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How much leverage would/do you feel comfortable with?

Discussion in 'Property Finance' started by Bullion Baron, 11th Aug, 2015.

  1. Bullion Baron

    Bullion Baron Well-Known Member

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    http://news.domain.com.au/domain/re...as-banks-tighten-lending-20150810-givb1c.html

    I was reading this article and thought to myself I probably wouldn't feel comfortable with such a high LVR on a portfolio that size. Seems pretty reckless if you ask me, a 10% fall would wipe out any equity and put him in the red by probably half a years gross salary (without taking into consideration stamp duty, LMI & legals spent + agent fee to sell). Some would be fine riding this out (without needing to sell even if went into the red), but in sales at a software firm in Adelaide... not much around if anything changes and he has to drop rents or 1-2 are vacant for a period of time.

    Do you have any rules / equations for working out the debt you feel comfortable carrying or is it just all guns blazing, borrow as much as the banks lets me, let the chips fall where they may?

    My thinking is that some sort of calculation based on whether I can carry the loans on my household income if 50% of properties were empty for X months if portfolio LVR exceeds X% might be prudent...
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Depending upon structures and personal liability 0% or less - then it is more a question for the bankers as to how much they are willing to risk.
     
  3. Be Developer

    Be Developer Property Developer Business Member

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    60-70% LVR is comfortable for me!

    not being rich, have to do 90% then bring it down to 60-70% by adding value to prop is been working well for me.
     
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  4. tobe

    tobe Well-Known Member

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    I like to have 3 to 6 months living expenses in the bank, which is easier to do now than when I started.
    I don't pay any attention to the LVR of my portfolio, its irrelevant what the LVR is, if I cant pay the mortgage the lenders can foreclose.
    Its also difficult to estimate. Is it my best guess of current value, the value on the rates notices, last bank valuation or purchase price?

    I don't have any multiple for incomes, rent coverage etc. When I do my numbers I assume 80% of gross rent p/a including vacancies, which is probably on the high side of the actual net rent.
    My guns cooled a little when I got married and had kids, I guess I had less to lose when I was single. Having dependents cools the lenders calculators as well...
     
  5. The Y-man

    The Y-man Moderator Staff Member

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    @Bullion Baron

    I tend to go guns blazing I guess because we have a pretty stable dual income household.

    The thing I have found is that banks will not lend if you are going to do something stupid anyway - long before it gets to the ridiculous stage. The banks risk assessment is almost always tighter than the borrowers.

    So as a general rule, if they will lend, I will borrow...

    In terms of vacancy, the way we mitigated this risk when starting off was to buy smaller (lower cost) properties - i.e. 1BR and 2 BR apartments across a range of suburbs in Melb.

    This gives risk mitigation on several fronts:
    - some geographical dispersion (although even better if done interstate for this)
    - low end of market - people can afford even in bad times (people renting houses may have to down size into a smaller unit/apartment)
    - lower capital requirements means greater number of properties. If you owned 10 x 1BR apartments vs 4 houses (for the same cost), having 50% vacancy is much less likely IMHO.

    Anyhows, that's how we started - we are in the process now of "swapping" apartments for houses as we have become more established.

    the Y-man
     
  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    If only that were true pre-GFC :(
     
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  7. The Y-man

    The Y-man Moderator Staff Member

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    Actually, that's interesting - we hit our serviceability limit pre-GFC.

    When the GFC hit, we suffered major damage in shares and derivative markets, but property lagged the crash - took a while for any GFC affected people to stop paying mortgage I guess - so managed to half our IP portfolio to mitigate the hit.

    Again, I think the unit/apartment theory helped in this situation too - liquidity in the lower end of the market.

    The Y-man
     
  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    I'm more referring to lending for equity investments rather than real estate.

    6 months before the GFC hit, I had a financial institution lend me $1m to invest in a MIS (structured investment into high quality international managed funds). I was technically unemployed at the time, having just been made redundant from my high paying IT job several months earlier. They knew this and approved the loan anyway :rolleyes: It didn't end well.

    Looking back, the amount of money being thrown around by lenders for equity investments back then was scary - and there were no serviceability requirements to be met - it was all asset lending.

