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Scenario to use a LOC

Discussion in 'Investing Strategies' started by Redwing, 9th Aug, 2006.

  1. Redwing

    Redwing Well-Known Member

    Joined:
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    Location:
    PERTH..WA
    Hi All,

    Any thoughts on the below scenario in how best to use a LOC would be appreciated;

    Say a person has;

    4 Investment Properties in WA valued at $1.1M approx with Loans of $640k, giving a LVR of 58.18% and an average yield (on Purchase prices) of 7% I also calculate costs of the Property Managers etc as 25% of the rent on these IP’s.
    ;)

    3 IP’s are FI-IO and one is Variable via a lo-doc and held in a HDT.

    Repayments per year would be around $46,200 and rent of $43,400- I work this out to be a cost to 'this person' of around $1,053.21 p/mth or $263.30 p/wk

    The person is on an Income of around $50k p/a with two children and a stay at home (some ad hoc part time work) mum.

    My Thoughts are to establish a LOC of $150k against 3 of the IP’s and then

    A-
    Use $70k to purchase another IP in another State (around $250k and renting at $260 p/wk) use $50k to purchase Shares in a Managed Fund and keep $30k as a Safety Buffer

    B-
    Use $100k to purchase Shares in two (2) managed Funds at $50k each and keep $50k as a Safety Buffer.

    RedWing
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
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    Redwing

    I would not presume to give this hypothetical person advice. However, it seems to me the key difference in strategies and thus return is the extent of leverage. Bear in mind borrowing magnifies both returns AND losses.

    Why not put together a little spreadsheet to compare returns? For example, by my rough back of the envelope calculations, a property geared at 80% LVR growing at 6%pa on average will result in net assets over 10 years of about the same as ungeared assets growing at 18%pa over the same period.

    Also, it is only in the later years that the ungeared assets start really catching up to the geared asset in terms of net equity...

    Crunch some numbers and talk to your accountant/financial planner.

    Cheers
    N.
     
  3. Redwing

    Redwing Well-Known Member

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    Thanks Nigel,

    Still looking at options and scenarios

    RedWing
     
  4. Redwing

    Redwing Well-Known Member

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    Things are getting clearer..I had to try and understand the concept of using the LOC to pay off the interest on an IP Loan i.e

    example

    If you are Paying I-O, F-I on a $230k @ 6.89% loan you pay $1,320.58 p mth or $15,846.96 per year.

    By using the LOC I-O to pay the interest component for the above for the year you pay $112 per mth or $1,344 per year.


    Trying to look at this and apply to several IP's and paying all your interest on the IP's for the year, I guess you are defering debt and capitalising your interest?

    When buying a new IP would it make sense to pre-pay one years interest payments via the LOC and then use the rent from the IP to assist in paying down the LOC and giving you some breathing space for 12 months (or longer if need be)?
     
  5. blackjack

    blackjack Member

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    Location:
    sydney
    Redwing I dont get what you mean. please explain?

    does this mean u are paign interest on interest. of the LOC component?
     
  6. Redwing

    Redwing Well-Known Member

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    hmm..

    Maybe one of the brokers here can do a better job than me (I'm still learning:) )?

    However, my thoughts are with sevral IP's on the go you could defer paying the interest component for a year (or two, three or five) by using the LOC Funds..

    My Loan payments are reduced from $1,250.58 p/mth (IP Loan)to $112 p/mth (LOC Loan)...assuming a rent of sayyyy $250 p/wk or $1,083 p/mth it makes payments a bit easier..you of course still have your $15,846.96 owing but its now in your LOC Loan..in the meantime your IP has increased in Capital Growth; looking long term you can refinance or top us well with the increased equity (if more than the Interest Component)..exactly like the Living of equity Scenario..but different ;)

    I haven't extrapolated this out or put it into a spreadsheet..I'm just throwing ideas around (maybe somebody smarter can do this?)
     
  7. Redwing

    Redwing Well-Known Member

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    Am i explaining myself (or losing even myself?)
     
  8. snowflake

    snowflake New Member

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    Location:
    Melbourne
    please explain!!

    Hi Redwing... As a newby, if you PREPAY interest on your loan... how come its less am month? Are you talking about the PAYG option of prepaying tax???:eek:
     
  9. Redwing

    Redwing Well-Known Member

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    Hi Snowflake

    I mean that you pay the $15k interest from your LOC, thereby reducing your Monthly payments from $1,250.58 p/mth (IP Loan)to $112 p/mth (LOC Loan)...

    However, all I've done is defered paying my $15k as it now sits in the LOC