800k dead equity - what to do?

[waz11]

Hi all,

I have a close friend who is in the situation where they have around 800k equity possibly more - and they are very cash strapped. They are a family living off 1 wage which is already being chewed up with their existing negatively geared property that is just waiting for the next round of capital gains.

They are desperately looking to get into something that will provide them with cashlow first and foremost - and also hopefully growth. They are keen to try whatever yet it obviously cannot be very high risk ventures as there is a family to consider.

They cannot afford to buy any more negatively geared property which draws against the 1 wage as it is already tied up. I have read some quiter good ideas on the board in the past regarding drawing a LOC against the equity, buying negatively geared growth properties and then paying the shortfall from the LOC also in the belief that the pvalues will rise faster than the LOC will wear down. I am not totally against this but im sure there are some other great ways to achieve what they are after.

They are definetly not against shares \ business etc - and open to all ideas.

Any help would be greatly appreciated.

Cheers,

Waz11

 

[Sunfish]

Leveraged Equities (they have a good web site) will lend for a margin loan on property but I think they want 1st mortgage so it would entail refinancing and it must be investment property, not PPOR.

Note though that this is commercial lending, not consumer and some comsumer protection may not exist.

I am merely saying this is possible. I'm definately not advising it. In fact I never advise anyone to walk into the stock market, fresh, with a wad of money. Very important to learn how to walk first. Daryll Guppy's book Stock Trading gives advice on how to start.

Thommo

 

[agent007]

Hi Waz11,

Before getting into "something" one's knowledge and financial education has to be at the same level or above that "something" otherwise, it could cause more problems that it tries to solve. On the other hand, they may not have much room to make mistakes. Since (apparently), they are in need of some cash flow to cover the short fall of the -ve IP(s) ,why they don't create a "Navra cash bond" with the existing equity in order to cover the short fall?. Then, they can use the time to learn about other "things" without the pressure to produce results and fast?.

Regards,

James.

 

[NigelW]

Hi Waz11,

Before getting into "something" one's knowledge and financial education has to be at the same level or above that "something" otherwise, it could cause more problems that it tries to solve. On the other hand, they may not have much room to make mistakes. Since (apparently), they are in need of some cash flow to cover the short fall of the -ve IP(s) ,why they don't create a "Navra cash bond" with the existing equity in order to cover the short fall?. Then, they can use the time to learn about other "things" without the pressure to produce results and fast?.

Regards,

James.

Or they could use their equity to get a LOC and then leverage into the Navrainvest Fund which is distributing quarterly in excess of 3%/qtr...

But you're absolutely right, financial education and discipline is critical to success.

Cheers
N.

 

[waz11]

ok - here's a bit of a dopey question:

If they were to buy the cash bond where would the money come from the pay back the interest on the LOC used to buy the cash bond?

Also assuming they are finance savvy - I am just looking for a few ideas on how they should proceed with increasing cashflow and growth without needing to take any more money from their 1 salary.


Waz11

 

[Rolf Latham]

Hiya

Various means of getting at that dead equity, it would help them I think to maybe sit down with a good independent broker and have a bo peep at some of the options to draw equity, then as suggested place some of that equity into higher yielding funds.

At all times Id agree they need to know not only WHAT they are doing, but also why and what the risks may be. I have often found that what looks like an informed investor on the surface is an accidental investor that has done well through time and often good luck

ta

rolf

 

[waz11]

NigelW,

Is it possible to get a LOC against the equity when on paper they dont have the capacity to repay the interest. The only way they could repay is if the money goes into something that returns positive cashflow from day one - enough to cover the interest on the LOC,

Waz11

 

[WillG]

Hi Was11,

Have you considered capitalising expenses on your negative geared IP's - ie ... pay the interest component only but add all expenses (rates, prop management, repairs ...) to the loans.

This should help ease the cashflow and help put extra $$'s on your PPOR loan.

Cheers

 

[Pete]

Waz,

Most likely possible. For example, a no doc loan. As others have said, they need to know what they are doing - or they can seriously "crash".

Servicing the loan should be the least of their problems. Funds must be sensibly invested & managed. Have they got defined, sensible, realistic, achievable goals, plans, strategy? Again, do they know what they are doing?

I think I'm very much repeating what others have written.

regards,

 

[waz11]

WillG,

maybe I should clarify a little -

they have a PPOR value = approx $950 000, loan of approx $190 000. & 1 IP value = $340 000, loan of approx $300 000.

They dont mind borrowing against the PPOR to invest.

Cheers,

Waz11

 

[waz11]

Pete,

They know what they want to achieve - they know what they have available - and what they are looking for is ways to make it happen - hence the purpose of this thread.

They are after some strategies - whether they can grasp the concepts at first or not - they just want to possibly no what others would do in the situation - then they will make sure they are educated enough before ever trying anything.

They are just curious of strategies to be able to use their equity to their advantage without have to fork out any more money from their wage.

Cheers,

Waz11

 

[Pete]

Thanks Waz. Much clearer.

They've done well. Now they've got to get that genie (equity) in the bottle out and working for them.

I'd suggest reading Rory O'Rourke's "Born Free Taxed To Death" as recently discussed on separate thread. Or Steve Navra's financial strategies such as the cash bond annuity.

OK?

 

[waz11]

Cheers Pete.

Waz11

 

[likewow]

The Navra cashbond relies on cap. growth to work and with the uncertain cap. growth in Sydney for the next X years it could turn out to be a risky strategy.

