How do you celebrate breaking the first $1m in debt?

[Piston Broke]

Yes Steveadl which is why i posted
"You can celebrate owning another property, IP etc but celebrating being
indebted to a bank?"
It this concept of "debt is good", when it is'nt really good, that i dont agree with. It's a cost, expense and risk of doing business while trying to increase your gains through leverage.
I'm sure many of those who had their IP's repoed thought it was good debt too.

Witzl, it's risk debt. And you will not know how risky it really was till a few years from now, unless you get margin called.
You are taking on risk, some call it making a gamble or educated guess, that your 8k yr wont end up being much more than that (it costs more than repayments to hold RE btw) and that your properties will fall in value below your loan amounts.

 

[Witzl]

well its less risk that sitting on my hands, or buying a brand new $50,000 car like most people my age. I fully understand and comprehend ALL risks, and have decided that this is still the best choice for me - and at just 27, its not like im in a succeed or perish situation.

The only risk i see is loss of job, but thats a risk to anyone in any position.
Margin calls on a property loan? This aint the sharemarket

Oh, and that $8k includes all costs, but excludes tax benefits. So the net position at the end of the year is actually only about $5600 negative.
Big whoop. I've spent more money than that in a year for booze and partying when i was younger.

 

[Rob Williams]

well its less risk that sitting on my hands, or buying a brand new $50,000 car like most people my age. I fully understand and comprehend ALL risks, and have decided that this is still the best choice for me - and at just 27, its not like im in a succeed or perish situation.

I agree. Even if something went terribly wrong and I lost all that I've accumulated over the last 2 years, I'll not be any worse of than the other guys I work with who have done nothing int he same timeframe. At least I will have had a go.

 

[BayView]

Witzl, it's risk debt. And you will not know how risky it really was till a few years from now, unless you get margin called.

There is risk, true.

But there is risk in driving a car, swimming in the surf etc.

The difference is managing risk. An experienced swimmer knows how to identify a rip. Knows when to stay away from very large waves and so on.

Part of this risk management is debt compared to asset value, and income compared to expenditure. You need to monitor them at all times and keep the levels correct.

Anyone who uses all their available equity in their one and only property - PPoR - on shares, which are more volatile than property, is not managing risk. But, people do it all the time.

It's not the DEBT that is the problem, it's the other factors associated with holding that debt.

A very highly skilled shares investor will have less risk than someone less experienced and skilled, but usually the highly skilled investor wouldn't put themselves in such a precarious situation. That's why they are experienced and skilled - risk management.

For me, who is only knowledgeable in property, I have no problems with being 5, 10, $20mill in debt with property. I know how to manage the risk well nowadays. The zeros on the end don't matter ultimately.

Having this much debt with solid risk management systems in place will accelerate your wealth, and with a high degree of safety.

For example; say you earn $100 p/w, but live on only $80 p/w, invest $10 and keep $10 for emergencies. This sounds like a smart financial practice, right? Of course it is, and we as individuals should follow it.

Now, add 5 zeros to that equation and make it a Company;

$10,000,000 p/w income from sales

$8,000,000 p/w business expenses (including loans; say 50% of the expenses)

$1,000,000 p/w for investing in the company in R&D, staff training, expansion etc. (Much of this would actually come under expenses, but let's call it investment).

$1,000,000 for emergencies. This emergency fund goes back into the debt, which can be utilised later if required should sales slump etc. This would be the LOC and/or Offset with a Re-draw account.

Imagine how profitable a company that makes this sort of income per week would be if they followed this risk management system religiously.

Would they ever go broke, even with debt repayment of $4 mill per week?

 

[Piston Broke]

The only risk i see is loss of job, but thats a risk to anyone in any position.
Margin calls on a property loan? This aint the sharemarket

So why are banks requiring that people sell down properties to payoff loans?
It's a margin call.

BayView there are many more variables than that in the equation.
And you make the very wrong assumption that nothing will change.
4mil wk in interest only is a loan of ~$2Bil @ ~10% interest.
Who will keep that loan going these days if your assets are only $500Mil?
Refer to Centro, RAT, Babcock etc etc
So yes they may go broke in a bear market.

 

[BayView]

So why are banks requiring that people sell down properties to payoff loans?
It's a margin call.

