Strategy/Advice needed from investing gurus!

Hey guys,

This is my first time on the forum. After reading through many of the posts, I feel extremely privileged to be in the company of such knowledgeable investors.

I would like some advice on the best ways for my wife and I to move forward in my investing career...I am open to any strategies and have no problems with incorporating property/shares/managed funds into our structure. Very interesting in LOE in the medium/long term. Any advise anyone can offer is extremely appreciated.

Here is a summary of our current position:

- Married, 30 y/o, no kids
- Wife's income approx $40k p.a.
- My income very low at moment due to very recently starting a new business from scratch after the company I was working for went into administration. Aiming to get my business income up to approx $50k within the next 6-12 months and then $50-$100k after 1-2 years.

- Wife's income may only be around for approx 12-18 months as we are planning to start a family fairly soon.

- PPOR - value $280k, IO loan $204k (including $45k offset a/c currently $0 balance) plus $20k LOC fully available
- IP1 - value $370k, IO loan $262k plus $34k LOC fully available, Rental Income $480 p/w
- IP2 - value $125k, IO loan $52k plus $48k LOC fully available, Rental Income $135 p/w
- IP3 - value $115k, IO loan $48k plus $44k LOC fully available, Rental Income $135 p/w

- Total LOC funds available = $146k

- Managed Fund - $35k (Perpetual Investor Choice Fund). I've had this fund for about 6 years but have not made any contributions for about 4 years. Has been averaging approx 15% (income + growth) over the past few year and the income is reinvested back into the fund. Combination of asset classes: Australian Share Fund (32%), Smaller Companies Fund (33%), International Share Fund (10%), Property Securities Fund (25%)

- $24k loan - borrowed from a family member, no fixed time to repay the loan but would like to pay it back completely over the next 2-3 years. Currently paying interest only (annually).

We are cash flow negative at the moment by approx $2k per month due to my current low income, so we have been eating into LOC funds before refinancing recently (hence the reason why we are paying IO on our PPOR at the moment). But not really fussed about this at the moment due plan for business income to increase over the next 1-2 years which will offset shortfall.

One idea I have considered is to close the managed fund and deposit the proceeds into our PPOR offset account so we don't need to dip into any LOC funds for personal use (and reduce non tax deductible debt). The fund is also in my name only so from a CGT perspective it would probably be the best time to do it due to my current income.

Also trying to decide whether to purchase another growth asset (which will further add to negative cash flow) or an income producing asset (which will sacrifice on growth). And whether to buy another property, or gear up into a share fund?

Other goals - we would like to use some funds to finish renovating our PPOR over the next 12-24 months which will be approx $10-15k total.

I am very interested to hear thoughts on some of the strategies that you guys who are experienced investors can suggest.

I appreciate any comments and/or suggestions!

Cheers.

 

Roman,

I am not a guru but if I were in your situation I would try to reduce debt.
I would probably close the fund too.
I wouldn't invest in any more IP's and I would concentrate on building the business up.
What type of business are you in?
You would hate to lose the wife's income if something went wrong or for example your business was not going as expected...

Cheers
Bill

 

Hi Ronan

Welcome to the forum. On the limited facts you've provided I have to agree with BV. If you're $2k in the hole each month (even if on a pre-tax return basis) on the income levels you've described I think you're probably overstretched from a cashflow perspective.

That said you've got 2 options broadly speaking. Either:

1) increase your income; and/or
2) reduce your expenses.

Having said that I think you're doing okay to have 3 IPs on this low level of income...well done! Is there scope for increasing rent to help a bit? The $135pw rents sound pretty low regardless of where and what it is.

Good luck with it.

Cheers
N.

 

Welcome Ronan,

Priorities:

1. Cash flow management.

2. Ensure adequate asset protection from business liabilities, e.g. insurance, assets in other names etc.

Cheers,

Rob

 

$2k shortfall per month is pretty substantial for a low wage.

To elaborate a little on what Rob said, now might be a good time to sell your managed funds to fund your cashflow shortfall. That would tie you over for 18 months..

