What to do with $325k

Hi Dave

I think this was option 4 (had to go and look )

As per Micheals #79

So, to summarise it:

• $325K proceeds from sale of PPOR invested into Navra and margined to $650K at a cost of 8.6% pa.
• IPs stay as is, neutral cash flow, doing their thing growing your net worth.
• Live off the proceeds of Navra, capitalising the interest on the margin loan portion.
• Forget LOE, you've got enough to live off your income managed funds now! Save LOE for a really rainy day.

Now, THAT's what I call a strategy!!
​

This is certainly the option I favour and in fact substantially follow.

As mentioned in my previous post you could do the initial step now and go from there. In my post I mentioned a 2%+ margin but have previously outlined that I would not follow this strategy for anything less than a 5% margin as I consider anything below this margin represents to large a risk for the reward. The only reason I mentioned the 2% margin is that this is the published returns (for illustrative purposes)

I have previously mentioned that I would also expect to exit the Navra strategy at the height of the market as I have no wish to ride through a share market bust holding any share based managed funds. At that time I will simply adopt a straight LOE and living of rents strategy until the markets settle and the relevant MF's prove their trading systems again.

Some 4 -5 years ago I was faced with the same situation. Up to then we had aimed simply to live of rental income and to that end we were reducing loans rapidly.

I was still operating my multi million $ company and did so until the end of 2005. At the time I was looking at net rental income of about $200-250k net based on successfully having paid out most of our loans. (achieved an LVR of 10-15%)

I looked at using equity and investing into shares but this really didn't cut it for me as the dividends paid really didn't give enough margin over cost of funds. ( my aims were way higher) Within my concept I do not recognise capital gain as income mainly due to the fact I would still have to acquire more debt (as per LOE) to utilise the capital gains (never sell). At that point I became aware of the possibilities of using the equity to generate income with the important criteria that the income was substantially more than the cost of funds.

So this is what we started doing, initially slowly, with just some cash that we had available and then eventually through a LOC and a money maket fixed loan against some of the property and then eventually utilising a margin loan.

Don't get me wrong our strategy is somewhat different to what you would need to do because if you were to follow this strategy and generate sufficient income you would not have a lot of buffer left ( although you can stay below the magic 50% lvr on the margin loan).

In our context we have not exceeded LOC drawings of 45%(with LOC's at less than 80%) and margin loan at 45%lvr. Mind you within this mix there is still cash so the figures may not quite add up. All up utilising this strategy we have increased our income and have nearly matched our income level from our old business.

Part of this income is also derived from the pathetic dividends we get on our share portfolio, pathetic in relative terms to the amount invested. Further we also have our super as a stop gap should things really go wrong.

So after all this you now want to expand your property portfolio!!!!! I don't quite see how this is going to achieve the original stated aims within the time frame but I will stay tuned for the developments

Cheers

 

Yeah without a doubt - the worst case scenario is that you have your worst years at the start when your LVR is at its highest (over long term you should get your average percentages, but this means good years and bad years). If you check out of the workshop and your LVR is sitting around the 60% mark, then you get your worst case of property & share market bombing, all of a sudden you get a margin call and cant get a LOC because banks decide they wont lend as freely in such a terrible market, and you have no income, and are on a boat un-contactable by the lenders so they invoke their power of attorney over your managed fund assets and sell down your assets to bring your LVR under control and now there is no room to withdraw money from anywhere even though you have $1m in equity available!
Not saying this is likely, or even to expect it, but you have to ensure that your strategy is robust enough to cope with worst case scenarios.

 

Good post Handyandy, thanks a lot for that!

 

How will you pick that? Can you post here when you do??

 

I'll answer this part of the post now and then take the rest in.

We live in about the scummiest part of Brisbane Bayside and within 2 klm is Blue Chip multi million dollar property.

In between there is the occasional dunger on a double block with 2 titles for 350K to 450K.

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Rent until DA and BA done, feed through mash, 2 newies @220k each

Now owe 840K. sell current PPOR for 325 and one newie for 550k = 875K

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au


loans paid out, some tax,some incedentals

Should end up with house almost owned outright, or close enough to, in a much better area with better rental and cap growth opportunity.

