When can too much 'good' debt be bad ?

Hello All,

I am reading a book by Anita Bell on Prop Investing. She seems to propogate the idea of paying off PPOR and IP1 before taking on IP2...although I am still yet to figure out how she paid off her PPOR and IP1 in less than 3 yrs..

As i am new to this and have seen that most people who buy IP choose to taken an I/O loan and use negtive gearing + tax ben + CG to their advantage.
And then borrow more against the IP and repeat the process.
The only risk, i see in this is if the bank changes the terms and/or Interest rates skyrocket.

I would like to know how most of you have planned to manage this risk ? Honestly..the reason i ask is coz' I am scared to spread myself too thin (i.e too much 'good' debt in sev properties).

Thanks for your patience & comments.
K
 
Hello All,

I am reading a book by Anita Bell on Prop Investing. She seems to propogate the idea of paying off PPOR and IP1 before taking on IP2...although I am still yet to figure out how she paid off her PPOR and IP1 in less than 3 yrs..

What did you draw from Jans books?
 
I manage the risks by:--
1. Keeping total LVR below 80%
2. Keep cash reserves in offset accounts
3. Live within my means and save at least 10% of income
4. Keep insurances up to date
 
The only risk, i see in this is if the bank changes the terms and/or Interest rates skyrocket.


K

There are actually many more risks:

1. losing source(s) of income - eg loss of job (hard to mitigate) or inability to work thru injury (mitigate with income protection insurance)

2. house gets trashed/ inability to be rented (landlord's insurance)

3. House gets destroyed (some cover by building insuarnce)

At present, I my opinion is that when the banks stop lending you money based on "off the shelf" loans, that's when to stop and wait.

Cheers,

The Y-man
 
I think this is quite a valid concern, especially in such uncertain times.

A few things work for me:

Overall LVR at or below 80%
Double income no kids (but this will be offset by paid maternity leave when the time comes)
Total monthly loss on 4 property portfolio (including PPOR) is about 3K per month - actively trying to reduce this through subdivision and sale of land.
Cash buffer that would cover this short fall for about 5 years if necessary.
 
after the last crash of 40% or so i now hold the belief that 80lvr is too high

cant agree with that,

40% crash that would be off a massive peak and if money was invested into other markets that would have been great insurance against this drop.
 
Load me up Johnny....no such thing.

If you've got the cash, I'll be able to find a decent home for it.

All donations gratefully accepted.
 
Hi

At present, I my opinion is that when the banks stop lending you money based on "off the shelf" loans, that's when to stop and wait.

Whats an "off the shelf loan"

SG
 
Hi

At present, I my opinion is that when the banks stop lending you money based on "off the shelf" loans, that's when to stop and wait.

Whats an "off the shelf loan"

SG

Ok, let's reword that to "when you go to apply for a loan at one of the Big 4 and they knock you back".

Cheers,

The Y-man
 
Whats an "off the shelf loan"
Something I can't get at the moment :mad:

Or at least not without 'interesting' haggling.

I'm not much fond of debt, good or otherwise. While I have a house that would make an excellent IP, I'm still doing my best to NOT own it so I have no debt. Evil plans from my mortgage broker at least backs this up.
 
Hello All,

I would like to know how most of you have planned to manage this risk ? Honestly..the reason i ask is coz' I am scared to spread myself too thin (i.e too much 'good' debt in sev properties).

Thanks for your patience & comments.
K

The way I manage my risk is to calcualte the -'ve cash flow over a year (assuming your properties are -ve geared) at a given interest rate (I like using 8% - but thats just me). Then I keep 3 years cash available to draw down on. That way if anything goes pear shapped I have 3 years to get myself back on my feet (or sell).
In the early stages of a property purchase this isnt possible, but after about the first 12-18months it is.
 