BayView there are many more variables than that in the equation.
And you make the very wrong assumption that nothing will change.
4mil wk in interest only is a loan of ~$2Bil @ ~10% interest.
Who will keep that loan going these days if your assets are only $500Mil?
Refer to Centro, RAT, Babcock etc etc
So yes they may go broke in a bear market.

I don't think a Bank would contact a client and ask for a property to be sold unless there were issues with their repayments.

It may also happen if the client was to try and do a refinance, or extend a line of credit, and when the Bank comes to do new valuations on the properties and it turns out that the property's value/s has/have dropped, creating an LVR over their criteria.

I realise my "model" for the company was simplistic, but you get my point I hope. Where did you get the $500 mill in assets from? We don't know waht the assets are, but the model assumes that the Company has built up their position to a point where the income is way more than enough to service the debt on whatever assets they hold. This is where many Companies and households fall over.

I've seen plenty of situations where successful, profitable companies take over a competitor that is actually making a loss. They do it to increase their market share etc, but in the process they break the rule of this simple model; they take on more debt, an asset that is actually a liability (costing, or losing money) and put their finance position under more stress.

If you take over or buy a company, you would want to make sure the nett return is well above the holding costs. Then it is an asset.

I never make an assumption that nothing will change - this is part of risk management.

But, if the Company operates their finances along these lines, you would have to assume that their Balance Sheet and Assets/Liabilities Statement should always look fairly healthy.

 

[Witzl]

So why are banks requiring that people sell down properties to payoff loans?
It's a margin call.

Got any real world examples of this, where the person has not had any issues making repayments? I'd be really keen to hear them.

I dont see why the bank would want to force you to sell when you are making repayments and EARNING THEM MONEY. If you sell and pay off your debt, you are no longer an income stream for the bank.
If the banks did this en mass, it would only serve to make things WORSE for them.... property values go down, more "margin calls", more forced sales, values go down more (self perpetuating falls)... and all the while the banks are earning less and less in mortgages as people have less and less mortgage debt.

The only situations I can think where it might actually happen are what Bayview has suggested... and i'm even sceptical of the bank forcing you to reduce your LVR if you asked for a refinance and found your property value had dropped.

Being a property investor means KNOWING YOUR MARKET, and thus you should bloody well know when your property has gone down in value, and thus not attempt to be revaluing it.... you'd only be attempting to reval when your experience and knowledge tells you that the value has gone UP.
I dunno about you... but i know full well the current market value of each of my 3 properties.
.... yet again, just another risk management strategy.


So, do you live in a bubble for fear of all the risks involved with living a fulfilled life? Have you avoided the opposite sex becuase of the risk of rejection?
Risks are risks. You calculate whether the benefits are worth the risk involved, and come up with strategies of how best to mitigate those risks and maximise reward.


Bayview,

I find your ideas intriguing, i'd like to subscribe to your newsletter.

 

[BayView]

Bayview,

I find your ideas intriguing, i'd like to subscribe to your newsletter.

What newsletter is this you refer to, Witzl?

 

[Witzl]

..... where are those pesky *simpsons quote* tags.....

 

[AlmostBob]

past six zeros

Today (Yesterday Oz time) we passed the $1million debt mark
$1 970 028 valuations
$1 124 505 debt

$845 523 equity

we went out to dinner

not to celebrate, eldest daughter bought us supper for driving her 100km to a small town to buy comic books,
collectibles
had a pub meal
disappointing, they burned the chips
BUT
great small town atmosphere, the Scouts charity auction was on, bought a shower tapset, and dog treats
decided just now this was a celebration

next closing 15 April 2009
its early spring, Property Season

 

[burty85]

Oh, and that $8k includes all costs, but excludes tax benefits. So the net position at the end of the year is actually only about $5600 negative.
Big whoop. I've spent more money than that in a year for booze and partying when i was younger.

Exactly where im coming from, over wasting money on point less nights out that I don’t remember and waste my whole weekend in bed sick the next day...

