Stepping over the edge

[goddessk]

I've been thinking about something I read today in a thread and would be interested to hear others viewpoints on this.

Y-man commented "I believe (the last time I looked), our total interest payments on our investment portfolio is approaching 2x our combine household income from work...". Now, not knowing the figures I can't make assumptions however that sounds a little scary to me. However I am sure that Y-man is not the first person in this situation.

Being a totally novice investor I am currently dabbling with three properties (one is my PPOR) and even if both my IP's are un-tentanted at the same time, I can afford all of the expenses for all three properties. Now, I am not spending huge $$$ here so that makes a difference of course, and I have a decent income. But I am interested in how you step over that next threshold whereby total expenses do exceed income.

What happens if one or two of a multiple property portfolio lose their tenants. Does everyone have a safety pool of funds in case of emergency or do you have to get a LOC or an overdraft?

Would love to hear from anyone that this has happened to, how you overcame it and how do you sleep at night knowing these possiblities may arise. I am not afraid of stepping over the edge but would just like to be prepared for it with some advice from experienced investors.

 

[keithj]

What happens if one or two of a multiple property portfolio lose their tenants. Does everyone have a safety pool of funds in case of emergency or do you have to get a LOC or an overdraft?

Would love to hear from anyone that this has happened to, how you overcame it and how do you sleep at night knowing these possiblities may arise. I am not afraid of stepping over the edge but would just like to be prepared for it with some advice from experienced investors.

For me the key is risk reduction.

• Diversification in IPs- lots of tenants, on long term leases, expiring at different times & in different cities
• Dividend income - all but guaranteed
• LPT distributions - 99.9% guaranteed
• A cash buffer/LOC/margin loan for N months/years

When I had 1 IP I used to worry about the possibility of losing my ONLY tenant - that would be 100%.
One solution is to get some more IPs quick, the worry will go away.

 

[alexlee]

My own strategy is to buy lots of cheaper properties instead of a few expensive ones. For a portfolio of, say, $1.5m gross and $1m net, the interest would be around $65,000. It's much safer to have 6 properties of $250k each, for example, than to have one property of $1.5m.

The chances of all 6 being empty is pretty remote, especially if you spread it around geographically.

Also, it's a gradual thing. You buy one property, get used to the numbers, and then buy more. I don't think anyone suddenly gets $1m and going out and buys a couple million of property, so you have time to get used to the numbers.
Alex

 

[Goldminer]

Living with fear

In building my portfolio i looked at all the what ifs?
Tennants move out
Interest rates rise
I earn less wages
Hit with expensive repairs.
Its kind of strange most people are put off by the possibility of a worst case scanerio, i thought all these bad things cant happen at once. Now got 1PPOR 2 IPS and No.3 IP to settle in August.
IP 1 Tennant wants to stay long term
IP 2 Tennant wants to stay long term
IP 3 under construction.
Finance side of things Interest only loans fixed 5 years
Have 2 LOC one for personal use, the other investment use deposits and costs for IPS interest rate variable. At this stage i have a minimum buffer of spare cash but IPs are all new so repairs and renovations are a long way off.Holding costs have worked out about the same as my old P&I loan on my PPOR. It also makes sense to have income insurance as i have. Landlord insurance is also a good idea. I feel the only thing that may destroy me is a change of government next federal election.

 

[sue78]

that's what insurance is for. I would have thought people with IP's buy landlord insurance? it covers loss of rental if tenants default.

Or do you mean what if the we can't find tenants to ren our IP's? we have never been faced with that scenario yet (touchwood).

But we see our investments sort of as a business eventhough it's personal which is why we bought and sold to build up cashflow first.

I think we may struggle a bit without any cashflow.

 

[Crystal]

Hi goddessk,

Now that you mention it - my interest only repayments nearly match my salary. Then again, so does my rental income.

Great comment Keith...
"One solution is to get some more IPs quick, the worry will go away."
So true!!!

