LOE Model

[landlubber]

Don't you think this conversation resembles the ones where people tell resi IP investors that they're going to be killed by the coming high interest rates and price crashes?

I hope not Alex. Because I do know associates who would be considered pretty astute business people & who were solely CIP investors (quite large ones in Melbourne) and lost their houses in the early 90's. When it happens, it's not pretty.

There's also (older) blokes in the CIP business, like Chris Lang who have lived through these periods and who tell the sad tales of those times...if you listen.
http://gal.com.au/

To me, this is not "chicken little" as your post may imply. It's educating yourself & keeping you wits about you. It doesn't mean "stop", or even "don't go there". It just means know "the rules" and be aware of the risks.

Now Dazz says "Bollocks to all that, come on in, the water's fine" and, based on his experience, I'm sure he's sincere.
LL

 

[Pete]

LOR might be great if you're portfolio is commercial IPs, AND you have them all rented. But the "risk" with CIP is loss of tenants and the long vacancies periods that can ensue in a downturn. With respect to Dazz, I admit in a boom economy like Perth the risks are possibly less, but in the "rest of the world" these risks are real and can wipe you out. If your portfolio is all resi IPs, you will need many, many years to achieve LOR IMO. If you think you have an XL spreadsheet that dis-proves this, feel free to PM me. I'm all resi & LOE and very happy with that situation.
LL

Hi, Landlubber

I'm pleased that you're LOE & very happy. Well done: it is a commendable achievement.

I'm responding to the comment that one needs many, many years to achieve LOR. In both this thread and another (post #25 yesterday in this thread http://www.somersoft.com/forums/showthread.php?t=64532)

Please don't live with delusion. You are in the wrong business if you think you will EVER generate a taxable income of 250K from LOR. DO THE SUMS. Sit down and work out how many IPs you have to own to generate rents ( less 20% expenses) above your interest costs.

I subscribe to Australian Property Investor magazine. There was an article a while ago, that showed a couple in Port Hedland who, IIRC in about the previous 5 years had built a portfolio of residential properties that were returning IIRC M$1.7 p.a. Even after all expenses there was plenty of cash. If you like, I can find the article. I'm sure their name is Crawford and they have a RE agency that still advertises monthly in API. They were aged around 30, IIRC.

More recently the same magazine mentioned a former teacher who had purchased houses in the same area and was IIRC receiving k$400 per annum after all expenses, including tax. Again, IIRC, this had been achieved in about the previous 5 years.

It can be done, and it relatively short time frames. Please consider the above before repeating the "it can't be done" message.

regards,

 

[Dazz]

Now Dazz says "Bollocks to all that, come on in, the water's fine" and, based on his experience, I'm sure he's sincere.

No I'm not saying that at all.

What I'm saying is ;

"The individual title deed purchased is paramount."

"The individual loan contract terms and conditions are paramount."

"The minutae of the Lease wording is paramount."


What I also said was, yes it's a big bad nasty world out there, with Banks willing to hang you out to dry, and Purchaser's willing to eat you alive if they smell blood.


I'd fully encourage everyone to listen intently to the published authors who all say in unison that CIPs are very risky and loss of Tenant is devastating. They all give the massive subject about half a page, along with CFDs and other whacko investments, before moving on to tell you why baking a cake recipe is safe and secure. Less competition the better.


It's just sometimes I arc up when constantly reading these falsehoods (in my experience) portrayed as unquestionable gospel by folk who generally don't own any CIP, or if they do, it's some ratty little retail outlet with some one man band selling flowers or doll's clothes and on the brink of going to the wall.

 

[alexlee]

I hope not Alex. Because I do know associates who would be considered pretty astute business people & who were solely CIP investors (quite large ones in Melbourne) and lost their houses in the early 90's. When it happens, it's not pretty.

But surely there are plenty of stories about solely resi IP investors who lost everything as well?

To me, this is not "chicken little" as your post may imply. It's educating yourself & keeping you wits about you. It doesn't mean "stop", or even "don't go there". It just means know "the rules" and be aware of the risks.

Now Dazz says "Bollocks to all that, come on in, the water's fine" and, based on his experience, I'm sure he's sincere.
LL

I'm more implying that to someone who does it for real, there are 'built in' risk management (property selection, lease clauses, guarantees, and so on) that non-commercial investors don't know and don't understand?

I would think commercial is not a homogeneous asset class. In the same way as an off the plan highrise in the CBD is not the same as a 350k 3 bedder in an outer suburb?