This one now PPOR, live in it for a while and do finishing touches to boat on the water before heading off.

This is back of the envelope stuff, but I did the numbers 6 mth's ago for real, so have bumped them up a bit on all end's, buy,sell and build.

Do LOE purely from IP val's for 5 years @ $30k/year and re asess then.

Brisbane PPOR should have gone up nicely, @ 7% it'll be $770k ish sell, do option 4 with more $$$ than before, if still going well.

Just a thought as I said.

Dave

 

The pretty good chance of having a good result far outweigh the smallish chance of failure in my eyes.

I'd gladly do my arse on a couple of hundred k to get 5 good years out there.

We will have satphone, while unreliable, not bad, and have email every couple of week's at worst, daily at best.

While I understand your concern, and I'll take your comment's on board, I aint working for another 10 years to get in the super safe position, while I have freind's out there who have been cruising for the last 5 year's waiting for me, with no plan at all.

Just a boat and make it up as they go, and sure, thing's get a bit tight and sometimes they have to work for a few month's to keep going, but the $$$ alway's turn up from somwhere. Rice is cheap, fresh mackeral is free.

A mate of mine was in exactly the same position as me 15 years ago, working in a reasonable job, earning money and anylizing every detail coming up with the perfect plan for his retirement, trying to figure out where to start.

His wife was a financial adviser for one of the big 3 bank's

In comparison,

We just did rough back of a beer coaster calculation's, built our last boat, sailed overseas, raced her for a while,cruised her for a while, bought houses, moved houses, built houses to get where we are today.

No real plan, just made it up as we went, jumped at opportunity and made it work when told it could'nt.

My mate and wife are now in much better job"s, earning more money and anylizing every detail coming up with the perfect plan for their retirement, still yet to start doing anything, and unlikely to start because of the risk.

Some talk, some do.

On the back of a beer coaster, and I realize a lot more effort has gone into it than that, I reckon this can work, and I truly appreciate the input and comment.

And I'm prepared to take a punt and give it a go while still healthy and able.

And thank's also Handyandy, informative post.

Dave

 

Dave: I heard a man infinitely wiser than I will ever be say the following: "Success is the design of your ideal life, then pulling it off".

A spreadsheet can help you work some numbers, but it cant help you design your life.

 

I'll make it up as I go.

The problem with telling anybody else is what if I am wrong and the market keeps going for another 1-2 years - I can take that in my stride but someone else may get really upset- you know how people can be - padantic.

Mind you I picked right on getting out of the US fund. So there is a chance

Dave - the developing idea is good particularly if things keep kicking on. I guess the indicator could be this next % rise. I think there is a real possibility that if things keep moving after this rate rise then we really are seeing the start of the next boom!!!

How are you intending to finance this sort of project? or is serviciability OK.

Also I note from the properties posted that the buys were in Wynnum but the sales were all Manly. Are you depending on the next suburb syndrome?

Cheers

 

As I said, just a thought.

We could probably do a No-doc on the various stages, but need to speak to our broker.

I was actually right to go on a NO-doc 6 mth's ago for those sort of number's and if anything i'd think the position financially now was better.

Heres a few at Wynnum and Wynnum West in the range.

Figuring on Bris going up, especially Bayside close to transport, shop's, school.

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Real Estate, Property, Land and Homes for Sale, lease and rent - realestate.com.au

Dave

 

When I say I don't have a plan that's not entirely true.

It is a loose plan, plan's change.

It is back of envelope [well in a book anyway] as I can't make spreadsheet's.

It alway's has a fudge factor, eg $180k build work on $240k leave balance in redraw just in case.

Every job we have done, from the first boat build in 1989 to the last 3 houses and arguably the current boat build, have came in under these back of envelope "Budget's", so the method seem's to work for me at the moment.

I thought the LOE thing worked in my head, then I got spreadsheet's from here and it appeared to work, then you guy's crunched the numbers and it seemed to work.

Sure there could and I dare say will be iffi patches, but for someone who is happy to live on rice, freshly caught mackeral, drink .50c beer and eat .70c curries in Malaysia, and not spend the numbers that are projected, but re-invest a third of it, it should be OK.

