Over geared? Problems with high LVRs?

[steveadl]

I don't assume were heading into another boom, average growth of 5% over the years will do me just fine. And again, I don't complain - think you may watch too much popular media and getting me confused with the victims? I agree with your sentiment with some of these people, but don't like assumptions being drawn about me, and remember SS is generally a more knowledgable type of investor crowd.

As for highly leveraging, for me it's not always a case of the market, more so the individual investor, their stage, their strategies and contingencies. As said, I'm not expecting a boom, but am still leveraging highly into both property (105% last yrs purchase), and into equities (bout 95% currently give or take). With proper structures and strategies in place there's nothing wrong with high leverage. OPM is a beautiful thing.

 

[investor888]

95% on equities, wow!. Too bad when the stock market comes back after the recent 3mth rally.

105% on property, wow!.

Good luck there.

 

[topcropper]

am still leveraging highly into both property (105% last yrs purchase), and into equities (bout 95% currently give or take). With proper structures and strategies in place there's nothing wrong with high leverage. OPM is a beautiful thing.

I don't understand this. If you are geared 95% into equities, wouldn't that mean a 5% drop, and you lose any equity? A 10% drop and your well negative?

These sorts of drops could happen in a week or even a day the way things are now.
Perhaps I don't understand what you mean?

See ya's.

 

[investor888]

no problem topcropper. Steve is one of the "more knowledgable type of investor" here on SS. He has "proper structures and strategies" Don't forget green shoots, confidence back etc. He's on a winner with the 95% leverage in equities, and the hugh profits to come will pay down his 105% leverage on his property. We are truely priveleged to have such "knowledgeable types" here on SS.

 

[steveadl]

95% on equities, wow!. Too bad when the stock market comes back after the recent 3mth rally.

105% on property, wow!.

Good luck there.

*sigh* again with the assumptions.

I don't understand this. If you are geared 95% into equities, wouldn't that mean a 5% drop, and you lose any equity? A 10% drop and your well negative?

These sorts of drops could happen in a week or even a day the way things are now.
Perhaps I don't understand what you mean?

See ya's.

True TC, I'll explain below, although the attitude isn't directed at you.

no problem topcropper. Steve is one of the "more knowledgable type of investor" here on SS. He has "proper structures and strategies" Don't forget green shoots, confidence back etc. He's on a winner with the 95% leverage in equities, and the hugh profits to come will pay down his 105% leverage on his property. We are truely priveleged to have such "knowledgeable types" here on SS.

Again with the ignorance, or just plain resentment or unwillingness to learn. Just because you may not understand more than the bare basics of investing or just choose to draw wild assumptions that suit your attitude, doesn't mean other people do.

The property LVR is fine, individual properties can be leveraged 105%. No margin calls (despite what some US D&G column writer posts on his blog), overall portfolios can be substantially less geared than an individual purchase, the latest purchase can be negatively geared whilst others in the portfolio can be positively geared, equity can be drawn from some properties without the need to revalue the whole portfolio (even when XColled).

As for the equities, I assume you're very knowledgeable and know all about margin loans and so therefore draw the conclusion that I'll crash and burn with a 2% drop in the markets. Did I say the 95% leverage was all through a margin loan? No, that would be insane and to my knowledge with only basic stock buying (not CFD's etc) almost impossible.

Our overall gearing in equities is around 95% - the margin loan component is nowhere near this amount. We have a few different loans drawn down from property equity (you know, the property that's been crashing the last year but we somehow miraculously still got higher valuations ) which we've put into stocks for additional leverage. That coupled with the fact that even if the markets did tank next week (from the relative lows we've picked the stocks up at), we can pump $k's into it within a day or two.

But yes Investor888, please enlighten us further about how there's no way to protect yourself with highly leveraged assets. Oh that's right, you're not actually imparting any strategy, just mocking those who are doing it.

