high LVR

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From: Anonymous


I am looking for some advice from you well learned souls about high Loan to Value Ratios. My current LVR is 70% and I am looking at another property which will be financed 110% ie purchase price and all cost,
thus resulting in LVR of 81%. This new purchase, if goes ahead, will be our 3rd investment property in melbourne.

My accountant says the LVR is way too high and we should be concentrating on getting it down to 50% - basically by paying our princ residence off.

What have other people done in similar situations? Any thoughts...
 
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Reply: 1
From: Rae B


Hi Anon,

Depends on what you feel comfortable with. If you can sleep at night with a high LVR, then go for it. If not, then take your accountants advice.

I have recently bought my fourth property (which I live in half and rent the other half out) and my LVR is in the high 90's%.

I'm OK with this as the first three are IO loans fixed for 5yrs while the fourth is a variable P&I.

Hope this gives you some food for thought. All the best.

Rae
 
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Reply: 2
From: Geoff Whitfield


I'd concentrate on getting residence paid off, because the interest is non-deductible.

Once you start going over 80%, mortgage insurance starts to kick in. It can be worth it for a good property. I recently asked for a loan using 2 other properties cross-collaterised, total LVR of 3 properties would have been 90%- the mortgage insurance is based on the combined value ($850,000), and was going to be over $10,000. The deal was worth it- but it fell through.

This time around, my equity has increased so that I can increase my line of credit on house plus IP1 to 80%, giving me $40,000 to draw. I'm buying a property worth $280,000- using the $40,000 as 10% down pay plus acquisition costs. That means this property is not cross collaterised- there's only a single mortgage involved, so mortgage insurance is $3,100. Even then, by decreasing the loan from 90% to 89.9% takes the insurance down another step- to $2,600.

Check out your mortgage insurance- it may well be worth your while to structure it the same way. It has the additional advantage that your own home is free of encumbrance.

You're still borrowing 81%- even check if you can eliminate insurance completely by using a credit card to pay that 1%. When we bought our own house, we saved $2,000 in MI by paying out less than $3,000.
 
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Reply: 3
From: Don Fraser


I'd definitely be looking to pay your own residence down as quickly as possible.

But don't forget that going from an LVR of 80% to 90% roughly doubles the amount of property you can hold, and therefore your return(depending on cashflow). It will also double your losses if there are falls, but careful buying should reduce the risk of this. Mortgage insurance is quite a small impost in the whole scheme of things if you are want your portfolio to grow quickly.

My own LVR has come down from 100% four years ago to around 80%, which is where I feel comfortable and also achieve reasonable cashflow over all the properties, but if there was a good deal going or wind of a boom coming I would definitely increase it.
 
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Reply: 3.1
From: Donna L


I know people will shoot me down in
flames but I still wonder about the whole
"pay down your home as quickly as
possible thing". As I see it, once you have
got your first home down to around
60-70% LVR you start ploughing your
income and capital growth on the property
into the next. I know the interest on the
home is not tax-deductible but if I have $4
or $5k to spare a year I can support
another property (before deductions
negatively geared in Sydney). If I pay it off
my home loan - whoopee - I have
increased my equity by $4,000 which has
cost me $7 or $8k to pay. If I buy the IP
(say $200k) I could be looking at a
$10-20k capital growth, get a tax
deduction of $4k on the IP and pay this off
the home loan if I must. You can always
use offset accounts for the homeloan too
which gives you a bit of a boost.

With regard to LVR, I hover around the
70-80% mark, OK 81% if necessary. As
your property holdings increase the CG
should give you a 20% deposit every 1-3
years on average with a buy and hold
strategy. This will be largely determined
on your age and security of income and
rental income. You might want to get your
LVR down to 50% if you were about to
retire etc.

Just my two bob's worth. Works for me.
 
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Reply: 3.1.1
From: Geoff Whitfield


Donna,

Thanks for the comments. It's good to hear a different view from what I've been told for a long time.

I just played Cashflow 101 yesterday after a long break (with beginners). It was interesting to see the way different people played. Some tried to pay off all debt ASAP; others let the debt ride so they could afford the big deals when they came along. I'm not sure which would be the best long-term. I'd need to play both in real life before I really knew the answer.

