How much debt is too much debt?

T

The_Bludger

First post guys and great forum. Why may you ask I am a bludger? Well, 5 years ago, I purchased my 1st IP. Since then, I have not bought anymore. I am annoyed with myself and I put it down to BLUDGING on the investment side of things and having interests elsewhere(not money making related!)...

Anyway, this year, my New Year Resolution is to get back into property investing and make up for lost ground. I guess I'm pretty new to the game, and want some advise. The property I purchased(along with my wife) 5 years ago cost us $337K. It's now worth $570K. A good return. But we still owe $232K on it, although we have $100K cash in the bank offsetting the lP loan(MISA account). So we're really only paying interest on $130K We own our own home worth about $600K. Rental property gets $300 per week. We have no other loans.

I'm on $105K pa and my wife earns $60K pa part time. Even though we earn ok money, I still feel that I have too much debt. Is there a formula or something I can use to work out what a "safe" debt might be. I realise this is different for everybody, but is there an accepted range that I should be looking at? I read Jan Somers about 5 years ago, lol, but as I said, have been a little inactive on the investing side of things.

Both wife and I have secure jobs.

Some direction\advise towards our future investing would be greatly appreciated.
 
Hiya

Welcome.

I think u have done ok..............quite ok, u own ur own home so thats a fantastic point to leverage from.

I would say a good yardstick will be how much can you afford each week to put into a new investment and/or are you ok to use some of your equity to cashflow some investments.

With a smart mix of some income producing funds and a few growth IPs u could get along really smartly IF that suited your risk profile

tarolf
 
Welcome to SS, Bludger!

Depends on the individual persons risk profile, their stage of life etc.

Generally speaking though, most people wouldn't feel too comfortable having debt greater than 80% of their asset values. People reaching retirement would probably be uncomfortable with more than 50%.

You have assets of $670k and debt of $232k - for me, that would be nowhere near enough debt, but I'm young. How old are you Bludger, and are you looking to retire soon?
 
steveadl said:
Generally speaking though, most people wouldn't feel too comfortable having debt greater than 80% of their asset values. People reaching retirement would probably be uncomfortable with more than 50%.
Click to expand...

So home(600K) + IP(560K) = $1.160M. 80% of that is $928K. So you'd be comfortable with that? Even 50% is $580K. Is that sort of debt ok with most here?
 
The_Bludger said:
So home(600K) + IP(560K) = $1.160M. 80% of that is $928K. So you'd be comfortable with that? Even 50% is $580K. Is that sort of debt ok with most here?
Click to expand...

Honestly, many of us have more, and at lower incomes than you and your wife. If you want to get rich in property, get used to it. It's just zeros.

Nothing wrong with debt as long as you can service it. After a certain point it's more about rent, dividends, etc than salary anyway.
Alex
 
The_Bludger said:
So home(600K) + IP(560K) = $1.160M. 80% of that is $928K. So you'd be comfortable with that? Even 50% is $580K. Is that sort of debt ok with most here?
Click to expand...

Oops, totally forgot to include your PPOR in my quick calculation! :eek:

You're still young, and on a great income. Your level of debt wouldn't phase me in the slightest. In your siutation, I would leveage into as big an asset base (property, funds etc) as you can comfortably service, and let it grow so you can retire wealthy and earlier than you planned. Debt is good as long as it's good debt (not for cars, boats etc) and you can service it.

Factors you would need to consider before loading up on more debt is the actual asset you are looking at (quality, growth prospects, yield), your income is stable and not in jeporady, budget for 2% increase in interest rates and make sure you are still happy with your overall situation.
 
Welcome to the forum. Thats a great position to be in at your age.

Its now a matter of working on getting a investment strategy or investment philosophy sorted. Then it is just a matter of repeating the same method over and over again.

Best of luck.
 
I agree with Alexee, you hardly have any debt at all relative to what you could have if you chose to be more agressive. If you are serious and want to aim for an early "retirement" - what ever that means, you need to start leveraging those lazy dollars. It heavily depends on your risk profile and your ability to "get over" owing money. Its the assets behind you that need to be taken into account as much as the debt, all this depends on your SANF and your perception of what the property market will do but if you hold for the long term, the debt you have now will seem insignificant in 20 yrs
cheers
pieman
 
Welcome bludger

We are in a similar economic situation as your are, have considerable more debt than you, but also control a bigger portfolio at a leverage of currently 60%.

My attitude to debt changed quite a bit after reading a bit of Bill Zheng's stuff (http://www.investorsdirect.com.au/bill_zheng.html). I like his explanations and concepts on property, finance and debt. Have a look at his articles and see what you think.