 

[Propertunity]

It is perfectly acceptable to be 100% geared into equities IF you have the right risk mitigation strategies in place. I don't know if Steve does this but I certainly do: buy a long dated put option with a stike price at or above the share price then even the margin lender will let you borrow 100% - EVERYONE is protected from any downside. Write covered calls on the share for premium income. The total money at risk is the cost of the put and the interest on the margin loan. I have used this strategy a lot in the past and have no issues with a market drop - totally unaffected by it.

Investor888 you are starting to show some ignorance of strategies that "more knowledgable type of investor" engages in. NO.... I'm not recommending it to a novice.

EVERY property I've ever purchased after #1 was more than 100% geared as I never saved a deposit for any property after #1. I used equity on other property/ies - 100%+ borrowing. Lots of smarter investors do this and more.

You'll just have to get over it.

 

[topcropper]

Thanks Steve. Hard to get my head around the gearing levels you blokes have.

No it is not. It is the same as always. The SYD market for example has been flatish (up a bit, down a bit, sideways a bit) since 2003/4. Here we are 6 years later. This, if it behaves as it has for the last 140 years, this is the beginning of the upswing. This IMO is the time to be geared to the back teeth

Same as always..?? I just can't see the fundamentals that will drive another property boom so soon after the last one, and especially in Sydney, arguably the sickest economy in Australia at present. Property booms start with high rental yields, falling unemployment and strong economic reasons for people to have increasing surplus money to spend on property.

I just see Australia's wealth falling now due to what's happening overseas, so how property goes and starts another boom now I have no idea? if it does, then great stuff for all you bulls, but I'm going to miss it all. I've been hoping to get a few property bargains, but if that's it, that's it.

See ya's.

 

[steveadl]

It is perfectly acceptable to be 100% geared into equities IF you have the right risk mitigation strategies in place. I don't know if Steve does this but I certainly do: buy a long dated put option with a stike price at or above the share price then even the margin lender will let you borrow 100% - EVERYONE is protected from any downside. Write covered calls on the share for premium income. The total money at risk is the cost of the put and the interest on the margin loan. I have used this strategy a lot in the past and have no issues with a market drop - totally unaffected by it.

Sounds very interesting, will have to look into puts and calls again at some point. Used to trade them a bit years ago but have fallen out of the loop a bit. My entry back into the market has just been plain vanilla stuff - ie. buying the actual blue chip stock at a decent yield, with good growth history and prospects (companies still doing well despite global turmoil), reinvesting the dividends, having adequate gearing level and access to cash at short notice if it gets closer to buffer. Boring, but hopefully effective in the long term - not brave or knowledgable enough yet to get into the sort of trading BC often talks of.

 

[steveadl]

Thanks Steve. Hard to get my head around the gearing levels you blokes have.

I'm still relatively young and in the growth/accumulation stage TC, once I get on a bit - I'm sure the strategy will be less agressive.

 

[topcropper]

EVERY property I've ever purchased after #1 was more than 100% geared as I never saved a deposit for any property after #1. I used equity on other property/ies - 100%+ borrowing. Lots of smarter investors do this and more.

You'll just have to get over it.

We are sort of talking about a different thing here.

If I buy another farm tomorrow, it would probably be 100% geared, but if I have 3 other farms as equity of equal value and all helping to pay for the new purchase, then I'm not really 100% geared am I? I'm really 25% geared.

As to the shares example, you would not really be 100% geared either if you have property as equity.

See ya's.

 

[housemute]

OPM is a beautiful thing.

sorry - I am not up on all the lingo. What is OPM?

 

[topcropper]

I'm still relatively young and in the growth/accumulation stage TC, once I get on a bit - I'm sure the strategy will be less agressive.

Yeah, all very interesting to me.

I'm a 5th generation land owning farmer, and my decendants before that were farm labourors and shearers. If you went back over my farm threads you could probably work out my [and my wifes and mum and dads] net worth, and we are currently debt free.

We just use a low gearing, keep expanding strategy. The next farm is funded by the current holdings. Just how most farmers do it. Can't get my head around the gearing you blokes are using.

