Why not borrow 100% and use 'deposit' for managed funds income?

[Firsthomelooker]

Hi everyone, hoping to find someone else with this strategy, or someone to tell me why it won't work before I go ahead and do it

I will have a 50k + costs deposit to purchase IP#1. I have a PPOR but no equity to draw from it yet (currently at 80%LVR, not going to refinance to higher for various reasons).

I have recently begun reading about managed funds as an income stream, particularly Navrainvest which I read is returning 20% growth, 15% as income currently.

So I have two scenarios in mind:

1 - Purchase $250,000 PPOR, $50,000 deposit
$1320 monthly repayments, principle & interest at 6.9% over 30 years
$~400 monthly costs (rates, BC etc)
Rent $1000 monthly

Shortfall = $720 monthly

2. Purchase $250,000 PPOR, No deposit 100% finance
$1760 monthly repayments, principle & interest at 7.6% over 30 years
$~400 monthly costs
Rent $1000 monthly
$625 monthly income from $50,000 invested in 15% income fund
$583 monthly income $100 000 margin loan invested 15% income fund, less 8% interest

Shortfall = $48 monthly

Additional benefit is the 5% capital growth on $150,000 worth of managed funds

I have a very simple understanding of investment strategies at the moment, and if buying into shares/managed funds is this good, why don't more people do it? Is the risk simply too high? What am I missing?

 

[The Y-man]

What am I missing?

Volatility. It comes down to if you are able to support 0 returns from your funds in some years.

Also, a minor item of LMI.

Cheers,
The Y-man

 

[alexlee]

I have a very simple understanding of investment strategies at the moment, and if buying into shares/managed funds is this good, why don't more people do it? Is the risk simply too high? What am I missing?

Because 20% isn't always sustainable. What happens when the return is lower or even negative? Can you still afford the cashflow shortfall? People don't go broke from falling values: they go broke because they can't afford loan payments.
Alex

 

[The Y-man]

HOWEVER.......having said all that, if you were able to originally fork out $720 a month, you should then be able to invest ANOTHER $660 odd each month into your managed fund in option 2.

Cheers,

The Y-man

p.s. is this a ppor or IP??? if it is ppor, why is there rent?

 

[Sunfish]

You guys really show me how old I am. This is a stupid proposition which could only be seriously put forward in this serendipitous time when we are in the middle of an asset boom.

There seems to be an attitude that funds always return double digit returns without risk. Frankly this is crap. Big time!

In case you missed it when I said it before: The best investment you will ever make, long term, is your PPOR. Assuming you have a family your first responsibility is to them and to provide the basics. Your kids aren't going to say, "Gee Dad, pity we are living on the street but I know we would be on easy street if the market hadn't tanked. Bad luck." And your sex life may take a turn for the worse. LOL

 

[Ol School Skata]

First home looker,

By adopting an approach you have laid out, you have increased your gearing ratio considerably in this situation.

• Would you be able to cover any margin calls for this position?
• Have you considered that the "income" you would receive from this fund is partially realised capital gains and as a result tax payable will reduce your net return?
• Have you done sufficient research on both the local property market and research into the sharemarket, investment style and philosophy of the fund manager? As they say, previous results do not necessarily indicate future performance?

• Do you are believe you are adequately educated to forecast what you anticipate both the property market to do in the long/short term? If you what to experienced investors believe

However on the flip side, there is the potential capital growth of both investments

Do a proper risk assessment as part of your own due diligence.

There is nothing wrong with asking the question, just make sure you do thorough research and seek the advice of others qualified/experienced enough to do so.

OSS

 

[sue78]

this could work if

1) get a 20% discount on a property (LMI fixed)
2) buy an IP that breaks even ($720 mth shortfall is a bit risky)

managed funds don't always return 15% income. I bought into a fund about 2mths back, got a statement recently and i'm down $3k!! lets hope that it performs better over a 1 yr period. Also managed funds don't always pay dividends...they can choose not to make a distribution if they want to. I have yet to hear of a distribution from last quarer so I assume they won't be.

this is also my 1st foray into managed funds and as with shares...it seems I have no luck.

I am very nervous and thinking about clear exit stratgies now for down the track.

property is king of all investment classes as far as i am concerned.

 

[Firsthomelooker]

Thanks for your comments everyone, I am very new to these concepts and didn't quite know how to safety test this idea, and I don't fully understand all the variables at this stage. You have all given me a great starting point for further research. Needless to say, there won't be any rushing in to anything

 

[Simon]

Also managed funds don't always pay dividends...they can choose not to make a distribution if they want to. .

Not sure if that is the case. I believe a fund must distribute all earnings each year and cannot retain earnings for reinvestment.

 

[alexlee]

Thanks for your comments everyone, I am very new to these concepts and didn't quite know how to safety test this idea, and I don't fully understand all the variables at this stage. You have all given me a great starting point for further research. Needless to say, there won't be any rushing in to anything

FHL, I think you need to read a bit more about economic and business history. All booms end. So do busts, of course. Leverage to the hilt when the bubble bursts and you get caught with your pants down.

As property investors we all use leverage. But there is managed, conservative leverage and there is borrowing from a loan shark and putting everything on red.
Alex

 

[austini]

Hi,

Just remember when the markets aren't doing so great there will be less or no capital gains in the fund some years. So guess where the fund manager gets their fees from - the income eg dividends from the underlying assets. So by the time the fund manager dip their greedy hands into the income for their fees there may not be much of anything left for the investor. This is why I'm a huge fan of the older Listed Investment Companies as you actually get the vast majority of the dividends. These really shine in more depressed times and can be relied on to deliver a much more (and tax effective) consistent income stream.

