What to do with $325k

Thanks for the explanation coopranos, and that was pretty much what I imagined it to be after googleing it.

GSJ, read that thread,re:Les and Brenda portfolio, and can see where your coming from, and if I understand correctly am quite happy to use equity from current IP stock with the cash from the sale of PPOR.

BUT, as we are only chasing $60k, we would prefer to only use enough equity from the IP's to acheive that amount, or near enough to it.

Leveraging the gut's out of everything, while working now, while having a finger on the pulse, would leave us feeling a bit exposed while on the wobbly stuff.

May seem a wastfull use, or lack of use, of resources, but it'll be nice to have some form of buffer for any fluctuation's in the market.

Am I understanding what you were getting at or not.??

Dave

 

If it is the Navra fund in particular you are refering to MW did sugest Navra or similar in this post

http://www.invested.com.au/32035-post86.html

Or was it the capitalized interest???

Another thing for me to read up about.

Dave

 

Can you give me a para explaining this?

Don't worry - I saw it lower down.

I cannot see any difference between what you suggest and borrowing via a LOC/margin and buying Navra funds??

 

Hi Dave

Been following your research with interest

Years ago I looked at taking things off shore, this wasn't becoming a non resident for tax purposes, and in the end it would only have saved me 10% and result in having all money off shore with associated problems of spending money in Aus.

Regarding our income situation. We follow a similar strategy as described by MW with the only difference being that we do not as a rule capitalise interest.

Within our concept (leveraging of property) we use MF's solely for income generation and the properties as the capital growth over time. I do not seek out MF's whcih are geared towards capital growth as these tend to pay out div's less than the prevaling interest rates (or just equal).

As far as the arbitrage between the cost of funds and the income. When we started I set a target of at least 5% as I saw that the risk to capital (remember, even borrowed money needs to be preserved) needed to have a sufficient income to warrant maintaining the investment. Another consideration was access to the funds, how quickly can we get our money back.

Just as a scoping - we generate a 7 figure income using this methodology. So we need to manage our risks very carefully but similarly we do not exceed 50% LVR in our margin loan. Another rule that I follow is that I will not exceed the total value of my properties.

Cheers

ps I haven't finished this post but need to go out so will get back to it later

-

 

Good man, look forward to it.

Dave

 

No difference, just a more general term (rather than specifically LOC & Navra).
In saying I prefer the arbitrage scenario, I simply mean I prefer this approach to the LOE type scenario (however if instead of LOC'ing into a income type fund, it has been pointed out to me in the past on this forum that you could just as easily invest in growth oriented funds and withdraw money from the margin loan for living costs which is effectively the same thing although a touch messier from a tax perspective - thus my comments that income = growth and growth = income)

 

Hi Michael,

Great posts, firstly.

My question is - with option 4 won't there be an LVR crunch in a few years time if he capitalises his interest, yet spends all the income? Even if the capital isn't tapped into via LOE, the Navra unit prices won't increase in value greater than a couple of percent a year..

I'd like to see option 4 played out over a 5 year period..

 

Just another thing, I personally wouldnt do a LOE type strategy with only $1M in equity. In my opinion you need a fair bit more of a buffer than that.

The other option you have is to jump into a few more properties and sit tight for another 5 years or so. Its nice to say that sailing around the world you only need $60k a year, but all of a sudden something happens and you have to do major boat repairs, or the $AUD drops, or any other number of problems, and you could be in a tight spot.
I think for a LOE to really work safely, you probably need average GROWTH each year on your portfolio to be 5+ times your 'required' income (this is if there is no plan to go back to work)

 

Me too!

This strategy is largely dependent on arbitrage. The risks of which must be very closely watched and contained. The back up is LOE, and that's when things will get even more complicated and messier.

Sorry MW, but I sure hope you're not a financial planner/advisor.

Dave,

Give yourself a bit of time to take in what is being said.

You really need to read this thread:

http://www.invested.com.au/7/navra-no-longer-income-fund-10214/

and similar ones on Somersoft and understand them fully (both sides of the debates) if you choose to use a strategy like this.

