Un-leveraged Residential Property - A DUD Investment?

[JIT]

I'd agree that IP is usually an inefficient way of generating retirement income - I'm not sure if you've read this thread which asked the same question.

Yes, of course. I'm not saying anything new here. I've really just looked at it from a different perspective, which seems to have confused people!

My asset alloc by Jan '08 will be -
IP & PPOR 33%
Shares 67%
Super < 0.5%

...and on an income basis
IP 5%
Shares 94%

Very impressive.

Fascinating to see how different people's asset allocations are here.

I recall that you are still relatively young, but do you think you would reduce your shares % down the track as a way of reducing risk/volatility?

I'd be wary of taking on board to much of Travis Morien (who I have a lot of respect for) - he's catering for the 'average' investor/retiree - anyone with multiple IPs will be way above that.

He's not much of a fan of residential property, that's for sure - or the 'Somersoft cult' as he has called it!

So when it's time to retire, the portfolio is already diversified, balanced, and reasonably yielding and is likely to be generating a reasonable income, have reasonable growth, and also suitable for LOE. There's no transition period, it's already got good growth & yield.

Yes, as I've already suggested, it's just a matter of striking that balance, and working towards it sooner rather than later...

So something to keep in the back of your mind for all the accumulators/growth stage investors here.

And for those with retirement looming, time to check their asset allocations are optimised.

Interesting thread from just a quick question at the start!

 

[JIT]

I may as well throw this one in the pot too...

Here are my thoughts on this subject 2 years ago when I critiqued Brenda Irwin's portfolio...not sure if you read that keithj?

It didn't go down very well at the time , but gives another illustration of the points being made in this thread:

http://www.somersoft.com/forums/showthread.php?t=23493&highlight=Irwin's

See what you think, I'm pretty sure Brenda Irwin has changed her stance on shares since then...I wonder what her asset allocation is like now?

Note, some of my views may have also changed since then.

 

[handyandy]

Initially I was not going to post in this thread as the original proposition for the thread was way to restrictive.

We have 'retired' (whatever that means). In our circumstances that means that we no longer get/draw a salary and have not done so for about 2 years. Prior to that we were drawing salaries but from our own company. Working in our own company also allowed us great flexibility in the time spent and as such people regarded that I had retired for some time prior to the closing of the business.

Originally my concept was to retire on income derived from rents. To this end we accumulated a portfolio of property, mainly residential, all with the main criteria of giving good +cf. Obviously over the years these properties have also increased in value markedly.

As the properties increased and the cost of money fell below the returns available from shares and MF's it opened up opportunities to make much better returns then just the rental income from the properties. None the less, I can live very comfortably from just the rental incomes, mainly because we have a very low LVR, virtually non existent, and the number of properties we were able to acquire.

So from this point of view property has not been a dud as it gave us massive capital gain at least 100% and does give us enough income. Similarly the properties will keep pace with inflation ensuring that my capital base will be maintained over the coming years.

But if I had just left all that growth underutilized then we wouldn't now have the extraordinary level of income we currently enjoy. This level is now equivalent to the income we earned when we were still operating our business.

As a result when figures proved to be right (cost of funds / returns) we started investing in MF's based in the main on borrowing funds against the equity in the property portfolio.

Our current portfolio is

Income fund 34%
Residential Re 46%
Commercial RE 3%
Growth Funds 5%
Cash/gold 2%
Super 5%
Direct Shares 5%

On the income side

Income Fund 75%
Rent 25%


As Keith has said

So when it's time to retire, the portfolio is already diversified, balanced, and reasonably yielding and is likely to be generating a reasonable income, have reasonable growth, and also suitable for LOE. There's no transition period, it's already got good growth & yield.

Because if I had waited until we retired then we would have missed a large chuck of income.

Cheers

 

[JIT]

Our current portfolio is

Income fund 34%
Residential Re 46%
Commercial RE 3%
Growth Funds 5%
Cash/gold 2%
Super 5%
Direct Shares 5%

On the income side

Income Fund 75%
Rent 25%
Cheers

Thanks handyandy, very interesting stuff.