By the way we are not clients of his company or in any other way connected to him.

Cheers

kaf
 
The_Bludger said:
First post guys and great forum. Why may you ask I am a bludger? Well, 5 years ago, I purchased my 1st IP. Since then, I have not bought anymore. I am annoyed with myself and I put it down to BLUDGING on the investment side of things and having interests elsewhere(not money making related!)...

Anyway, this year, my New Year Resolution is to get back into property investing and make up for lost ground. I guess I'm pretty new to the game, and want some advise. The property I purchased(along with my wife) 5 years ago cost us $337K. It's now worth $570K. A good return. But we still owe $232K on it, although we have $100K cash in the bank offsetting the lP loan(MISA account). So we're really only paying interest on $130K We own our own home worth about $600K. Rental property gets $300 per week. We have no other loans.

I'm on $105K pa and my wife earns $60K pa part time. Even though we earn ok money, I still feel that I have too much debt. Is there a formula or something I can use to work out what a "safe" debt might be. I realise this is different for everybody, but is there an accepted range that I should be looking at? I read Jan Somers about 5 years ago, lol, but as I said, have been a little inactive on the investing side of things.

Both wife and I have secure jobs.

Some direction\advise towards our future investing would be greatly appreciated.
Click to expand...

Investable Income = (105,000 - 30,000) + (60,000 - 13,000) - 2 * 25, 000 = 72,000

Residence is dead money = not investable.

Assets = 570,000, total yield = (3% + (1 - 22.5%) * 7%) * 570,000 = 8.43% * 570,000 = 48,000

Liabilities: 130,000, cost 9% * 130,000 = 11,700

Cost of liabilities (9%) does not sufficiently exceed yield on assets (8.5%) to make stopping bludging profitable.

Putting investable income in superannuation to bring marginal tax rate down to 15% would be more profitable.
 
The_Bludger said:
I'm getting on... I'm 35, wife is 30. Looong time till retirement though.
Click to expand...


OH, PLEEEESE!!!!!

I'm 46 and the Minister for War is 36.

The level of debt is all relative.

As you acquire more cap growth, more rental income, and the LVR starts to drop, you become more comfortable with the numbers.

Pretty soon it is just a figure and the equation is what it is.
 
Hey Blud_ger

Dont look at debt in a negative way, if you can afford the repayments and upkeep, no debt is too much if used the right way.

We all know the difference between good and bad debt.

You make yourself rich by owing the bank money esp with property, you can leverage.
 
What is it about debt that scares you?

Maybe look at it this way. You have $1.160M property which you could conservatively lend up to 80% or $928K. You already have a loan for $232K, so that would leave available equity of $696K.

Lets assume you create a LOC for $696K against your existing properties.

You go out and buy another IP for $500K, to buy this you put down a 20% deposit + $25K costs from your LOC and take another loan out for $400K with another bank.

So you have used $125K of your LOC which means you would still have available funds of $571K.

Lets assume the yield on the property you buy is 4% you pay interest at 8% and other costs are about 1%, so you negative cashflow before tax would be about $25K, or after your tax refund about $15K a year.

Now rather than funding this $15K a year from your pocket, remember you still have $571K available in your LOC, why not use this to fund the $15K shortfall? It would take you about 38 years to use up the $571K LOC and by then the property would be well and truly cashflow positive, but how much would the property be worth????

This is pretty much along the lines of Michael Yardneys book 'how to grow a multi million dollar property portfolio in your spare time'. Or Ed Chans book "Wealth for Life" number 1 in most books shops.
 
[SIZE=""]I'm with the majority and think you can afford to be quite a lot more aggressive. We were on a similar income to you a couple of years ago - when we were about your age, actually - and felt quite comfortable with about $1.1M in debt (and less equity) at that time.

I'm also a fan of Bill Zheng, and recommend you get his special report at this link: http://www.investorsdirect.com.au/mailinglist/free_report.asp

And go to one of his seminars if you get the chance - he has a very different take on debt than some of the more conservative "gurus", and I love it!

Well done on getting yourselves in a great position from which to launch yourselves into financial freedom.[/SIZE]
 
Thank you so much everybody for your responses. You're a great bunch of people and very inspiring! I spent the most of yesterday reading the forums and went to bed at 3.00am! This stuff is addictive and I love it.

Willy1111, I've just been to two bookstores and I can't find those books you mentioned. Do you know where I can get them? "How to grow a multi million dollar property portfolio in your spare time" and "Wealth for Life"

There are many more questions I have in my head and I will try and search them online before hassling you guys again.

Ta.
 
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