Hi all,
Ahh hindsight, isn't it wonderful.
Steve's example,
"So for someone with $500,000 of equity available then to employ on a LOE structure . . . who had property worth for example 2,000,000 with $1,300,000 debt.
They might have purchased a $500,000 property in Brisbane. (($125,000 deposit and costs at 80%) and invested the balance of $375,000 into the fund with a 50% margin."
Now unless my maths is wrong, if you add the new $500,000 debt to the existing $1,300,000 debt, you get $1,800,000 debt against property of $2,000,000.
That would be 90% LVR. Did they get this loan on No-doc??? Please tell me where.
Then this bit....
"LOE would have provided an income of $75,000 per year."
Followed closely by.....
"The share fund would assuming reinvestment be worth $856,676. (Gain of $106,676 after the margin loan.)"
It is so nice to have your cake and eat it too.
But when I put your figures into a calculator, I get a different answer.
$375,000 at 7% (no-doc loan) = $26,250
$375,000 at 8.5% (margin loan) = $31,875
Total interest = $58,125
Fund return (Year 1) at 19.66% = $147,450
Net return after interest = $89,325
Minus $75,000 to LOE = $14,325
Now for year 2 add the $14,325 to the $750,000 = $765,325
Total interest for year 2 = $58,125
Fund return ( Year 2) at 19.66% = $150,266
Net return after interest = $92,141
Minus $75,000 to LOE = $17,141
Total gain in fund after LOE = $31,466 or 4.2% over 2 years.
Now if the fund keeps performing at 19.66% pa, the couple will be very happy.
Also what about if the couple had their property in Sydney and the purchased property in Melbourne, say at the new developments in either Heatherton or Mulgrave, but only purchased the new one at around the start of the fund in 2003. Would this change the rosy picture for the property growth at all???
Again, isn't it easy, no need to consider the downside, don't listen to anyone who would advocate a more conservative approach as they are just doomsayers, comes to the fore.
My beef has always been that the proponents of this strategy NEVER show that there is fire in the markets, and what could potentially happen if it didn't go according to plan( and I don't mean end of the world meltdown, just the type of correction that tends to happen every 10-15 years).
bye
P.S. (and it would be good if they got the numbers correct anyway)