Equity to fund shortfall

[Ausprop]

I read somewhere that James Paker has $2B in debt. I assume that his interest rate should be much lower than ours simple mortals nonetheless, the interest payment should be hughe I don't believe he is to concern in owning everything out right but, in controlling it. Perhaps, he knows something we don't...

Rgds,
James

I think I know what he knows... use debt to buy assets that actually generate incomes that EXCEED the repayments on the debt. Try borrow $2bn from a bank and tell them you have no idea how you will make repayemtns but at the end of year 1 - based on statistics - you shoul dbe able to refi the asset and more than cover interest!

 

[mja]

.....however, 2 weeks after settlement of the IP, the tenant from hell moves in, causing untold damage and refuses to pay any rent. He, with his mung bean squaw have done the round of the tribunals many times before, and know every legal stalling tactic there is. This is house number 10 for them
...
Dazzling meanwhile, pours himself another red wine....hic.

In short... "Invest in commercial property or go to hell!"

Very funny Dazz.

 

[mja]

In short... "Invest in commercial property or go to hell!"

I just had an idea - that could be the name of your new book Dazzling!

It'll sure get some publicity!

 

[Kristine..]

Oh, Daz, you naughty boy!

Not content with sending the Coffin Cheaters over to live next door to keg75, you are now making misogynist statements about Jane and also lambasting her finance guru.

What are we to do with you? Banish you to the shed to count your equity for a couple of years? tsk, tsk.

Daz, we all tread a different path. Yours is through fields strewn with scrap metal, while others must wander amongst the daisies and hope not to get stung by bees. Or, as in the case of my new tenant’s child today, by a wasp.

Back in about 220BC (that’s Before Ched) Archimedes put it quite nicely when he purportedly said “Give me a place to stand and a lever long enough and I will move the world”.

You, of all people, know the power of leverage. Whether our fulcrum point is leveraging off the PPOR, or off our jobs (for those who have them) or off other investment properties, there is nothing quite like a bit of leverage to move the rock out of the dirt.

I first started selling real estate in 1975. In about 1977 we were selling brand new, triple fronted three bedroom cream brick veneers in Lalor, north of Melbourne. Bog standard, heater in the lounge room, upright stove in the kitchen, fences and a couple of strips of concrete along the driveway. $13,995, that’s your lot.

I left my day job in 1975, where as a skilled Spectroscopist I was earning $65 per week ($3,380 per year). So the price of a house out in the boondocks was quite a lot of money.

Imagine if I had bought one of these houses – or two, or three, leveraging away despite the possibility of feral tenants or tenants doing a runner or maybe parking a truck in the driveway and cracking the concrete. Whatever.

Over the past thirty years I imagine that all sorts of things have happened in the houses, but most of the activities would have been good. In my own experience as a residential and commercial landlord, the overwhelming majority of experiences have been good. Without drawing down equity at regular intervals I would not have achieved half, nay! a third of what I have achieved and drawing on equity relieves me of the concerns of income, regular or otherwise.

But it is not for the fainthearted. No investing is. In fact, being alive is a risky business and there are risks in all manner of things.

However, this is ‘only’ money. At the end of the day, money is not worth losing sleep over. My main concern with this transient and fleeting lifetime, is that there are not enough days to do all the things I want to be doing. A feral tenant here or there is of no concern in the grand scheme of things.

Enjoy your impending equity funded retirement. Congratulations on achieving your goal of being financially self sufficient and here’s to many more sheds!

Cheers

Kristine

 

[Kristine..]

Try borrow $2bn from a bank and tell them you have no idea how you will make repayemtns but at the end of year 1 - based on statistics - you shoul dbe able to refi the asset and more than cover interest!

Yeah, but Ausprop

I recently introduced a small developer to the venture capital arm of a well known bank. Know what they asked for? Her resume! Weren't interested in financials, just if she had been around the block once or twice.

As far as they were concerned, if the deal stacked up, they would fund it. Her bona fides were almost incidental. First mortgage security, remember, low LVR, their interests are protected and if she makes a go of it, so are hers.

Cheers

Kristine

 

[BayView]

I read somewhere that James Paker has $2B in debt. I assume that his interest rate should be much lower than ours simple mortals nonetheless, the interest payment should be hughe I don't believe he is to concern in owning everything out right but, in controlling it. Perhaps, he knows something we don't...

Rgds,
James

It's all just zero's on the end.

