What to do with $325k

Nice explanation Michael.

ADD: I put this sort of strategy to Peter Spann on Somersoft and he advised against it.

I still think Dave needs to look at offshore options given that he will be a non-resident for Australian tax purposes.

Perhaps combining an offshore strategy with some sort of very conservative arbitrage and LOE strategy, given that he has several IP's with significant equity in Australia, would be ideal.

This could be facilitated by selling a couple of the lower performing IP's to reduce debt and send some funds offshore. Selling all the IP's and moving funds offshore may not be possible in a tax effective way.

GSJ

 

Thank's Michael, yep a strategy plus, and actually makes me feel a little sick, but in a nice way.

I sent you a PM and without telling the world to much

I have gone into the XL spreadsheet you posted and changed the numbers around a bit to what the Vals and debt actually are.

Being conservative,

I increased the interest on loan to 8%
I decreased cap growth to 5%
I increased the assumed rental to 3.8%

A question on the assumed rental, I worked it out at current rent minus managment fees, rates, insurance and a few grand for maintenance gave me 3.8% of the val of the property.
Is that the correct way to do it??

I left all the Navra invest stuff as is and came up with,

Option 1 $85,995
Option 2 $81,770

Option 3, I added $40,000 into the debt for repairs to make it livable for "Paying Customer's" and came up with

Option 3 $75,995.

WOW

Thank's again mate,

I can't wipe the bloody grin off my face at the moment and between those few option's you have laid out will certainly have something to speak to the accountant about in a few day's.

Dave

 

As you know, I am investigating exactly that for the NON-property component and only if we comply with the NON-resident classification by the ATO.

Only catch is, our worst performing IP has an 8.2% yield, is 18mth's old and almost has people falling over themselves to move in.

Dave

 

Have plenty of lanlord's insurance on the IP's

3 are oldies, but recently reno'd [5 years] 3 are new brick [18mth's] in a major CQ regional, but we always try and have a bit of a "slush fund" for unforseen's.

Absolutely, couldn't agree more.
We alway's throw a worst case scenario in the mix to see how scary it really could be.

Dave

 

Don't forget the new Option 4 now either, which is Navra (or equivelant) generating 10% pa with capitalised interest on your margin loan.

That would be:

Option 4 $65,000

with the benefit of no equity extraction. If you add the 65% drawdown of the equity growth in your IPs then that $65K goes up significantly. But there is a drawback in using an LOE approach in that you get an ongoing liability with associated interest everytime you do it. i.e. You spend $30K of your equity growth by taking an LOC against it and blowing it on expenses. Even when you've spent it all you're still paying interest on that $30K forever.

So, if possible, stick to spending net passive income and only draw down equity as a last resort.

Cheers,
Michael.

 

The points Michael and Sim have made are good ones - all assumptions in a model need to be relatively conservative. Test the base case on these conservative assumptions, then adjust the key variables up AND DOWN to see what impact different vacancy rates, interest rates and returns will have.

My thoughts are what if you keep the PPOR and gear against it instead of (or in addition to a smaller) margin loan?

The interest rate on 1st mortgage secured resi property is about 110-150 bips lower... With the rental income from the property you adjust the gearing so the property itself is neutral if that's what you want...also reduce or elminate risk of margin call...
I just don't like to see people sell growth assets when they can harvest the equity from it without selling...have your cake and eat it too...

Cheers
N

 

Dave,

Consider referencing this strategy in a post on Somersoft and you might get some very, very different responses.

GSJ

 

Yield on purchase price or yield on current estimated valuation?

GSJ

 

Purchase price, what it actually owes us now.

4.7% on current val.

I take it you'll come back and tell us what you're getting at???

Dave

 

Hi Dave,

So if for eg. this property is worth $500000 now, at 4.7% pa that gives you a current rent of $23500 pa.

If the current yield on purchase price was 8.2% pa, at the current rent, that makes the purchase price in this example, $286585.

My point is regarding the opportunity cost of having an asset, in this case, a residential property, worth $500000 and generating an income for you now at 4.7% pa.