When you do happen to buy managed funds again down the track, consider buying them within a trust or in your wife's name.

What interest rate are you paying your family member back at? Is it non-deductible interest or is it investment related? If it's non-deductible, I'd probably redraw on my PPOR loan and pay my family member back. I personally would be unconfortable owing money to family and friends, but we're all different.

 

Hi Ronan

Great points so far, particularly about insurance for your wife's income. After all, this is what is sustaining you both at the moment. Conduct the "what if" scenarios and ensure that you are covered, even if you only insure for a percentage of your spouse's income.

As far as financial advice goes, do you have a good accountant who's also able to advise? This would be my first port of call- lay it all out on the table, so to speak, and see what plan/scheme can be considered for the benefit of your individual situation.

Best of luck with the business- it's always slightly terrifying going out on your own, but you sound like a man of action already

 

Ronan,

Your post has been nagging at the back of my mind a bit.

From the brief facts you sound exposed to cash flow risk at a time when you will be going through a transition in the major source of your income - i.e. wife soon on maternity leave & you building up the business.

You may have already done this, but I strongly recommend you talk to some business advisors about the growth phase of your business.

Particularly analyse your options and make sure that you are not under-capitalised at a crucial time, usually this happens during periods of growth.

Also, with a new family, you may well need some help in the business as you may be short on time. Could be by employee, contractor or associate so you will need to give some thought to the extra outgoings and risks.

Make sure you don't lose business control or assets by protecting any IP - this all costs to set up.

*AND* it should not be done in isolation from your overall financial objectives and risk exposure. Everything is a compromise.

Just a thought.

Cheers,

Rob

 

Thanks

Hi guys,

Thanks for all of your great feedback. I have definitely taken on board that cash flow management and appropriate risk management is the most important thing for me at the moment.

Out of interest - what would your suggestions have been if I had exactly the same scenario, but wthout the monthly cash flow deficit? (ie. if I had plently of cash flow to support further purchases).

Cheers,
Ronan

 

Roman,
You say this but where is the money going to come from?
Are you planning to tap into your equity?
IMO this is not a good idea so unless you won lotto I would probably take the fund money out and would cut non essential expenditure.
Cheers

 

Property investing is good, and diversifies your portfolio.

But direct investment in property is very 'lumpy' in that you have to get big chunks. This also means big increments in cashflow requirements if you are to negative gear.

Many people start another property acquisition cycle by investing (and reinvesting) in income producing assets to establish enough cashflow (and equity) before committing to the property purchase.

Whilst you have other income to offset gearing expenses, these sources might be a little uncertain in the near future.

Hopefully the new business will take off in due course and more than make up for the loss of your wife's income while you build a family portfolio !!

Cheers,

Rob

 

Hi Guys,

This is where I don't like property.. Your situation changes, ie lower income, and then you can fall behind quite quickly with negative cash flow.

negative IP's are good to get you going if you have a large disposable income.. ie want to reduce your 30%+ tax rates.. but anything beyond this, your really better off increasing your managed funds portfolio.

At least with managed funds, they don't kill your cash flow. IP's only really pay off due to their high gearing, ie 90% LVR.. once you start to lower your gearing, then shares are better..

You have all that tied up equity there now which you can't access due to your income restraints. With shares/margin loans you can keep on re-gearing and access all your equity without causing a further cash flow problem.

I was in a situation with 3 IP's as well, but having unstable income caused me problems. Now with a managed funds portfolio, I can easily adjust for my current situation.

I would look at reducing your debt to a level where rent covers most of the IP shortfall.. following that, grow a managed fund portfolio. Plus if you already haven't done so, you should fix your rates for 5-7 years.. with your level of debt, interest rate movements affect you significantly.

 

Hi crc_error,

Can you elaborate on this point? Are you just referring to how easy it is to exit out of a margin loan (as opposed to selling a property)?

Whether I'm paying $1000 a month to support IP's, or $1000 a month to support a margin loan - I'm still paying the same amount right? Are you doing some fancy structuring?

