Increasing Portfolio

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From: Mike .


Choices
From: Mike
Date: 3/29/00
Time: 2:28:02 PM

Greetings all, just looking for a few opinions on my current situation.

I've been going a little berserk on the investment property scene over the past two years or so and at present things stand as such. I have 3 investment properties and a 4th currently being built & due for completion by 30.06.00.

Gross income from all 4 properties is 39K . Full debt exposure is 421K on a portfolio value of 600K (Based on conservative bank valuations) for a current LVR of 70%. Int. rates are all fixed for 5 years, shortest to mature in 3.5 years. Interest expenses are 34.3K with prop. Mangt. Exp. Of 5.8% (avg.).

The properties basically pay their own way with minimal input from me. I live rent free with friends earning 55K and have no other debts. I use depreciation and a 221D to maximise tax returns so I'm in a fairly enviable situation.

I have been sticking to a fairly strict saving regime for the past 12 months in an effort to save 35K to renovate my principal, inner city property. This plan requires 70K and I had intended to borrow half from my lender. Due to a somewhat austere lifestyle and a few speculative forays into the share market (not for the faint hearted let me tell you!), I should have very close to the required amount without having to approach my bank.

My rationale in renovating is that by spending the 70K, I will add at least 170K value to the house based on comparable sales. I have planned & costed the additions and will do the majority of work myself hence big savings. This scenario will drop my LVR to 57% and allow greater invest. flexibility with the bank.

My dilemma is that 35K could buy me another inner city property now (5.8% gross yield) or two new 3 b/rm homes in a large country city (8.4% gross yield) for a total outlay of 280K(less 35K deposit). This would bump my current LVR up to the high 70's. Serviceability is still well within limits and I maintain a safety net of 5% of full loan exposure in cash/stocks. Both options have great rental markets and good cap growth. Inner city option presents outstanding Cap Growth (20% present, 8.7% compound avg. over past 10 years). Tax benefits etc are also great.

Both the renovate/purchase scenarios have distinct benefits and any decision is based on a long-term outlook. The bank wants me to go Margin Lending with them (yeah yeah) but I am addicted to, & feel better with property. Any advise/opinions greatly appreciated.
 
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Les

Reply: 1
From: Mike .


Re: Choices - GREAT to have ;^)
From: Les
Date: 4/3/00
Time: 7:12:10 PM

Mike,

That is the kind of choice I would LOVE to have - and will, one day!! You appear to be setting yourself up big time, and good for you!!

Here is couple of opinions:-

I believe that GST is going to throw the cat amongst the pigeons with regard to new Real Estate - then add the "Olympics is all over now" factor, and I expect the housing industry will stagger a little. With lots of builders sitting around twiddling their thumbs, prices could drop to move product - and if THAT isn't enough to stimulate interest, then the Govt. will likely drop Interest Rates to get the wheels turning again.

So, considering your current position, I would opine that you do up the inner city property. And, if my prediction holds, you could likely pick up a couple more properties nearer the end of the year at around the same price anyway (or less?). And if I'm wrong (horrors :^( then you have added $170k to a Capital Growth giant - which then multiplies the future Capital Growth. And, you said it yourself, your LVR% drops to around 50% - which allows you some serious flexibility in arranging future finance.

I'm with you, too, over the Margin Loans - give me the steady pace of RE over the shares any day.

The only other thing that springs to mind is whether you SHOULD perhaps use OPM to do that renovation - the ROE will end up far better that way - but it would depend if these renovations will allow the rents to be bumped enough to offset the loan.

Do let us know what you choose, too. I would love to know just which way you decided to go. I want those choices in the future, so if I can learn from your successes, that's great.

Let's see what others say too

Regards, Les
 
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