My strategy in the game was to maximise debt- and I had some really good cards.

My theory in real life is to maximise debt- but, in real life, I'm much more cautious than that.

Certainly, given the choice between paying off a deductible debt and a non-deductible, there's no conflict at all.

And given the choice between doodads and non-deductible debt- well, I'd go for the doodads some of the time (otherwise, what's the point of money at all), but not as much as I used to.
 
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Reply: 3.1.1.1
From: Frank Shead


My 2 bobs worth is go for high mortgage without LMI (it's Possible) and pay out your home loan as Quick as possible because as Donna says you will have more equity to Purchase more IPs. With NMG of all those IP should have Home paid off in 5 years. You may need monitoring.

Frank
 
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Reply: 4
From: Rolf Latham


hI Anon

Maybe thats why your accountant is still practicing.

Sorry about being a bit though there, I find the advice of most of my clients get from their accountants is geared to managed funds or risk avoidance.

Most accountants manage their clients risks by avoiding the exposure totally. Cant go too wrong there cant you. Problem is your accountant will NOT pay your medical bills in retirement.

Really bad move in most cirumstances.

For all I know you may be a totally risk averse person. If this is the case then ignore all i have said.

However, I have found that many people that have a risk avoidance mentality are just transferring the risk.

To where you ask ?? Well imagine being 85 and needing a hip replacement and being asked to wait for two years ?? Wont happen to me ?? If youre 63 then your accountant is possibly right, if youre not 63 then.........

Get some people on your team that will uplift you and look at the potential you have in you, people that have an emotional and financial interest in you.

Off my soapbox now, PS I am not a licensed planner so please realise Im not offering Advice :eek:)

Ta

Rolf
 
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Reply: 3.1.1.1.1
From: Steve Piggott


Dont bother even owning your own home!!

There are as you know no taxation advantages other than zero CGT after the qualifying period. As for paying off your mortgage... just give it to me!! it will at least do me some good!! Seriously paying off your own mortgage is the worst advice !! Every dollar you put into your own home is wasted in terms of investor leverage and opportunity costs. Eg Work yourself to death and pay off your home in five years and then leverage the equity Vs. direct the same funds into IP's and leverage more property and widen your asset base. Is it better to own 100% of one property or leverage 5 properties with a 20% equity base?
I honestly dont know how people can ask 'beancounters' for investment advice when they are not specifically trained for investment analysis.
If you get 'advice' telling you to pay off your mortgage from an accountant.. get another one quick.. he/she will cost you a fortune!

Happy Investing Neb :)
 
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Reply: 4.1
From: Jeremy Laws


I only skimmed through all the replies except the first one. My thoughts:-
1) I am wealthier than just about any accountant I have ever dealt with, purely by not following their advice. If you want a reason NOT to do something you will ALWAYS find the reason from an accountant.
2) To pay off your home requires after tax dollars. ie to pay off $1.00 you must have earnt $2.00. If you buy more investment property and it costs you $1.00 you have only had to earn $.50. Its deductible in other words. Say you have a loan/home worth $300,000 on your current home. In 20 years when the property is worth at least $1.2m is it really a problem that you still owe 300k? Add to that the potential gain when you buy your other say 300k IP. Another $900,000 in capital growth! - will you make that from paying off your home sooner? I doubt it!
 
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Sim

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Cashflow 101 and percentages

Reply: 3.1.1.2
From: Sim' Hampel


(In response to Geoff Whitfield's post)

My experience with playing Cashflow 101 is that there tend to be two extremes of strategy that inexperienced players will take.

The cautious types will make a bit of money on some shares or some property trades - without taking too many risks. This money they then pour into paying off their debts, figuring that one of the best ways to make it easier to get out of the rat race is to decrease your expenses.

These people will generally get out of the rat race successfully - although they will rarely win the game with more experienced players around... this strategy simply takes too long.

