How I got from just a PPOR to multi millionaire retiree in 5 years using only OPM.

[BV]

Keith,
I forgot to ask you what your future plans are in regards to the stocks you are holding.
Some experts predict that the stock market is overvalued and that it is a matter of time
before a large correction comes. Have you started to move some of your funds
away from the stock market and into other investments?
Cheers

 

[ralph wiggum]

G'Day Keith
Like everyone else, I would like to congratulate you on a great achievement so far.
My question refers to the early stage of the process when you were accumulating IPs. Was servicability an issue with the banks? Sure there ewas plenty of equity with rapidly increasing values, but from my experiences, banks get very hesitant to lend if there is a concern with serviceability.
What income do you consider is sufficient to service a rapid accumulation of IPs on a similar scale to yours?

Cheers

 

[keithj]

It was easy to tell that you knew your stuff during some of those debates on LOE a while back. The only comment I can make here is that I thought you were a lot older than you actually are. It must of been your posts that sounded 'mature' (as in experienced from previous market performance).

I notice that you say IP in the not too distant future, myself, I am seeing property move in inner Melb, starting to in Syd, and constant growth in Brissy at present.

What are your thoughts on this current IP behaviour?? My take is that it may be a boom that no-one expects. But then again, doesn't that mark all booms?

Hi Bill,

I deliberately made the paragragh on the IP wealth creation bit v. short, not only everyone here is familiar with it & should be doing it, but also because I don't really consider myself an IP expert. I'm sure the majority here are more knowledgable than me regarding IP - I rarely respond to posts re IP. Regarding IP, I practice the 80/20 rule - 20% effort gets 80% of the results - the rising tide. I put 20% effort into shares & achieve similar results. The other 60% is spread between structure (LOE, asset allocation,etc), risk management and timing. My school reports invariably said, 'must try harder', 'could do well if he applied himself', etc

I spent a while away from SS, but the reason for my return was that the ASX had doubled in a short period (time to rebalance?) with increased volatility (investors getting worried?), rents were increasing rapidly, interest rates rising - is IP nirvana approaching ?????. And the most reliable place to find out if IP was good value again is of course SS.

As a 'value oriented market timer', I like the threads about yields & reasons for growth. Good yields means good value and that means less risk - Buffet would call it margin of safety.

And for a long time, I've looked at London/NY prices & compared with Syd etc and asked WHY? See Germany, Japan, China better value than Oz thread. Historically, ASX has always traded at a discount to the world, now it's on a par. Maybe IP will follow ? I think it's mostly a sentiment thing - and that's v. hard to predict. But if you're not in the game you ain't gunna win it.

As you say, Adelaide, Bris & Inner Melb are growing. However, that isn't one of the things I place highly on my list of investing criteria - not directly anyway.

The 4 criteria I use when investing -

1. compare asset to other asset class (shares or IP)
2. compare asset to it's previous yield/earnings
3. compare asset to forecast earnings (this is more relevant to shares)
4. compare asset to similar assets in other countries (this is more relevant to shares)

The way I see it.....

1. Shares are still better value IMO. But that is beoming a closer call.
2. Yields are creeping back up.
3. Low vacancies everywhere - rents will rise more.
4. Oz IP is still fairly expensive - but that doesn't really matter to much.

Risk is usually pretty low when a couple of these things coincide. And after that happens.... growth often occurs, even if it doesn't it's probably not costing anything to just hold & wait. Of course, growth does occur at other times, but (because I'm lazy?) it's hard for predict.

So the bottom line is 'I don't know', but I'm keeping a much closer eye one things ATM - And I REALLY LIKE the threads on yields & reasons for potential growth in suburbs - hint hint.

Cheers Keith

 

[keithj]

Some experts predict that the stock market is overvalued and that it is a matter of time before a large correction comes. Have you started to move some of your funds away from the stock market and into other investments?