Hi

Blacky
The way I manage my risk is to calcualte the -'ve cash flow over a year (assuming your properties are -ve geared) at a given interest rate (I like using 8% - but thats just me). Then I keep 3 years cash available to draw down on. That way if anything goes pear shapped I have 3 years to get myself back on my feet (or sell).

Do you mean keep total amount of the 8% interest rate in cash for 3 years worth or only the negative portion.

SG
 
Hello All,

I am reading a book by Anita Bell on Prop Investing. She seems to propogate the idea of paying off PPOR and IP1 before taking on IP2

This is not a bad strategy as it gives you a very good equity base and less chance of things going wrong.


As i am new to this and have seen that most people who buy IP choose to taken an I/O loan and use negtive gearing + tax ben + CG to their advantage.
And then borrow more against the IP and repeat the process.
The only risk, i see in this is if the bank changes the terms and/or Interest rates skyrocket.

Yes, this is a risk, and YMan has outlined many others as well. I am not sure if you have read Jan Sommer's books, but she advocates having surplus cash each year to put against your loans/LOC's. So essentially if you don't have surplus cash from your investment or wages then you are overdoing it.

I would like to know how most of you have planned to manage this risk ? Honestly..the reason i ask is coz' I am scared to spread myself too thin (i.e too much 'good' debt in sev properties).

As with others I have buffers in the form of offset accounts, LOC's and an ungeared share portfolio that I could liquidate if necessary.

Just another thought - being too conservative can be as costly as being too aggressive! Think of Goldilocks - not too hot, not too cold - just right.....
 
cant agree with that,

40% crash that would be off a massive peak and if money was invested into other markets that would have been great insurance against this drop.

tell that to anyone that bought in blue chip perth, or mandurah or the south west 3 years ago. they would still be in very negative equity. there would be no insurance becasue all the cash went in as 20% equity and costs and it would all be gone. they would be insolvent if the bank called in their debt. i've personally torn up a couple of mill in equity over the past few years - got a few properties sitting at possibly higher than 100% LVR after originally being 70%. one property s underwater and will need cash to exit it.

buying into melbourne at todays prices would hold a similar danger
 
tell that to anyone that bought in blue chip perth, or mandurah or the south west 3 years ago. they would still be in very negative equity. there would be no insurance becasue all the cash went in as 20% equity and costs and it would all be gone. they would be insolvent if the bank called in their debt. i've personally torn up a couple of mill in equity over the past few years - got a few properties sitting at possibly higher than 100% LVR after originally being 70%. one property s underwater and will need cash to exit it.

buying into melbourne at todays prices would hold a similar danger


i cant forcast what Mr Market will do on the share market, and i cant forcast what Mr Market will do in regards to melbourne property PRICES.

but i think you have hit a very VALID point here.

I'm getting hammered on several fronts about the need to look at whether one is an investor or a trader. If they are an investor to try to focus on intrinsic value.

This is exactly the reason why.

People think that buying 'blue chip' whether its shares or property translates into meaning 'i cant suffer a loss'.

Generally speaking, and this doesnt apply in all cases, just generally, buying blue chip allows you to come out the other side. In other words, your investment shouldnt go to ZERO. (again here its a bit different between shares and property, property is actually like a mini monopoly on that place on the earth).

If you over pay for 'blue chip' you have an increased probability of achieving substandard future returns. The propability is not 100%, but the greater the difference between intrinsic value and price paid, the greater the probability.

Why do people recall the 'nifty fifty', and then why do people subsequently deride it???. Its not because the nifty fifty was the problem. The problem was that people thought that any price is justifiable to hold the nifty fifty.

Now consequently, if one was a trader, and that trader sees a change in the trend the trader EXIT's first and then asks questions like 'why' later.
 
fair enough, except in property you can be eaten alive before you can exit. i know because about a year ago i had to sell a property and there just wasnt a market to sell into. putting together a deal in that type of environment will give you years of experience in a very short time. eastpac was about to push the button on me so i HAD to get a result
 
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