Essentially this becomes like a retirement strategy... save a bit, decrease some expenses... eventually you will be able to stop work, but you will not have much time left in life. There should always be a time limit on the game, as there is a time limit on life. Failing to exit the ratrace before the time is up, is losing the game. So the slow strategy is a rather low percentage one.

The other strategy is the "gung-ho" strategy of gearing to the maximum, some even to the point of being in a negative cashflow situation (they borrow the downpayments on the properties) on the hope that they will be able to sell the property (or shares) at a good enough profit before they run out of cash.

If it works (depends on luck mostly - if your cards don't come up or you land on a nasty doodad - or get downsized - or have kids - or... etc.), then this strategy often will get you out of the ratrace quite quickly. However, in my experience it has a very high failure rate. Essentially you are gambling on getting good cards. In my view, this is not a high percentage play either.

Going bankrupt is not an option... you cannot just dust yourself off and start again. Once you are bankrupt you have lost any chance of winning the game.

The goal is to win the game... if you are not playing to win, then all strategies go out the window - and you may as well be playing solitaire. There is no point in playing a game not to win... if you never win you have never learned anything, so what was the point ?

Note that I am not talking about a "win at all costs" strategy... I'm just talking about goals - if you set a goal and then don't pursue it then you have already lost. I am also saying that "I'm just playing for fun" is a pathetic excuse - you can play to win and still play for fun.

However the "I'm playing to learn from others or to teach others - so the game is more the means than the end", excuse does have some merit ;-)

So anyway, assuming that we don't have a good excuse, and we are playing to win, and failure is not an option, then surely we want a high-percentage strategy.

Look at the bigger picture then... say if we play a tournament of 10 games. The aim of the game is to exit the rat race with the fewest number of turns within the allowed time. A scoring system is devised to allocate points based on how many turns it took people to get out of the ratrace. Of course, zero points are awarded for failing to get out within the time limit or for going bankrupt.

So, the goal is to get out quickly and get out frequently. Note that being the first out will not necessarily win you the tournament ! Also note that it has nothing to do with how much money you made when you got out !

Now the low percentage strategies will not serve you terribly well in this position, as you need to get out more times than you don't. Like tossing a coin (which relies purely on luck), if you only play one game you have a 50% chance of choosing the right side of the coin. If you play 2 games, you have 25% chance of choosing the right side both times. If you play 10 games, you have less than 1% chance of choosing the right side all 10 times.

So someone who goes through life using high risk and low percentage games and often goes bankrupt, dusts themselves off and starts again with another high risk low percentage strategy will most likely never succeed.

Now of course this is over simplifying, and hopefully people do "learn from their mistakes" along the way - thus increasing their percentage chance of success, but I hope you can see where I'm going with this line of thinking.

Surely if we come up with a high percentage strategy (remember that saving cash and paying off debt is NOT a high percentage strategy because it simply takes too long) for getting out of the ratrace before we are out of time (ie. too old), then even given some failures, we are much more likely to succeed.

So the obvious question remains... what are the high percentage strategies ?

Well... that's a topic for another post, but I will let you all in on a secret... I think that most of these "magical" high percentage strategies for real life have already been discussed right here on the forum, and our successful property "gurus" have been using them for years !

So what about high percentage strategies for winning Cashflow 101 ? Umm... I'll get back to you on that ;-)

*Sim' rushes off to practice his Cashflow 101 and to see if he can work out those high percentage strategies before someone challenges him to a tournament*

 
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Sim

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Reply: 4.1.1
From: Sim' Hampel


On 1/29/02 8:20:00 AM, Jeremy Laws wrote:
>
>2) To pay off your home
>requires after tax dollars. ie
>to pay off $1.00 you must have
>earnt $2.00. If you buy more
>investment property and it
>costs you $1.00 you have only
>had to earn $.50. Its
>deductible in other words.

Umm... actually this is not entirely correct (although the intent of what you were saying obviously was... the figures are a little misleading).

First of all you need to differentiate between "paying off" and "paying interest".

Paying off implies paying back principal - which is never tax deductible. Whether it is an IP or a PPOR... if you pay out of your own pocket you will always pay principal with after tax money - so to pay off $1 you must earn $2 - even for an IP ! Of course, you would have rental income to help you do that with an IP.