Good Luck - Now is a great time to buy more IPs!

Cheers,
Crystal

 

[wylie]

We have always "gambled" on the bad things not happening. I know it sounds flippant, but each time we have bought an IP over 25 years, money has become tight. We have only ever once bought a house that wasn't negatively geared. Over time, rents have risen and debts have reduced, until we buy the next one.

When money gets tight, we live on the smell of an oily rag. This has become harder as our kids have grown because they cost very little when small, but that changes as they grow.

Twice we have sold an IP. First one we sold to finish renovating our PPOR which was costing more than expected (because we kept doing more to make it a long term comfy PPOR). We had borrowed from my parents (and were paying interest) but we didn't want to owe them money long term. I wish we hadn't had to sell, but it was the right thing to do. We made a "lifestyle" decision that we wanted to live in a nice house and the cost was selling an IP. We made a profit, paid some tax, reduced some "bad" debt and put the money into our PPOR, which is tax free when we sell, so it was not all bad. Cleaned up some loose ends.

As soon as we could, we bought another IP.

A big factor in our comfort level is that with debts of over $1M and very little savings, we know that if we get into serious trouble my parents would cover us until we could sort things out. Just knowing my parents would not let the bank sell us up is a comfort.

I think if my parents did not have the ability to, for example, cover repayments if my husband lost his job, we would probably be a bit more careful. It just lets us sleep easier at night.

Bottom line is I take the attitude that if things go sour, we would sell a house and reduce our debts. Flippant perhaps, but that is how my mind works.

Cheers, Wylie.

 

[The Y-man]

Our strategy is similar to KeithJ and Alex - we tend to buy small, lower end properties in several, solid, inner suburbs of Melbourne (for geographic diversity).

We have not gone beyond Melbourne for residential property, as we feel this is another risk in itself - not knowing the "lie of the land" in other places, as it were.

As Keith has mentioned, we too have multiple sources of "non-employment" income -although my original post may have been a bit misleading, as I also do share trading - which probably comes under the banner of "self-employment".

We use income generating managed fund and commercial property trusts to supplement employment income. These too are spread amongst several managers to maintain a spread of risk which we are comfortable with.

Another thing I should clarify is that over a quarter of our interest payment is NOT for property. They are actually margin loans, investment loans and other loans. In other words, having some vacant properties is, relatively speaking, a smaller part of the big picture.

Cheers,

The Y-man

 

[lizzie]

i had never thought of it like that ... our interest payments are twice our monthly household salaried income but is practically covered by rental incomes from 10 ips and the balance comes from a smallish loc against our very comfortable house. we are in slight deficiet but plan to clear that with the sale of our current rebuild (finished in 3 weeks! yay). obviously there is no income from that property while rebuilding but should make a profit of over $100k (conservative). we will then use that to clear the loc, pay down some loans to reduce interest and then draw on the loc for deposit for the next purchase.

i sleep very well at night - expect for when i see a bargin buy. then i toss with potentials

 

[arriety]

We have insurance incase tenant defaults on payment or place is left empty for certain length of time (this only covers so many weeks though). I know someone who unit got torched so although insurance covered replacing everything the loss of rent was only for 6 weeks or something like that.

We also have LOC and we regularly add money in to bring down loan so we can borrow that if necessary.

We have small amount of savings. I'd rather invest it either buy another IP or shares but my better half wants it as a buffer ($20k last year made $1 interest....what a waste!).

We always buy positive or cash neutral properties. Always properties that will rent well and have only ever had 1 week empty.

I sleep well at night but with the amount of debt we have my partner is a worry wort!! I mean what if we have World War 3 and no one has any money for rent?

 

[The Y-man]

We have small amount of savings. I'd rather invest it either buy another IP or shares but my better half wants it as a buffer ($20k last year made $1 interest....what a waste!).

