Getting started

[pete_w]

so ... nows not a good time to be getting into IP, yields are low, potential for CG is fairly slim (overall).

but im going to do it anyway

theres lots of reasons why ... im pretty cashed up, good servicability, young and foolish

however, i dont want to be stuck servicing a bunch of negatively geared IP's for the next 5+ years with no return (little cg). so, i figure if i put enough cash into them to keep my LVR at 50% - 60%, even with low yields they should be cf neutral or maybe slightly cf -ve which is ok. cf -ve to the tune of $5 - $10k pa is ok, but i wouldnt want to be paying $30k pa, at this point in time.

if, in a few years, yields improve, i can redraw on the equity raising my lvr to about 80% (say), to purchase more, as it becomes more attractive.

time frames are purchasing in 6 - 12 months, then in a few years look at more agressive gearing. i can hold them for 40 - 50 years if need be (assuming i can service them), so in the long term a few years of low yields wont really bother me. the market is quiet at the moment, which means theres less pressure, which for the unexperienced like me, i see as a plus.

what do you think of this as a general plan?

 

[alexlee]

Sounds like a good plan, Pete. My own advice would be to go do it. Start looking at properties, meet the people, etc. It's great to map things out on paper but nothing beats going out there and plunking some money down.

By the way, if you put in enough money to drop your LVR, you're basically saying that the 'return' you get for the higher deposit (what you save on interest, say 6.5%) is better than any alternative return you can get with the money.

Personal preference, but I tend to keep my LVR reasonably high (70%) and buy shares and other investments with the spare cash I have. Say you bought CBA shares, you would be earning a higher return than the 6.5% you would save on bank interest. Plus you get diversification between shares and property.

In other words, you counter -ve CF from properties with dividend income. There are good investments that yield higher than mortgage rates (some corporate bonds, for example).
Alex

 

[pete_w]

thanks. that is a good point, and i have thought about it myself quite a bit. i would agree that over the long term, shares provide better returns than residential property.

however, the use of gearing in property is less risky than gearing into shares, as there is an underlying tangible asset, and a greater level of control. it is the (relatively) safe gearing property permits that makes it attractive compared to shares. with an lvr of 50% im not taking as much advantage of this as possible, but im ok with that for now. the risk/return of property is attractive to me at this stage.

secondly, im a control freak, and i just dont have the level of understanding about the share market i would like to have to feel comfortable investing in it. im working on that though i also have perhaps a third of my assets in shares, which i may or may not cash out to get into property (probably not though), and exposure via my admittedly tiny super balance. i am not to sure on the returns from the sharemarket over the next few years, i have some ideas, i could be wrong or right, but untill i can make an educated guess im steering clear.

in a few years (3-4) i would like to perhaps go back overseas to work for a few years. basically im trying to set things up so i can still be young and dumb, but know ill have something to fall back on, if things dont work out.

 

[alexlee]

Actually I was talking about buying shares straight (no gearing). Personally, I don't like the risk of gearing into shares. If you take gearing into account, the Return on Cash (i.e. return on how much you put in yourself) is much better for property.
Alex

 

[tubs]

Your Plan

Sorry Peter, but your plan to keep your LVR low seems to have a few fundamental flaws (IN MY OPINION ONLY!)

- It will eliminate (or severely reduce) the leverage that property investing provides. In other words, I can put in $10k for a deposit and $10k for costs and purchase a $100k property for $20k, so I am controlling $5 for every $1 I put in. This makes much more sense than controlling $2 for every $1 which you have suggested.
- You wont get any negative gearing benefits from the govt. I know that tax benefits are not why you invest, but wouldnt you be better to get a high LVR property, keep the rest of your money as cash and use this cash to cover what the government wont pay? IE, you go negative, have $3000 in deductions in a year, the governmetn pays you $1500 and you pay the other $1500 out of the cash you have left over. You'd be $1500 better off.
- Oh, and finally, if you dont want more than one property then at least get a high LVR property and if you want to artificially create a low LVR, then put the rest of your money in an offset. So you'd borrow 80%-90%, attach an offset to the loan to reduce the interest and then when you wanted to buy another one, just take the money from your offset and save refinancing and valuation costs. Plus this is really flexible, because you can take the money out when YOU choose, not when the bank LETS you.

Just my 2c.

Good luck

Tubs

PS I think this is a fantastic time to buy because there are so many people out there trying to sell.

 

[pete_w]

thanks for your input tubs!

- It will eliminate (or severely reduce) the leverage that property investing provides. In other words, I can put in $10k for a deposit and $10k for costs and purchase a $100k property for $20k, so I am controlling $5 for every $1 I put in. This makes much more sense than controlling $2 for every $1 which you have suggested.

yes, thats true. $100k at 50% lvr on a property returning 6% is only as good as $50k in shares returning 12%. however for me its a risk thing. unless i know what im doing theres no guarentee the shares will return 12%, they could drop to 0. theres no guarentee with property either, but at least ill have land and a house that has some tangible value. also, i wont keep it like that forever, once yields improve and/or there evidence of another cg boom coming, i will take that equity out to buy more property and get the full advantage of gearing.

your comment on the 80%-90% lvr with the offset is a good idea. i have the serviceability to do this, i just dont want to be "trapped" servicing loans for years waiting for the market to pick up. hence putting in the extra cash to bring the lvr down. i wil investigate doing it as you said though, my plan was to revalue and refinance, but that is a much better idea, thanks!

i see ng as a perk, and i expect to make use of it, i jsut dont want to be massively negatively geared, untill things pick up at least. however im just trying to cover my arse, while i get my feet wet, so to speak.

 

[keithj]

yes, thats true. $100k at 50% lvr on a property returning 6% is only as good as $50k in shares returning 12%. however for me its a risk thing. unless i know what im doing theres no guarentee the shares will return 12%, they could drop to 0. theres no guarentee with property either, but at least ill have land and a house that has some tangible value. also, i wont keep it like that forever, once yields improve and/or there evidence of another cg boom coming, i will take that equity out to buy more property and get the full advantage of gearing.

Hi Pete,

It's natural to concerned about shares losing 100% of their value (HIH,Enron,Worldcom....). If you buy index funds you'll only lose 100% if capitalism (& all the top 200 listed companies) fails!. You can also buy LPT index funds which currently yield around 7.3%. Index funds have a max gearing of 70%.

I structure my portfolio by borrowing as heavily as possibly against all IPs, & investing any available cash into shares/index funds/LPTs. I have a v. conservatively geared (25-40%) margin loan that I use like a LOC/offset a/c.

Of course, the structure didn't start off like this, but as previous posters have mentioned borrow to the max even if you don't plan to use it today.

KJ

 

[Bear924]

Just in case you've missed it:

If you have any consumer debt (which may include your PPOR) it may be worthwhile getting rid of that.

Personal car loan at 10%, paid with after tax dollars taxed at 50%
equates to an equivalent return of 20% to beat the return.

PPOR at 7.5%, paid with after tax dollars taxed at 50%
equates to an equivalent return of 15% - risk free.

 

[pete_w]

thanks guys

i have been lucky enough to avoid any consumer debt, no ppor and no real desire for one at this stage. index funds look interesting, overall im a big believer in them but im not too sure what the returns will be from the sharemarket will be over the next few years. if i do go that way, i guess it would be better to trickle the money in over a period of time to get the most out of dollar cost averaging.

thanks again!

 

[pete_w]

you know ... i really like property cause i see all these pictures of smiling, err well fed people at the meets (no offence!). makes a change from pictures of strung out and skinny day traders. the proof is in the pudding, as they say