The stockmarkeis due for a correction this year so there another risky one. Their timing isnt the best but maybe they could talk to a financial advisor as well as educting them selves to the risks involved. As they are using the equity in the family home it is crucial to have a low risk strategy. Im hesitant to offer advice as i'd buy shares but im a little bit educated there and know how to manage the risk.

btw: The repayments for the LOC comes from the interest returned from the annuity with the return of principal received as income.

 

[NigelW]

NigelW,

Is it possible to get a LOC against the equity when on paper they dont have the capacity to repay the interest. The only way they could repay is if the money goes into something that returns positive cashflow from day one - enough to cover the interest on the LOC,

Waz11

Probably yes. If anyone can get it Rolf Latham can. He's a mortgage broker who posts on the forum.

What's required is a bit of financial engineering. Assuming they can get a LOC for say $600k then what you could do is set aside an amount, say $100k as the contingency fund which is kept in the offset a/c.

The remaining $500k could then be used to invest in a high yielding fund/s (perhaps across equities and listed property trusts) and the $100k would buffer the couple of months until distributions are made in which case the distributions are then paid into the offset a/c to bring the balance back up.

Think about it this way. 1 year's interest on $500k at say 7.5% =$37,500.

With the $100k buffer there's 2 1/2 years where the investment could earn $0 and you'd still be okay.

It will be important to match investments to their risk profile but you've got to take SOME risk to get ahead financially. As long as the risk is managed as much as possible...

As an additional suggestion:

1) are they getting ALL the deductions they should be for their -ve geared IP? Eg qty surveyor's report may reveal a whole host of deductions.
2) are they otherwise getting all the deductions they're entitled to...
3) To ease cashflow squeeze could they use a 2215 PAYG variation so that there's more $ available each pay {only to be used if they don't blow the excess on doodads/high living ;-) }

Hope this helps

Cheers
N.

 

[Kristine..]

Hi all,

I have a close friend who is in the situation where they have around 800k equity possibly more - and they are very cash strapped. They are a family living off 1 wage which is already being chewed up with their existing negatively geared property that is just waiting for the next round of capital gains.

Waz11

Hi Waz

Well, at the risk of sounding very old fashioned, why doesn't the partner not working start working?

I really can't see the point of them adding mega-stress to their lives by taking on more debt when from reading your post the main problem is the shortfall caused by the investment which they already have.

So how much are we talking about per week / per year? $200 per week? Even if they have small children it isn't hard to earn another $200 per week - evening work at the local supermarket would provide that in about 13 hours of casual work.

Instead of putting their heads further into the noose, perhaps they need to sit back and re=examine their actual life priorities.

If being at home with small children is a high priority, or living in an expensive house, or whatever, then they need to examine the financial and emotional cost of those choices.

Sunstone shared a great family decision they made about selling their family home when it reached a market point, and buying into a less fashionable area. This gave the family a home owned outright plus money to put a sizeable deposit down on other investments. It doesn't take much to turn a negative investment into a positive investment.

And it doesn't take much imagination or work to turn a weekly shortfall into a neutral or cash positive situation. 15 hours work a week can perform miracles.

I wish them good luck, but seriously if they came to me I would be encouraging them to not even consider any more debt until they had sorted out the other issues.

Cheers

Kristine

 

[Lissy]

waz11
Another possibility may be to look at partnering with a cash strapped property investor and making money that way. I know a few of the investors I work with are in a position where they have equity available, but just don't have the time or expertise to do anything with it that makes them money.
I know how to make the money, but have run out of borrowing capacity long ago! By working together we both make money.

 

[shazza]

I agree with Kristine (smart lady that). If they're in financial stress why get in more - for the moment.
I must admit my original thought on reading the post was 'sell the negative geared property'. Its all very well buying for CG but if you cant afford the holding costs in the meantime its not going to get you far. Esp. if it leads to stress or marriage breakdowns.
I guess they need to examine their priorities.
Hope they make an informed decision.
cheers Sharyn

 

[quoll]

don't buy more property - yet / buy income!

Hi all,

I have a close friend who is in the situation where they have around 800k equity possibly more - and they are very cash strapped. They are a family living off 1 wage which is already being chewed up with their existing negatively geared property that is just waiting for the next round of capital gains.

They are desperately looking to get into something that will provide them with cashlow first and foremost - and also hopefully growth. They are keen to try whatever yet it obviously cannot be very high risk ventures as there is a family to consider.

They cannot afford to buy any more negatively geared property which draws against the 1 wage as it is already tied up. I have read some quiter good ideas on the board in the past regarding drawing a LOC against the equity, buying negatively geared growth properties and then paying the shortfall from the LOC also in the belief that the pvalues will rise faster than the LOC will wear down. I am not totally against this but im sure there are some other great ways to achieve what they are after.

They are definetly not against shares \ business etc - and open to all ideas.

Any help would be greatly appreciated.

Cheers,

Waz11

Waz11

This scenario is very familiar, I'm in it. Got 2 appointments on Monday to talk to busines brokers, looking at small business's around the $300-400k mark that can bring in $100k net profit to owners. Have spoken to the bank they will lend against the equity we have in the IP's and PPOR as long as the business has enough cashflow to pay the loans.

With some good income we might be able to buy another IP soon.

Cheers
quoll

 

[juzz]

Wazz,

We have a few people involved in what we do (JV' & 2nd Mortgages)
in the sort of position your friends are in.
It is a different risk category though & you must know what your doing.
(Proffesional/sophisticated investors).

The way they usually do it is to spread their available equity over a few projects.
Not just one. ie Dont put all your eggs in the one basket.
Remember everyone you talk to will have their own barrow to push.
Make them do their own reasearch. Never rely soley on the information given.


Justin