LOE (again)

I posted some questions on Somersoft regarding this scenario; however, I cant seem to get an answer to this particular scenario (can anyone else help )

And In a Reply

Maybe I am presenting it wrong as a question?

 

Yeah I'm not too sure what you're trying to say, but let me give it a go.

Let's forget the crop and income for a moment. With a $3m unencumbered PPOR in a perfect world I'd get an 80% LOC, which amounts to $2.4m. Of course you only pay interest on what you use, not on the $2.4m.

It all depends on what I use. Let's say I need $50k per year. Then I need to pay the incremental interest on that 50k of borrowing. I would also probably want the CG of the PPOR to cover what I used and the interest for the sake of capital preservation.

So... say the interest rate is 10%, we need to cover $55k in the first year.

If CG of the PPOR is 5%, that is $150k per year.

Prima facie, the CG covers the living expenses plus the interest.

Since I got such a large LOC, I wouldn't need to refinance for a long time. I think that's much better because finance is always a pain in the ass. Of course you may not be able to get that LOC, but this is a perfect world scenario.

Then in terms of the crop, that just adds to the available of funds for living expenses. From my understanding (could be wrong), LOE is simply a calculation of the sustainability of funding living expenses based on CG and drawing down that CG. With a $3m unencumbered prop and modest living expenses, it should be easy (not that I'd know though)!

 

Hi Redwing

I already posted a possible scenario on SS.

The scenario I proposed is not to LOE but instead use the equity to generate an income.

Borrow $1.5mil (50%) or as much as possible into a LOC (no cost if you don't draw it down.)

Invest in an income fund like Navra (last 3 years 15%+) but conservatively lets say 10%. Cost is 8% so you make 2%.

On $1.5mil this then gives an income of $30,000 pa. If you then get a margin loan for another $1.5mil then you should have an income of $60,000.

With this method you are not increasing any personal debt and still have some LOC left for a rainy day.

Any LOC used in excess to the amount invested should at least be able to be repaid when the funds provide returns over and above the 10% mentioned.

I see this as a much better alternative to simply spending your equity with no view to reducing the growing debt into the future.

Cheers

At this point is should put that this is not advice and please seek professional guidance etc but I am sure you have read it before.

 

The previous two posts just about sum it up!

You could use property trusts as an alternative to Navra funds or a mix of both. My favorate LPT has been doing over 20% pa income but I do my calcs on 10% also.

Either you spend the equity to live or you use it to fund cashflow positive investments.

MJK

 

Thanks for the replies guys and dumbing it down for me

Whats your favourite LPT MJK

 

Macquarie property income fund?

 

UBS Property Securities Fund. Perhaps I should clarify. Growth plus income but its all the same to me.

What I'm doing at the momoment is as follows.

50% of my managed funds are with Navra and the other half spread across a heap of other funds.
I reinvest automatically the distributions from all the "other" funds.
The Navra distributions are paid out to me.
I capitalise interest within the margin loan and growth plus distributions covers all the cost, maintaining <50% LVR.
The Navra distributions are all mine to do with what I please but because I am still focussed on the building portfolio stage I choose to reinvest the Navra distributions manually back into whichever fund outside of Navra looks good.

So I dont track income seperately from growth in the "other"
funds.

MJK


MJK

 

Margin Lending

MJK,

To clarify you place some of your distributions to keep the margin lending below 50percent and the rest of the distribution you place into other funds??


Bob

 

Is that the Australian or Global fund?

 

Aussie Fund. SBC0816AU 7yr return 8% income + 8% growth, total 16%. Approximately...I dont have latest data.

MJK

 

All distributions from all but Navra go to Margin automatically and this with growth keeps Margin at 50%.
I have the Navra paid out to me to meet any small property gearing shortfalls and could spend the rest but because I am so focussed on my longer term goals I end up reinvesting the Navra Distributions as well into the Margin loan.

The point though is, I dont need to reinvest Navra Distribs to keep it ticking over atm but because I want a larger capital base I put them back in and then buy more funds to bring LVR back up.

If the market tanks I may reinvest all dividends into the margin loan allowing the LVR to go as low as posible. taking aan even more conservative position.

MJK

 

Latest data:

UBS Global Asset Management Property Securities Fund

Nice fund, almost as good as Macq PIF (and Navra )