When I was 19, I was earning $55 per week, paying $25 p/w board at an Auntie's house, and my car engine seized. A cheap piece of cr@p Ford Escort.

$1,000 for a new engine, and I needed the car to get to work. I got a cash advance on a new $2,000 credit card the Bank graciously gave me.

So, I'm in debt for $1,000, had to take on a second job as a Barman at night to pay back the credit card, and can't sleep at night.

Now, have almost a million in investment debt and sleep like a baby.

 

[redwing]

.....however, 2 weeks after settlement of the IP, the tenant from hell moves in, causing untold damage and refuses to pay any rent. He, with his mung bean squaw have done the round of the tribunals many times before, and know every legal stalling tactic there is. This is house number 10 for them, and they barricade the place and invite 15 others from the commune to join them.

Jane cracks a wobbly and decides to sell the IP, but the Bank won't play ball without jacking up the 100K on the PPoR way back to 420K.

Bob cracks a wobbly and goes around to sort it out mano to mano with the feral tenant, who slaps a VRO on Bob. Police are called and Bob is removed from the property.....he forgot the feral tenant has enormous rights.

Bob starts fighting with Jane over the stressful situation and they blame each other. Bob wants to get ahead in life with the IPs so he can quit work. Jane doesn't give a rats about the IPs really, cos her life is spent with shopping, gym and getting her nails and hair done...life's good....why rock the boat ??

Jane kicks Bob out of the PPoR....he was a bit of a wus anyway she decided and started shacking up with spunky Trevor from across the road. Bob's got nowhere to go, and tries to move in with the feral at his IP, but cannot afford the rent being charged as a sub-lessee. The feral tenant is a shrewd businessman and making a motza out of the place.

Trevor meanwhile, behind her back spends all of Jane's cash, and hocks Bob's credit card right up to the limit. Trevor's a happy boy. So is the feral.

Bob goes back to his friendly finance guru, who left town last week to start up another business down the coast.....he's informed by the new butcher who moved into the office space that she said she won't be back. Bob quits work and shacks up with one of the commune. He's smokin the gunga, pickin' daises and not really concerned about the Fed or what Wayne Swan has to say.

Jane is blissfully unaware of what's going on, but still manages to find the time and money to have her hair and nails done. She looks and feels fantastic. You go girl !!!

The Bank eventually sells both houses and gets 100% of their funds back.

The finance guru is recommending to a new set of clients they should buy a 300K IP......


Dazzling meanwhile, pours himself another red wine....hic.

I read all of that and thought Jane must be a "wanna-be" Mung-Bean (possibly a pscych student at Uni?), what kind of Munga would get her Hair & Nails done

Thats some good red wine Dazzling

In short... "Invest in commercial property or go to hell!"

Very funny Dazz.

Dunno, I'm betting Commercial Property could be just as hard at times, with a year or two of vacancies and a number of other hiccups that life is often wont to throw at you (look at Jane & Bob)?

A WA investor I know who recently picked up some more commercial property for their portfolio was telling me of the times when commercial tenants wanted the first year or two free of a 5x5 lease and negotiatied like hell with the outgoings as well; he's been happy as Larry with the last few years though, with his land, resi's and commercial portfolio (not a buy and holder exclusively though, as he trades as well as holds).


No Risk....No Reward

PS: Found my next decision making tool

 

[Dazz]

Oh, Daz, you naughty boy!

Not content with sending the Coffin Cheaters over to live next door to keg75, you are now making misogynist statements about Jane and also lambasting her finance guru.

What are we to do with you? Banish you to the shed to count your equity for a couple of years? tsk, tsk.

Daz, we all tread a different path. Yours is through fields strewn with scrap metal, while others must wander amongst the daisies and hope not to get stung by bees. Or, as in the case of my new tenant’s child today, by a wasp.

Back in about 220BC (that’s Before Ched) Archimedes put it quite nicely when he purportedly said “Give me a place to stand and a lever long enough and I will move the world”.

You, of all people, know the power of leverage. Whether our fulcrum point is leveraging off the PPOR, or off our jobs (for those who have them) or off other investment properties, there is nothing quite like a bit of leverage to move the rock out of the dirt.

I first started selling real estate in 1975. In about 1977 we were selling brand new, triple fronted three bedroom cream brick veneers in Lalor, north of Melbourne. Bog standard, heater in the lounge room, upright stove in the kitchen, fences and a couple of strips of concrete along the driveway. $13,995, that’s your lot.