And mine is very similar to alexlee at present.

 

[kissfan]

Very interesting thread.

What I'm planning on (at the moment), is to reduce debt on margin loan (don't like the thought of capitalising interest long term) which is currently attached to an income fund, once some of my IP's go up a bit more in value, sell some of them off progressively (i.e, over different financial years), pay off as much loans as possible.

If all goes to plan, will have income fund distributions coming in, 2-3 IP's (hopefully unencumbered or very small loans against them) providing rent and capital growth. PPOR also unencumbered.

Then get LOC (or similar) against existing IP's to buy more investments, probably more income fund/s and a bit of growth funds. With the newly acquired funds, I will pay down the LOC (and pocket some), to repeat over again.

That's how I'm thinking at the moment but not quite ready to implement it just yet and who knows, by the time I'm ready (hopefully not too far in the future), something might happen that will make me change paths.

Regards
Marty

 

[Sunfish]

Now ya talkin Marty.

A suggestion, if I may: I would be buying more individual stocks. BHP, RIO have so many projects in so many countries they have the diversity of a resources fund without the fund's management costs. AGK, CSL, WPL are others with long term horizons and who knows by the time you get there the banks may be worth buying again but I don't like them ATM and funds would have truckloads of them.

Funds are best for the real diversity (eg overseas, cash management) that are impractical for the individual.

 

[kissfan]

Now ya talkin Marty.

A suggestion, if I may: I would be buying more individual stocks. BHP, RIO have so many projects in so many countries they have the diversity of a resources fund without the fund's management costs. AGK, CSL, WPL are others with long term horizons and who knows by the time you get there the banks may be worth buying again but I don't like them ATM and funds would have truckloads of them.

Funds are best for the real diversity (eg overseas, cash management) that are impractical for the individual.

G'day Thommo.

Yes, definately considering buying individual shares as funds permit.

Do you recommend them for growth or income? If circumstances permitted, I'd probably reinvest the dividends anyway.

Besides what I mentioned in my previous post, I also have some holdings in a couple of LPTs (not travelling well at the moment, but I bought them with a long term view) and a bit more more invested a LIC.

Regards
Marty

 

[JIT]

Hi there,

I'd love to hear some more people's current asset allocations...especially those nearing retirement, anyone else want to share?

Thanks!

 

[Sunfish]

OK. You talked me into it. LOL

Excluding my PPOR which I've owned 40 years:

Property...... 60%
Business...... 12%
Super etc .... 10%
Shares ........ 22%
Collectibles .. 1%

Yes, I can add up but this is as close as you get.

LVR about 40%

You may be surprised at the high %age property for someone about to retire in light of recent posts but refer: http://www.somersoft.com/forums/showthread.php?t=36402

 

[JIT]

JIT,

What else would the portfolio be in? there's only businesses, cash (we know what happens to cash over time). Precious metals and art (no income from these two), or royalites from books etc?

Hi Marc,

Broadly speaking, yes there's only a few options, but here's a more specific list of investment classes, vehicles, structures or ''avenues'' (eg. you can invest in shares or commercial property via a number of different ways) I started recently on GHPC (http://forum.globalhousepricecrash.com/index.php?showtopic=25713), some of which can be used for generating income:

Direct Shares (B&H, Trading)
Active Managed Funds (including Mezzanine Funds, Hedge Funds)
Listed Investment Companies
Listed Property Trusts
Passive Index Funds
Exchange Traded Funds
Instalment Warrants
Gold
Silver
Other Commodities
Options
Futures
Other Derivatives
Currency
Business (including Private Equity Funds, Venture Capital, Franchises, IPOs)
Direct Residential Property (B&H, Renovation, Development)
Direct Commerical Property (B&H, Renovation, Development)
Unlisted Direct Commercial Property Trusts
Private Syndicated Property Investments (Commercial or Residential)
Public Syndicated Property Investments (Commercial or Residential)
Reducing Debt
Cash in Bank
Bonds
Debentures
Mortgage Trusts
Other Fixed Interest Securities
Land (Landbanking, Sub-division, Development)
Trees
Wine
Other Agri-Business Schemes
Ostriches
Art
Antiques
Collectables
'Superannuation'
'SMSF'
'Trusts'
'Yourself'
Offshore Managed Funds

Take your pick !

