How much risk is TOO much?

I need to obtain a PPOR while retaining my investments. Nice if I can do it eh?

I could put down $150k as a deposit which is free from any encumbrance.
So far so good.

Then I would get a loan for another 200k; so total value of PPOR would be $350k.
Once my loan is in place I would wish to borrow against the equity of $150k.

Say I could borrow 80% - $120k.

I could then margin lend into a income fund such as Navra; and use the income to hopefully pay the home loan of $200k balance.



My question is how much debt recycling is TOO much?

Perhaps a strategy would be to have amount in offset as backup?
PS - I could struggle to pay the entire house payment on 200k if the scheme fell over.
Any thoughts / adjustments/suggestions welcome?

 

I am currently considering a similar scenario except i won't be using investment income to supplement my employee derived income to pay my loan on my PPOR.

I prefer to reinvest the dividends automatically. I know this isn't the most efficient means to reinvest in terms of maximising returns, however it is the most efficient means for me due to time constraints. I cannot pick the top or the bottom of a market and over the longer term I don't believe that it will make a huge amount of difference.

When I ran the numbers on my scenario I ran a very detailed budget. It sounds obvious however this is the cornerstone of these sorts of analysis. Once I had this established I factored in interest rates at 9%. This provided my base case scaenario. I could then see how much "wiggle" room I have or to put it another way how much "Oh ****" money I had without having to dip into the cookie jar. My analysis includes tax benefits and then feeds into a set of assumptions that shows my equity and at which point in time I envisage hitting the number I need to pull the pin on the income I desire.

How much is too much ? No-one can tell you, its a matter of running numbers again and again until you are happy that the numbers are as correct as they can be, that you understand the weaknesses in the numbers you have run and then standing back and seeing if you are comfortable with the result, whether you are cutting it too fine.

The answer is in the numbers and being honest with yourself as to what you can live off. Don't stack the numbers to give you an answer that you want.

 

But where's the fun in that?

 

sleeping at night

 

To the best of my understanding, the banks will lend on 80% of the security value. In your case that would be 80% x $350k = $280k. Less the loan of $200k gives you $80k to invest.

Of course, you can reborrow at a higher LVR, but I think you would need to look at your scenario using these figures.

Hopefully you arrive at a strategy to suit.

 

What happens if you have a period of negative growth in the share market and have to fund the margin loan on your managed funds .

See Change

 

Thank you Lauries - so if i bought a home worth $400k and put in 150k; it would go like this -
400k x 80% = $320 minus the amount owed $250k leaves me with the ability to borrow back $70k

Or if I bought a home worth $300k and put in $150k it would be 300 x 80% = 240k minus the amount owed $150 leaving $90k to borrow back.

Or I could borrow 80% on the new home ($280k on the 350k home) and use the balance of my cash $80k to invest.

A lot of it is a matter of preference really eh?


Thank you v much to you Dr Lobster and Glebe for your input which pointed out something I should know but hadn't considered enough - The fact that I need to make absolutely certain I am comfy with any arrangement i put in place.

Any other experiences/advice appreciated.

 

Whats the name of that creek Seachange - yes that one- that the the creek I am up.

Have to factor in some safety lifeboats for this to be any good to me.
Thanks.

 

Thanks Doc,

Stacking the numbers sounds better to me he he.

But seriously you are right EXCEPT I disagree with running a detailed budget.

I would rather have a thorough understanding of where the figures can go wrong - a la various perverse scenarios.
I reckon working out a meticulous budget doesn't help in this.
Too many variables to b udget usually.
Thanks for you help.

 

Actually that's an excellent point ! Certain personality types (at least mine) cause people to cloud the figures to convince themselves they can do it no matter what. Doesn't always work out

 

Yeah and you'd have no paddle either!

Seech's point is a valid one. You need to be able to weather a prolonged downturn. How long and how much you need is an individual choice.

Cheers
N.

 

Maybe the point I should have made is that ( IMHO ) if you know what you are doing you can make a considerable amount of money when the market is favourable .

If that is the case , how much of a risk do you need to take when it's not favourable , if , the downside of taking that risk is going back down to the ladder to ( possibly ) the start ( or even further back ... ).

If you wern't concerned about that , you wouldn't be asking the question....

See Change

 

I stared investing in 2000 and the question you ask has ppreoccupied me ever since. I still haven't found a 'perfect' answer.

Here's the way I look at it now (e.g. when beginning a margin loan to supplement a managed fund portfolio initially financed by increased equity from property investments. Steve suggested a safe gearing ratio of 50%. That would allow a fall in vlue of about 25% before triggering a margin call. That seemed an adequate cushion to me in the circumstances of the time and currently.)

But I did an interesting little experiment. I fed the Navra (my sole current share investment) unit price series and distributions into an Excel spreadsheet which held the proportion of Navra dollars to cash balance constant. Then I used the Solver function to see what proportion would have maximised the nett worth of my cash/Navra portfolio. The answer was that I should have borrowed 19.5 times my initial amount of cash.

Now the reservations. Firstly the period for my Navra data did not include corrections of any size.

Second, the figures used daily rebalancing, which would be impossible to achieve. You would send the Navra staff crackers if you tried.

The nett value of the portfolio swung around like a drunken sailor even in a relatively benign period. It would take nerves of steel to maintain that ratio.

Nevertheless my gut feel is that for most share investments gearing to the maximum allowed by the lender is the most profitable in the long run but that most of us most of the time couldn't psychologically stand it.

When my CFS-ridden brain clears a little more I hope to repeat my exercise with more up to date figures and a more realistic rebalancing frequency.

jenpalex