Join our investing community

Advice on investment strategies - Living off equity & investing in shares

Discussion in 'Investing Strategies' started by Gem16, 21st Sep, 2007.

  1. Gem16

    Gem16 Member

    Joined:
    14th Sep, 2007
    Posts:
    10
    Location:
    Brisbane
    Hi all,
    New to this forum & trying to work out our way forward with our investing strategy. Our goal is to eventually live off equity from our investments. Current situation;
    PPOR value $500k, loan $400k (note $100k is non deductible debt, 300k is deductible debt)
    IP 1 value $435k, loan 1 $390k
    IP 2 value $385k, loan 2 $320k
    IP 3 value $330k, loan 3 $264k (estimated completion date March 2008)
    IP 4 value $330k, loan 4 $264k (estimated completion date October 2008)

    As at October 2008
    Total assets, $1,980,000
    Total liabilities, $1,638,000
    Total equity, $342,000

    So far, we have been planning to purchase more properties & eventually live off the equity......however, we know that servicibility will probably become an issue for us when we try to buy the next one. We recently came across the Living off Equity articles posted by Steve Navra.....which so to speak, gave us a lightbulb moment! It seems that the share component of the portfolio compliments the negatively geared IPs beautifully by generating the income that can sustain the portfolio costs......but it just seems too good to be true!!
    My questions for members;
    (1) How can you buy shares that can give an almost guaranteed income of 10% & growth of 5% (as per the example in the article). Even with the dollar cost trading method, isn't there still a risk of the share prices going up or down?
    (2) What other managed funds to members invest in besides NavraInvest?
    (3) How would you move forward with your investment strategy if you had $342,000 equity in property?

    Thanks in advance
    G
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Gem,

    I am intrigued about how you get $300k in your PPOR being tax-deductible?
    This is some sort of redraw facility?

    1. Guaranteed income of 10%. I don't think so...The closest thing to Risk Free Rates are the RBA and they are paying 6.5%. I don't know where you live but just like shares, properties in Sydney's western suburbs have decreased in price, just like shares can. It's only because property isn't as liquid that you can see daily ups and downs...

    2. I'll let someone else answer this one, because this could be a thread or two long.

    3. Personally I would diversify into different asset classes, but that's me personally and not advice.

    Cheers,

    Dan

    The above post is not an inducement to invest in any asset class. Before making an investment decision it is important to discuss with your FPA registered Financial Planner, Accountant or Tax Adviser.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    "Almost guaranteed" is just marketing spin ... the simple fact is that there are no guarantees at all.

    This is a commonly asked question about the Navra fund and the DCT methodology, but the reality is that in the 4+ years that the Navra funds have been operating, we haven't experienced a good example of every market condition by which we could test the funds ... the only thing we have to go by is "back testing", which is no proof other than from a conceptual point of view.

    That being said, we have seen 4+ years of more than 10% income - so it is working thus far ... but again, this does not prove that it will always work.

    Like many others here, I do use the Navra funds to generate income to help pay the holding costs of my investment portfolio, and together with the use of cash buffers to smooth out any periods of low income distribution, I am confident that over the long term we should see an average of at least 10% distributed. The cash buffers are there because there are no guarantees, and "almost guaranteed" isn't good enough :D
     
  4. Gem16

    Gem16 Member

    Joined:
    14th Sep, 2007
    Posts:
    10
    Location:
    Brisbane
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
     
  6. Gem16

    Gem16 Member

    Joined:
    14th Sep, 2007
    Posts:
    10
    Location:
    Brisbane


    Hi Sim,
    Thankyou for the feedback. If we were to go ahead & invest in a managed fund :eek:, it would make sense to forecast an appropriate cash buffer. Just one question;

    (1) How do you calculate a conservative initial cash buffer figure? Is it simply a percentage of predicted total portfolio costs? .....or is it more complex than this?

    Thanks
    G
     
  7. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Just out of interest, how much loss are you making on all those properties each year?

    I would imagine it would be quite large on so many properties.

    Secondly there is no garrantee in yield. Shares generally only pay about 4.5% yield, not 10% so your relying on the rest been gained from trading/capital growth.

    Plus the last 4 years have been boom years in the stock market, so it wasn't hard for anyone to produce profits of 10%+ in the market.

    In saying that, I don't see why you would put money into a asset which only returns 8% PA return.. ie property.. when something as simple as the Navra fund returns 15% PA..

    I'm not good with Maths, but if you borrow money from the bank, say at 8% PA, and invest it into property and get 8%, that means your not making any money at all! Just breaking even.. But your holding all the risk of a downside!