 

Samaka, what I'm meaning is with a margin loan, you can access new equity on a daily basis, however with a property, you need to re-finance, which is costly.

Its easier to access equity in shares than it is in residential property. So with shares, you can re-gear or buy more, each month, rather than every year or two. as with IP.

Plus with a margin loan, the interest is capitalized, so new borrowings don't really cost you out of pocket.. with a property, your hoping rent goes up to cover your additional borrowings otherwise you need to negatively gear more. Hence you hit a borrowing limit based on your income with IP, with shares, you wont hit any borrowing limits.

 

Ahh, gotcha. Thanks mate.

 

Hi crc_error,

Thanks for the tips. Our 3 IP's are currently only costing around $100-$150 per week in total (before tax refund) which is not too bad. Of course the real killer is the PPOR loan which has no rental income coming in to offset the interest payments.

Due to the liquidity of managed funds, are you suggesting that it could be worth using some of the $140k line of credit funds we have available to invest in managed funds, while obviously keeping an emergency cash flow buffer available in the LOC?

Also, is it really a good time to be starting to invest in a share fund?

 

This is the exact situation I'm refering to. You have $140k available to you, but from what your telling me, your at your limit servicing the existing loans.

To draw out the $140k, can you afford to pay the extra $11k per year in interest ontop of your current commitments? Investing into a managed fund is a good option if you can afford it. You can collect the managed fund dividends which on shares average 4% PA, which will offset 1/2 of the 11k, but you will need to be able to finance the interest inbetween dividends.

Had you had this equity in shares/funds, then you could easily re-draw the $140k and capitalize the interest into the margin loan.. having the whole thing maintaince free!

You could also consider investing into a fund and selling down capital growth to fund the interest as well, or use a fund like Narva which pays out regular distributions.. How ever keep in mind the risk if you don't get dividends, or capital growth to sell down, you will need to make up the cash shortfall..

Personally if I was you, I would hesitate to draw down the 140k equity until rents go up to cover the additional borrowing.

Also make sure you always have redraw available to you for times of distress!

With my situation, my margin loan is now at 50% due to the recent market run, so I'm looking at redrawing the new equity to buy more funds.. I don't need to worry about funding the interest out of my pocket, as it capitilises into the margin loan.. As the investment grows, it automatically unlocks new equity to fund more interest, and additional investments.

I personally re-invest all my distributions for additional units giving me more borrowing capacity.. If you want to be more conservative, you can take the distributions and dump them into the margin loan to offset some of the interest.

 

PS, is it a good time to get additional funds now? When is a good time..

If your worried about timing the market, you can either wait for a market correction like we had recently, or you can spread out your entry points.. say invest 10k per month for 12 months.. hence dollar cost average your entry point..

If you diversify your portfolio into Australian and international shares and property, small and large caps, bit of china, bit of resources, and infrastructure, then you do protect yourself more than say dumping all into Australian shares, which HAVE run strong recently...

What I do is I do a top up each 6 months.. so I save my wage into a ING account, then move it into my margin loan and make a new/additional investment with my cash, and new equity available to me. Quick, simple, hassle free..

 

Hi crc,

If I have 140k available but I only draw down say $70K to start with to ensure a sufficient safety buffer, why couldn't I capitalize the interest in the LOC to cover the interest?

Isn't this the same result as capitalizing the interest in a margin loan?

 

Yes you could do that.. I have done that with my mother since she doesn't work and has equity in her home.. I also pay dividends back into the loan to cover some of the interest. once the line of credit runs out, we can sell down the capital growth of the funds.. In your case this could be a good thing to do to take advantage of some of the equity. but I wouldn't gear those borrowed monies again via a margin loan.

 

If your looking for a good entry point, Monday might be it! the DOW JONES was down 366 points overnight.. so Monday we should see a 180 point+ drop... good time to get in at a discount... 20 years ago, Rivkin was the only person buying in the 87 stock market crash on 19th october! Black Monday! was a golden Monday for him!

I'm going to be shopping, as I have been waiting for another good entry point! I'm looking at buying some MAP shares.. wonder how much they will fall