If for eg. this property was debt free** and you sold it (and ignore CGT for the moment), you could invest $500000 in an ING savings account and get 6.8% pa!

If you can minimise CGT in a tax-effective manner, then there are far more opportunities for you to achieve a better yield or income - which is what you want since you're plannning to retire - on $500000, than leaving it in a poor-yielding asset such as residential property.

Unless of course, you do something with the equity you have in that residential property, and here's where arbitrage and LOE strategies come into place.

Maybe you can arbitrage and LOE using this equity too, but then I think the whole things gets far too complicated and time intensive to manage, and could potentially be disastrous.

Make sense?

GSJ

** To be more precise, you can include the debt and look at the net equity figure that is generating this income instead - and this would give you a better yield, so at 40% LVR, that means $500000 - 200000 = $300000 net equity generating an income of $23500, so 7.8% pa current yield on net equity - which is a bit better. The lower the LVR, the poorer the current yield on net equity.

*** If you search on Somersoft I made a similar point on Brenda Irwin's thread '20 IP's in 5 years' or something like that - it didn't go down very well!

 

You're kidding me! Ignore the numbers and look at what Michael Whyte is actually suggesting here - you're previous posts suggested to me that you did not agree with this sort of strategy, but I may have misinterpreted - or you maybe confused?!

GSJ

 

Well explained GSJ
My own preference is the arbitrage type of situation, but you could definitely improve your performance by bailing out of the arbitrage investments and putting the money back into the loan if you decided that the market was on a downward slope (this is really the only situation in which I think unutilized equity is justified)

 

No...you think?!

 

More like $320,000 owing $186,000 renting $290/week.x3
We built 3 of them side by side, so not keen to split that lot up.

One of the others maybe,had considered it a while back and that'd be an 8.3%, $300k owing $144k renting @ $230/week. big flat 1600M2 block, not keen to sell that one either.

The other 2, well their walking distance to the CBD, are side by side, have a park over the road and good river views. We can sink a mooring and park the boat in view in the river.
They definetly aint getting sold.

without CGT, agent's fees, early termination of loan etc we'd have $134,000 but in reality after CGT +++ we'd have about $60k

Doing something with the equity is an option, and some of Michael's option's had that.

Sort of, but cant really bring ourselves to cough up CGT if there was another way around it eg: by not selling IP's.

These were hard won, and have a fair bit of CG in 'em yet I'd reckon, not to mention further oportunities down the track on the 1600m2 one and the riverview two.



GSJ

I'll track down all of the thread's mentioned and have a read.

Our decision does'nt have to made this week either, so time on our side for a bit.

Will I ever get back to building that bloody boat??

Dave

 

You could also look at net rent (rent - property expenses - loan costs)/net equity, if it is not negatively geared.

Your particular properties seem relatively high yielding at present, but as you get CG, the % yield will drop (as a % of current value vs. purchase price). So you would need to make use of this equity using arbitrage/LOE to make it worthwhile I think and avoid the opportunity cost.

Good luck with it.

Here's the somersoft thread:

Portfolio 2006 Les & Brenda - Somersoft Property Investment Forums

GSJ

 

Thank's for the link, and can you give a quick explanation on the arbitage concept for me please

Dave

 

effectively you borrow funds at x% and aim for a return of x+y%, y% being your arbitrage amount.
E.g. you borrow funds through a line of credit at 7.5%, invest those funds in a managed fund returning say 12% (whether through income, growth or a combination), giving you an arbitrage amount of 4.5%.
The beauty of it is because those funds are borrowed, although the arbitrage amount may only be 4.5%, you didnt put a single dollar into it so your return is actually infinite. Of course if you dont get your 12% and only get say 6%, you have to fork out the 1% shortfall from your own pocket (which is where your own risk management strategy comes into play).
As has been pointed out, this works nicely in a rising market but is more difficult in a falling market (unless you can find a fund that returns more than your interest rate % in down years).

 

Dave,

Have a look at Peter Spann's thoughts here in post 28, note MW has suggested 65% LVR which is more conservative, but Spann refers here more generally to the strategy that MW has suggested to you:

Peter Spann??? - Page 2 - Somersoft Property Investment Forums

GSJ