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Property and Shares

Discussion in 'Introductions' started by Al1979, 20th Feb, 2017.

  1. Al1979

    Al1979 Member

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    Hi Guys,

    I am a regular reader and sometime contributor over on the property chat forum.

    I am 37, married with kids and currently hold four properties.

    I feel like I have a good understanding of property and am somewhat addicted so continue to soak up knowledge.

    I have ventured over to InvestChat to hopefully learn a little more about investing in shares long term. I have read @austing's "LIC Beginners guide" and loved it. Thanks Austing.

    I have looked at Peter Thornhills stuff briefly and have some interest in exploring his idea of drawing equity from a property as a line of credit and then investing those funds into LIC's, dividends pay interest on LOC and remainder of dividend pays down mortgage, as mortgage reduces LOC increases and more LIC's are purchased. Over the long term the mortgage disappears and only tax deductible debt remains along with a positive cashflow portfolio. Do I have this right? I would love to discuss this further!

    Thanks for reading, say G'day and keep posting as its a great read!

    Cheers

    Al
     
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  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Hey Al - welcome to InvestChat!

    It's called debt recycling and is a commonly used strategy - and worth the effort in my opinion.

    Gradually replacing non-deductible personal debt with tax deductible investment debt is a sound approach to improving the tax-effectiveness of your portfolio.

    A couple of things to keep in mind though - if you can foresee the possibility of moving out of your PPOR and converting it to an IP (especially if you subsequently purchase a new PPOR), you may want to think through the ramifications of reducing the debt on that property.

    You can't arbitrarily increase the loan to maximise the deductibility after you've paid it down - especially if you want to draw upon those funds for a new PPOR, you'll be increasing your non-deductible debt again and reducing your deductible debt.

    Also consider what your portfolio is going to look like in the future - would a family trust or other structure make sense? Are you or your spouse business owners or in high risk professions where asset protection is worth considering? That will have an impact on how you might want to approach things.
     
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  3. Al1979

    Al1979 Member

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    Thanks Simon, I won't say never but I highly doubt our PPOR will ever be an IP. Previously I wouldn't have considered paying the debt down during accumulation stage as I understand the ramifications of you then want to use it as an IP. However with stricter servicing rules I see a lot of value in reducing PPOR debt.

    I hate a family trust that I will likely use in this situation. Very keen on debt recycling through LIC's. Just need to gain more knowledge.
     
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  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think if you are most likely never going to keep an ex-PPOR as an IP, then there's merit in reducing PPOR debt in any case.

    But you are right, in a post-APRA world, reducing PPOR debt is going to be even more important than it was before. Being able to improve your tax position in the process is a bonus - although there is no doubt that the amount you'll be able to borrow as a LOC will likely be substantially less than it was previously due to APRA too.

    You've come to the right place - read lots and ask lots of questions - we can all learn! :D
     
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  5. twisted strategies

    twisted strategies Well-Known Member

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    Al1979 ,

    since you have a feel for property , would REITs ( in their various flavours ) suit you better as a starting point ???
    , one prominent downside with REITs is few pay any franking credits at all .

    as a second area of thought , since you are looking at investment strategies and fund structures , would buying shares in a fund manager ( super or an investment house specializing in LICs/REITs ) , be attractive options

    using Buffet's 'invest in what you understand' principle .
     
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  6. Al1979

    Al1979 Member

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    Hi Twisted, I don't know a lot about REIT's but believe they are some sort of property fund?

    I feel like I have sufficient exposure to property and have enough knowledge to make that work over the next 20 years. I am probably looking to diversify a little now and educate myself on shares in the process. I am effectively setting up my retirement structure now, not just investing for it. As much as I love property and have confidence in it I strongly believe I need to have a solid understanding of shares so that I can structure my retirement efficiently.

    Property will continue to raise capital for me but when I retire I would rather be getting $125k p.a from property and $125k p.a from shares than $250k from property.

