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Discussion in 'Investing Strategies' started by wealth_creator, 19th Apr, 2010.

  1. wealth_creator

    wealth_creator Member

    Joined:
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    Hey guys!

    Very good to be here and I look forward to reading.

    Let me tell you a little about myself.

    I'm 28, have been investing for 3 years and wish to be financially free asap. I don't like having to turn up for work everyday.

    I have four properties (living in one, interest only, don't care about paying down debt)
    I have around $330,000 equity altogether and my aim for the medium term is to live off equity rather than sell anything and re-assess as time goes on. With a conservative growth rate across the portfolio as is now I see it as quite safe and I'd be making more equity than I'd be spending each year. Thing is, I don't want to stop work just yet as I require more assets cause I want to be much more well off than I am now and still have my prime earning years ahead of me. Plus, I get bored at home if I'm there too long..

    Anyhow, total value as of now is $1.600,000 with an LVR of 79%
    I don't plan on paying off my PPOR as I can that to live on also and don't see any point in paying it down as I'll always use the equity for further investment purchases anyway.

    So, in reality, I do wish to add to the portfolio and then let compounding work it's magic.

    I really hope that I can take a year off and travel with my wife within the next year or so, do you guys think this is possible?

    Also, do banks lend to 80% LVR without any servicing income these days? I was able to pull some funds recently to 80% without question, but the same bank can probably see that I have a wage to service this, dunno?

    Cheers guys.
     
  2. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
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    Location:
    Brisbane, QLD
    Welcome to invested

    :D

    I think the bank might care... it's their money.

    Not if this is your get rich quick strategy, but that is just my opinion, many on these forums might disagree with me.

    :cool:

    If you want to know more about why I don't like the idea, here are some of my recent comments in threads you might like to read:

    http://www.invested.com.au/85/no-housing-bubble-37335/
    http://www.invested.com.au/6/housing-disaster-looms-if-rates-rise-36923/
    http://www.invested.com.au/96/worlds-biggest-debtor-nations-37522/
    http://www.invested.com.au/6/australias-property-bubble-its-here-37494/
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Sydney, Australia
    Hi wealth_creator.

    As you can probably tell, Chris C is a bit of a property bear. Don't let his negativity keep you from developing a sound and sensible plan (although some caution is always wise).

    First question - how much income do you think you will need to live on?

    Second question - what assumptions (eg growth, income, expenses, etc) are you making in your plans for living on equity?

    Third question - How much money do you predict you will need for your year of travel?
     
  4. Chris C

    Chris C Well-Known Member

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    :rolleyes:

    I don't mean to be negative - I just don't want people assuming property investing is a one way street, or that property is always a "safe" investment.

    I'm more than happy for individuals to invest however they choose, though he asked the question, and I felt compelled to give him an honest response (from my perspective), which is that I don't think it's wise to indulge in luxury spending (travelling) based on a set and forget speculative investing strategy (I'm making the assumption his properties are negatively geared).

    At the end of the day all I want is for people to treat debt with a bit more reverence, because ultimately, debts must be repaid, and to borrow your future income to utilise it today comes at a cost (interest) and when investing in assets whose nominal values are very susceptible to changing debt levels this has inherent risks that are rarely factored for by the average investor.

    This isn't obviously just an issue that is exclusive to property either. So I'm not a "property" bear, I'm a "debt" bear, and I think debt is about to get a lot more expensive over the next decade or so. So strategies that have worked previously with the availability of cheap credit and growing credit levels might not be prudent positions in the future.

    Just food for thought. No action required.

    ;)
     
  5. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
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    Location:
    Berwick Vic
    Wealth Creator,
    Welcome to the forum and you sound as if you have made a very good start to creating that long term wealth and choice.

    With a 79% LVR, I would be cautious taking time out so early on and dropping your wage income. Lenders have tightened lending criteria significantly and continue to do so and I do not see an end to this restrictive approach any-time soon. The press headlines and doom and gloom about property bubbles may become a self fulfilling prophesy.

    If you can service your debt comfortably with residual income, being rental income after expenses, then you can look to take time off for travel. If you are not yet in that position, keep working and building your portfolio and safety net.

    I am comfortable with not paying down principal but I would use an offset account against your PPOR to reduce the effects of non deductible debt. If you build this to a size where you have a safety net and be able to take the year off travelling, then do so.