Hi BV,

I agree it is only a matter of time, but how long ? I reckon between 6 months & 3 years - I'm keeping a close eye on things. Earnings have driven price gains over the past 3 years. Sentiment will drive the next gains - that'll give PE expansion & increase risk. I assuming earning won't grow much, but it'd be nice to be wrong.

I'd feel really bad selling quality shares which have increased 100%+ & paying CGT. Their earnings are unlikely to fall - they'll probably stay steady. Also, my margin LVR is v. conservative.

Remember I mentioned under the heading "Things that didn't work that well' was Options. I'll sell calls & buy puts. It wasn't the right time for that strategy back then, but I learnt a lot & it will be useful in the next correction.

Cheers Keith

 

[MJK]

Thanks for your post Keith. I was inspired by your strategies which you have discussed in previous posts as well.

I am doing pretty much the same but predominantly use managed funds rather than direct shares. This may have cost me a bit I suppose but I am getting +20% per annum over the last few years.

My mantra - property for capital growth
Shares & MF's for income

I note you dont use LOC but rather margin loan. I would have thought you'd use LOC to get the equity out of the IP's?

Then Margin to work the shares, capitalisation and income?
Margin loans are a beautiful thing with no limit to borrowings except equity and no need for continual applications and...capitalisation being the norm for this product.

Curious to know what sort of rate you are getting on your margin. I'm geting 8.35% whereas Im getting 7.3-7.4% on my LOC's.

MJK

 

[willair]

I agree it is only a matter of time, but how long ? I reckon between 6 months & 3 years - I'm keeping a close eye on things. Earnings have driven price gains over the past 3 years. Sentiment will drive the next gains -
I'd feel really bad selling quality shares which have increased 100%+ & paying CGT. Their earnings are unlikely to fall - they'll probably stay steady. Also, my margin LVR is v. conservative.

Well done, but more importantly i,m impressed not everyone can
copy what you have done over the past few years,and do the
same over the next 3 years,I would not worry too much about
the shares markets we are still holding everything, and the way
property values are starting to run
upwards again in Brisbane the big bust that everyone has talked
about for the past 3 years may never happen,and if it ever does
the high end Blue Chips never stay down for long.........
good luck willair..........

 

[MichaelW]

Well done mate!

As you're probably aware, I'm trying to follow a similar balanced strategy approach between IPs and shares. Your timing has been better than mine and as a result the rising tide has served you very well. I'm still heavily invested in shares and reckon they've got some legs yet. All blue chip ASX200 stuff, but lazy me did it through the you-know-who's managed fund.

I agree that property is starting to look good again too. My lack of equity meant I couldn't buy as much as I'd like in today's market though so I'm doing my development so I can basically hold more than I otherwise could buy if I was just paying retail. By the middle to end of next year my build should be finished and my property holdings should be around the $3.5M mark in Sydney. That's considerably more than my $1M in shares, but that's about the right sort of mix for me at the moment for my cash flow needs. I prefer property for growth (as per my sig) so only buy shares if I need the cash flow supplement.

Time will tell if it pays off for me like it has for yours truly, but as you rightly pointed out: you can't win the game if you don't play it.

Thanks for the inspirational post and please do keep posting your views on where the relative markets are at. I'll take your hint and add my 2c worth when I see something interesting on that topic.

Kudos coming your way.

Cheers,
Michael.

 

[bort]

I've never had a LOC. I use my margin loan like a LOC.

do you run into problems mixing deductible and non deductible expenses in your margin loan?

 

[keithj]

My question refers to the early stage of the process when you were accumulating IPs. Was servicability an issue with the banks? Sure there ewas plenty of equity with rapidly increasing values, but from my experiences, banks get very hesitant to lend if there is a concern with serviceability.
What income do you consider is sufficient to service a rapid accumulation of IPs on a similar scale to yours?

Hi Ralph,

Ther first couple were easy enough. Then it got harder. I investigated cashbonds, but they seems such a waste of equity - there had to be a better way.

Then I found out there were some lenders that didn't take margin loans into account when calculating liabilities, but DID take the dividend income into consideration. So I bought high yielding shares with the margin loan & capitalised the margin interest. I think I posted about this a looonnnng time ago. Servicability jumped.

