Changing Direction to Improve Income

Hi everyone

I have been trying to change direction as far as investing goes for the last 6 months, the more I read the more confused I get and you guessed it, "DO NOTHING".

I have $5M in property, and $2.5M equity.

I use LOC to fund all shortfall, including capitalised interest. At present this is around $50K-55K pa.

I would like to diversify into either
shares
managed funds
LPT

I would like to improve cashflow but hopefully not sacrifice capital growth

Can someone recommend a financial person or just a simple way to move ahead.

Cheers and thank you

 

Hi Always

With that level of equity you should be able to comfortably generate an income which more than covers your negatively geared property portfolio.

Essentially you're working the arbitrarge between your cost of funds and the income return from say an income fund like NavraInvest or high yielding shares or property trusts for example.

The good folk at Navra Financial Services Navra Financial Services will be able to use their Xplan software to model various cashflow scenarios and "what-ifs".

I'd suggest you give Mark Raymond a call.

Cheers
N.

 

Nigel, can I ask what the Xplan software model is ?

As a NFS customer I have never heard of it.

 

Hi H2L

It's a suite of financial planning software which I understand NFS uses to help it develop a financial plan for its clients.

See here for details about Xplan XPLAN TECHNOLOGY - AUSTRALIA. I understand from Steve and Mark that the version NFS use has been heavily modified to take into account their optimised approach which includes investment property - something most FPs just won't consider

Xplan is just one product. There are others like visiplan and Coin.

Cheers
N.

 

Congratualtions on getting yourself into such a strong financial position.

Back of the envelope calcs would suggest you could get an additional 1.5mill facility, use it to buy higher yielding assets (bank stocks, utilities, LPTs, managed funds like the NAvra one etc) and if you like then ramp that up with another 1.5 mill in the form of a magin facility. If the income exceeded the cost of capital by say 2%, then that would provide $60k pa and cover your shortfall.

That would give you 8 mill assets and 5.5 mill in debt neutrally geared.

I'm not a FP and the above is not advice, just an idea to chew on perhaps.

 

Thank you for the help and generous comments.

I am trying to soak in as much information as I can at the moment.

I have noticed is that management fees can be very costly and really bite into your profits. I guess not a problem if the returns are excellent.

I have also been looking at the idea of investing money into high yielding bank shares etc. Looking at starting with small amount $100K and margin lend at 50%. Still not sure about margin lend though??

Once I start feeling comfortable with the process I could then look at other options.

I also have a friend who has been able to give me some great tips and has been successful with resource stocks.
I have just invested $10K in resource stock, just to see how I go, they were .58c 3 days ago and have now jumped up to .77c.

In future though I think I will be concentrating on blue chip stocks and look forward to any help I can get as there seems to be some great info on this forum.

Thanks again.

 

while margin lending is great, if you have ample funds in a LOC, it may be a better option to draw all funds directly from ur LOC and skip a margin loan, this is because LOC interest rates are usually cheaper than margin loan rates, as well as no margin calls and faster process when buying and selling out of funds (ie doesnt have to go through your margin lender)

just a sugestion, not advice...

 

All good points as to the downside of a margin loan.

I feel though that by not utilising a margin loan you are possibly not making full use of your borrowing capacity. By using a margin loan and leaving the LOC undrawn you are ready to act on any other oppurtunities that may come along.(real estate wise)

I use the margin loan approach by utilising 1/2 my LOC and then a margin lending for the rest (other 1/2). In this way I still have 1/2 my LOC available and still am below the 50% lvr on the margin loan. I don't reinvest but use the income to pay all the interest (I don't capatilise) and with the remainder generally pay down the LOC. (after living expenses)

In relation to the costs my Margin loan and LOC are both at 7.25%. I am told this is a very good rate, so the only draw back is having to deal via the margin lender.

One rule I do apply is that I don't invest more than the total equity of my properties.

Cheers

 

Bingo! Great point Handy. It's all about making efficient use of your assets. Work your assets hard rather than working yourself into the ground.

In corporate speak, don't have a lazy balance sheet! Of course you must stress test and look at what-ifs but I think there are lots of people who could easily replace at least one, if not both, family incomes if they just worked their assets harder...

I'll get off my soapbox now

N.

 

Keep going Nigel....

This is probably not easy to answer, but will ask anyway.... what about an example, on how you have used the lazy money to make it work.



Cheers

AL

 

Hi Handyandy
Thanks for that info, it helps.

I have also read where investors use margin lend to purchase high yield shares etc. and capitalise interest on the margin lend, yields are then used to reduce LOC. As pointed out though LOC interest would be lower.

I contacted MB today and they advised me that I could not capitalise interest on a margin lend? Will also be contacting Comsec.

Interest rates varied, around 8.75 - 9.00%


AL

 

Collier Global Securities

Hi All
just continuing with my research.

Went onto Colonial First State site, Collier Global Securities seems to be providing a very good return (6 monthly), also excellent growth.

Just interested to know whether these are the type of products I should also be looking at.

Thanks

 

Nigel I have this image in my mind that you are somehow associated with NFS? Or is it just that you are a client/investor with NFS?

AL, just curious as to your views on diversification.

I would guess you haven't got that nice chunk of equity from share picking, so am curious as to why you want a 'change in direction', I mean if you have some skill with property I would venture the next 2.5 would come more easily where your strengths are.

Having said that I like the idea of capturing the beta of the share market if you want to go in that direction and recognizing how tough it is to pin down market outperformance, you can leverage the beta to 70% with some products I have seen and you get low management rates compared to damaged funds. I saw David Murray (of future fund fame) mentioning 12.8% as the 50yr returns of the Aus market and suggesting they would largely like to track that, with a much smaller punt on finding alpha.

Translation of that is capture the market with an index fund style product and then take a punt of finding a star share picker with a much smaller % of your capital.

Interesting story about the resource picker, lots of heroes around at the moment, lucrative while it lasts, potentially very lucrative! but it's a story with a well known ending.

No idea of what your situation is, curious though.

 

Is there an index fund (say ASX50) that also pays the divs out and passes on franking benefits?

 

Not guilty your honour!

Steve's a friend of mine. I was (indirectly) one of the seed investors in the funds' manager NavraInvest Limited way back in 2002 (I think). So Steve's working for me!

I have some investments in the Navra wholesale fund. Altho I have fairly strong personal cashflow, I have been using that income to fund various other investments, including some VC/private equity investments.

I know Mark Raymond and think he's an excellent financial planner (from the discussions we've had about investing). Both he and Steve operate with great integrity in my view. Altho like all good friends we don't always agree on everything. The NFS approach aligns with my views on adopting an optimised investment structure involving property, shares and cash. So very much a meeting of minds...

But no I'm not a "client" in the traditional sense with NFS. I don't pay them anything and they don't pay me!

Cheers
N.

 

Thanks Nigel.

'Taming the Lion' Farleigh, is a book you might be interested in regarding VC.

 

Yeah I've got it.

One of the interesting things he says, which I alluded to in another thread is that (from memory) he disagrees with the view that the market is wrong and overshoots...he think the market generally gets it right

It's been a while since I read it so I hope I'm not misquoting him. I'll have to dig it out and read it again.

Cheers
N.

 

Hi Insight

Thanks for your reply.

My IPs are all in WA, unfortunately now that this market has peaked my strategy of building/developing no longer stacks up and rents are still on the low side.

WA may remain flat for a couple of years and as I am capitalising interest I think diversifying may help me and hopefully I can achieve growth as well as improving cashflow.

Cheers

AL