved for or were in the planning stages for gentrification.

We looked for the following 4 flag sectors injecting money. -

Government, Commercial, Retail, Private

We discovered this ultimately uplifted & beautified the area resulting in people's attraction thus moving in and creating demand.

We have found this to work very well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

Typically these are some of the signs we looked for where sectors were injecting money -

A/ Local/State/Federal Government. ie Major arterial roads, Govt Depts locating to area, Street Scrapping, New Public Transport, Recreational facilities, Hospitals/Medical facilities, Suburb Redevelopment Authorities being formed. etc

B/ Big Multi National Retail & Commercial type companies. ie Major Shopping Centres, McDonalds Hungry Jacks, KFC, Bunnings, Harvey Normans, Good Guys, etc. These companies spend $Millions on market research before going into and setting up shop in an area. If there was no current or immediate future demand for their products and services they would not be moving in, so leverage off the back of their research.

Sources for information as part of your due diligence - You can check out all the federal/state/local government planning & development websites at this one convenient link http://www.oultwood.com/localgov/countries/australia.php .

Other sources I use to gather info are from all the various big multi-national company websites, local newspapers, community news, local businesses, and people in the area.....general networking etc.

C/ Private People/Investors. ie Owner occupiers and Investors bowling over old houses then rebuilding new modern homes and redeveloping town houses / villas.

Get out and about. Jump in your car and drive around the area. Better still is once you're in your prospective area hit the streets by foot. You will see so much more on foot than by driving.

I hope this helps and sorry once again for the oversight.

 

[Rixter]

As you are all about maximising funds, what depreciation method do you use

Wasp, we use the diminishing value method. Get more back up front in the early years to maximise cash flow, then as time goes by and the depreciation tapers off, the natural rental income increases along the way more than offsets it.