Overextending..?

From: Duncan M


Following on from Michael Yardney's post in the thread on "Non Recourse Finance", specifically the part about being overextended..

I'm wondering what sort of metrics one would apply to suggest that someone is too heavily geared? LVR is a start, but for me it seems to simplistic a measure..

Age, interest rates, RatRace salary, Rental Income, vacancy rates, etc would also have input..

Perhaps the banks know best? If you cant get the finance maybe you're overextended at least from a conservative point of view?

Duncan
 
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Reply: 1
From: Paul Zagoridis


I posted a reply but it's been lost somewhere. Here I go again...

Overextending is normally called overextended because it's really hard to see until it's too late.

I have a simple rule...

If I don't go to work, how long before my creditors come after me. That includes mortgage, credit cards and living expenses. 3 months is a minimum, 6 months is better.

That is why I say "never negative gear". It is easier to make the 3/6 months if I'm not being eaten by a property.

Dreamspinner
 
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Reply: 1.1
From: Rachel Freedman


We have income protection insurance..I think this is must if you have high levels of debt.
 
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Reply: 2
From: Rolf Latham


Hi Duncan

Overextension is really a matter of attitudes and risk management. Many a person is overextended with a 2 k credit card, since if you gave them a 200 k one it would be spent just as quickly.

That is effectively what most LOCs can be, even at some of the conservative lending levels of three of our big 4.

If you do your sums, use investments that suit your "investment horizon" you manage your rate and tenancy risks, and you have adequately insured your income streams, AND if money does not burn holes in your pockets, then it is very unlikely that any of our existing lenders would ever let you get into twouble by lending too much.

Ta

Rolf
 
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Reply: 1.1.1
From: Paul Zagoridis


A good point about insurance here.

But what if your investment is cashflow positive (before tax)?

Similarly how much life life insurance is good if you have dependents?

If negatively geared I'd say you need enough to pay down the mortgage to +ve levels or to cover the shortfall in event of sale.

Now if EVERYTHING is negative and your estate is bleeding cash, maybe no insurance is the way to go (if you don't own your own home).

But if you own your home AND have IP then plan carefully. Leave enough to balance it out.

Dreamspinner
 
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Reply: 1.1.1.1
From: Rachel Freedman


I was actually thinking of income protection insurance not life insurance - quite often you can be worse off if your partner is disabled long term than if they died - financially speaking that is!
 
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Reply: 3
From: Michael Yardney


Duncan
One of my concerns in the present property market is that clients / investors are potentially over extending themselves because they are given misinformation by some of the "guru's" who suggest they should borrow 90-100-110% of the value of their properties.
Apart from the ability to service the loan, I feel you have to consider the possibility of low or no capital growth for a while. Especially if we are near a peak in the property cycle.
BIS Schrapnel,one of Australia's most respected economic forecasters are suggesting a prolonged period of low capital growth in some property markets in Australia.
If prices were to fall 5% over the next year or so, and I would not be surprised to see this in some of the "hot spots", gearing to the hilt and buying multiple properties could see some investors financially embarrassed.
I see too many young investors in too much of a hurry to growth their portfolios.
Remember... wealth is the transfer of money from the impatient to the patient.
Michael Yardney
Metropole Properties
 
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Reply: 1.1.1.1.1
From: Paul Zagoridis


I agree about the income protection being important, that's why I wrote "similarly".

The problem is that you can only get income protection to 75% of your income and you have to pay tax on the payments. Also it is quite expensive for the cover you get (the definitions are important).

So you need medical, income protection and term life insurances to cover catastrophic events. Most people under-insure because they can't afford the premiums because they're often in the wrong sort of insurance.

If you are building a portfolio your insurance needs may actually decline as your wealth increases. Especially if the portfolio is generating profits.

Dreamspinner
 
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Overextending.The BOOM IS FOREVER / This Time!!!.?

Reply: 3.1
From: Gee Cee Cee


Very Well posted Michael
I have been saying similar for some time.
However some people that have never had to wear a drop in values, rising interest rates and tightening of everyone's wallets believe the boom cycle can never end.

The figures they project are wonderful. The real story can be different.



Just my old conservative views again.

Happy investing


Gee Cee

(The unemployed bum)
 
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Overextending.The BOOM IS FOREVER / This Time!!!.?

Reply: 3.1.1
From: Michele B


As they say GC - when the tide's in, everyone looks good. It's only when the tide goes out that you get to see who's not wearing shorts.

Michele
 
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Overextending.The BOOM IS FOREVER / This Time!!!.?

Reply: 3.1.2
From: Rolf Latham


Hi Gee Cee

I must agree here, not so much on the boom/bust thing but very definitely on the issue of some never having had much financial hurt.

They usually have different attitudes to those that have had the expereince of their hard won $ walking (running) out the door.

One of the assumptions that is statistically very incorrect is that the cycles are boom and bust. They definetely are not.

Boom and bust implies the gains made during the growth phase are lost during the bust phase. In isolated cases this may be true especially where people have excess exposure and no risk managament.

Empirical evidence suggests that the gains made are not lost during the bust phase. Mostly the gains slow to a snails pace, and in some cases the there is some
downward adjustment.

