Servicing LOC

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From: Ray .


Whilst browsing thru the archives I noticed a no
of posters who purchased 3-4 IPs using a loc for
deposits. I havent seen a posting that
emphasises that the loc comes at a cost of
interest that must be serviced on a regular basis
otherwise --Kaboom! For arguments sake, if a
person has a mortgage of $150000 on a
$300000 property then their equity is $150000 of
which you can borrow 80% as I understand it.
Assume this equity is used to buy 3 properties
using 60000 equity with I.O. loans. This person
either self-employed or Payg now must service his
mortgage and loc loans, assuming that he/she is
able to have neutrally or positively geared IPs.
There appears to be no concern in postings
placed on servicing loc debt. Maybe I have
missed something here and are wasting
everybodies time. My miserable excuse is that I
am new to this valuable forum and come armed
with inexperience and ignorance. I would really
value comments from other posters.
 
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From: Russell H


you are right, the interest on the LOC has to be included. When i calculate returns/costs/ etc, I include EVERYTHING i spend - which means the loan is usually around 105% of the purchase price, if not more.
the spread sheet i use takes 80 or 90 % of the purchase price and calculates the payment on that at whatever is appropriate ( say, 6.3% ) and the balance of the funds at the LOC rate ( 6.7% eg)

As I see it, even if i was putting in cash, I would expect it to return some amount.
( which makes it harder to find a +ve cash flow!)- and the idea of 'making' it positive by borrowing less is not sensible ( to me).

I know how much i can afford out of my pocket ( again, $10 in or $10 out is not much different in my eyes) What counts is the return over 15 years or so.

What I find difficult is estimating the capital growth! However, even 5% return on $100k invested over 15years is over $100k profit, and it essentially hasn't cost me anything.
 
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