    I don't have such a problem with lending for residential property, since there already are pretty strict serviceability requirements that must be met.

    Interestingly, I also don't think there should necessarily be serviceability restrictions on straight margin lending - since I think that a purely asset-based loan controlled by carefully managed LVRs is an acceptable approach (if managed carefully - which is the problem for the average investor who isn't really able to manage the risk themselves) ... where I have a problem is lending for structured products where the loans are not flexible or easily unwound like margin loans are.

    This is where most people I know who got into severe financial difficulty in the fallout from the GFC got caught out - they were placed in structured products which could simply not be unwound easily (or without massive penalties) when the proverbial hit the proverbial.

    Despite the damage caused by the GFC, I still think margin loans are great - because they are simple and flexible and easily managed. But I strongly believe that structured investment products (ie investments with loans attached to them) are evil and will recommend to everyone to stay well away.

    I also think that residential property is a fundamentally different type of investment to equities and don't have a problem with the higher gearing levels allowed because they are supported by strict serviceability requirements.
     
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  9. The Y-man

    The Y-man Moderator Staff Member

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    Ah, now that I can absolutely agree with.

    Yep, was incredible how you could just get 100% gearing on structured products with no proof of income etc...... core of the reason we were forced to sell half the IP fleet too!

    The Y-man
     
  10. Leo2413

    Leo2413 Well-Known Member Premium Member

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    The most I can get that fits my strategies and goals and is in line with my risk tolerance for that particular purchase. Unfortunately when it comes to developments, you have to put in a large chunk anyway.
     
  11. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Banks will lend because they shift the liability to someone else, its the tax payers who ends up paying the bill when SHTF.

    Current tightening is not because banks have suddenly become the guardian angels of financial stability.
     
    Last edited: 11th Aug, 2015
  12. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    More then LVR its the serviceability that matters in residential investment, as there are no margin calls as long as one keeps repaying.

    One can get repossessed even on 10% LVR if they are not able to service the mortgage.
     
  13. Player

    Player Well-Known Member

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    Depends on age, economic conditions and stage of life. Our current LVR is well under 35 % and this excludes our PPOR and SMSF holdings being counted as net equity, so really the LVR position is much, much lower.

    When I started out in my early 20's I was very aggressive and accumulated what became the mainstay of the portfolio's capital growth assets. Over the years this was pared back as we repaid some investment debt and then borrowed later for future acquisitions. We have sold down three last year and are looking for different assets now and even different investment classes. We are now more interested in income over potential capital growth.

    With Sydney and Melbourne having run so hard, IMO now is not the time to push the LVR envelope on new acquisitions, unless topping up offset(s) through re-vals to be prepared for opportunities as they may arise in the years ahead.
     
  14. Simon Hampel

    Simon Hampel Founder Staff Member

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    Wording it like that makes it sound as though the property owner would lose everything if they had 10% LVR but could no longer service the mortgage.

    The reality is that the bank would force the sale of the property and would then get their 10% loan paid out - all the remaining proceeds (after sale costs) go to the owner.
     
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  15. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    If you read the full post and got this impression than
    [​IMG]
     
  16. Leo2413

    Leo2413 Well-Known Member Premium Member

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    @TheSackedWiggle I'm curious to know what's your investment approach/philosophy if you don't mind sharing.

    thanks.
     
  17. 2FAST4U

    2FAST4U Well-Known Member

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    Currently 80% to avoid LMI but my next purchase will be a PPOR so I’m prepared to use Westpac and go 85% with their no LMI offer (hopefully they extend this offer past September and some other lenders make PPOR more competitive). I can’t envisage myself owning 10+ properties either due to serviceability constraints and I also wouldn’t want to put all my eggs in one basket.
     
  18. Leo2413

    Leo2413 Well-Known Member Premium Member

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    But there are many different property baskets :)
     
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  19. Bran

    Bran Well-Known Member

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  20. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Is that a polite way of asking me to shut up? :)

    I think Real estate provides an average joe like me to play the leverage game without margin call (as long as one has ability to repay) and access to cheapest credit compared to any other asset.

    But leverage has a time and place.
     
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