We decided to hold our (emergency) savings as gold bullion - you never know, your other half might like the idea of having a few blocks of 99.999% pure gold.... although then you have to worry about it going missing!!

Cheers,

The Y-man

 

[arriety]

We decided to hold our (emergency) savings as gold bullion - you never know, your other half might like the idea of having a few blocks of 99.999% pure gold.... although then you have to worry about it going missing!!

Cheers,

The Y-man

Interesting. But what is the advantage of that? Does gold increase much in value - doesn't it just hold it value? Just a thought but in the advent of WWIII gold would be better!!

 

[Mr. Fabulous]

We have small amount of savings. I'd rather invest it either buy another IP or shares but my better half wants it as a buffer ($20k last year made $1 interest....what a waste!).

arriety,

You're partner has a good head on their shoulders. Try not to look at your buffer as a lost opportunity. Look at it like this - what if you got hit by a bus tomorrow and couldn't work for six months?

Some questions to ask yourself here:
- Will my income protection insurance cover me?
- Will I have enough in savings to cover me?

If the answer to either of those is 'no' then I'd have a good hard look at adding to that buffer. But that's just me. I'm currently in the process of adding to my insurance, as I realised not that long ago that I'm underinsured. Bear in mind I don't have a lot just yet either.

Even with my small amount of investments, I still put money away now into a buffer. But that's a habit I've always had, which I taught myself (with a little help from a good mate who also happens to be my mum's bf) - and that is to always look forward, just in case.

Mark

 

[The Y-man]

Interesting. But what is the advantage of that? Does gold increase much in value - doesn't it just hold it value? Just a thought but in the advent of WWIII gold would be better!!

It just looks nicer than cash .....

Cheers,

The Y-man

 

[NickB]

arriety,

You're partner has a good head on their shoulders. Try not to look at your buffer as a lost opportunity. Look at it like this - what if you got hit by a bus tomorrow and couldn't work for six months?

Even with my small amount of investments, I still put money away now into a buffer. But that's a habit I've always had, which I taught myself (with a little help from a good mate who also happens to be my mum's bf) - and that is to always look forward, just in case.

Mark

If that buffer was an offset account, surely that is a win-win situation.

Cheers,
Nick

 

[arriety]

If that buffer was an offset account, surely that is a win-win situation.

Cheers,
Nick

Yes I agree Nick, we should be getting something out of it and offset account might be best, I will look into it. I do like the idea of Gold bullions though, or what about a diamond? (Then after 12 months if we don't need it as a buffer I could get it mounted and wear it, haha).

 

[The Y-man]

Yes I agree Nick, we should be getting something out of it and offset account might be best, I will look into it. I do like the idea of Gold bullions though, or what about a diamond? (Then after 12 months if we don't need it as a buffer I could get it mounted and wear it, haha).

Funny thing - can wear either, but Asian and Middle Eatern culture seems to prefer the yellow stuff over the clear stuff.

Cheers,

The Y-man

 

[Goldminer]

Gold Bullion buffer

To the Y man,
"Gold bullion as a buffer", cheers to that gold has increased in value by 6% this year, thats 2006 one month in 6% increase in value. I doubt it wiil sustain that for the whole year but i dont think you will ever see gold under $300.00USD ever again as it costs at least that to produce.

 

[Panic]

With US (and OZ for that matter) printing paper with this speed, Gold will keep on appreciating. With prospects of war with Iran Gold is trending up.
I'm looking into adding more physical Gold to my portfolio. Missed the 490$ drop few weeks ago :-(
If you want more leverage then gold socks are great, although a bit pricey at the moment.

Thx
V

 

[pete_w]

Funny thing - can wear either, but Asian and Middle Eatern culture seems to prefer the yellow stuff over the clear stuff.

the rarity of diamonds is a myth, other gems are far more precious. the price is artifically inflated by a monopoly (DeBeers) and demand created through very slick marketing. http://en.wikipedia.org/wiki/De_Beers