Debt to Asset Ratio

Discussion in 'Loans & Mortgage Brokers' started by GalacticExplorer, 22nd Jan, 2017.

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  1. GalacticExplorer

    GalacticExplorer Well-Known Member

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    I'm genuinely interested in what level of leverage the investors on property chat have.

    I myself am particularly risk averse, and after doing some stress testing for an (unlikely) "disaster scenario", e.g. 8% interest rates, property and rents drop 25-30% and a few vacancies, I've concluded that I would be comfortable with at most 10% debt to asset ratio, where = Total debt/Total assets.

    Personally, I do have an aversion towards debt as I have seen closely what it can do to people when things go belly up. But I might be too conservative, and am toying with the idea to positively gear a property in inner Brisbane. I think I may be somewhat of the school of "get rich slowly."

    What ratios are you guys comfortable with? And why exactly have you chosen those levels? Have you stress tested those levels? If so, what were the results?

    George
     
  2. Barny

    Barny Well-Known Member

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    10%? So if you had a house paid outright worth 500k, you would only borrow 50k?
     
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  3. GalacticExplorer

    GalacticExplorer Well-Known Member

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    Well more like for example, if person X had 5M in assets, and zero debt, then burrow 500k to pay 100% of the property. It would still be 10%.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    @GalacticExplorer - that's an extremely low pain threshold.

    The other side of the coin is the ability to repay a $500k loan if the $5m is tied up purely in the ppor ie asset rich but cash poor scenario.
     
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  5. GetRIDof5CENTpiece

    GetRIDof5CENTpiece Well-Known Member

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    10% wow and I thought I was risk adverse.
    Are you approaching retirement by any chance?
    I'm sitting at 50% atm but expect that to increase to 60-70% max if I add 1-2 more IPs.
     
  6. Barny

    Barny Well-Known Member

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    If you are at that stage and have a large base, then you may not need to borrow, unless cashflow poor as Scott no mates said.
    Generally when starting out most will borrow a percentage much higher in debt to asset ratio, and reverse that trend as nearing retirement. It's continually changing along the way.
     
  7. kierank

    kierank Well-Known Member

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    IMHO, if one is young, in good health and has good, secure cashflow then one should be in asset accumulation phase.

    In the above situation, a debt to asset ratio of 10% is high risk if one is seeking financial independence.

    It is a bit like having all your assets in cash earning 1% to 2% (no capital growth investments) and thinking you are going to retire wealthy.

    I am a pensioner and my property debt to asset ratio is 50% and my total asset debt to asset ratio is 30%.

    I know everyone's risk level is different and one has to consider SANF. I have a retired older sister whose total investment portfolio (including her Super) has been invested in cash for most/all of her life.

    She says she is playing it safe; I having been telling her for years that her investment strategy is high risk. Now, I hear her cash balances are running low and she is not even 65. High risk and predictable.
     
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  8. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Ratio is relative to cash buffers. You can be at 90% with decent cash buffers and be perfectly safe or be at 90% with no or little buffers in place and be in a vulnerable position if things go a bit wobbly.

    Hope for the best and have a plan in place for the worst case scenario.

    Cash flow is King!
     
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  9. kierank

    kierank Well-Known Member

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    Totally agree. Part of the reason why my ratio goes from 50% (property only) to 30% (total assets) :) :).
     
  10. GalacticExplorer

    GalacticExplorer Well-Known Member

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    So it seems many here are comfortable at 50%? E.g. 1M debt for 2M assets.
    By the way I meant only for working assets. So not including your home.

    That's interesting, some real go getters here!
     
  11. kierank

    kierank Well-Known Member

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    Most people would consider 50% as conservative, not 'real go getters'.
     
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  12. Perthguy

    Perthguy Well-Known Member

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    It depends. I would be comfortable with $1 million of debt and $1.5 of assets if the properties were all positive cashflow and I had a cash buffer in case.
     
  13. Hodor

    Hodor Well-Known Member

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    Investments only we are running in the 60%'s

    Home is highly LVR'ed so would drag that up :oops: (IP equity used so 100% borrowings, which isn't counted above wasn't sure how to include it which I guess is the danger of excluding things)
     
  14. thatbum

    thatbum Well-Known Member

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    Are you coming from a share investing background?

    Personally I think anything under 80% LVR to be reasonably safe assuming you aren't approaching the retirement phase of investing.

    10% LVR would be bizarre and even anything less than 50% would probably be a waste of your time and potential assuming you had borrowing capacity to use.
     
  15. MTR

    MTR Material Girl Premium Member

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    My LVR changes all the time because I am always buying, selling, developing, holding and its dependent on opportunities the markets presents at any given time.

    I don't really consider age when it comes to investing, but more about servicing debt and cash flow
     
  16. GalacticExplorer

    GalacticExplorer Well-Known Member

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    I do invest in the share market yes. But I never use loans to fund share purchases.
    I am nowhere near retirement, currently our debt to asset (not including homes) ratio is 4.5%, around 2 years ago it was over 10%.
    Looking at some of the experiences here is making me think that perhaps I am being too conservative. I guess it is about balance.

    Also for the people on 30-50% LVRs, are you guys employed full time or have a stable cash generating other than property business?

    I would think 50% LVR would be too dangerous on just rental income alone. For example on 1M debt to 2M assets. If the assets yield on average 6%, and interest rates are like 4, than the rentals alone barely cover the repayments and interest on a 10 year loan.

    But what if yields drop (rent reductions and/or vacancies) to 4.5% and interest rates increase to say, 7%?
    Then yearly repayments + interest become $170K compared to 90K in rental income.

    I guess you would need a cash buffer. But how long would that last?
    Stress testing brings up some interesting results.
     
  17. Bran

    Bran Well-Known Member

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    Hadn't looked for a while - I'm down to 63% total LVR by the looks of it but Im gearing up for a commercial buy soon with a recent focus on liquidity - cash/shares, one property sold

    A 50% LVR at my stage is wasted opportunity. I'm perfectly comfortable 80-90%, and was 93% not too long ago
     
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  18. Biz

    Biz Well-Known Member

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    About 40% lvr at the moment. I see little reason to be highly leveraged with resi property in Australia at the moment unless you are making a significant yield to cover it. If you are tipping in your own cash to a negatively geared portfolio you'll be wasting your money for a long time from where we are now.

    Nuggets starting now and stringing their necks at 80% are going to feel the pain in a few years.
     
  19. GalacticExplorer

    GalacticExplorer Well-Known Member

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    Perfectly comfortable at nearly 100%? That's quite something. And here I am languishing over 10%!
     
  20. euro73

    euro73 Well-Known Member Business Member

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    50% isnt go getting.... and as @colinrice said above, even 90% isnt go getting if you have the appropriate cash buffers in place.
     
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