Would appreciate your advice on strategy

OK - first post with a million questions in my head. I started with one but started reading the forums!
First is LOC strategy - I have had an FP recommeneded that uses LOC strategy (using only Westpac!) in conjunction with a focus on debt reduction/budgeting and tax minimisation with some very promising projections.

I don't know the particulars but am assuming IO for PPOR (with an offset) and investing with IO and channelling income into the offset.
Either way I have procrastinated for way too long and want to kick off now!

My position is this:
Married with two children, combined income of $190k, $420k equity in PPOR, $40k in shares, $10k cash. One IP with $30k equity ($150k:$120k) which is CF neutral. Conservative free cashflow of $250 per week. My HL is fixed at 6.84% until 2010. Owe around $25k in personal loan.

I consider myself risk-tolerant. Can you fill me in on the LOC strategy or something more suited to my situation?

I will post my other questions separately!

 

Hutch

Welcome to the forum.
You seem in a good financial position.
Where do you intend to invest?
Are you near retirement age?
Have you paid off your PPOR?

Cheers

 

Hi Bill,
I intend to invest in shares and managed funds and either property or property trusts.
I am about 20 years off retirement and still owe a fair quid on my PPOR ($320K).
Cheers
Tim

 

Hi Hutch

I would probably do all of the above starting with a few IP's
in proximity to your location i.e around Queanbeyan or along the South NSW Coast.

You have plenty of time to create a nice portfolio but from what I hear now is not the best time to get involved in funds and shares.

I would refinance the PPOR and borrow 80% of it's value.
I would convert the PPOR loan to an interest only loan with 100% offset.
or to an interest only LOC with sub-accounts.

STGeorge has a portfolio LOC which would suit your situation as it allows you to have many sub-accounts so you can have 1 sub-account for the money you will spend on shares, 1 for your managed funds, 1 for IP2, 1 for IP3 etc
With such a structure it will be easy to calculate the interest for each 1 of your investments.

You said your PPOR is worth around ($420K+$320K=$740K so you should be able to borrow $592K.
You already owe $320K so you will have $270K leftover to use as deposits for more IP's, for shares, funds etc. You can leave these funds in a LOC so that they offset the main PPOR loan and you can draw them out when required.
As soon as you draw money out the interest on that amount becomes tax deductible.

Cheers

 

Why do you say you are 20 years off retirement?

With a net worth of approx $500k + super there's no reason you can't be worth $1m in 5 years time and $2m in 10 years time...

 

Some would say you are about 10 years from retirement.

 

Hi Hutch,
If you are looking for ideas on strategies, a good place to start would be to read the Living Off Equity articles;
http://www.invested.com.au/76/

 

Hi Gem16,

Personally, and I stress PERSONALLY, that is the last place I would redirect a NewB investor to start their learning. For me that is a very advanced strategy that is suitable only to a very few people that are asset rich and cash flow poor. If you structure your portfolio well, then by the time you need the passive income you won't need to rely on living off equity.

For me, as a NewB, you should read a few good books like Peter Spann's $0 to $10M in 10 years or the Jan Somers stuff. Even Kiyosaki has a place, but I think Tim already has the motivation so can skip that one.

But in his position, I'd definately be taking an LOC against that PPOR equity and putting it as 20% down on a new IP or three. His salaried income means his cashflow is OK and managed funds should play a secondary role in his wealth accumulation strategy for now. But, if cash flow were an issue than some liquid managed funds help from a servicability perspective. The trick is just to keep your absolute managed fund/shares return sufficient to offset the capitalised margin loan portion of that asset class with sufficient after tax cashflow left over to supplement the holding costs of the negatively geared IPs. Simple really!

Tim, let me know if you would like me to elucidate a little less eloquently and with a few more hard numbers...

Cheers,
Michael.

 

Howdy,
I say 20 years because I enjoy my work and would like to continue to build wealth for my kids and maybe be extravagant occassionally!