    Whereas Margin loans are 9.25% and Narva fund returns 15%PA, your making 5.75% return on the banks money!

    I don't know about you, but I like the latter result more. As the fund grows, you can continue to draw equity from your margin loan and buy more managed funds..

    Plus with your stratergie, your putting all your eggs into the property basket.. If property fails to grow, then your going no where.. whereas using funds and trusts, you can diversify easier.. lowering your risk..

    With your type of borrowing, I hope you have fixed your rates!!!
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    I'd work out a realistic figure for what your holding costs will be for the entire portfolio (including accounting fees and everything else), and if you can afford it, hold, say, 12 months worth of these costs as a buffer (ideally in an offset account so it is not sitting idle).

    How much you hold back depends on your thoughts on risk and your exposure to volatile income streams ... you need to consider "what would happen if I received only X% over the next 12 months from this investment", or even "what would happen if I received $0 income from my portfolio over the next X months"?

    Being able to hold your assets through the bad times is what will lead you to making the most out of the good times that will eventually follow.

    How far you prepare is up to you ... although it might be worth sitting down with your advisors (accountant etc) who understand your portfolio and circumstances to have them help you with a risk management plan.
     
  9. Gem16

    Gem16 Member

    Joined:
    14th Sep, 2007
    Posts:
    10
    Location:
    Brisbane


    Hi CRC,
    Property is fantastic for leveraging, you can borrow up to 80% of its value & utilise the equity to purchase further IPs or other assets. However, in our situation we are highly negatively geared, hence this post to learn more about other assets that can provide income to offset our property costs. We are never going to be able to traditionally "save" enough money to buy a substantial share portfolio (if we want to live on equity), this is the beauty of investing in property as you can let "Mr Equity" do all the hard work of saving for you!
    Regards
    G
     
  10. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Just did some sums, your property growth should be $158,000 PA

    Your loan commitment is $131,000 PA
    Your rent collected is $79200 PA
    Shortfall is $51800 PA

    So Capital growth less shortfall is $106,000 PA

    Now in my calculations I have not deducted other costs like Repairs, house insurance, rates, land tax, real estate commission of 7% rental, body corporate (if unit), re-letting fees, advertising and the list goes on. That could easily add up to another $25,000 in expenses per year. Then we see a more realistic return of 23% PA. But you will get a tax refund of about $15,000 PA which will cover some of those costs.

    So your $342,000 equity is making you $106,000 profit less $10,000 in costs plus tax refund = $96,000 profit PA or 28% PA ROI.

    Now lets look at my stratergie.

    $342,000 + $508,000 margin = $850,000 invested 60% LVR

    =$127,500 return on investment in Narva 15%
    = $46,900 margin interest
    = $80,600 profit in your pocket.

    So using property you would make $96,000 on your money, with Narva you would make $80,000. So yes property is more profitable at these suggested levels, but you need only something to go wrong, like a heater blows, couple vacancies etc which would bring down your $96k to 80k giving is a similar result.

    With Narva, there are no worries.. with IP's you would be dealing with a vacancy each two months, house maintaince, other issues. plus a $50,000 PA interest shortfall.

    How are you going to afford a $60,000 per year expense! both of you must be earning a good income!
     
  11. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    But how are you going to draw out this equity? It would seem you must be at your borrowing limit by now?
     
  12. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    Until this boom comes to an end.

    Imagine a year where the share prices go backwards and you still have to pay your interest costs. Cant capitalise interest when this happens.
     
  13. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    Dont forget to calculate the interest on the equity you withdraw.

    So interest on $342,000 @ 8% takes an extra $27,360 from your profit.

    Also dont forget to calcuate that the negative geared property will become less negative over the first few years. Negative properties eventually come positive remember.
     
  14. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    And property can't go down in prise? At least the fund you can capitalise for a period of time.. with property, you loose your job, or something else changes where you cant pay the bank... then your in trouble!
     
  15. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    My second example has nothing to do with property. I showed two possible uses for the $342k cash. One was to use it to buy property, the second was to invest into a managed fund like Narva.

    This would the case with the 'living on equity' plan yes.. in my opinion gearing upon geared money and then margin loading it again is a high deck of cards stacked very high!

    It wont ever become positively geared, as their stratergie is to constantly redraw new equity to buy more IP's or invest into income funds like narva.

    I look at the total return of the investment.. it doesn't matter if its made of up income or growth.. essentially as the property value grows, so does the rent, and the LVR becomes lower as the loan amount remains the same.