    Buffets quote of "invest in what you understand" is great but I would counter that with "If you don't understand it then learn"
     
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  7. twisted strategies

    twisted strategies Well-Known Member

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    but REITs can vary greatly in the properties they invest in

    BWP , and SCP mainly invest in shopping retail space , NSR in safe storage , INM in safe document handling , RFF in rural properties , as a short list of examples .

    your counter argument is fine , provided you are running out of good places to invest ( and have abundant assets to make failure unlikely )

    the current dilemma ( i am facing ) is i need to profitably park cash ( but not at even moderate risk ) , and i have already taken many of the opportunities presented in 2011 and 2012

    i could speak volumes on VAS and VHY but i bought them near cycle lows ( in 2011 ) .
    those 27% and 21% gains respectively , on unit price only reflect the gains on the broader ASX ( less costs and fees ) ( the market gaining more than 27% in that time )

    so apart from the DIVIDEND gains the ETFs have gone nowhere exceptional ( just as they are designed to do )

    but than was 2011 , this year the ASX is quite likely to loss more than 20% in a big dip ... and then maybe claw it back .

    so you can wait for that dip ( which is NOT guaranteed to come )

    put cash in at regular intervals during the year ( some will be high some will be low )

    or say put $10k ( or $20k ) into a ETF or to two , leaving the rest in the bank in case of a major dip , or another compelling opportunity arrives ( i bought BSL in an institutional placement @ $2.40 'new share price' [ was 40c before a 6 into 1 consolidation] .... they have since been sold at a very nice profit .. over 300% in about 3 years )

    rightly or wrongly previously made plans got delayed for 3 years ... but the opportunity was taken and succeeded .( because the cash was in the bank , to take advantage ).

    cheers and good luck ,
    i am single , old , and NOT looking like i will get a birthday card from the Queen ( or King should i outlive her .) .
     
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  8. Al1979

    Al1979 Member

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    Thanks twisted, I am enjoying hearing about all the different options and to be honest maybe REIT's could be where I end up. I have a bit of time ahead of me so I think it is imperative that I learn about the share market. I feel like I have done my apprenticeship in property (always more to learn) and now I want to increase my knowledge and do an apprenticeship in shares. It's my opinion that with a reasonably solid asset base, strong knowledge of property, strong knowledge of the share market and almost 30 years before retirement I could change my kids lives forever. I enjoy learning and love the journey, its also a bit of the tattslotto feeling, you know, a "ticket to dream".

    I think at this stage I am happy with any investment that is reasonably low risk and has a reasonably good yield.
     
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  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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  10. austing

    austing Well-Known Member

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    Agree.

    Areits (Listed Property Trusts), no thanks.

    Why? A picture will help:
    IMG_0026.PNG

    And very importantly, read this article to understand the "yield trap" with Listed Property:
    Welcome - Motivated Money (Round and round we go - My Say No 53)

    PS: The main ASX index ETFs such as VAS / STW already hold Areits by market capitalisation.
     
    Last edited: 22nd Feb, 2017
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  11. austing

    austing Well-Known Member

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    Hi @Al1979,

    If you've been following me and my Thornhill ramblings on the other site I assume you've seen this diagram on Debt Recycling:
    IMG_0081.PNG
    Source: Motivated Money
     
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  12. Al1979

    Al1979 Member

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    Hi @austing - yes I have been reading everything on the other forum. Some great information! I have seen that diagram but was still a little lost however I saw an explanation by Terry in one of his structure threads and it has clicked. I am still reading a lot (on page 9 of your Thornhill thread currently) so I will read everything before asking further questions.

    I have a feeling you are changing some peoples lives with what you are sharing mate. Thanks.
     
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  13. twisted strategies

    twisted strategies Well-Known Member

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    away from REITs ??

    i did initially, investing heavily (.. over 30% of holdings )in bonds , hybrids and notes , back when they offered good returns on the risk taken .

    however sensible companies traveling well have a habit of retiring that debt early ( redemptions ) , and that is what mostly happened , i was redeemed/converted out of them ( profitable but not as long a term as i had hoped ).

    leaving such equities with unsatisfactory ( to me ) substitutes ( i still hold MBLHB and SVWPA ... CAMPA will be converting soon )

    when risk is considered , there is not much value in the current market , but where ( and when ) do you start to build the base for your investment plan ??

    i would have suggested financial services but political meddling in regulation changes ( especially if this lot loses power ) makes such a suggestion unthinkable ( to me )

    yes i can still find return on investment but not without ( mid-term ) significant risk of capital loss ( AKA share-market crash ).

    i would love to go back into interest bearing equities ( more heavily ) but most are unsecured and in many cases 'junk bonds '