    I would strongly advice that you do not rely on being able to extract equity easily in the future using LOC facilities. This area more than any other is what banks are tightening on. They now call it 'Cash Out' as if it is something altogether new and to be treated as if it is highly toxic. Some lenders will allow you to refinance to 80% with a LOC but they may ask all sorts of questions, may want statutory declarations, financial planners SOA, tax accountant advice, see a contract of sale etc. Over 80% LVR it is very difficult as mortgage insurers are even worse.

    We are moving into another era of lending and investing. I believe we need to look very closely at more neutral and even positively geared properties or we need to allow enough time so we are achieving these.

    Build your portfolio while you are working and are able to support the debt levels with wages and allow compounding to occur over time but perhaps not jeopardize it by taking time out so early.
    Good luck
    Greg
     
  6. wealth_creator

    wealth_creator Member

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    Thanks everyone.

    I'm also used to the property bulls, they're everywhere! But I don't listen to those people as they're never rich, nor are they ever in the position I'm in or want to be in. I've seen these people proven wrong during the GFC they've been around since very early days, hows their theory going?.. They say fortune favours the brave Certainly has done for me so far when everyone told me I was foolish to buy. I find that if I do the opposite of what the masses do, I gain the most reward. Plus, when Woolworths have a sale, do you buy? Or is that 'too risky' It makes no sense to me to buy when prices are inflated. Thats not good value. But the masses see it as 'safe' which may be totally wrong. ACA can't be wrong though, can they?

    :D Anyhow.

    I earn $45,000p/a as it stands in my job now and I'd like to double that in the future but the more I can get my hands on the better.

    I only really 'need' the same to LOE ($45,000)r but want more. With interest rates rising I'll have to monitor the portfolio. I do have a LOC with $20k or so and $10k savings plus my tax refund which will be around $9000 due shortly (I don't use the tax witholding variation but might consider it) So I'm not at all worried about rate rises, although these low rates are easy to get used to. The decrease in rates have allowed me to build my portfolio much faster. I look forward to raising my rents with the rises. Rates go up and rates go down. It's all a part of the cycle

    Someone intelligently mentioned an offset against my PPOR but with CBA the offset on a fixed loan account is 1.5%..!!:eek: So absolutely no point. I'm better off keeping tin an investment offset as it costs me more than I'd save, even after tax.

    So yeah, I'd really like to have a large enough portfolio for me and my wife to live on but that will take time and at least a few more years at work.

    My wife has the ability to invest and has quite a lot of money saved up but is a little scared to go ahead and buy something. She will in time though, I'll walk her through it. She was dicked around with finance not long ago and pulled out so is also tainted by that long drawn out experience but will go ahead shortly. We do need that extra income to better the portfolio the way we would like to.

    I have a friend, who in just 10 short years (with 4 kids mind you..) (a couple) have managed to amass a portfolio of resi worth $16mil and are LOE, have been for 3 years now. Their interest bill out of pocket, minus all rents is currently $300,000p/a and they tell me their portfolio only has to grow 2%p/a to break even, they've been seeing around 10% the past 3 years so they tell me no probs whatsoever. They're even ready to test the banks as are wanting to purchase more. Will see how they go but their LVR is dropping for them. They are certainly big numbers to me..

    That same friend told me I've got to use my PPOR if I'm serious about LOE and creating wealthy in general. He says 'you must totally change your paradigm, completely' money is not real, it literally grows on trees if you know how to'

    He's my idol and I can see how the LOE has worked and continues to work for him and his Family.

    Anyone else here LOE only?
    Cheers.
     
    Last edited by a moderator: 20th Apr, 2010
  7. wealth_creator

    wealth_creator Member

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    Hi Sim!

    1/ I need $60,000 to be safe.

    2/ I'm assuming standard 7% growth, but am fully aware that a buffer is a great risk mitigation tool and growth doesn't occur each and every year. Sometimes you'll see nothing, or perhaps even negative growth. Other years you'll see possibly 25%.

    3/ I think we'd only need $30,000 realistically but I will require the interest bill also which would be around an extra $20,000 assuming no taxable income benefits for the year. I'd ideally like to save some cash for our travels and save the LOE for later as the LVR drops and portfolio grows in value. We could also rent our PPOR out in the mean time and take the bill down by alot.
    Plus, my wife has a fair wad of cash and full time job earning the same as I do so the travel might be $15,000ea or so. We're not big spenders at all and the most money we'll usually spend is on dinner. No fancy clothes, phones or anything like that.