If you don't really understand it (sorry, but at this early stage I'm not so sure you're following it fully), then don't invest that way, regardless of how the numbers look and how easy it may seem on paper. The risks involved are a lot harder to see and comprehend when you look at the $$$, and are eagerly looking forward to an early retirement.

Above all, keep it simple and use some common sense, you've come this far and done well using a pretty simple strategy in residential property. So, the investment strategy you use in your retirement phase should be even simpler, not more complicated.

Otherwise, you will end up 'working' just to maintain your retirement income stream.

GSJ

 

Explanation why please?

And I did'nt think we were looking at a LOE outcome, at worst it was a partual.

Don't think the bank will play the game unless we do NO-doc and even then I can't see us getting any property at the moment that will pay for itself either, like our current IP's do.

It'll only be Vanuatu, Bank's Group, Soloman's, PNG, Indonesia, and Malaysia loop, not the world

$60 k is all that has been coming in for the last 12 mth's, before that less.

We have actually done extended cruises on our last cat on + - $100/week.

Boat repairs are fine, I am a boatbuilder, and built her, so not much that my 30 litres of epoxy ,some glass and a few grand won't fix. Engines are bulletproof, slow reving and economical, so 15 years of service is not unreasonable for them.

We will have insurance.

I have posted here, Somersoft Property Investment Forums - View Single Post - If You Could Retire In 10 Years Time, But Had To Live Like A Miser Would You Do It?, rough living expenses for 2 in Malaysia, so $25k'll do.

Yes, other problem's could happen, I could drop dead while typing this.

Even if we have to accept $25k/year, we'll still give it a go for a while and won't be put off by "what if's".

If it does all go pear shaped, I suppose we could alway's step out of a few IP's.

Your comfort level and fair enough.

Dave

 

Purely a comfort level thing. Personally I would want 8-10 years worth of living costs available in equity before the LVR even got uncomfortable. That way you have plenty of time to see ahead to ensure you take proactive steps to tackle and problems that might arise so you arent forced into any quick/uncomfortable decisions. Again, just a comfort level thing.

I guess this one (as most things) is just a matter of personal preference. If you do the numbers, the exponential growth of the whole thing means that you could probably make more in the next 5 years than you did in the last 10, and could probably easily double your equity available and thus increase your options.
As has been said before though, everyone has a certain level of lifestyle they expect, so you may decide the extra few years arent worth the equity increase you may not utilise anyway.
Also, people can only really comment from their own points of view - my point of view is coming from a 27 year old who hasnt been slaving away working for the man for as long.

Fair enough. Just remember that with an extra 40+ hours of play a week, at some point you are going to want some more hobbies to fill the days. Being able to live on $60k when your normal daily expenses are $5 for lunch a day and $5 for the train a day is one thing, but golf in the morning, personal trainer before lunch, a movie in the afternoon, and the theatre at night is a bit more expensive (exaggeration but you get my drift!)

A fair option, my comments above about no LOE'ing on $1M in equity are from a western world point of view. Go somewhere where you cost of living drops by 2/3rds and the whole game changes.

Yeah not suggesting you dont follow the dream, just make sure you take a life-vest - on your boat and on your finances. As I said, you dont wanna be forced into a situation where your back is against the wall and you gotta make calls you dont want to make.

 

Pretty sure he is not claiming to be, any more than you are.

I agree

Retirement planning is by its very nature more complicated, you have to do a lot of analysis to ensure that your strategy can hold up not only now, but for the next 20 years. At least when you are working you have a job to fall back on, not so with retirement planning, make sure you dont take it lightly.
However, if you choose to go down the LOE path, I think you will find that once your structure is in place it is not complicated at all. I think a lot of people that claim it as an overly complicated process simply dont understand it, or are very averse to debt. Personally, I see debt, equity, and money as nothing more than tools. Like any tool you want to learn how to use it and not be careless, but once you know how to use it it can certainly get the job done a lot quicker.

 

Me 3

Like most thing's, I will get independant financial advice probably from some muppet less set up than us trying to flog his own product.

This is something that'll happen in about 2 years, so have a while yet to get our ducks in a row.

