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How Much Debt?

Discussion in 'General Property Chat' started by SerenityNow, 7th Dec, 2015.

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  1. SerenityNow

    SerenityNow Well-Known Member

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    How much debt are you comfortable with? How much of a cash buffer do you need? :confused:

    I've been wondering about this recently. I know being aggressive can get you greater returns, quicker. But at what cost?

    For instance, I know someone who earns a decent wage, and is able to borrow 90% without LMI due to the nature of his work. He doesn't have much cash savings (has around 5 - 10x monthly outgoings) but has a lot of equity in his IP(s). He can take LOC's to buy more IPs (I think, no money down? Pays deposit plus buying costs with LOC) or to invest in shares. Hasn't hit serviceability limits yet either, and probably won't for a number of years to come. Most of his cash is in (reasonably blue-chip) shares or ETFs.

    If you were in such a situation, what would you do? Gear up as much as possible and invest? He's got no dependents and his job is pretty secure; I'm assuming if one had less job security (as do I, being self-employed), you'd want a greater cash buffer, and more cash if you had dependents.

    Also, because I'm new to the concept of "good debt", it's personally a bit nerve-wrecking for me to consider having only a tiny bit of cash on hand, and gearing up to invest!
     
  2. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    It's all relative. I'd be completely comfortable with $80M of debt................as long as I had $100M worth of assets.

    If you are in "accumulation" phase, then you gear up, as much as you are comfortable with - this is different for each individual.
     
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  3. Johnny Cashflow

    Johnny Cashflow Well-Known Member

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    I just made an identical thread to this lol
     
  4. SerenityNow

    SerenityNow Well-Known Member

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    Haha - I guess great minds think alike. Or at least great chickens (?) think alike :cool:
     
  5. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    There's no perfect answer.

    Everyone is different.

    It comes down to your risk profile, future plans and age.

    For instance- I've got clients in their 20's/30's that accumulate quickly at high LVRs. They're not losing sleep about debt levels - they're often more concerned about not being able to access additional funds for their next IP.

    On the flipside - I've got many other clients who are past the accumulation stage and are starting to pay down deductible debt.

    It all comes down to the individual.

    Having insurances (life, income, etc) in place can also help with the "sleep at night factor"

    Cheers

    Jamie
     
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  6. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    That would seem pretty risky to me, depending on what you are invested in.
    At these levels, if an out of control correction happens, doing a bit of overtime to help with servicability won't save you.
    And you don't know how you'd feel unless you're actually in that position for real.

    Personally, I feel that the greater the debt, the lower the LVR required to protect your capital base, as swings would be wilder at the higher stakes.
    I've always considered myself as high risk, especially when younger and accumulating.
    However, having just hit 40 and transitioning into retirement, I'm a lot more cautious than before.
     
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  7. Barny

    Barny Well-Known Member

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    When I first started investing a long time ago I was highly leveraged and took on risk. Over the years I no longer feel comfortable being leveraged over 50% in property. Will be just under 30% leveraged as of next month.
    I always kept a years cash or equity in an offset prior, to use if something really bad occurred such as job loss or health issue for me or family.
    Always have insurances in place for income protection and others.
    Last couple years I've saved 2 years in cash offset account.
    I've always veiwed debt is debt, no such thing as good debt or bad debt. Debt to me is always risk and always will be. But used correctly can help build your wealth.
     
  8. Bayview

    Bayview Well-Known Member

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    We had until very recently over $1mill in debt.

    I have no probs with debt amounts...as long as the serviceability is there.
     
    Last edited: 7th Dec, 2015
  9. ellejay

    ellejay Well-Known Member

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    It depends on your own personal circumstances. It doesn't really matter what anyone would choose to do if they were in your friends position. Personally I don't like to go much over 50% LVR with plenty of cash flow coming in. I'm semi retired though and that's my reasoning. I don't want to have to go back to work to fund a negatively geared property (that may or may not increase in value in the short to medium term).
     
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  10. MTR

    MTR Well-Known Member Premium Member

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    I have found the older I get the less debt I want, cash is queen:)
     
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  11. ellejay

    ellejay Well-Known Member

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    Same!
     
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  12. MTR

    MTR Well-Known Member Premium Member

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    will pm you later today:)
     
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  13. fols

    fols Well-Known Member

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    80% debt.
     
  14. SerenityNow

    SerenityNow Well-Known Member

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    Thanks everyone for your answers! It's always good to hear different perspectives. :)

    Personally, I'd love to gear up and be aggressive. However in terms of taking on 80M debt to fund assets worth 100M, the fact remains that in desperate times, these 100M worth of assets might turn out to be worth much less than 80M, as anyone who's invested through a market crash, or faced bank repossession, knows. I've never been there personally, but know people who have, and as @Ace in the Hole says, it's completely different knowing this theoretically, and actually facing it in practice.

    @Bayview I completely agree that serviceability is key. Unfortunately, since I'm self-employed, I tend to be nervous about my future income. Just because someone offers you 90/80% doesn't necessarily mean you should take it, right? :confused:
     
  15. Big Will

    Big Will Well-Known Member

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    Depends on each individual situation there is no magic number.

    The general theme though is the more money and secure your job is the more debt you are willing to take on both in % and $.

    The less secure your job or if you are retired the lower amount of debt you want again both in $ term and %.
     
  16. Big Will

    Big Will Well-Known Member

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    100M in mining towns is very risky, but having 200 houses in Melbourne at 500k each wouldn't be as risky.

    Just because someone offers you something doesn't mean you should take it, you need to work out what you can afford and want to afford.

    What if you know you are going to be made redundant next week and the bank offers you $10M loan, would you take it?? I might take a certain amount that I felt comfortable but would decline the full 10M.

    90% is pretty aggressive no matter which market (yes you can go higher). 80% is more a balanced LVR with 50/60% LVR being conservative.
     
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  17. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    I'm old(er) and have seen many cycles come and go. I held property when IRs were 17-18%. I've held property thru the GFC.

    The issue with having $100M of assets with $80M of debt is that quality assets only tank in value for a few years (worst case scenario). The bank does not want to repossess your assets, it wants it's interest on the loan. There is nothing wrong with selling down a small potion of your $100M (even at a loss) to get cash to fund repayments on the loan of $80M for a few years until markets recover, IMO.
     
  18. MattA

    MattA Well-Known Member

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    As everybody else has said, it's all relative.

    For me, I like to keep it fairly simple so just work off the 10 week theory.

    I aim to keep my portfolio neutral or C/F+ so that it is self sustaining in a normal environment without my input.

    Beyond this I keep the equivalent of 10 weeks in cash reserves for all my income streams.

    Eg. My wages x 10 weeks, wife's wages x 10 weeks, each IP rent x 10 weeks etc

    Beyond this I have the standard insurances (Income protection, LL Insurance, etc)

    I figure this will sustain me through pretty much all 'standard events'. Anything more sinister (Eg, a massive GFC, 20% unemployment etc) and well, the results for everybody, not just me, will be interesting'
     
  19. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
    J. Paul Getty
     
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  20. tobe

    tobe Well-Known Member

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    When I was single, the risk was I would have to work until I was 60. Debt was how I managed that risk, as much as I could. I managed a 90 to 95% LVR across my portfolio for 6 years or so.
    When I got married, and then when we had kids, the risks changed. Lately I have an LVR about 80% overall (excluding PPOR), and about 20% in my offset account/buffer.
     
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