From $0 to $5.6 Million in 4 years

[BayView]

Is the difference that he's risking too much $$, that wht you're saying ? or is 70odd%LVR too far to push the envelope from a risk point of view ?

To me, the actual dollar amounts of debt are not the important issue.

In other words, you could owe $50 million in debt (and there are many who do).

It's the LVR that is important.

And it is only important when you HAVE to sell.

When this occurs, the seller usually has to sell in a hurry, and usually end up selling for a cheaper price.

It would be fair to say that a 20% drop in price would be common in order to sell quickly - or an even bigger reduction.

This is why a very high LVR (more than 80%) is dangerous, no matter how many zeros are on the end.

It is a lot harder to sell a property at full price than it is at a big discount. Everyone wants a bargain, and no-one wants to pay top dollar.

We have triple the debt now than we did back in 2001 when our first IP was purchased, but I was way more nervous then than I am now, because the LVR then was 100% (borrowed equity and other borrowed funds), whereas the LVR is now below 50%.

SANF

 

[jaycee]

Which is what I'm asking Psiton... MY LVR & Q's are about the same about 71% odd

But he semeed to think I'm ok but Q in a more dangerous postion ?


Is 70% LVR too high ?

What about 62-63% LVR ?

 

[Piston Broke]

Jaycee I agree with BV, I reckon he's spot on:

It would be fair to say that a 20% drop in price would be common in order to sell quickly - or an even bigger reduction.

This is why a very high LVR (more than 80%) is dangerous, no matter how many zeros are on the end.

I've always posted along these lines.

But dangerous does'nt mean uncontrollable (he was running at 100% LVR).
You take a financial risk in everything you do.
An increase in interest payment of 8k a year is not the same as 80K if your running a NG portfolio.
In the early stages of investing the theoretical risk is generally higher but the potential losses are less.
You can put it all on the line or play "double or nothing" if you can easily afford the repayments.

 

[jaycee]

Did I misundertans earlier ?

Q's LVR is not greater than 80% ? BUt you seemed to express concern at it (that's the only way I can think of to say it right now) ?

$4m loan... $5.6m value is about 71.5%

oh, and dont think Im pro high LVR's or expreienced enough to know if I should be or not, I think by the time I purchase again, my new LVR will stay the same, or if I drag my feet, drop to less than I have now.

 

[Piston Broke]

Did I misundertans earlier ?

Q's LVR is not greater than 80% ? BUt you seemed to express concern at it (that's the only way I can think of to say it right now) ?
$4m loan... $5.6m value is about 71.5%

Geez, I'm trying not to be too negative here Jaycee... your making it difficult lol, but imo if Q has a couple problematic IP's and interest goes to 8%, he's pushing **** uphill.
Being in ACT maybe he's (or both) got a nice gov job, but they sacked ten of thousands a few years ago too.

"I'm talking numbers not necessarily ratios.
If rates go up another 1%, then it's another 40K yr in interest. $769 per week.
Can you just put up the rent? Well even if you count the OTP ones it's an increase of $70 x wk x IP."

Can you really raise a 300wk rent to $370 over a short period just because you have to pay the mortgage? Call me skeptic.
Me thinks your gonna be waiting a while to find a tenant, and of course better $300 than nothing.
Many REAs been watching their rental list grow lately.
And don't forget it's mostly x-col, a sniff of blood and the sharks start circling.

But hey, if the is another bailout it may buy some time and I'm just a D&Ger naysayer. If rates rise to 9% then it because of us D&Gers.
either way markets have functioned the same way for years, and they ain't gonna change anytime soon.

 

[jaycee]

Although Bayview was talking LVR's and you said you agreed with him when he said this"

This is why a very high LVR (more than 80%) is dangerous, no matter how many zeros are on the end.

I guess if ***** hit the fan and you dont have access to easy LOC or savings to contribute, you'd be in trouble, me with my 2 measly properties could chiop in more from my salary, or also LOC ..

Wonder how he plans to manage this risk ?

 

[BayView]

I guess if ***** hit the fan and you dont have access to easy LOC or savings to contribute, you'd be in trouble, me with my 2 measly properties could chiop in more from my salary, or also LOC ..

Having some (unused) LOC, or savings to access would mean that the LVR is less than the 80%.

