CAN INVESTORS LIVE OFF THEIR EQUITY ?
While some may sell the concept of equity as a source of income to replace or support a regular income stream, Nathan says investors should avoid living off it at all costs. Instead, investors should aim to generate a passive income stream which doesn’t erode their equity– otherwise, they will be ruining their chance of reaching financial freedom by undermining their total net worth position.
EQUITY IS A LOAN – WITH INTEREST
If you think living off equity is a good thing, consider this. In order to access it, you would need to fill out a loan application to prove regular income and your serviceability. Although it is your share of the property, the only way you can access it is in the form of a loan that is subject to interest. By accessing equity, you are increasing your debt, and you’ll need to make regular repayments on it, just like any other loan. You will be getting the income today, but you will have an obligation to pay it back later. Why would you stunt your financial growth by using your equity for immediate gratification, when you could delay that gratification and build a better lifestyle for your future.
RENT IS A RECURRING INCOME
Rent, on the other hand, is a regular income that should cover all expenses related to your investments, and if you have structured your portfolio well, can create passive income perpetually. Nathan says, investors should aim to generate a passive income stream through their portfolio instead.
EQUITY CAN BE USED TO BUILD YOUR PORTFOLIO – NOT PAY YOUR BILLS
Instead of drawing these funds to live off, Nathan says investors should use them in order to build their portfolio and take it to the next level. For example, if you purchase under market value properties with strong growth prospects and neutral cash flow, then as your net worth position gets better through solid capital gains, you can build a strong foundation portfolio. Once your portfolio has generated enough equity, you may choose to access it in order to purchase strong cash flow producing assets, such as shopping centres, apartment blocks and development sites. This will enable you to build a passive income stream to support your lifestyle – a much more beneficial strategy than that of living off the additional credit.
Have you ever lived off equity? How did it affect your finances? Please share your experiences in the comments section below.