Drawing down equity on IP's for shares

[Trogdor]

Not saying its a good or bad idea, but remember most shares also have in-built leverage within the company.

I.e. read the balance sheet and see that companies gearing.

Implications:

1. You borrow on your LOC
2. Your buy shares and margin up into them to buy more
3. Those shares are further geared insofar as you are buying the equity "piece" with a bunch of debt sitting behind the scenes.

You can see that a small movement in the underlying (ungeared) business price will make a big increase in points 1 - 3 above !!

I.e. look at stocks which had high levels of gearing at level 3 above over the last 5 - 7 years (Centro, Transpacific, BNB, ABC learning, etc..) first few years **big** returns, last few **big** losses using the OP's strategy. And of course you can get easily "blown up" from items 2 and 3 above due to covenants at the company level (3) and at the margin call level (2).

 

[Mr. Fabulous]

i am terrible at maths.

You don't need to be a maths whiz to be successful investing in businesses. Also, if you maintain interest, I'd suggest reading Peter Lynch's One Up On Wall Street and Beating The Street. They are excellent introductions to investing in the stock market and written in plain, easy to understand english. Ideal for those starting out.

 

[BV]

The thread speaks of 'drawing down' equity from the IP's and taking out a margin loan off this©

It was different times when Keith did this.
In the current economic environment its a very risky strategy.
IMHO

 

[Ridin-High]

Hi,
I have a printout from the forums that caught my eye in 2007. This is how long it takes me to make a move on things... It was a thread from keithj.
We have 4 IP's with a fair bit of equity in them. I would like to invest some money off the back of this equity.
The thread speaks of 'drawing down' equity from the IP's and taking out a margin loan off this. My question is how does this physically happen? How do you 'draw down' on the equity. I can't quite work it out and though I would run it by you all before going to a bank.
I guess I will need to get some valuations done (which would be good anyway after all these years).
Also could you tell me what an LOE is?
Cheers,
©

Hi Kasper,

I've done this recently (drawing down equity to invest in shares, then margin loan).

Process was applied with my mortgage broker (in your case it might be directly with bank or your MB) to have a loan top up or line of credit against your house. I took my LVR's upto 90% so gave me some $$$.

Took that money and purchased stocks, now my stocks have a value and i burrow money against those stocks to purchase more stocks.

Banks will most likely pay for the valuations for the purpose of a loan top up.


Regards,

RH

 

[Ridin-High]

Wobbycarly, your example is no different to me using $120K in LOC and using it as 20% deposit against another IP worth $600K and borrow $480K. What's the gearing ratio now on the $120K???

For every liability (Loan) you have you have an asset (Shares or Property) against it.

If you believe the asset (property/share) you are buying with borrowed funds is going to be worth more in future and will rise above the cost of borrowing money (interest rate) and the loan servicing costs (cashflow) is managed there is nothing wrong with the strategy. You just need to know what you are doing and be prepared for the worst case scenario.

Cheers,
Oracle.

Agree with Oracle.

And with the comments made from trodgor, But on the point of some companys have high gearing, you can research this. Eg BHP has a LVR of about 6% and about double that amount in cash on hand... so basically their is more chance of me going broke then them.

 

[redwing]

Wow. I have been working away on something else and all these threads have happened! look what I've started. I am going to take a serious look at all these over the weekend and digest them. So glad I asked. ps i am terrible at maths.©

You will need to post some figures then, you will probably get some great feedback from some of the forum members based on some numbers

 

[redwing]

Nope?

Okay, check out this thread and have a read of the post by TomL at #5 for some rough figures and something to ponder

 

[Peterw]

The debate between property and shares, is always an interesting one. Some years ago, Phil Ruthven spoke at a conference, and told us all that he just signed a 3 year lease on a residence in Melbourne, that showed the owner a 3% gross return. At those numbers why would you buy a property, was his view. He was a share man and used his knowledge and experience to make his wealth in the equities market. Now I am a property bloke, and having seen tenants evicted when a landlord takes a bath, I want security for my family. So Ruthven would probably say, I could have done better, following his plan. I do also have a lot of friends who have done well with shares. On the other hand, I have a friend who entered the share market more recently, and he thought 50% gearing was conservative. When the GFC hit, he did not have available funds to top up, and had to sell his portfolio, and was still left with a debt of $200,000. Now, I am sure that he now knows that he did not have an effective plan B, in case things change. On the other hand, I do not know of banks, forcing people to sell property when values have fallen. As long as they maintain the payments, they are OK. Now, I am a biased property bloke, and just suggest, have a plan B, when borrowing to buy equities.

 

[Ridin-High]

The debate between property and shares, is always an interesting one. Some years ago, Phil Ruthven spoke at a conference, and told us all that he just signed a 3 year lease on a residence in Melbourne, that showed the owner a 3% gross return. At those numbers why would you buy a property, was his view. He was a share man and used his knowledge and experience to make his wealth in the equities market. Now I am a property bloke, and having seen tenants evicted when a landlord takes a bath, I want security for my family. So Ruthven would probably say, I could have done better, following his plan. I do also have a lot of friends who have done well with shares. On the other hand, I have a friend who entered the share market more recently, and he thought 50% gearing was conservative. When the GFC hit, he did not have available funds to top up, and had to sell his portfolio, and was still left with a debt of $200,000. Now, I am sure that he now knows that he did not have an effective plan B, in case things change. On the other hand, I do not know of banks, forcing people to sell property when values have fallen. As long as they maintain the payments, they are OK. Now, I am a biased property bloke, and just suggest, have a plan B, when borrowing to buy equities.

Peter mentions some good things here about why property would be likely to outperform shares (eg. 2 newbs slogging it out)

Resi property you can gear 90% no worries, can hold out when values drop, as long as you keep up payments. Shares if you highly geared and market takes a sudden drop and you breach your margin LVR it doesn't matter if you keep the payments up lender just start selling stuff (unless you can cover the difference of course)

But Shares are considered generally a higher risk asset class so the chance for higher returns is their.

I think its good to have a mix of both and have some money in other asset classes, some will perform when others ain't.

Eg. Things are slow in my residential portfolio at the moment (no growth) but my mining and retail stocks are doing good (bank ones are up small amount, but CBA and WBC have large exposure to resi property, ANZ doing better because of focus on azn markets)