How to retire without selling

In this method a property portfolio is accumulated, as in the ‘retire on rental income’ approach, but instead of selling properties to pay down debt, the entire portfolio is refinanced in retirement so that the Loan to Value Ratio (LVR) is topped up periodically to provide funds.

Both Metropole property investment strategist’s director Michael Yardney and Wealth Acceleration Group’s chairman Jacque Mamet both advocate this approach. With this method the passive income is the additional borrowings to pay for the groceries. The interest is capitalised, that is, it is added to the principal and the interest is payable on the new, larger borrowing amount. Rents and tax deductions are used to reduce the overall cost of the portfolio. The Investor may need to rely on low doc or no doc loans. Yardney maintains that a bank will likely be happy to lend to a borrower with an LVR of 60 percent or less without the borrower having to show a real income. On the plus side, the funds generated by the refinancing aren’t classed as income so tax isn’t payable. It is important to note that the investor’s portfolio needs to have reached critical mass to enable this strategy to function – this means that the difference between the value of the portfolio needs to be in tune with the required income needed from the portfolio. Here’s an example of how the Critical Mass strategy can work.

An investor has accumulated a property portfolio worth $8 million with $4 million in borrowings associated with it. The investor’s LVR is therefore 50 per cent (4 divided by 8 equals 0.5 which is 50 percent). The investor requires $100,000 to meet her living needs.  So she refinances to 60 percent LVR and frees up $800,000 of equity in a Line of Credit. This enables her to pull out $100,000 in tax-free funds to live off for this year and further $100,000 lump sums most probably for the next 6-7 years to come.

The $100,000.00 is added to the $4 million debt, taking total borrowings to $4.1 million. At a later time, the property can be revalued and the Line of Credit readjusted accordingly.