Is there an optimum level of LVR?

I had two properties in which my LVR overall was 69%. I have just purchased my third by using some of the equity and got a loan for 90% on said property. This has brought my total LVR to 83%. My broker believes I should maintain a 90% LVR in order to "maximise" my accumulation of property.

I don't feel comfortable with this unless the cashflow from the properties can cover a certain portion of the debt every month (in the event I lose my job or whatever).

So my question here is, what % of overall LVR would the investors here feel comfortable with? Is 90% overall leaving little margin for errors? I won't be going for 90% overall, in fact I'm on my way to lowering the debt to about 70-75%.

Yes, the accumulation phase will be slower, but perhaps the point is that you actually REACH the end.

What are your thoughts?
 
Daniel I think you need to go with what you feel comfortable with. SANF is very important as you want to enjoy the journey as well as the destination.
 
yes depends on comfort level but personally if you max LVR while you can in terms of servicing limits and lenders etc then your portfolio grows much quicker, over time the LVR can slowly reduce.

I know many successful investors who started buying all properties at 100% ( the good old days) then moved to 95%, then 95% and now buy all properties at 80%.

good luck
 
I don't feel comfortable with this
Then don't do it.

However, I'd agree with your broker - maintaining a 90% LVR will assist in accumulating properties quicker (but will also add to the risk). If your not comfortable with a high LVR across your portfolio than stick with a lower ratio that gives you comfort.
 
Hi Daniel,

It really depends how quickly you want to get to your goals and your risk tolereance as others have said. Myself I am happy at 80% but would go to 97% if I came across a deal that would be a good buy or if I thought an area was about to boom.

Cheers
Paul.
 
80% avoids LMI but more importantly it avoids scrutiny by the mortgage insurers.

If you can handle 20% then this is as good an LVR as any.
 
There is nothing wrong with having a low LVR.
It's the way to build a solid and safe portfolio. It probably means it takes a bit longer to get a large portfolio, but you will probably have more disposable income along the way, and its much safer.
I prefer to keep my LVR between 45 and 70.
 
Hiya


I disagree with the general concensus presented here, for exactly the same reasons used for the lower lvr argument.

Logic would dictate the opposite view ..........often with this sort of thing when we remove any emotion and look at the facts different results emerge.........

If you are risk averse, take the LVR to 90 % ( notionally speaking, since I dont know your full details)

Place the spare cash into offset as buffer.

You have now transferred a fair bit of risk to the LMI provider for a moderate and depreciable fee. This provides lots of space for one of the risks u mention, loss of income.

I know this seems counter intuitive, but if you take a step back it works well in many ( but not all) circumstances.

I get the "low risk 70 to 80 % thing" all the time, with the argument being that "we can always refinance or top up to 90 % when we need to".

While that may be true, it can be like trying to buy life insurance after a terrible bunch of blood tests. Unless u have sufficient cash reserves on top of the 70 to 80 equity difference, you may get stuck, and the whole risk equation is now turned on its head.

yeah I know is sounds emotive........and its meant to, thats where the perspective of lots of client experience comes in useful..............I have seen the blind side to risk cost a lot more than it should have.

If your broker is suggesting you purchase more properties and run to 90 % lvr, well thats a diff thing altogether and there the comments made by all above apply.

In closing my rant, there is no optimum LVR, it is dependent on the clients circumstances and their actual rather than their perceived risk.

ta

rolf
 
Dan, you seem to be putting the cart before the horse to a degree.

The way I see it is your effective LVR should be subservient to cash flow.
It isn't your LVR that will get you into trouble, it is your cash flow.

Consider two scenarios where only rent and interest are the cash flows (all else is excluded)
A 75% LVR with a 3.5% gross yield is 10k -cf
A 75% LVR with a 5.5% gross yield is 10k +cf

So your risk analysis should be focused more on your cash flow -> normal and extraordinary outflows and hits to your inflows.