If the investor does have any savings, then he/she would do far better to have them in their LOC, or in an offset to decrease the debt, and thus the LVR - unless he/she is clever enough to find a savings account or TD that returns better interest than their debts are charging in interest.

Many people have LVR's of less than 80% and have no accessible LOC as they don't have the servicability for the Bank to allow more LOC, unless they buy another income producing asset.

We have been in this scenario a few times ourselves. Asset rich and cash poor, so to speak.

The other factor in this scenario of Q's - and is especially relevant as the portfolio increases is the cashflow of the portfolio.

He sounds as though he has a very high personal income to support the neg cashflow, and this is good, but a personal cashflow (job or business) can be lost.

On top of this, you can easily have a few properties vacant at the same time - we had 3 vacant simultaneously one year, and for a few weeks (Xmas holiday time - no-one is moving).

So, if by some stroke of bad luck his personal income drops, and a few properties become vacant simultaneously, then the cashflow will be compromised, and this could trigger a forced or quick sale.

As the portfolio gets bigger it is imperative that the cashflow generated by the portfolio starts to support itself through rents and tax benefits.

 

[MCS_80]

This is why I love this forum.

From a simple post by the OP to over 7 pages of discussion !!!

Love it. I must admit I lurk more than post, but im learning as I go.

QuyenAn2002 is 100% correct when saying Australia is full of opportunity and gives everyone a great chance of "making it". What im seeing, and have experienced myself, is that the people coming into Australia are making more use of these opportunities here than people who have lived here their whole lives are.

Sometimes I have to admit we have it too easy here in Australia and can learn from "boat people" "refugee's" what ever we want to label them. I know ive been wrapped in cotton wool most of my life and am only now finding out what the real world is like.

Will pick up a copy of the magazine today while on my lunch break

Cheers

Mick

 

[jaycee]

Having some (unused) LOC, or savings to access would mean that the LVR is less than the 80%.

If the investor does have any savings, then he/she would do far better to have them in their LOC, or in an offset to decrease the debt, and thus the LVR - unless he/she is clever enough to find a savings account or TD that returns better interest than their debts are charging in interest.

Many people have LVR's of less than 80% and have no accessible LOC as they don't have the servicability for the Bank to allow more LOC, unless they buy another income producing asset.

We have been in this scenario a few times ourselves. Asset rich and cash poor, so to speak.

The other factor in this scenario of Q's - and is especially relevant as the portfolio increases is the cashflow of the portfolio.

He sounds as though he has a very high personal income to support the neg cashflow, and this is good, but a personal cashflow (job or business) can be lost.

On top of this, you can easily have a few properties vacant at the same time - we had 3 vacant simultaneously one year, and for a few weeks (Xmas holiday time - no-one is moving).

So, if by some stroke of bad luck his personal income drops, and a few properties become vacant simultaneously, then the cashflow will be compromised, and this could trigger a forced or quick sale.

As the portfolio gets bigger it is imperative that the cashflow generated by the portfolio starts to support itself through rents and tax benefits.

Marc, you are the only one to go on about high LVR's, everyone else has accepted Q's LVR is lowerthan 80% (he has given us the details, not like we have to guess and theorise) -


Doesnt that same thing apply to me ? My income & access to LC abased on that income for servicialbity can leave me jsut as short, but Piston laughed when I asked if he thoguht I too was overexposes ?

What aren;t I seeing ? he built a proprty portfolio, same as me, but quicker... he seems to have the income to support ti, just like me at my scale... possibility of vancnies and shortfall iin percentage terms is the same

What am I missing here which makes me safe & him dangerous ?

I'm being srious, I'm not trying to argue for the sake of it, it just feels as though comments are not making sense 100% to me at least

 

[skater]

What am I missing here which makes me safe & him dangerous ?

At 80% LVR there is little room to move, unless part of that 80% is a nice large undrawn LOC waiting for emergencies.

Now, let's just suppose you owe $1mil (using this as an example, as I don't know real figures). The repayments on this @6.5% IO are $65kpa, or roughly $5416 per month. Lets also presume your yeild from your IPs comes to $3k per month, leaving you with a shortfall of $2416 each month. Not too bad. If you are on a large income, this would be easy to do.

Interest rates go up to 7.5%. Your repayments now come to $6250 per month. You have to fork out another $834 each month.

