How much Leverage is Prudent?

Anyone have any thoughts on this.
Higher Leverage Higher Risk??

 

Depends on a lot of factors imo.

• Whereabouts in the cycle you are: You want maximum leveredge just as it takes off and to de-leveredge as it reaches the top. Because that's hard to time it pays to be conservative.
• The size of your portfolio: The larger it is the more prudent it is to reduce leveredge imo. Especially because the effect of your salary becomes smaller.
• Age: Atleast if your younger you have more years to bail yourself out.
• A big one for me would be yield. (and be realistic about how sustainable your yield is). You want to be able to very comfortably service your debt. You want to be in a good position to refinance.

 

Everyone always says as long as you can service the debt when **** hits the fan and keep moving forward.

 

Completely depends on what you are doing with it. If I borrowed $2 million to invest in low yield properties in Sydney, then interest rates went up, I would not be able to cover the shortfall.

I am borrowing now to build a positive cashflow property. I see that as less risky.

 

Yep, I think there's a second, related question about how much oh **** money you should hold - which can carry through these times, or at least gives you time to consider options to move forward.
I'm conservative though - need SANF - I'm not going to risk the PPoR, or other IPs for one next IP.

 

I agree with this - it's a question that depends on so many individual factors.

 

One thing about high leverage - you have nowhere to go if something amazing pops up.

My uber wealthy clients rarely do anything and when they do they do very very fast.

 

So in this climate (APRA etc) plus recent rising values, is it better to do the offset thing or just pay it off and then refinance when it comes time to buy again?
I'm guessing it's much of a muchness but what's the point of keeping unused funds in an account when it's equity that will be used for the next deposit anyway? And cashflow is somewhere close to neutral.
Of course, some buffer is lovely to have if and when the boss tells me to scram but the offsets seem a bit messy to me. Maybe I have too many.

 

Speaking from experience, it is not much of a muchness. I paid down a loan of more than $400k and to re borrow now I can get less than $300k. It's not a huge deal for me but you should have your borrowing capacity assessed before you pay down a loan. Particularly with Basel II coming in people need to be very careful with the loans they have.

 

The offset thing creates big benefits for taxation later on. It allows you to retain your tax effectiveness if you need money personally - like a house upgrade.

 

A big factor in choosing your leverage is where your primary income is from.

If your income is from property then you should not be highly geared to property. When times are bad you will lose your job (or business profits will fall) when your property values fall and rents fall.
A bad outcome.

So your leverage to the same asset class as your primary outcome should be lower.

If your income is stable and unrelated to economic cycles (like Medicine or teaching) then you can afford to take on higher levels of gearing.