Then lo-docs came along.......

I didn't mention my income in the first post because it wasn't actually relevant. Everything I did was good value & just about paid for itself straight away. That's a huge benefit of buying at the right time in the cycle. Shares paid for themselves from day 1 back in 2003.

Of course the banks only took 75% of rental income into account, so I did get frustrated, knowing I had the ability to service the debts, but being unable to convice them so.

I currently have a v. low income, due to LOE, so I still have servicability problems.... but Lo-docs at sensible rates is the way I'll go.

Cheers Keith

 

[simonjulie]

Finally
If in 2001 anyone had told me I'd be writing this story in 2007 I'd never have believed them. So to all the gunnas out there, I was once one of you, then I bought a really average IP at the asking price....

......and I apologise for the sensationalist title.

No need to apologise Keith these are the stories that people build their futures from. Kudos
We stuck with only property and our own strategy and we are still here at the other end ready and willing for the market to bring us all more wealth. Let the celebrations begin.
I raise my glass to the Keithjs of the world.
Cheers
Simon

 

[keithj]

do you run into problems mixing deductible and non deductible expenses in your margin loan?

Hi bort,

It's ALL deductible. When I have sold shares/IP I make a profit. The DT distributes the profits to me (I pay tax), & lend it back to the DT. When I need living expenses, the DT gives me the cash I need & it borrows more from the margin loan. This is what my accountant tells me happens. Practically speaking, I get onto Netbank and transfer from the DT a/c to my personal a/c - takes 10 secs. Currently the DT owes me $100Ks. When I pay rates, insurance or anything, the DT pays me for it & borrows the the funds from the margin loan. I maximise my borrowings & maximise my c/f.

Cheers Keith

 

[keithj]

I note you dont use LOC but rather margin loan. I would have thought you'd use LOC to get the equity out of the IP's?

Hi MJK,

LOCs are (or were) more expensive. I always maximise IP LVRs. So when I reval, I get another investment loan with the same lender for the difference. One prop currently has 3 loans against it - all different amounts, rates, fixed/var, inception dates.

One lender I use prefers to pay out the existing loan with the new bigger loan & put the difference into my margin a/c. This only works with var rates loans or at the end of a fixed rate loan, unless you want to pay break fees. And you only pay mortgage stamp duty on the difference.

Margin loans are a beautiful thing with no limit to borrowings except equity and no need for continual applications and...capitalisation being the norm for this product.

Curious to know what sort of rate you are getting on your margin. I'm geting 8.35% whereas Im getting 7.3-7.4% on my LOC's.

I agree - a beautiful thing. A 1 page application, 1 day for approval & the next day I can spend it. I have a fixed @ 7.45% & Var @ 8.15%. The fixed expires next month - they offered 7.7% for any term of 6 months to 3 yrs, but they'll always knock another 10bps off if you ask them nicely. I get a discount for borrowing lots. I think the blue-chip nature of the portfolio & low turnover helps.

Cheers Keith

 

[AndyB]

Keith,

Thanks a lot for sharing such an inspirational story. I congratulate you on having a basic strategy and sticking to your guns to reap the rewards. As far as luck goes, you created your own. Well done.

Regards
Andrew

 

[keithj]

Overall results been mixed - it's too hard to value a cpy with no history. WOW & CBA would have been exceptions, but they were before my time anyway.

I have probably bought into a dozen floats over the last 15 years and only lost money on T2. I generally went for the blue chip types which were always going to be safer.

Rivken's advice hasn't rung true for my experience.

Don't dismiss floats as all being the same.

Hi Simon,

I certainly not dismissing IPOs. I don't think I was v. clear earlier. When I said WOW & CBA were exceptions - I meant that they had a business history & therefore there was a basis for valuing them, unlike startups. I certainly didn't mean they were exceptions because they did well.