Only after you've analysed that, and put into place appropriate insurance, and contingencies for unemployment, injury and death, will you 'feel' differently to now.

I agree with Rolf that borrowing to a higher LVR now, ensures you have more options in the future. If you have enough cash now to afford a 75%LVR, then you can park your spare 20% in offsets.

Then, as Rolf says, if credit gets tighter in the future (lower LVRs), and you see a property you absolutely must have in 2012, then having a higher LVR now will give you the opportunity to purchase by tapping into the cash in your offsets.

If you stick with a lower total LVR now, and are faced with tighter LVRs in the future, you may not have the free cash to make that 2012 purchase.
 
I had two properties in which my LVR overall was 69%. I have just purchased my third by using some of the equity and got a loan for 90% on said property. This has brought my total LVR to 83%. My broker believes I should maintain a 90% LVR in order to "maximise" my accumulation of property.

I don't feel comfortable with this unless the cashflow from the properties can cover a certain portion of the debt every month (in the event I lose my job or whatever).

So my question here is, what % of overall LVR would the investors here feel comfortable with? Is 90% overall leaving little margin for errors? I won't be going for 90% overall, in fact I'm on my way to lowering the debt to about 70-75%.

Yes, the accumulation phase will be slower, but perhaps the point is that you actually REACH the end.

What are your thoughts?

Will the broker pay your loan repayments for you if you can't?

I agree with Winston:
"The way I see it is your effective LVR should be subservient to cash flow.
It isn't your LVR that will get you into trouble, it is your cash flow."

LVR only really becomes important when you
a) want to borrow more for another purchase
b) you are in financial trouble and need to sell a property TODAY.

In the a) scenario, if your LVR is at 90%, the Bank will probably say no.

In the b) scenario (current Melb prop market notwithstanding), someone is bound to offer more than 10% less than you are asking so to sell it quick you may need to accept their offer and end up with still owing money and nothing to show for it.

Everyone has to start with high LVR's usually, but it should be a short term position, and work towards getting it down.

Keeping you LVR's lower is a good safety margin and allows you to keep buying - with safety.
 
i am with Rolf as well,

LVR does not get u into trouble, cashflow does, low lvr protects the bank not u.

ur broker won't need to make your repayments if you keep cash back as a buffer, if you buy at 80% and use up all cash and something goes wrong u might have to ask him to!

If i was offered $100m in property and $110m in debt = LVR 110% and cashflow in offset account to hold it for 5 years i would say where do i sign

if i was offered $100m and $80m =80% in debt and no cashflow i would have to say no as i couldn't service to debt ( ignoring selling option to make a point)
 
If i was offered $100m in property and $110m in debt = LVR 110% and cashflow in offset account to hold it for 5 years i would say where do i sign

The bank may decide to sell your loan to me for $80m (or less) and I would then issue you with a margin call for the difference between loan and valuation, say $90m.
Either you put up $20m or it goes for sale, and anything >$80m (+ costs) is profit.
Or I just repo and bankrupt you.

DanielG it's an ever changing see-saw where optimal values vary depending on both economic factors and your own personal factors.
 
With reference to Rolf's idea of borrowing more than you need and putting the extra into an offset...... there are extra costs, namely LMI, in going above 80% LVR. For example, if someone was on 80% LVR and had no spare cash, then it does make sense to go above 80% to have cash on hand. Obviously equity isn't always accessible as we've experienced recently.

However, if your LVR is say 60% and you've refinanced to 80% and have 20% in offsets, does it make sense to refinance to 90% and pay LMI, when the extra 10% doesn't make much of a difference given the buffer you have already?

Different circumstances for everyone, obviously. It depends on whether you have other income sources, what you can save from your job, how secure your job is, etc.
 
My optimum level of LVR for new purchases is no greater than 80 on full purchase price borrowings.. My optimum level for portfolio LVR is sub 50 to LOE.
 
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