I left my day job in 1975, where as a skilled Spectroscopist I was earning $65 per week ($3,380 per year). So the price of a house out in the boondocks was quite a lot of money.

Imagine if I had bought one of these houses – or two, or three, leveraging away despite the possibility of feral tenants or tenants doing a runner or maybe parking a truck in the driveway and cracking the concrete. Whatever.

Over the past thirty years I imagine that all sorts of things have happened in the houses, but most of the activities would have been good. In my own experience as a residential and commercial landlord, the overwhelming majority of experiences have been good. Without drawing down equity at regular intervals I would not have achieved half, nay! a third of what I have achieved and drawing on equity relieves me of the concerns of income, regular or otherwise.

But it is not for the fainthearted. No investing is. In fact, being alive is a risky business and there are risks in all manner of things.

However, this is ‘only’ money. At the end of the day, money is not worth losing sleep over. My main concern with this transient and fleeting lifetime, is that there are not enough days to do all the things I want to be doing. A feral tenant here or there is of no concern in the grand scheme of things.

Enjoy your impending equity funded retirement. Congratulations on achieving your goal of being financially self sufficient and here’s to many more sheds!

Cheers

Kristine

OK ???

 

[kegger]

Dazzling has dazzled us with his 'too much time on his hands' approach again....

Nice reading though and a good insight into how things can go horribly wrong. The 2 sales by the bank might go for a song and I would be keen to be there and pick up either their PPOR or the IP as an IP for myself - would probably buy well and make some good cash on settlement. Refi B4 settlement and have more in the kitty than prior to purchase.

Hence the post.....this is a strategy that is well worth while once you have diversified in a few areas and are not so susceptible to price growth in just one area. I have no problems at all in either funding an IP with equity or funding living expenses with equity. I admire James Packer - I bet he doesn't care about the price of a beer at the pub and ums and ars about whether he should go home and have a glass of home brew instead......

How is this for an idea - number plate for my car....'EQUITY 01'

 

[cgw]

I am in the same boat at the moment. I want to buy IP no 4, and then use equity via a LOC and use this for all of the holding costs of al the 4 IPs $22 - $25K.
The Mortgage Brokers spreadsheet says I can do it, Ed Chan's from his Wealth for Life book says UNSAFE.
So be careful.
I will now read the other posts on this.

 

[jaycee]

thanks Ausprop

I remember first hearing of using LOC's or "equity mate" like a bank ad would say and I'd think, that used to be called remortgaging, something tht scared the pants out of me coming from parents who had no other debt ever other than a PPOR whch they hammered down in 8 years to 0.

Even the "draw out the equity once your place has grown enough & use that as a deposit for your next place" made me think, as these pple are talking IO loans most of the time, is this not the same as just borrowing 100% anyway ?

80% of the loan against the new place/20% from LOC on your first place = 100%

100% of the loan against the new place = 100%

The only "advantage" I have heard is escaping LMI, but is the cost difference that much ?

Finally found this thread again…

In terms of using existing equity to fund the deposit for a new IP, is my last question in the quote above correct ?

 

[Finance guru]

80% of the loan against the new place/20% from LOC on your first place = 100%

100% of the loan against the new place = 100%

The only "advantage" I have heard is escaping LMI, but is the cost difference that much ?

Hey Jaycee,
This is almost correct. But you've forgotten purchase costs. Estimate this at 5% and the equation becomes...

80% of the loan against the new place/25% from LOC on your first place = 105%

100% of the loan against the new place/5% from LOC on your first place = 105%

But regarding the LMI, the amount varies from lender to lender of course, but, for example.
If you purchase a $500K property in NSW at 80% LVR on a full doc loan, you pay no LMI.
If you purchase a $500K property in NSW at 95% LVR on a full doc loan you pay around $10K in LMI.

Whichever way you go you still need 105% of the purchase price, but if you choose to load up the LVR on your new IP instead of accessing more of your home's equity, it will cost you $10,000 extra. Is that worth it?

 

[Spectre]

Noting the lmi premium should be deductable and more available equity to do other projects, leave you cash up your sleeve if you need it to cover costs

So there are a few benefits w/the LMI in place... yeah you pay for it but sometimes its worth it.

 

[jaycee]

So just double checking my understanding of the answer to my question

- at the end of the day, the only advantage to using an LOC to fund part of a purchase instead of using a mortgage to fund all of the pruchase is LMI ?

Now that I understand how much LMI might be, I can see why...