Can anyone think of anything else?

 

[JIT]

OK. You talked me into it. LOL

Excluding my PPOR which I've owned 40 years:

Property...... 60%
Business...... 12%
Super etc .... 10%
Shares ........ 22%
Collectibles .. 1%

Yes, I can add up but this is as close as you get.

LVR about 40%

You may be surprised at the high %age property for someone about to retire in light of recent posts but refer: http://www.somersoft.com/forums/showthread.php?t=36402

Thanks for that, this asset allocation thing really put's a poster into perspective!

 

[JIT]

I'm really milking this thread for all it's worth aren't I!

 

[BayView]

Thanks for that, this asset allocation thing really put's a poster into perspective!

So, ok; I don't get it; what's the big attraction with 5 or 6 different asset allocations as opposed to just property?

Surely if they are all un-encumbered, and all provide an income, then it's just a matter of which provides the most income; or is there something I'm missing?

Are you trying to work out which one you should have at retirement other than property, or instead of property?

Back to the original question:
Quick question, would you all agree that if you take the leverage completely out of residential property, it becomes a DUD investment??

If property is such a dud, then what is the best?

No opinions either; hard facts thanks.

 

[jingo]

I'm really milking this thread for all it's worth aren't I!

It's a great thread JIT, keep on milking. Best read on the forum for ages!

 

[alexlee]

Another way I look at it is, if you focus on one asset class, you're more likely to be good at finding opportunities. So, while residential property usually doesn't yield very much, there are those who manage to find good yields (renos, development, just undervalued, etc). If I focus on residential property (though I also buy shares as well), I'm more likely to be a GOOD residential investor.
Alex

 

[JIT]

Are you trying to work out which one you should have at retirement other than property, or instead of property?

Quick reply to this bit for now: no, I'll definitely have property there, as well as a few others.

 

[alexlee]

I don't doubt that when I 'retire' my asset mix will be different from what it is now. I'm not very concerned about it at this stage, though. I just feel that I'll naturally adjust as I gain more experience in different asset classes.
Alex

 

[JIT]

I'm not very concerned about it at this stage, though.Alex

Neither am I, just pondering it all for now...I don't see a problem with say 90% or even 95% in residential property in the early days.

There's no set formula for asset allocation anyway, a lot of variables involved of course.

I wouldn't mind un-leveraged direct commercial property in retirement, even 95% ...

 

[Dazz]

I'd love to hear some more people's current asset allocations...especially those nearing retirement, anyone else want to share?

As you know JIT, we are both 37 and nearing retirement....hopefully later this year.

Our mix is as follows ;

PPoR..............................6 %
Residential Property.........12 %
Commercial Property........79 %
Cash..............................2 %
Super.............................0.5 %
Shares & all other stuff......0.5 %

We always attempt to minimise our diversification as much as possible to extract our advantages of what we are good at...and what we have control over.

 

[JIT]

As you know JIT, we are both 37 and nearing retirement....hopefully later this year.

Our mix is as follows ;

PPoR..............................6 %
Residential Property.........12 %
Commercial Property........79 %
Cash..............................2 %
Super.............................0.5 %
Shares & all other stuff......0.5 %

We always attempt to minimise our diversification as much as possible to extract our advantages of what we are good at...and what we have control over.

Yes, I was editing my prior post as you were typing this.

I like your mix and it's probably something I may consider too (direct or indirect comm., not sure yet, depends on how successful the resi. part is).

Take the leverage out of commercial property and you've got a very high yielding investment that rises with inflation (both income and capital growth) - perfect for retirement IMHO.

Not so with residential property though...