Bill, Bill, Bill,
Thanks for getting back to me..........always a pleasure.
Bill.L said:
Do you really need to attack the messenger
Ahhh......you didn't disappoint again Bill........bless you.....there's an old favourite.
Ok Bill, I think it's apparent this will go round and round in circles with little resolution and I for one don't have the time........so one last time.......
If I understand you correctly, you'd like me to list ALL the risks and then eliminate them one by one for you?
Ok.......lets go back to my example which you are so fond of ridiculing.
Wouldn't you agree that a number of the 'risks' could probably be all but eliminated with adequate cashflow reserves? (Don't worry....it was only a retorical question......I don't expect you to agree with any of this.
).
In the example, I tried to display one way the couple could get the desired cashflow but you're quite right there was a couple of reasons I didn't want them to simply sell the properties and invest the money.
The first reason was to give a
little 'backup cashflow' that I didn't even include in my original LOE annual income of $120K pa. It's simply there to reduce risk.
Let's not forget that because they still have these properties, they
also still have the $55.5K NET coming in from rent and this is indexed for life. This is a 'little extra' I didn't include.
Actually, since we were really only meant to find $100K pa for them, we now have $75K pa indexed ($20K + $55K) extra as a 'bit of a backup'.
Now I suppose we could simply put this $75K pa in a Bank Term Deposit each year and get some interest as well to cover emergencies. However, as you've clearly stated, banks can be unreliable places......afterall they've been known to go broke someplaces in the world and therefore I guess this is yet another risk you'd like me to cater for.
Instead, let's get a large tin box.......... which for want of a better name we'll call 'Bill's Buffer Box' ..........and we'll bury the money in the backyard. As the rents etc come in we'll dig it up and put the money in the box.
The purposes of the money in the box is to help cover crook events that may occur every 10-15 years. That should give us up to the $750K-$1.125mil range in the box to help with 'incidentals'.
The second reason I didn't really want them to sell their property assets was also to help reduce future risk.
As you quite rightly stated, this couple could live for another 35-40 years......
How about we be pessemistic for a change and assume they only live for another 35 years? Remember they are starting with $2.27mil in property.
If we project an historicaly known property growth rate of 7% compound on their $2.27mil property portfolio for 35 years it would mean that this same property portfolio
could be worth approx. $25mil in 35 years time.
Now I guess your risk is that there will be
no property growth for the next 35 years so in all probability the potential Capital Gain will be somewhere between $0 and $25mil.
How about for the sake of argument we at least split the difference and say a potential Capital Gain of $12.5mil is quite possible in this 35 year period?
Up to $12.5mil in additional equity may also help to reduce the odd risk along the path in the future ..........
I'm sorry Bill, I guess I can't eliminate all investment risk for you, but neither do I think we are ignoring
reasonable risk.
Buying a business is a risk.......the young married couple buying a house is a risk........anyone who has ever had a mortgage has probably run a risk of losing their job/income.........and on it goes.......life can be a risk........not ever taking a risk can be a risk.
As I said, I don't think we'll ever agree on this issue Bill........so be it.....