You're right, I don't fully understand it, but considering when we first started on "The Big Boat Project" we had no idea how we were going to fund it or run it.

We just did it.

At that stage only had a PPOR with 50%LVR and no IP's, I think we've got a far better chance of making it happen now than when we started

I agree that it should be simple, and on the surface it appear's simple.

But so does boatbuilding

Now you really should wash your mouth out with soap

Thanks for the comment, as I said we have a couple of years yet, so am exploring as many scenario's as we can, but rest assured, it will happen.

Another thing to get thrown into the mix is downsizing the boat in 5 year's.
This style of vessel on today's market get's around $800k,the one in the pdf is $870, and 42 ft not 50ft, so after a refit in Thailand should still get a fair bit of cash for her with no CGT as she'll be the PPOR, step into something else or build again for $200k and have a few hundred K in the investment mix for round two.

Dave

 

Dont forget he has the whole property portfolio growing along for him at the same time.
Sure, if you pull out income and capitalise interest and have nothing else growing for you, you will hit the wall pretty quick. But if you have $2M of property sitting there kicking along at only 6% average growth per annum, there is plenty there you can rip out through a LOC and put into your margin loan account. If you run the numbers, I think you will find the overall equity situation continues to improve every year. This is effectively a LOE strategy.

 

Hi Boatboy.

Don't know if this will be any help at all, but what I am aiming at is something like this.

Currently have I/P's in place, getting close to neutrally geared.

Have mgd funds in place, main holdings with Navra and a bit more with CFS.

The mgd funds (Navra holdings only) also have a margin loan.

I am paying down the margin loan (mainly from distributions but also from excess monies).

My goal is to eventually pay off debt associated with mgd funds (and possibly I/P debt as well).

In X amount of years time I could sell off a couple of I/P's and retire debt (most of it anyway) and live off mgd fund distributions AND rent from remaining I/P's, which are now owned outright (will probably have 3 I/P's remaining).

That will then leave me with the option of drawing down (again) against PPOR and I/P's to further invest (probably into income fund) for even more cashflow, which I can keep on doing as growth occurs. This debt can be slowly reduced over time (doesn't have to be, but I probably would).

I think Handyandy was hinting at something similar (except on a larger scale , and possibly only meeting interest payments, not reducing it), he will clarify for you I'm sure.

Some may scoff at repaying loans then having to pay tax etc on income, but it is fairly conservative and has SANF for me.

I'm a little way off implementing this yet and it definately has room for many variations/improvements, but just thought I'd throw something else at you.

 

Yep, that's true!

And this is basically what I am suggesting too, but for Dave's situation, use an offshore structure with offshore investments for the income focussed managed funds.

It's simple, easy, manageable, conservative and has a good SANF, but also has the potential to use equity in remaining IP's to leverage and increase the income returns if needed.

GSJ

 

WOW!

GSJ

 

Just a quick refresher, as it sit's today.

Current HTW report's would suggest 20% increase again next year, but working on today's conservative val's and the % shown below.

9% interest rates [currently mid 7%]
5% growth on property
9% rental yeild [ it is currently ]
3% inflation

Show's $93k increase in val in the first year.

year 2 $97,650
year 3 $102,533
year 4 $107,659
year 5 $113,042
year 10 $144,274
year 15 $184,134

But if we put in 8% interest rates
20% growth for next year and back to 5% after.
Leave everything else as is , we get:

Year 1 $372,000
year 2 $111,600
year 3 $123,039
year 4 $129,191
year 5 $135,650
year 10 $173,128
Year 15 $220,960

Of course these are only number's, and in reality, the val's may infact wash of 20% in a few year's time, who know's.

The numbers are pretty to look at though.

Dave

 

Good morning GSJ,

I must point out that we won't be that flash when we go in.

While looking great on a marina berth and in a glossy magazine, all the electrical's and leather would keep us in the poor house and be stuffed in a couple of years anyway, needing replacement.

Our's has a more sensible KISS aproach, so $500k is probably more the number, on a $140k build outlay.