 

Thanks Gem,
I have actually just downloaded those articles

 

Michael,
I would love a dumbed-down version with some hard numbers. I need to get my head around offsetting the capitalised margin loan portion! Yes I am also a visual learner!
Feel free to PM me.
Cheers

 

Hi Tim,

Come to think of it, there's a thread here by BoatBoy that covers a lot of the hard number stuff based on his situation. I can't remember what it was called, something like "What to do with $325K" or some such. Maybe some nice person can link it here.

Have a look at that thread first and digest the info and let me know if you'd like a similar mock-up for your exact situation. I'm a bit flat out for the balance of this week though at this stage...

Cheers,
Michael.

 

Whats not to like about the navra LOE articles?

 

Here ya go Michael

http://www.invested.com.au/2/what-do-325k-16272/

PS: Interested in the alternative to LOE (LOI or LOD ).

 

Thanks All

 

Hi Michael,
As a NewB, I think the more information you can soak up the better positioned you are to formulate your own strategy & work out your own goal. It's amazing where knowledge can take you!
Regards
G

 

Hi Michael,
I saw the options you produced for Boatboy (aka Blossom!).
Would love something similar - no rush - I have procrastinated for the past few years anyway.
Cheers

 

Three scenarios modelled

Hi Tim,

Gee I'm a nice bloke!

OK, I modelled three different scenarios for you based on what you provided on your current financial situation and have attached the model here.

Scenario 1: Do Nothing

Cash Flow from investments (PPOR only): -$18K pa
Asset Growth: $63K pa
TOTAL Return: $45K pa

Scenario 2: Buy IPs only to max 80% LVR

Cash Flow from investments (PPOR and IPs): -$29K pa (assumes 6% yield on IP)
Asset Growth: $158K pa
TOTAL Return: $128K pa

Scenario 3: BUY IPs and income managed funds to keep cash flow at current levels

Cash Flow from investments (PPOR, IPs and MFs): -$18K pa (as scenario 1)
Asset Growth: $127K pa
TOTAL Return: $109K pa

So, in summary, the highest total return is to max out your LVR to 80% and buy growth IPs but this does result in a $11K hit to your current cash flow. You did say you have free cash flow of $250pw which is $13K pa so you can afford this option (2). Alternatively, you can buy some income managed funds as well and keep your cash flow at current levels and thereby sacrifice $19K pa in total portfolio returns. Or, in other words, investing that extra $11K in cash flow delivers a return of $11K plus $19K = $30K in additional growth for a net total return increase of $19K pa.

If you can get the IPs in good growth areas with 6% yields then option 2 seems the go given your free cash flows. But if you want to be a bit conservative and maintain your current cash flows then a mix of IPs and shares as at option 3 might be the go.

Remember, all of this is predicated on the explicit assumptions around rates of return and interest costs built into the model. It is a tool to help you visualise the alternatives and not a gaurantee of these returns being realised. But at present, its fair to say, that you are under-leveraged. I'd be upping your IP count. Whichever way you look at it, leveraging more significantly increases your portfolio returns for minimal cash flow impact.

Cheers,
Michael.

PS Insert appropriate caveat here. I know nothing, don't listen to me!

 

remember if your using borrowed money to invest in shares/funds to fund the short fall of your negative geared property.

With Interest rates (for MLs) at 9.5%. Say you take the long term average of 13%, youd need $314,285 worth of funds to offset one $11k per year property.

If you go to 14% it comes down to $244,444
16% = $169,230
However if you only get a return of 10% you need $2.2million of funds to offset it.

Since youve got the cash where you can service the short fall ur in a much better position to buy IPs

 

I agree Michael - you are a good bloke.
Much appreciated - I investigate these options with my accountant.
My cashflow figures are conservative so option two looks good.
Looking forward to getting started - have been doing plenty of IP research.
Cheers
Tim