In Q's case, he has around $4mil in debt, with only around $3545 income per week, around $14180 each month. His repayment @6.5% would come to $21664 each month, meaning he has a loss of $7484. Interest rates move only 1% and the repayment moves to $25k. He has to find an extra $3336 making his loss $10820 EACH MONTH.

Of course this is very simplistic. It does not take into account any expenses or non-cash deductions. Now, calculate what the loss would be if there are problems (which do happen occasionally), like a non paying tenant or some major repairs, or a couple of vacancies etc.

The LVR is not the only risky thing I see. I am concerned at the yeild this portfolio is generating.

 

[Dazz]

Skater is right jaycee,


The magnitude of the portfolio, the larger it is, diminishes the ability of the high income earner to "step in" with their high income from the job and "patch things up" if things go awry.


If the portfolio is worth 2m and things go wrong temporarily, no problem....high income from job to the rescue. If the portfolio is worth 20m and things go wrong, big problem.....high income from job is useless.


This is the link you are missing or "not seeing" yet. The reason is probably that you haven't entered this territory as yet. Some of the ground rules change as you start to get serious when you play this Landlord game.


As Marc said above ;

As the portfolio gets bigger it is imperative that the cashflow generated by the portfolio starts to support itself through rents and tax benefits.

In my opinion, this is the crucial factor why most investors, when they become of a 'substantial' size, start to gravitate away from residential buy and holds.....if they wish to continue growing. Most Banks will start to insist upon it.

 

[jaycee]

So I guess to simplifiy it, it's the danger of lots of quick accumulation using a reasonably high LVR (71% as I explained earlier is what Q's LVR is not 80 - just divide his $4m Loan by the $5.6m Value) and not having the luxury of time kicking up the yields.

 

[BayView]

Marc, you are the only one to go on about high LVR's, everyone else has accepted Q's LVR is lowerthan 80% (he has given us the details, not like we have to guess and theorise) -


Doesnt that same thing apply to me ? My income & access to LC abased on that income for servicialbity can leave me jsut as short, but Piston laughed when I asked if he thoguht I too was overexposes ?

What aren;t I seeing ? he built a proprty portfolio, same as me, but quicker... he seems to have the income to support ti, just like me at my scale... possibility of vancnies and shortfall iin percentage terms is the same

What am I missing here which makes me safe & him dangerous ?

I'm being srious, I'm not trying to argue for the sake of it, it just feels as though comments are not making sense 100% to me at least

I'm not taking sides in your debate with LC about your level exposure.

I am putting forward my views on levels of exposure, and why.

Use it as you see fit. FWIW, I think a 70% LVR is fairly safe, but as long as your portfolio cashflow is enough to support the whole shebang if you lose your job and/or some IP's sit vacant for a few weeks or months.

So, going forward, my advice to you would be to concentrate a lot more on the cashflow, but still keep a sharp eye on the LVR.

I realise that Q's level of LVR is lower than 80%, and that is good, but based on the figures, his cashflow seems quite negative, and it seems to me he is banking on his high income to carry the whole deal?

This is a bit precarious in my book, and not only that; it keeps you a slave to your job to pay the shortfall.

Isn't the whole idea of investing to get out of the rat race asap?

To me, that means acquiring as many assets that make a pos income as you can, as quick as you can to replace your earned income and give you the freedom to choose to go to work, or sleep in, or go fishing.

Having said all this, Q has done well, but as others have pointed out; it is far easier with a very big income than it is if you don't.

My analogy is the one where you see the 7 foot guy dunk the basketball. No big skill in that, and I cannot be impressed by modern day basketball because of this.

This is the investor with the big income who buys a truckload..

But to see a 5' 10" guy dunk a basketball...now yer talkin'.

This is the single mother on a pension investor who accumulates 6 IP's.

 

[jaycee]

I'm not taking sides in your debate with LC about your level exposure.Where I typed LC, I meant LOC. NOt sure what you thought/meant.

I am putting forward my views on levels of exposure, and why.

Use it as you see fit.

I realise that Q's level of LVR is lower than 80%, and that is good, but based on the figures, his cashflow seems quite negative, and it seems to me he is banking on his high income to carry the whole deal?But don't most of us do this, epecially in the first few years.. he's only been doing it 4 years ?