IPOs such at dotcom or spec miners or biotechs are what I consider to be gambling. Profitable cpys like Platinum, WOW, CBA, TLS are a completely different story. I shouldn't have lumped them all together under IPOs. Both you & TC have picked me up on it.

Good luck with the Platinum allocation,

Keith

 

[bort]

Hi bort,

It's ALL deductible. When I have sold shares/IP I make a profit. The DT distributes the profits to me (I pay tax), & lend it back to the DT. When I need living expenses, the DT gives me the cash I need & it borrows more from the margin loan. This is what my accountant tells me happens. Practically speaking, I get onto Netbank and transfer from the DT a/c to my personal a/c - takes 10 secs. Currently the DT owes me $100Ks. When I pay rates, insurance or anything, the DT pays me for it & borrows the the funds from the margin loan. I maximise my borrowings & maximise my c/f.

Cheers Keith

thanks keith, i have set up the exact same thing ... based on the same theory ...

 

[Kenster]

I agree - a beautiful thing. A 1 page application, 1 day for approval & the next day I can spend it. I have a fixed @ 7.45% & Var @ 8.15%. The fixed expires next month - they offered 7.7% for any term of 6 months to 3 yrs, but they'll always knock another 10bps off if you ask them nicely. I get a discount for borrowing lots. I think the blue-chip nature of the portfolio & low turnover helps.

I wonder where you have your margin loan with?

I'm currently with Comsec 8.65% variable (already have 0.25% discount - standard rate is 8.90%)

 

[topcropper]

Hi Simon,

I certainly not dismissing IPOs. I don't think I was v. clear earlier. When I said WOW & CBA were exceptions - I meant that they had a business history & therefore there was a basis for valuing them, unlike startups. I certainly didn't mean they were exceptions because they did well.

IPOs such at dotcom or spec miners or biotechs are what I consider to be gambling. Profitable cpys like Platinum, WOW, CBA, TLS are a completely different story. I shouldn't have lumped them all together under IPOs. Both you & TC have picked me up on it.

Keith

Yep. Gotcha there. When I think about all the IPO I took part in, they were all established businesses, or at least things that were easy to value and understand. WOW, CBA, TAB, TLS1 and 2 etc. Now platinum.

I could have had some tech IPO, but I didn't understand any of that stuff. I had an offer of E-corp, as I was a PBL shareholder. They floated at $2. I felt like a complete goose when they were at $8.

See ya's.

 

[handyandy]

Yep. Gotcha there. When I think about all the IPO I took part in, they were all established businesses, or at least things that were easy to value and understand. WOW, CBA, TAB, TLS1 and 2 etc. Now platinum.

I could have had some tech IPO, but I didn't understand any of that stuff. I had an offer of E-corp, as I was a PBL shareholder. They floated at $2. I felt like a complete goose when they were at $8.

See ya's.

One IPO that I should have participated in was the Cochlear float out of Dunlop Pacific, I think it was at $2 per share. The reason I didn't was that just my stuborness (I already held shares in the parent why should I have to pay again for part of my shareholding). Additionally, I had purchased another IPO out of the same company and it had done really badly (Can't remember what).

This would have fallen under your heaing of a new business so who was to know.

LOCs are (or were) more expensive. I always maximise IP LVRs. So when I reval, I get another investment loan with the same lender for the difference. One prop currently has 3 loans against it - all different amounts, rates, fixed/var, inception dates.

Interesting concept. I wouldn't have thought that this would be worthwhile with the extra bank fees etc. I guess it's not a problem huh

Cheers

 

[quoll]

thank you

Thanks Keith

Answered a few questions I have that I haven't asked of others as I've been to busy living and fighting fires.

Been too busy with business and not spending enough time on the big picture. Thanks for opening my eyes on just want can be accomplished.

Cheers
quoll

 

[keithj]

I wonder where you have your margin loan with?

I'm currently with Comsec 8.65% variable (already have 0.25% discount - standard rate is 8.90%)

Comsec too. Ask 'em for rates for $1M loan. See what they offer. I also pay $300pa for their wealth package which gives me a small discount.