 

[Dazz]

I would think commercial is not a homogeneous asset class

All of the below get lumped into the same pot and called CIP....and therefore risky. It simply just shows to me that the person writing that simply doesn't have a clue as to where to start.


Hotel in Hobart
Shipping container yard in North Fremantle
Office Block in Pitt Street Sydney CBD
Hospital in North Adelaide
Factory in Canning Vale
A Bank on Collins St
An orchard in Berri
Warehouse in Dandenong South
Backpackers in Woollongong
Nursery on the Sunshine Coast
A vineyard in the Hunter Valley
Storage Facility in Brisbane
Motel in Orange
TC's farm
Service Station on the Pacific Hwy in Albury
Wharf frontage in Newcastle
An airport in Esparance
A Council facility in Darwin
Cattle station south of Katherine



Anyone that says these somehow all act the same is talking out of their hat. It's such a vast, varied and unknown subject all within the realm of "property", but gets conveniently ignored most of the time in favour of houses and units....no-one has even scratched the surface.

 

[D.T.]

no-one has even scratched the surface.

Then I'm certain it's time to don your author hat, Mr Dazz.

 

[landlubber]

In response to Pete ....

It can be done, and it relatively short time frames. Please consider the above before repeating the "it can't be done" message.
regards,

Pete, I'm sorry, but I don't know what "IIRC" means ( and I thought I knew all the property acronyms used here). I also read API. I'm not familiar with these articles. I find when I read API articles IN DETAIL, the "numbers" for income, worth etc use a fair amount of journalistic licence. The first example you mention; an income of $1.7m; if from rents at 4% yield, would mean a portfolio of property worth $42.5 million. I don't recall that.

I also note, API "mixes" up income numbers. Some income is really from development or sales or sub-division or "one off" deals (means lots of work!)...not just passive buy/hold/rent.

I'm happy to comment further, either PM the details, or respond here. I can always learn something new.
LL

 

[wobbycarly]

Then I'm certain it's time to don your author hat, Mr Dazz.

Yeah, c'mon!!

 

[HiEquity]

Pete, I'm sorry, but I don't know what "IIRC" means

If I Recall Correctly

The first example you mention; an income of $1.7m; if from rents at 4% yield, would mean a portfolio of property worth $42.5 million. I don't recall that.

The portfolio in question yields circa 10% on today's values. Much more on original purchase prices. I don't remember much, if any, developing in the story. Just buy and hold... a very good strategy in Port Hedland and Karratha for quite some time now.

 

[WinstonWolfe]

I'd agree not all CIP is the same.....just look at GPT and WDC on the asx.

 

[Pete]

The first example you mention; an income of $1.7m; if from rents at 4% yield, would mean a portfolio of property worth $42.5 million. I don't recall that.

I also note, API "mixes" up income numbers. Some income is really from development or sales or sub-division or "one off" deals (means lots of work!)...not just passive buy/hold/rent.

I'm happy to comment further, either PM the details, or respond here. I can always learn something new.
LL

Sure. I'll have a look in the old mags. From memory it was a M$18 portfolio and 26 properties. I'll let you know how I go (finding the article).

regards

 

[landlubber]

If I Recall Correctly

Thankyou ! (I coudn't recall that acronym correctly. )

The portfolio in question yields circa 10% on today's values. Much more on original purchase prices. I don't remember much, if any, developing in the story. Just buy and hold... a very good strategy in Port Hedland and Karratha for quite some time now.

Even 10% yield values the flock at $17m. A good effort definitely. But do you think it's sustainable? or repeatable? for the "average Joe". It's like picking a winning share. It can happen, but it's very rare.
LL

 

[HiEquity]

Thankyou ! (I coudn't recall that acronym correctly. )

Even 10% yield values the flock at $17m. A good effort definitely. But do you think it's sustainable? or repeatable? for the "average Joe". It's like picking a winning share. It can happen, but it's very rare.
LL

I think there's a reasonable chance of it being sustainable.

I'm sure it's also repeatable, even if it maybe not in this location. Either way, I don't know "average Joe", only good and bad property investors...

 

[Pete]

A search just now didn't find the magazine. Though there is 'hole' in my collection for the first half of 2009. I can't find them, but they are sure to be about somewhere. Maybe it was published then?

Yes it is certainly a very special & rare result - and I hope yet to find the article to get a bit more understanding of the details. Whatever the details are, I'm sure they confirm that k$250 LOR can be achieved in a relatively short time. For sure it will not be be achievable by lots of "average Joes", but it can be done.

