Debt to Asset Ratio

In accumulation phase, I would be comfy at 1.5 Million debt for 1.5 Million assets (100% LVR) as long as they were all significantly CF+ and I had buffers in place as well ...not just 1 or 2K per annum either. Im talking 7,8,9K or better of surpluses per annum... enough to absorb several rate rises or a long period of vacancy and still stay CF+ ...

 

Make the debt work for you!

 

10% gearing wont get anyone very far, is the point.... unless they fluke some massive capital growth...but even then , with 10% appetite for leverage, the growth would barely be harvested.

 

When I say total assets I also mean including cash as well though. What about for somebody whose income is almost exclusively from rentals? Still 50% LVR? Surely you would not recommend that?

 

Your a worry wort maybe, the world would stop if everyone took that position, in fact property would be a dud investment if everyone thought like that.

 

So, you saying unemployed OR retired and no Super?

 

More like the person being unemployed in this case and no super.

 

The OP was talking about Debt to Total Assets ratio. The only way for this ratio to change is take on more debt or to repay debt. For example, selling and keeping the cash does not change the ratio at all; it just converts a illiquid asset into a liquid asset.

With a reasonable size portfolio, the ratio doesn't change that much.

For example, if one owned $5M in property, loans of $4M and cash reserves of $500K, the Debt to Total Assets ratio is $4M / $5.5M or 73%.

If one then goes out, buys another $1M property and borrows the lot (ignoring buying costs for now), the Debt to Total Assets ratio is $5M / $6.5M or 77%. Some would say that this approach rather aggressive.

Even if one bought this $1M property at 80% LVR or borrow $800K and use $200K of their cash (ignoring buying costs for now), the Debt to Total Assets ratio is $4.8M / $6.3M or 76%. To me, this is a riskier approach as one has consumed some of their cash reserves.

Either way, by taking on 25% more debt, the Debt to Total Assets ratio hardly moved (from 73% to 76% or 77%). The benefit of a reasonably large asset base.

To really change this Debt to Total Assets ratio, one has to take on a serious amount of extra debt (or pay it back). Last year, I made a massive, massive property purchase and I borrowed the lot including all expenses. My total debt more than tripled in size (well on its way to quadrupling) but my Debt to Total Assets ratio went from a VERY conservative 20% to a conservative 50%. But it took a serious amount of extra debt to get the ratio to change significantly (not that this was the aim of this purchase .

You may not but I assure you the banks do, especially as one gets older .

 

I believe PC members have given you generalised answers to a generalised question.

if you want a specific answer to your specific situation, you need to post the specifics on here.

 

I have been using RAMS lo doc and get my accountant to sign off on this, no need for financials

Also I am buying in Trust/Company, developments sales are treated as a business. However, now I am playing in the USA market and injected profits from sales into this market.

At the moment I am pretty much cashed up as I have sold all my recent projects, but this will change again dependent on what happens moving forward.

 

My LVR aim for when I transition out of work is actually 50%. At that point I would be keeping some fairly high yielding assets.

 

Trying to take max advantage of NG hey ? lol

 

If you keep them for a while, the LVR will shrink to an insignificant amount as well, assuming not too many bought at peaks.

 

10% isn't a debt ratio, it's a margin of error.

 

Even under normal interest rate conditions? E.g. 6-7% rates, you guys would still do 50% LVR?

 

I consider myself conservative. So our family home is held by my wife for asset protection and our SMSF has no debt.

So regardless of what happens financially I will never be kicked out of the family home or lose our retirement nest egg.

Given that position I am comfortable to take an exposed position - but it is all relative.

Treat your investing activities like a business - define your strategies, targets, KPI's and succession strategies.

Once you have done that your leverage ratio will come out.

Speak to a good well practiced person who has done this type of thing before.

 

Even at 17%

 

Treat it as a business. I could not agree more hombre.

 

I've calculated mine to be approx 58.3%. It would be quite a lot higher except my share of the PPOR is at an LVR of roughly 27% and I've included it in my figures.
As others have said, 10% is a rounding error... To grow a big portfolio you need leverage. Eg. $1 controls $10. Not $10 controls $11!

 

I would feel under leveraged at 50%. I usually sit around 70%