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What to do?

Discussion in 'Investing Strategies' started by samaka, 30th Sep, 2007.

  1. samaka

    samaka Well-Known Member

    30th Sep, 2007
    Hi all,

    I've pretty much acknowledged that the 6.5% that I earn from Bankwest is getting me nowhere quick, so for the last month or so I've been trying to work out what is the best strategy I should take with investing. Here's my current situation:

    Early 20's, living at home, so basically zero living expenses except running a car (no money owing though). I'm saving between $300 and $500 a week at the moment. Got about $2000 worth of shares, in Telstra, iiNet and the local Bendigo Bank community branch (not on ASX).

    I've got $17k in a term deposit maturing mid November, as well as $47k in the Bankwest account above. My goal here is growth - I'm not worried about drawing any spendable income. If I decide to move out and rent then I'll just be contributing less on a weekly basis.

    My initial goal was to buy an (investment) property and try and take as much off the loan, to make it cashflow +ve quickly. Then I read some more and the advice I got from people is that the property market is in a lull (and will be for a few years) - and they recommended shares - as the long term return is much better.

    What would you guys recommend as an ideal strategy?

  2. crc_error

    crc_error The Rule of 72

    1st May, 2007
    Melbourne, VIC
    You need to be careful about saying property has been in a lull, hence its not a suitable investment.

    Property is good that you can leverage high.. but if your planning on paying it down, then your losing its apeal of high leverage and negative gearing.

    I would suggest considering 1 IP, and then focus the rest of your money into managed funds or shares.

    Funds are good because you can diversify into property, shares, infrustrure locally and internationally.

    So considering buying a IP, put down the min amount required to buy, then put the rest into funds and contribute to them.

    I'm personally focusing on managed funds and contributing to them as much as I can.. I got rid of my IP's as they gave me to many head ackes and to many expenses to keep them.

    Weigh both up carefully, but when considering property, don't forget to calcualte ALL the costs to keep and buy it. ie stamp duty $15000, mortgage insurance $3500, rates $1500PA, tenant insurance $280PA, advertising to get tenants, time without tenants, repairs, bank fees etc.. To many people on this forum forget all these things when calcualting their NET return.. and only focus on the gross return.

    Then compare the SAME commitment into managed funds.. use a spreadsheet to make these calcualtions.. Remember you can gear or borrow to buy shares also..

    If your stuck, read some of the threads completek opened when we discussed various options for him, he to was starting out like yourself.. otherwise consider getting a financial planner... like freeman fox..

    But its great to see you doing SOMETHING, many people don't do anything, and this is why they fail.
  3. voigtstr

    voigtstr Well-Known Member

    24th Jan, 2007
    for one approach, check out the living on equity articles as general guide.

    I would add that since you are young (30+ years till retirement) you should be able to take some risk. Geared funds could be the go?
  4. DaveA

    DaveA Well-Known Member

    19th Feb, 2007
    Sydney, NSW
    I think the most important question at the moment for you is....

    How do you think the share market is going?

    Is it near its peak, will run along time more or its about to dive. It just doesnt come down to risk, it also comes down to your personal perception. Analysts say 6700 is full value for the asx 200. Well where not far off there at the moment so is the return worth the risk. Some people here will say yes, some people (like MW) are seriously considering no, however its only a choice you can make..

    But regardless, with an IP or funds/shares. Your ~60k in the bank WILL BE THERE next year, however if you invest in to either, this 60k could only be 40 or 50, the flip side is it could also be 100k
  5. seaview

    seaview Well-Known Member

    8th Jun, 2006
    Diversification is a great way to build your asset base (the key to wealth) while reducing risk. You appear to have enough saved to allow a 5 to 10% deposit on an IP (or maybe your own home to benefit from first home owners grant).

    You could also diversify greatly by choosing several good managed funds across a range of sectors (eg. for growth: geared OZ shares, listed property trusts, small company funds, global resources, and a dash of Asia to add some spice). Such a basket of funds would each invest in a diversified basket of companies, and hopefully the wise fund managers will regularly monitor and tweak it for you.

    Depending on your risk tolerance, you could increase this portfolio by taking out a modest margin loan, say somewhere from 30 to 50% LVR which should withstand a severe drop in value. Note, even when price does drop severely (like recently) it usually bounces back fairly quickly. Even in a prolonged sideways market, this sort of portfolio should just keep growing surely, if not always steadily, far surpassing interest from a savings account. As Steve Navra says, it is good to put those lazy dollars to work.

    Lastly, by focussing on growth funds, you could capitalize the interest on the margin loan, and still keep your LVR low. This way you could use your income to add more funds/IPs to build wealth faster. Eventually, you could even draw funds down from margin loan to help cover negative gearing on IP, or for deposit on further IPs. (this IP margin loan account is best kept segregated from the managed fund margin loan to avoid a mess at tax time.)
    The other way to provide income to cover negative gearing is to invest in income funds such as Navra, though when starting out most people prefer to build up their asset base with growth assets. Direct shares could also be added over time such as solid performers like banks and good old BHP etc.

    Of course, some folk avoid IPs in high growth areas to avoid negative gearing. But there is a better way: just buy a cheap block of land in a reasonable growth area, or the suburb next to it, and build a budget priced duplex. This is NOT as hard as you think. This is best done at first near where you live, so you can keep an eye on the building process. The double rent will take the IP to almost cash flow neutral, and the tax deductions are great with all the depreciation. Of course in prime CBD areas you may still be negatively geared. It is important to crunch the numbers to see if it works. There are great threads on by investors on how to do this. If not planning to sell, then don't strata title them, but keep them on one title as a dual occupancy and save on land tax. Also it is best to buy IP before getting margin loan, as this may impact your serviceability.

    You don't have to start with a $1 million town house development. Where we live, the Hunter Valley/Port Stephens, we are buying land for $120k, building 2 x 2BR brick duplexes for $200k total. Finished value is $450 to $500k. This process also creates instant equity of at least $100k plus brings IPs to cashflow neutral before tax. That is the way we plan to go from now on, using new equity to buy more IPs and more Managed Funds/shares via margin loans with capitalized interest. We are not builders, far from it, just mum and dad investors. We pay the building company to do all the hard stuff.
    Anyway, that is my two bobs worth.

    You have already laid a good foundation to amass great wealth. Just keep on keeping on, and acquire some good growth assets.
    PS Sorry this post is so long, but I was on a roll.:)
  6. archangelsupreme

    archangelsupreme Well-Known Member

    7th Sep, 2007
    Thankyou. that was a good post.

    Though i'm still not very confident about taking out marginal loans...just seems to risky for me.

    Is there just as much risk investing in internally geared funds?

    What's the pros and cons