Repeatable, for sure. Sustainable, I don't know: though I guess so.

 

[Intrinsic_Value]

Dazz, these are some great posts on your behalf.

Please keep the 'general' details flowing, alot of people on this forum can bennefit from you knowledge.

Thanks again.

 

[VYBerlinaV8]

Sheesh - and I thought having $5M equity generating about $250k per year would be a huge achievement! There are some serious skills and committment from those who reach up inot the tens of millions.

 

[landlubber]

Maybe ....

I think there's a reasonable chance of it being sustainable.....I'm sure it's also repeatable, even if it maybe not in this location.

It seems this success story is based on "boom mining town" investments, some how. Whilst these obviously "work" I personally wouldn't be following them. Both nature & business abhor a vacuum and move to fill it. If it's a shortage of housing and/or an excess of demand that's caused the "bubble", sooner or later one parameter will change. This particular game favours the locals, who can monitor the situation constantly and react accordingly. You have to get in BEFORE the boom...and get OUT before the bust. Difficult to do from a distance. Not for me. But, hey, if you're a local & moreso if you're young and starting out...BLEEDIN' GO FOR IT !!
LL

 

[landlubber]

Sheesh - and I thought having $5M equity generating about $250k per year would be a huge achievement! There are some serious skills and committment from those who reach up inot the tens of millions.

VY, that is a huge achievement. Make no bones about it. But as long as you "built your house upon the rock" ...and not the sand. Today's boom mining town can so easily be tomorrows ghost town. Some one measures the "lead" content in the soil , someone says "asbestos" ...and it's all over. The Oz countryside is full of them. But a little house or apartment in the suburbs of a capital city ( or Dazz's rusty sheds on valuable blocks of land) will pretty much be a "thing of joy" forever. Yep. Conservative. I know.
LL

 

[Kinnon Bell]

Hi All, quick question in regards to the LOE model if I may. I'm fairly new to the world of property investing and still trying to get my head around everything.

As I understand it to LOE you do it by drawing down on your equity via a LOC loan? With my own experience of LOC with my bank it's an interest only loan for a fixed period of time, lets just say 5 years for argument's sake.

So, say I have a LOC for $100,000 at 7.41% (and again, for arguments sake, let's say it it's a fixed 7.41%), which over the 5 year term will generate approx $37,000 worth of interest. Are the extra interest payments covered by the existing cash flow of my properties. If so, why then can't I LOR? Or do I just use the LOC to cover its own interest payments so then the $100,000 turns into $63,000 worth of spendable money.

Also, what happens at the end of the 5 year term when the time comes to pay back the principal? Does existing property get sold off to cover the LOC debt and maybe to use left overs to fund the next IP/s? Or can a LOC somehow be refinanced/renegotiaed/absorbed into an existing mortgage so really then you're paying interest on the original $100,000 all over again.

Or am I just totally missing the point and not getting it altogether???

TIA.

 

[BayView]

Hi All, quick question in regards to the LOE model if I may. I'm fairly new to the world of property investing and still trying to get my head around everything.

As I understand it to LOE you do it by drawing down on your equity via a LOC loan? With my own experience of LOC with my bank it's an interest only loan for a fixed period of time, lets just say 5 years for argument's sake.

So, say I have a LOC for $100,000 at 7.41% (and again, for arguments sake, let's say it it's a fixed 7.41%), which over the 5 year term will generate approx $37,000 worth of interest. Are the extra interest payments covered by the existing cash flow of my properties. If so, why then can't I LOR? Or do I just use the LOC to cover its own interest payments so then the $100,000 turns into $63,000 worth of spendable money.

Also, what happens at the end of the 5 year term when the time comes to pay back the principal? Does existing property get sold off to cover the LOC debt and maybe to use left overs to fund the next IP/s? Or can a LOC somehow be refinanced/renegotiaed/absorbed into an existing mortgage so really then you're paying interest on the original $100,000 all over again.

Or am I just totally missing the point and not getting it altogether???

TIA.

I don't think you can get a LOC with a fixed rate, and the ability to redraw funds from it.

If you have 100k of useable equity to live off, you could arguably spend the whole 100k, but it is a LOAN and must be repaid at some stage.

The idea is that your properties' values go up more each year than you spend from the LOC, so when you get to the end of the IO period and have to refinance to go again, the properties are worth more than the debt.

The problem is that the Bank will want to see servicability and this could cause some issues.