Cheers - Gordon

 

[sue78]

older listed investment companies? for example?

simon - that's what it says in Rreef Paladin's prospectus. They distribute each quarter unless they chosoe not to. Last year it returned 42% combined income and growth. Though thereason i choose them was coz they have been in inception since 1995, has a good rating highly recommended and consistent returns.

 

[MelbEngineer]

Although the lower short fall in the short term looks good, in the long term you property may double in value within 7-10 years. So you need to take that into account. Also on a sidenote, there are some managed funds making more than 15-20%. You may be able to make 40-50% if you shop around.

 

[Omega Investmen]

Higher risk is not bad, just higher risk

Hi FHL,

You've proposed a high risk strategy - in that you're wanting and relying on double digit returns from equities. However, I don't think a 100% or even 105% lend is very risky if you keep your deposit in an ING account as a buffer in case cashflow becomes an issue. As Alex said, people go broke because the can't afford repayments. Holding back your deposit as a buffer will give you a 'safety net' for any higher risk strategy you take in leveraging yourself up.

Alex and I have debated the pros and cons of a 105% loan strategy under the tread: 2 Loans for 1 property in the Property Finance forum if you're interested in reading more.

All the best!

Flynn

 

[tubs]

Maybe you could do it with a 100% loan for the house, but instead of putting all $50k into a margin loan for managed funds, only put in $25k. This leave a $25k buffer in case you get into trouble. You could even put this into an offset account against an existing property, which would help you build in some equity for later.

 

[BayView]

You guys really show me how old I am. This is a stupid proposition which could only be seriously put forward in this serendipitous time when we are in the middle of an asset boom.

There seems to be an attitude that funds always return double digit returns without risk. Frankly this is crap. Big time!

In case you missed it when I said it before: The best investment you will ever make, long term, is your PPOR. Assuming you have a family your first responsibility is to them and to provide the basics. Your kids aren't going to say, "Gee Dad, pity we are living on the street but I know we would be on easy street if the market hadn't tanked. Bad luck." And your sex life may take a turn for the worse. LOL

Newsflash; you don't have to have a portfolio of tanked shares to have no sex life.

(at least; that's what I'm told)

 

[MJK]

Hi everyone, hoping to find someone else with this strategy, or someone to tell me why it won't work before I go ahead and do it

I will have a 50k + costs deposit to purchase IP#1. I have a PPOR but no equity to draw from it yet (currently at 80%LVR, not going to refinance to higher for various reasons).

I have recently begun reading about managed funds as an income stream, particularly Navrainvest which I read is returning 20% growth, 15% as income currently.

So I have two scenarios in mind:

1 - Purchase $250,000 PPOR, $50,000 deposit
$1320 monthly repayments, principle & interest at 6.9% over 30 years
$~400 monthly costs (rates, BC etc)
Rent $1000 monthly

Shortfall = $720 monthly

2. Purchase $250,000 PPOR, No deposit 100% finance
$1760 monthly repayments, principle & interest at 7.6% over 30 years
$~400 monthly costs
Rent $1000 monthly
$625 monthly income from $50,000 invested in 15% income fund
$583 monthly income $100 000 margin loan invested 15% income fund, less 8% interest

Shortfall = $48 monthly

Additional benefit is the 5% capital growth on $150,000 worth of managed funds

I have a very simple understanding of investment strategies at the moment, and if buying into shares/managed funds is this good, why don't more people do it? Is the risk simply too high? What am I missing?

Contrary to popular opinion, I think its a good idea.


1. You can use distributions to pay down non deductable debt.
2. You can make regular P & I payments to reduce non-deductable debt capitalising margin loan interest into deductable debt.
3. You should get a nice tax refund on your margin loan interest to apply to your non-deductable debt.

Personally I would margin the 50K to 50% and buy 100k MF's. I WOULD KEEP THE LVR CONSErVATIVE IN THE MARGIN LOAN!
Risk is acceptable to me. NI is a reasonably low risk fund relative to its peers. Of course there is some risk but you need to risk something for the reward.

This is my opininion which does not constitute advice but rather discussion.

The problem I see with this strategy is where and at what cost are you going to be able to get 100% finance?????

MJK

 

[Able]

Its funny that in the 200-2002 period there was almost no talk anywhere of margin loans. Now there is talk everywhere of margin loans. I am not for or against them. I am just weary of the risk.

A question to all thoughs with margin loans. Assuming markets turn and your portfolio returns start going into the negative - when do you cut your loss and exit?
- Portfolio down 10%?
- Portfolio down 20%?
- Portfolio down 40%?
(remembering that these % losses would be doubled asssuming a 50% gearing level).

Regards
Able

 

[MJK]

Its important to make a personal assesment of where you think markets will go over the next year. Just as you would do buying property.

If you have a very bearish outlook then perhaps a margin loan at this stage is to much of a risk.

Like I said for debt recycling a margin loan is a great tool.

It seems odd to me that some investors are desperate to borrow as much as they can against their properties but are scared to borrow against their equity in shares.

Even if you where to apply for a margin loan so the money is ready for the next correction before entry would be a good idea.

By the way if your property dropped in value by 20% for a year would you sell it?

MJK

 

[Welcome]

By the way if your property dropped in value by 20% for a year would you sell it?

But on the other hand.... do you need to worry about margin calls with property?