My mates think that I am stupid and that I cant do anything fun coz I own property, (rite now my property is putting money into my pocket).....I do go and do things that I enjoy but not every week and don’t cost me hundreds of dollars to do so,

Arrgghhh, this really annoyed me the other day at work. This is coming from a guy that I work with who is pissed off that the government won’t give his mother a pension coz all 6 kids now left home; well stuff me, why should tax payers support her laziness… some ppl just love to try and bleed the system, thinking that they are owed some thing, well wake up it not all rainbows and skittles

 

[Piston Broke]

Actually a few people have posted on this forum that banks have asked them to lower their LVR, which again is a margin call.
"KNOWING YOUR MARKET" is speculation and assumption. If a boom wave comes in and lifts your boat, then you "know your market" and your a RE expert.
If not, you hang on until the next wave lifts it, or a storm drowns you.
It's the same as buying the dips and dollar cost averaging, but the reality is you dont know how long or how deep the dip will be. You can only assume and guess.
I've seen the banking practices of the past, maybe you dont remember them o did'nt live thru them as an investor. At the moment they are not moving because it's not in their best interest, but that situ could change.
And I certainly agree on this point:
"You calculate whether the benefits are worth the risk involved, and come up with strategies of how best to mitigate those risks and maximise reward."


Bayview your "losing asset" seems a perfect definition of negative gearing, which could become a problem in a bear market.
But most who follow the speaking circuit gurus still believe it's "good debt".
That "good debt" will cost many thousands of families a half lifetime's of work.
The "it's better than buying booze" justification is just an excuse. Even though in theory I agree as someone who does'nt drink, smoke, gamble nor play lotteries of anykind.
But I still know plenty people who are high net worth and buy, and only drink, blue label by the box. It seems buying booze has worked for them so far.
And your the one making all the assumptions, I just added a crucial one.
And also you seem to forget that I've been harking low LVRs (because debt is not good, and worse in a downturn) for a long time now, while "experts" kept on saying the boom was about to start, or "we had a crash but did'nt know it" "it's always time to buy", it's all "good debt".
The last point that debt is good, is what I dont agree with.
Debt >50% LVR is a short term solution for long term plan. Well thats my opinion anyways.

all the best with your newsletter

 

[BayView]

Actually a few people have posted on this forum that banks have asked them to lower their LVR, which again is a margin call.

What was their LVR before the Bank called?

How did the Bank know their LVR was at whatever it was at?

 

[BayView]

My mates think that I am stupid and that I cant do anything fun coz I own property, (rite now my property is putting money into my pocket).....I do go and do things that I enjoy but not every week and don’t cost me hundreds of dollars to do so,

Not being part of the pack is tough sometimes, but rewarding in other ways.

 

[Token Funder]

Bizness. U are doing it wrong.

Scene 1
A boardroom in Sydney
Mid-morning

CEO: Thank you for you kind words, Chair, on what is a momentous day for the business. Today, I am pleased to announce that we have now reached the highest level of debt in the history of the company. Moreover, our assessment of the market suggests we are now carrying more debt than the majority of our competitors.

*CEO winks*

By a significant margin, in fact

CHAIR: WTF?

CEO: Well, we've issued a whole mess of bonds to buy some stuff and in doing so have more outstanding liabilities than you can poke a stick at. Our competitors are stunned.

*board members stare at each other, stunned*

BOARD MEMBER : Have you lost your freaking mind? Why the hell would we be celebrating piling on the debt?

CHAIR: *looking perplexed and seating slightly* Settle down there Bob, I'm sure Bill just isn't expressing himself clearly. Bill, seriously, WTF?

CEO: Well, I can make it any clearer than I have. We've got shitloads more debt!!

CHAIR: Which is good why?!!

CEO: Well be must be in spectacularly good shape, otherwise we couldn't have convinced anyone to accept the IOUs, mate. It's the KPI everyone's using these days.

CHAIR: For Chrissake Bill. The shareholders only give a **** about yield and growth. They're not stupid. What will this increased debt level be delivering in terms of the numbers that matter?

CEO: I'm not sure I understand?

CHAIR: There's the problem right there, Bill.

CEO: I'll get my coat.

 

[vincenzo]

CHAIR: Where are you going?

CEO: I'm off to celebrate over $1mil in debt with my fellow ponzi specufestors.

CHAIR: Ummm, why

CEO: We find it funny, and laugh at the amount of debt we have, because it has bought us many profitable assets, which are worth so much more, but damn, 1 million dollars has a nice ring to it. Just come along and have a beer, you might enjoy yourself!

CHAIR: Ok this is a bizness meeting, i will be claiming my beer.

CEO: Good boy