Think I will stick to doing what I know.

See ya's.

 

[steveadl]

As to the shares example, you would not really be 100% geared either if you have property as equity.

See ya's.

That's a fair call. When talking about my leverage in shares, I'm only referring to the liabilities I have incurred in the purchasing of that equities portfolio - not left over equity I have lying in property as well. If it makes you feel better TC, my overall position is about 68% though not from a lack of trying to increase the asset base believe me!

 

[investor888]

Yeah, yeah Propertunity!! I'll be looking forward to your predicted property boom.
Buy now, leverage to the teeth everybody. The knowledgeable have spoken.

"This IMO is the time to be geared to the back teeth. The market is IMO primed to go. "

Oh that's right, you're not actually imparting any strategy, just mocking those who are doing it.

Not true. Propertunity is suggesting a hugh LVR because of the coming property boom. What strategy is it to leverage to the teeth, and hope for the next boom.

We'll see guys. We'll see. Bookmark the post, and come back in 12mths (July 2010), and we'll see who is right.
IMO, the stategy you guys used 8yrs ago, is more risky today, and the original poster would be well advised to be more conservative currently with LVR's.

 

[steveadl]

sorry - I am not up on all the lingo. What is OPM?

One of the most beautiful things in the world Housemute: Other People's Money.

 

[battler]

One of the most beautiful things in the world Housemute: Other People's Money.

That you hire off them for a premium

 

[steveadl]

Not true. Propertunity is suggesting a hugh LVR because of the coming property boom. What strategy is it to leverage to the teeth, and hope for the next boom.

We'll see guys. We'll see. Bookmark the post, and come back in 12mths (July 2010), and we'll see who is right.
IMO, the stategy you guys used 8yrs ago, is more risky today, and the original poster would be well advised to be more conservative currently with LVR's.

Not going to get into a debate about what Propertunity meant, he's a big boy and can speak for himself - I'm not familiar with the market he's knowledgable on. My comments above don't require a boom, I'm happy with just slow plodding along growth rates - so good thing I'm in Adelaide, smooths out the bumps.

You bookmark the post, I'll be busy monitoring my gross asset position and net worth as I do every month (week actually) and looking for avenues of expansion.

I'm assuming you wouldn't have advised high leverage 12 months ago either when we were staring down the barrel of big bad stuff? There's nothing wrong with being cautious, it comes down the individual investors choices, but I like to point out to people's there's more than one type of cautious; being scared stiff and waiting till everything blows over before making the next move, or contiuning to expand with said caution regardless of whatever your official LVR is. I know which I choose.

 

[steveadl]

That you hire off them for a premium

I could save till I was my dad's age and probably still wouldn't have the asset position I have now. What's your point? Interest on funds is just a cost of doing business.

 

[battler]

What's your point?

Housemute asked what is OPM? and you said it is one of the most beautiful things in the world.... it seems to me that OPM is always portrayed in essence, as free use of others money, which it's not, you have to pay a premium to hire the use of it and then pay it back. Pretty basic I know but it is never explained that way.

 

[Propertunity]

.....property boom so soon after the last one, and especially in Sydney,.....

so soon? ....geeze TC it has been 6 long, flat, hard, years mate.

Property booms start with high rental yields, falling unemployment and strong economic reasons for people to have increasing surplus money to spend on property.

You sure? We have been having some high rental yields already. I'm sure we've had property booms before with rising unemployment. And surplus money comes from people who have been burned by the stock-market - remember 1987? I think supply of credit is also a factor and although credit is tight, it still seems readily available to people who can service the debt and have a good history of doing so.

if it does, then great stuff for all you bulls, but I'm going to miss it all. I've been hoping to get a few property bargains, but if that's it, that's it.

TC I'm still waiting for RIO to get back to $36 but it stubbornly sits at $50+ mocking me I think I missed the bottom - correction I know I missed the bottom.