Dave

 

Dependent on arbitrage? Where did you pull that one from. It is in no way dependent on arbitrage, unless of course you're alluding to the DCT methodology within Navra that extracts its trading profits for distributed incomes, but that's not arbitrage, that's imperfect information in equities markets which the ASX is exposed to like all other markets. Some days sentiment is up, some days its down. Navra eeks profits out of those "imperfect information" movements.

OK, I'll spell it out in more detail to answer Glebe's, yours and BBs request for more detail but coopranos has gone a fair way to doing so already...

Firstly, I specifically mentioned Navra as my fund of choice for this approach and not some of the other funds others have mentioned. Why? Because they retain about 3% pa in capital growth on top of the 10% pa distributed income. Forget about the growing equity in your IPs, they are your set and forget net worth accumulator now. Your Navra is completely "self-sufficient" in its own right.

It works like this (in detail):

You use $325K cash (from sale of PPOR) and invest it in Navra margining it to $650K. That margin loan at today's rates costs you 8.6% pa.

The managed fund pays you $65K pa income (assuming 10% distributions). You live off this and have some cash left over drinking mai-tai's in Malaysia.

Here's the bit that you guys are getting hung up on spelt out in detail: You capitalise the margin loan interest. That's 8.6% on $325K, or $28K. But Navra has a retained growth of 3% on the full $650K invested which equates to $20K. So, in reality you've only added $8K of debt to your structure in that year. If you only need $57K to live off, then take $8K of that surplus distributed income and pump it back in to Navra to offset the difference between the capitalised margin loan interest and the retained growth in the fund.

All clear now?!

Even if you needed every penny of that distributed $65K to live off (unlikely given Dave's previous posts), then you would still only capitalise $8K worth of debt in the first year. And that presumes a 10% income distribution. Navra did 20% last year so would have added an EXTRA $65K of income that could have been pumped off the margin loan. But, to be VERY conservative and assume Dave blows every cent of the $65K and that Navra only distributes 10% pa, you still won't margin call over a five year period.

To spell it out over the 5-year horizon Glebe asked clarity on, this is what capitalising interest with a 3% retained growth assumption looks like:

Year 0: $650K value, $325K debt, 50% LVR
Year 1: $670K value, $353K debt, 53% LVR
Year 2: $690K value, $383K debt, 56% LVR
Year 3: $710K value, $416K debt, 58% LVR
Year 4: $731K value, $452K debt, 62% LVR
Year 5: $753K value, $491K debt, 65% LVR

Depending on your lender, I think 75% LVR is the maximum lend you'll get a margin loan for on Navra. So after 5 years with no additional capital investments you're still not at risk of a margin call.

And don't forget that your growing value base on this fund means that in year 5, you're no longer distributing $65K in income assuming 10% but are distributing $75K in income due to the larger base from retained growth.

The trick is to just watch your LVR and pitch in enough to keep it around 50%. That would mean discounting your "spending" dollars from $65K in a 10% distribution year to $58K. Doesn't sound too dodgy to me. And in a 20% distribution year like last year you'd have to survive on a measley $122K. Sorry 'bout that...

But in reality, in that $122K year, you'd pump an extra, say $60K off the margin loan, and really knock that LVR way back below 50%.

If you keep your eye on the structure then it is easy to keep it "safe". This is PRECISELY the strategy that I am CURRENTLY employing. This isn't some pie-in-the-sky philosophical discussion from a theoretical viewpoint. My LVR has stretched to 65% at present because I've been "spending" all of my distributions in paying down my non-deductable PPOR debt. Now that I own my PPOR outright I am going to rebalance my LVR by using the distributions to pay down some margin loan debt. Simple really. And at the same time as paying off my PPOR I've also spent $50K-$100K in professional fees for my development at Mona Vale plus related expenses and done so out of distributed incomes. The cash flow is huge and the impact of the capitalised interest on the margin loan portion minimal.

OK, back in my box. Sorry about the tone in this post, but the last sentence in the quoted section above got my back up. It reads as "That's a stupid recommendation, its a good thing you're not qualified to give advice". I never said I was an expert, but at the same time I wouldn't recommend something that I wasn't myself intimately familiar with and comfortable in its application.

** grumble, grumble, press submit **

Cheers,
Michael.