When people are conditioned to 10 and 15 % cap gains, we get a bit fluffy when growth slows to inflation or less.

Ta

Rolf
 
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Reply: 1.1.1.1.1.1
From: Michele B


Paul, worth noting here that the 75% of income paid in the event of a claim is usually based on declared taxable salary. Self-employed people need to ensure that their insurance company knows about and agrees to pay 75% of actual income which can be significantly higher once various payments to other entities etc are added back in. Not something to find out when you actually make a claim!

Michele
 
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Overextending.The BOOM when 13% was a great % Rate

Reply: 3.1.2.1
From: Gee Cee Cee


Does anyone remember back in the 80's when interest rates were around 17%.(Scary stuff)

The Banks & Real Estate agents were setting up loans where you paid only 13%. The other 4% just capitalized onto the loan.
(Run that through your computer)

Anyone on a regulated 13.5% home loan was LAUGHING.

Gee Cee

P.S.OK, I may be talking all past stuff.

(Just attempting to keep my No. of posts up with TW)
 
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Overextending. 18% was the good news for me

Reply: 3.1.2.1.1
From: Paul Zagoridis


Ha!

18% was what I ended up paying on some of my borrowings in 1991/92. My bridging finance hit 33%.

Back then they'd say 25% with a discount to 18% if loan stayed within guidelines and payments were on time. Plus penalties if guidelines exceeded = 33%.

Regards

Dreamspinner
 
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Overextending. 18% was the good news for me

Reply: 3.1.2.1.1.1
From: Glenn M


Guys, during those times of 18% interest, was the Property market tumbling as people didn't have enough to service their loans? I suppose I'm coming from the point of view that if this ever happened again, would this be a fantastic opportunity to buy some more properties (if you were cashed up and could service the loan/loans?)

Here I am, off on a tangent again....for those experienced investors out there, was there a time that you thought that's it, property prices can't go much higher than what they are now (perhaps in the early 90's)?

Glenn.
 
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Overextending. 18% was the good news for me

Reply: 3.1.2.1.1.1.1
From: Paul Zagoridis


"Property prices have peaked" was the point my boss was making when I worked as an Trainee Economist in 1988. I quit to become a property investor/manager.

I made $1Million in capital growth between 1988 & 1991 (lost it all and more in 1992). But none of the property sold for less than I bought it. They were sold at fire-sale prices though.

I don't try to pick market highs or lows.

Most people during that time just held tight waiting for better times to sell. Only those forced to sell experienced falling prices.

Bargains are always available. I happen to like buying when everybody else thinks it's a bad time.

Dreamspinner
 
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"Overextending, boom/Bust"

Reply: 3.1.3
From: D R


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Ok,

Thanks GC and MC, you guys are depressing me. Your all being too realistic.
Interest rates hitting 18% and stuff like that will never happen, again
....................:eek:).

So lets try another tack. Hope theres some die hard economist/political
commentators out there.

Who to vote for. Labour/Liberal and the boom/bust theory.

If we vote for:

Liberals
Then the economy will trickle along with average inflation and all the peaks
and troughs will be smoothed out by the fiscal and monetary policy.
Inflation will kick in and interest rates will follow.
We should get some growth in property with the economic cycle but nothing
spectacular.

Labour
The economy will fire up. Labour traditional crank up spending and hence
inflation will boom.
Interest rates will follow, a lot steeper then with the liberals effort.
Hence a boom in property prices, atleast for the next three to four years.
Arn't property prices suppose to increase with interest rates and inflation
or is it the other way around.

Labour\Liberal
Now, if we vote labour now(1/12/2001) and the libs get in next time then
this will throw the whole economy into a downward spin to hell.
Labour will spend spend spend for four years. Followed buy a liberal
governments, 000's of job cuts and a tightening in monetary policy to
compensate for labour's effort.

Now, this is just my 2c worth and is only an opinion. Would like to hear
what everyone else thinks.

Cheers
Darren
 
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"Overextending, boom/Bust"

Reply: 3.1.3.1
From: The Wife


Darren,

Says in your email attachment you work for the ATO....and then your asking us who we are going to vote for???

oh man....is this how you win friends and influence people? Bet its a party at your place every night of the week.:eek:)


~Life is a daring adventure, or nothing at all~
 
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Overextending

Reply: 3.1.3.1.1
From: D R


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The information transmitted is for the use of the intended
recipient only and may contain confidential and/or legally
privileged material. Any review, re-transmission, disclosure,
dissemination or other use of, or taking of any action in
reliance upon, this information by persons or entities other
than the intended recipient is prohibited and may result in
severe penalties. If you have received this e-mail in error
please notify the Privacy Hotline of the Australian Taxation
Office, telephone 13 2869 and delete all copies of this
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TW,

Thanks for the vote of confidence.

I really am a nice person............................:eek:)

By the way, is there anything wrong with working at the ATO?

Thanks

Darren
 
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Overextending

Reply: 3.1.3.1.1.1
From: Robert Forward


Darren, are you sure you want to ask that question....

hehehe
 
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