Another financial therapy request

Greetings, I'm only an occassional poster but would greatly appreciate some input on my next step.

My situation today is that I own 3 properties. The 2 IPs are fairly cashflow negative and I'm capitalising about 50% of the shortfall. Total LVR including PPOR is 60%. I also have a lot of PPOR debt unfortuantely.

I currently have about $135k in spare equity I can draw out of one of my IPs. I don't hold any shares.

I want to keep buying assets, but this time to diversify a bit and to get something higher yielding as I don't want to increase the rate of capitalising the shortfall too much. Call me conservative

My idea is to use the new $135k loan plus a new margin to buy (through a DT?) about $220k in LICs. They seem to pay around 4% divs I think. Not great but compared to property fairly good.

Is this a dumb idea, should I look at instead buying direct shares? What would you do in my position?

Thanks in advance

 

Thanks Sim.

I read somewhere someone critisicing LICs because they trade at a premium to their asset backing. Is that a significant factor?

 

It's an interesting scenario. You're heavily negatively geared. You also have high non-deductible PPOR debt. Should you borrow more?

I would caution against borrowing a further $220k to invest in the sharemarket. You'd be looking at an interest bill of $17800p.a. Some of that would be covered by dividends (say, $10000), but the remainder would need to be capitalised against rising share market prices.

I'm not sure at this stage of the market if share price rises are 'guaranteed'. Whilst you'd probably only need a share price rise of about 4% to maintain your LVR, it wouldn't be inconceivable for the sharemarket to pull back 10% over a year either.

So you need to stress test various scenarios. Start with the fun stuff like a 25% return p.a. over the next couple of years, then drop it to 20% then 15% etc etc all the way to about -15%.

Also, play with interest rate changes from 7.5% -> 9% and see if you can withstand the scenarios.

Will you get a margin call? Will you have enough cash in the bank to top up your account? Will you be able to sleep at night?

The good times will look after themselves, but whether or not you can weather the bad times should be the decider.

This is the crux of the matter, the LIC vs ETF vs managed fund vs direct shares debate is largely irrelevant.

 

With your level of debt, i would be careful about margin loaning your equity.

Prehaps start with investing your IP equity into a managed fund, and collecting the dividend and using it to pay some of the IP interest.

Plus capatilizing IP interest.. your really skating on thin ice!

Prehaps look at more higher yielding investments like Listed property trusts, and use the dividends to pay some of that interest.

 

Thanks for everyones input.

I hear what you are saying about skating on thin ice, I know it might look that way. The capitalising of some of the shortfall on IPs is only for 2 to 3 years at which time our household income will go up substantually.

That said perhaps it might be more prudent to just buy $100k of shares and not margin them. Decisions decisions...

 

Hi shake-the-disease,

You mentioned that you have a fair bit of non-deductible PPOR debt. Might be worth your while to read this post from Corsa over at Somersoft, it's absolutely marvelous.

Interest on Interest and Capitalising Interest - the Facts - Somersoft Property Investment Forums

There's more than one way to skin a cat.

Mark

 

Probably a good idea