This is a bit precarious in my book, and not only that; it keeps you a slave to your job to pay the shortfall. As above, it's only been 4 years, I thought others investors had also did this, in fact I'mpretty sure on this

Isn't the whole idea of investing to get out of the rat race asap?In 4 years ?

To me, that means acquiring as many assets that make a pos income as you can, [BHow's $5.6m in 4 yrs ?[/B]as quick as you can to replace your earned income and give you the freedom to choose to go to work, or sleep in, or go fishing.

Having said all this, Q has done well, but as others have pointed out; it is far easier with a very big income than it is if you don't.Nothing to do with my discussion and he didn;t ask for a pat on the back, so who cares either way

My analogy is the one where you see the 7 foot guy dunk the basketball. No big skill in that, and I cannot be impressed by modern day basketball because of this.

This is the investor with the big income who buys a truckload..

But to see a 5' 10" guy dunk a basketball...now yer talkin'.

This is the single mother on a pension investor who accumulates 6 IP's.

Dazz answered my question pretty well before.

But was able to do without focussing on the guy's supposed high income and therefore ability to accumulate being easier.

Rather, I got the impression from Dazz, that an alternative may have been to buy more wisely since the ability was there and with the same amount of salary money invested over the same time, be in a safer position with regards to yield.

The issue of high income investors vs. single mothers on a pension is a whole different an irrelevant story which could be discussed in more depth in its own topic probably.

 

[BayView]

Rather, I got the impression from Dazz, that an alternative may have been to buy more wisely since the ability was there and with the same amount of salary money invested over the same time, be in a safer position with regards to yield.

I agree totally.

Just becuase you have the means to buy (more) expensive neg cashflow properties, doesn't mean that you should, or that they are a good investment.

I knew a doctor who lives in Kew, who bought the vacant land next door as an investment.

$700k he paid I think from memory, and there is no rent or tax deductions on it.

Why buy it? because he could.

I can think of a few better ways to invest $700k.

Now, he may see good cap growth with it, but what's the interest bill going to be like?

That'd keep him working for many years out of necessity rather than choice.

 

[skater]

I agree totally.

Me too!

 

[jaycee]

I agree totally.

Just becuase you have the means to buy (more) expensive neg cashflow properties, doesn't mean that you should, or that they are a good investment.

I knew a doctor who lives in Kew, who bought the vacant land next door as an investment.

$700k he paid I think from memory, and there is no rent or tax deductions on it.

Why buy it? because he could.

I can think of a few better ways to invest $700k.

Now, he may see good cap growth with it, but what's the interest bill going to be like?

That'd keep him working for many years out of necessity rather than choice.

They can't all be wise investors who know everything now can they. I mean what did you expect, he is a high income earner after all hey ?

 

[redwing]

Read another interesting story today in YIP Magazine about a couple who turned $100,000 into a profitable $11M Property Portfolio over the last ten years

There was also an earlier article located for the couple listed on RP Data in 2007 showing they were at $7M at that point in thier journey

2007

Suzette and Tony Mackley
Net worth: $5.2 million
Suzette and Tony began investing together in 1998 on Queensland’s Gold Coast. They started out small, buying a single unit and then stepping up to a pair of townhouses.

"It was advertised as ‘renovate or demolish’ – and it stank. We worked six days a week on it to get it ready for rental as quickly as possible," Suzette says.

From those humble beginnings, using a strategy of buy, renovate and hold, Suzette and Tony have amassed property worth more than $7 million

 

[Ridin-High]

Read another interesting story today in YIP Magazine about a couple who turned $100,000 into a profitable $11 M Property Portfolio over the last ten years

There was also an earlier article located for the couple listed on RP Data in 2007 showing they were at $7M at that point in thier journey

Yeah don't know the story of that couple

But high income DINK's can mass a serious amount of property quickly.

Im not high income, but if i was still with my ex and we went hell for broke buying property. would have a portfolio gross value around 2.6m+ and thats in 2yrs. Wouldnt be bad for a couple in early 20's

 

[wobbycarly]

Read another interesting story today in YIP Magazine about a couple who turned $100,000 into a profitable $11M Property Portfolio over the last ten years

There was also an earlier article located for the couple listed on RP Data in 2007 showing they were at $7M at that point in thier journey

Looking forward to reading that one. It's still sitting in plastic beside the bed - I am really getting behind in my reading!