Advice on investment strategies - Living off equity & investing in shares

Hi all,
New to this forum & trying to work out our way forward with our investing strategy. Our goal is to eventually live off equity from our investments. Current situation;
PPOR value $500k, loan $400k (note $100k is non deductible debt, 300k is deductible debt)
IP 1 value $435k, loan 1 $390k
IP 2 value $385k, loan 2 $320k
IP 3 value $330k, loan 3 $264k (estimated completion date March 2008)
IP 4 value $330k, loan 4 $264k (estimated completion date October 2008)

As at October 2008
Total assets, $1,980,000
Total liabilities, $1,638,000
Total equity, $342,000

So far, we have been planning to purchase more properties & eventually live off the equity......however, we know that servicibility will probably become an issue for us when we try to buy the next one. We recently came across the Living off Equity articles posted by Steve Navra.....which so to speak, gave us a lightbulb moment! It seems that the share component of the portfolio compliments the negatively geared IPs beautifully by generating the income that can sustain the portfolio costs......but it just seems too good to be true!!
My questions for members;
(1) How can you buy shares that can give an almost guaranteed income of 10% & growth of 5% (as per the example in the article). Even with the dollar cost trading method, isn't there still a risk of the share prices going up or down?
(2) What other managed funds to members invest in besides NavraInvest?
(3) How would you move forward with your investment strategy if you had $342,000 equity in property?

Thanks in advance
G

 

Hi Gem,

I am intrigued about how you get $300k in your PPOR being tax-deductible?
This is some sort of redraw facility?

1. Guaranteed income of 10%. I don't think so...The closest thing to Risk Free Rates are the RBA and they are paying 6.5%. I don't know where you live but just like shares, properties in Sydney's western suburbs have decreased in price, just like shares can. It's only because property isn't as liquid that you can see daily ups and downs...

2. I'll let someone else answer this one, because this could be a thread or two long.

3. Personally I would diversify into different asset classes, but that's me personally and not advice.

Cheers,

Dan

The above post is not an inducement to invest in any asset class. Before making an investment decision it is important to discuss with your FPA registered Financial Planner, Accountant or Tax Adviser.

 

Hi Sim,
Thankyou for the feedback. If we were to go ahead & invest in a managed fund , it would make sense to forecast an appropriate cash buffer. Just one question;

(1) How do you calculate a conservative initial cash buffer figure? Is it simply a percentage of predicted total portfolio costs? .....or is it more complex than this?

Thanks
G

 

Just out of interest, how much loss are you making on all those properties each year?

I would imagine it would be quite large on so many properties.

Secondly there is no garrantee in yield. Shares generally only pay about 4.5% yield, not 10% so your relying on the rest been gained from trading/capital growth.

Plus the last 4 years have been boom years in the stock market, so it wasn't hard for anyone to produce profits of 10%+ in the market.

In saying that, I don't see why you would put money into a asset which only returns 8% PA return.. ie property.. when something as simple as the Navra fund returns 15% PA..

I'm not good with Maths, but if you borrow money from the bank, say at 8% PA, and invest it into property and get 8%, that means your not making any money at all! Just breaking even.. But your holding all the risk of a downside!

Whereas Margin loans are 9.25% and Narva fund returns 15%PA, your making 5.75% return on the banks money!

I don't know about you, but I like the latter result more. As the fund grows, you can continue to draw equity from your margin loan and buy more managed funds..

Plus with your stratergie, your putting all your eggs into the property basket.. If property fails to grow, then your going no where.. whereas using funds and trusts, you can diversify easier.. lowering your risk..

With your type of borrowing, I hope you have fixed your rates!!!

 

Hi CRC,
Property is fantastic for leveraging, you can borrow up to 80% of its value & utilise the equity to purchase further IPs or other assets. However, in our situation we are highly negatively geared, hence this post to learn more about other assets that can provide income to offset our property costs. We are never going to be able to traditionally "save" enough money to buy a substantial share portfolio (if we want to live on equity), this is the beauty of investing in property as you can let "Mr Equity" do all the hard work of saving for you!
Regards
G

 

Just did some sums, your property growth should be $158,000 PA

Your loan commitment is $131,000 PA
Your rent collected is $79200 PA
Shortfall is $51800 PA

So Capital growth less shortfall is $106,000 PA

Now in my calculations I have not deducted other costs like Repairs, house insurance, rates, land tax, real estate commission of 7% rental, body corporate (if unit), re-letting fees, advertising and the list goes on. That could easily add up to another $25,000 in expenses per year. Then we see a more realistic return of 23% PA. But you will get a tax refund of about $15,000 PA which will cover some of those costs.

So your $342,000 equity is making you $106,000 profit less $10,000 in costs plus tax refund = $96,000 profit PA or 28% PA ROI.

Now lets look at my stratergie.

$342,000 + $508,000 margin = $850,000 invested 60% LVR

=$127,500 return on investment in Narva 15%
= $46,900 margin interest
= $80,600 profit in your pocket.

So using property you would make $96,000 on your money, with Narva you would make $80,000. So yes property is more profitable at these suggested levels, but you need only something to go wrong, like a heater blows, couple vacancies etc which would bring down your $96k to 80k giving is a similar result.

With Narva, there are no worries.. with IP's you would be dealing with a vacancy each two months, house maintaince, other issues. plus a $50,000 PA interest shortfall.

How are you going to afford a $60,000 per year expense! both of you must be earning a good income!

 

But how are you going to draw out this equity? It would seem you must be at your borrowing limit by now?

 

Until this boom comes to an end.

Imagine a year where the share prices go backwards and you still have to pay your interest costs. Cant capitalise interest when this happens.

 

Dont forget to calculate the interest on the equity you withdraw.

So interest on $342,000 @ 8% takes an extra $27,360 from your profit.

Also dont forget to calcuate that the negative geared property will become less negative over the first few years. Negative properties eventually come positive remember.

 

And property can't go down in prise? At least the fund you can capitalise for a period of time.. with property, you loose your job, or something else changes where you cant pay the bank... then your in trouble!

 

My second example has nothing to do with property. I showed two possible uses for the $342k cash. One was to use it to buy property, the second was to invest into a managed fund like Narva.

This would the case with the 'living on equity' plan yes.. in my opinion gearing upon geared money and then margin loading it again is a high deck of cards stacked very high!

It wont ever become positively geared, as their stratergie is to constantly redraw new equity to buy more IP's or invest into income funds like narva.

I look at the total return of the investment.. it doesn't matter if its made of up income or growth.. essentially as the property value grows, so does the rent, and the LVR becomes lower as the loan amount remains the same.