Following on from recent threads regarding the dangers and successes of capitalisation of interest and LOE.
The attached spreadsheet shows what a $400K cash deposit invested in either -
It attempts to demonstrate that an investment in high growth IPs combined with a relatively small share portfolio can produce a positive cashflow far sooner than a solely IP strategy can.
Assumptions
The leverage I've assumed is 80% for IP, and 50% for shares.
For the first scenario the $400K cash is split equally into 2 deposits and gives a total investment of $1M of IP and $400K of shares.
So the 2nd scenario gives total assets of $2M of IP.
The IP growth and yield I've assumed are 9% growth and 3% nett yield.
For shares - 7% growth and 5% nett yield (this is after grossing up for franking).
So they both add up to a 12% total return.
Rents grow at 3% pa, while dividends grow in line with share growth. This is an important difference between the asset classes.
Feel free to adjust them to figures that you are comfortable with. The output is fairly sensitive to some small adjustments, so DO use your own assumptions.
I've assumed the rent goes towards the IP loan and the dividends pay off the Margin Loan.
Some of the assumptions I've made which probably don't reflect reality -
Output
Using my assumptions the output shows that
The bottom line for me is that a diversified strategy can -
The attached spreadsheet shows what a $400K cash deposit invested in either -
- 50% in high growth IP and 50% an average basket of shares (Scenario 1) or
- 100% high growth and highly negatively geared IP (Scenario 2)
It attempts to demonstrate that an investment in high growth IPs combined with a relatively small share portfolio can produce a positive cashflow far sooner than a solely IP strategy can.
Assumptions
The leverage I've assumed is 80% for IP, and 50% for shares.
For the first scenario the $400K cash is split equally into 2 deposits and gives a total investment of $1M of IP and $400K of shares.
So the 2nd scenario gives total assets of $2M of IP.
The IP growth and yield I've assumed are 9% growth and 3% nett yield.
For shares - 7% growth and 5% nett yield (this is after grossing up for franking).
So they both add up to a 12% total return.
Rents grow at 3% pa, while dividends grow in line with share growth. This is an important difference between the asset classes.
Feel free to adjust them to figures that you are comfortable with. The output is fairly sensitive to some small adjustments, so DO use your own assumptions.
I've assumed the rent goes towards the IP loan and the dividends pay off the Margin Loan.
Some of the assumptions I've made which probably don't reflect reality -
- interest rates are constant (@8% IP & @9% for shares) for the 20 yrs
- no additional equity drawdowns for either LOE or investment
- growth is constant throughout the period
- tax isn't considered
- the $400K deposit is all cash and doesn't attract interest
Output
Using my assumptions the output shows that
- the IP only strategy never becomes cf +ve, and every year cashflow becomes increasingly negative
- the IP only strategy ends up with more gross assets and has 40% more equity after 20 yrs
- a 50/50 IP/shares split becomes cf +ve after 17 yrs
- the combined strategy margin loan is fully paid off after 13 years
- the combined strategy has a lot less debt after 20 yrs with lower LVR
- the combined strategy becomes less cf -ve after the 3rd year
The bottom line for me is that a diversified strategy can -
- reduce volatility
- produce +ve cashflow sooner
- has some lower risks, higher SANF
- help significantly with servicability issues
- lower overall borrowings so less sensitivity to IRs
- no need to sell IP (& incur CGT) to create a cf +ve portfolio for retirement
- however, the downside is less equity after 20 years