However, when it comes to paying off interest, for a PPOR, it is indeed the same, you must earn $2 to be able to pay $1 of interest.

For IPs however, you actually need to earn $1.33 to pay $1 of interest... earn $1.33, pay 66.6c in tax, which leaves you 66.6c to pay off interest, you then claim that as a deduction, which gives you 33.3c of your tax back, so you have $1.33 - 66.6c + 33.3c = approx $1 !

 
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Reply: 4.1.1.1
From: Duncan M


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Sim,

Whats your angle then? Pay off the PPOR or maintain it on an IO facility?

Duncan.

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<TITLE>RE: high LVR</TITLE>



Sim,


Whats your angle then? Pay off the PPOR or maintain it on an IO facility?


Duncan.




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Sim

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Reply: 4.1.1.1.1
From: Sim' Hampel


The answer to that really is "it depends". There are too many factors (many of them not financial related) which will affect the decision of whether to buy or pay off a PPOR or not.

I hate dealing in generalisations and assumptions - saying it is "always better" to take a particular strategy is rather short sighted. You need to look at the big picture, look at your current personal situation and your goals, and work out a plan. Then stick to the plan until your situation or goals change and you need to tweak the plan !

If we always did what was financially best for us, we would all still be living at home with our parents (in country SA where rent is cheap), perhaps married (if she earns enough money) but without kids (unless we can make money out of them - but isn't that illegal now ?), and we would never be spending any money on lifestyle.

 
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Cashflow 101 and percentages

Reply: 3.1.1.2.1
From: Felicity W.


I have found that my strategy for Cashflow 101 varies depending on which occupation I am playing with.
I find that it's actually easier to be one of the lower paid occupations. In that situation I don't usually worry too much about paying down the debt, just do a few good share or property deals and you can usually make it into the big deals cards and get out of the rat race.
With the high paying occupations, it's more crucial to get as many big deals happening as fast as you can. Then once you've got a lot of properties/businesses from big deals, and raised your passive income to a high level, sell off one or two of the lower income properties and use the proceeds to pay out enough debt to get you out.
It doesn't always work (and I borrow heavily when I pick up the $1/$5 shares cards, regardless of occupation!) but as a general rule of thumb it seems reasonably successful.
Keep smiling
Felicity :cool:
 
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Reply: 4.1.1.1.1.1
From: Jeremy Laws


Point was that you can afford to run at least another one (my guess 2-3) IP's for the cost of paying your own home off.
 
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Cashflow 101 and percentages

Reply: 3.1.1.2.2
From: Michael G


Sim,

I found when I last played 101 and was dealt the "Doctor" card I really had to get into the big deals fast.

getting alot of little deals was too slow, but getting that bargin 3/2 house gave you the cash to jump into the big deals quickly.

Unless the stock price was really good i.e. $1 or $5, it was hard to make good money quickly, besides the problem with investing alot of $ in mediocre stock prices was that you tied up a lot of $$ while waiting.

Businesses offered the best returns on investment for cashflow to get you out of the rat race.

While it was hard to get good returns on average properties, ones where the cashflow and profit meant it wasnt worth selling either way.

Ironically I got onto the fast track first with a sizable cashflow day, but didn't win because someone else on their first throw onto the fast track landed on their dream :p

I havent played 101 against a time limit, but I think that's the way to go, especially with players who already know the rules.

Michael G
 
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Reply: 4.1.1.1.1.1.1
From: Shaun Latham


I'm surprised that so many people have such high LVR's. We have been in a rising market for the last 6 years. The property I bought 5 years ago has more than doubled in price. Don't kill yourself paying off your own home. Let the market growth do it for you. i e build up equity in IP and pay out your home loan. We have reached the peak of the current cycle, but the underlying (long term) growth of property is usually about 8-9%. Don't forget the rule of 72. i e Capital growth of 7.2% doubles your money every 10 years. If you buy right you should not need to be so highly geared. I too borrow at 110%, but I usually buy at or below bank valuation.
 
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