Sorry if I got defensive, but we have been told all our life by parent's, teacher's, peer's that we have to work until 65 then retire and die.

That's BS and I aint listening.

Dave

 

That's great. So why do you want more money??? :

Anyway, to recap, here is a summary of the options presented to Dave, in no particular order:

(1) Arbitrage
(2) Pure and Passive LOE
(3) Arbitrage and LOE
(4) Sell a couple of properties/reduce debt/invest in offshore income funds
(5) Sell a couple of properties/reduce debt/invest in onshore income funds
(6) Buy, renovate and develop more properties...
(7) A combination of all of the above

I think this about sums it up in a nutshell?

You guys happy with that list, any additions?

I'm still standing by number (4) as the primary and best option , with some features of the other strategies to complement it , for Dave's particular circumstances as I understand them from what he has posted so far.

ADD: I have enough hassles and hiccups getting simple loan deals processsed with banks now, with full serviceability, so when I retire, the thought of relying on the banks for my living expenses by continually refinancing and creating LOC's, with several banks involved, seems a real pain to me...

GSJ

 

I think it would make everyone who posted here feel a bit happier

I'm happy, thank's.

Mainly Number 4 MW's version,with a bit of something else sound's good for me .

GSJ's (4) Sell a couple of properties//invest in offshore income funds

Will be taken care of as well, with sale of PPOR, whether current, or future build.

Getting that other build in, if possible, may make the bank's feel a bit better

Thank's

Dave

 

Sounds good, do I get the prize now?

I actually would have labelled MW's strategy as number (1), with LOE as a back up only, although he might not like me calling it 'arbitrage' .

GSJ

 

Hi BB

My thoughts below:

 

Dave, have you read through the LOE threads on somersoft...there's a lot of them?

Very interesting reading, especially the ones with Navra posting.

GSJ

 

So would I , that's what I meant.

His Number 4 version.of selling PPOR, buying income funds and not using LOE.

Which ties in with your part of the plan, sort of, sell property[PPOR] and buy income funds offsure in Vu. I may not be able to buy Navra, as it is an Australian fund.

But after speaking to the accountant and bank this afternoon, I may well do LOE for 5 year's before doing the sale of PPOR.

Bank led me to believe after a quick whip through the numbers that if PPOR was unencumbered a $500,000 LOC may be available, and after demonstrating LOE for 2 years, should be able to access equity for top up with no problems, which we won't need to do as PPOR will be sold to purchase
income producing funds.

They also said that if we could pull off our idea as in this post,
http://www.invested.com.au/32471-post205.html
then do LOE for 5 years while next rise in Brisbane takes place and then do the MW thing and sell the then PPOR (conservative $550k now after 5 years at 7% $770k) we don't need the margin loan any more, as we are already better than the original $650k.

So, if they come through for us we'll run that way.

Dave

 

Great to hear, looks like you're making some good progress reviewing all your options and moving forwards.

GSJ

 

Handyandy,

I might be pushing my luck here, but apart from Navra, what sort of high yielding investments do you put your money in to get that 5% margin?

So if interest rates are at 7% pa, you're investing in assets that are giving you 13% pa as income, right, +/- capital growth on top of that?

I can't think of how you can get that sort of yield without taking on considerably higher risk, and this is with your leveraged funds (eg. 50% LOC + 50% margin loan = effectively 100% borrowings)?

GSJ

 

Embedded answers in blue

 

Thanks Handyandy,

I see exactly what you're saying now with respect to buffers and the example used for Dave with 80% of equity in IP taken as a LOC and used to margin at 50% LVR - here you will have exceeded the value of the property portfolio quite considerably !

I guess your approach would be very conservative then in the context of your overall property portfolio value, the LOC's created (eg. at 60% LVR) and the % of the LOC's that you actually use (eg. 45%).

Hence, even if the chosen investment doesn't yield as well as you had hoped, and say in a worst case scenario yields less than the cost of borrowed funds, you have a huge buffer (in your LOC/borrowed funds) to make up for this.

I agree that finding an appropriately yielding investment would be the hardest part in all of this...

GSJ