Ideas of utilizing Portfolio Loan

Hi Guys,

I have this random thought today while I'm on my way to work.

Say for example you have $250k in Cash.

1. You found a property for 250k and bought it under a portfolio loan structure.
2. You than put the whole $250k Cash back into the portfolio loan so you pay no interest, and have a $250k worth of line of credit plus extra cash form rental income.
3. Hold the property for 1 year, for example you receive $300/wk, because you pay no interest on the loan you are now able to put toward surplus funds into the portfolio loan, after 52 weeks you have got yourself an extra $15600 in your loan.
4. Now look for another property roughly the same price, repeat step 1 & 2, basically you have now only used $250k and have acquired asset worth of $500k with credit exposure of $250k.
5. Now because your first portfolio loan has surplus, you can now switch to pay principle and interest, and since it also has income coming through, it is pretty much paying off itself slowly.
6. Repeat previous steps and so on....

So ultimately you have only used $250k to acquire your property empire and over time you will have multiple properties fully paid off earning you crap load of income, and because over time you will slowly pay off your first portfolio loan, you will have surplus income which will help you build your original $250k to $350k and also increase your serviceability.

Another good thing is you are not betting on capital gain on each property because you always have this $250k equities plus your slowing building up surplus cash from rental income.

This process need at least 10 to 15 years to see the fruit, but it will be a rock solid portfolio that will ride you through waves and storms because though out these years all you have done is take 1 Loan per property and NEVER top up on your loans so you are slowly paying down the money you owe.

 

I'm confused - how is this different or better than how you would "normally" buy and borrow money for properties?

 

Normally what most investor does including myself:

1. we buy a property and have a loan for say $250k.
2. property increased in value and now I've topped up the loan to $350k
3. use the $100k equity to purchase one or two more properties utilizing LVRs.

so basically what we have been doing are accumulating numbers of properties we hold, but at the same time we are increasing the loan amount per property because that is the only way we can access equities.

And what I'm trying to achieve is NOT to increase the loan so it can be paid off over time.

Increased loan = higher repayment = more cost.

if rent doesn't go up the same rate as you increase your loan amount you are pretty much pushing yourself into a credit hole or what a lot of people like to call negative gearing.

if instead we can remain or even reduce each of our loan amount and have them slowly pay off, we will be in a much better position down the track(positive gearing).

I believe this is also similar to Skater's approach where she hold a number of fully paid off properties.

 

And while we are having all these property bubble bursting fears, if we have used the approach I mention it would illuminate the fear of property price crashing because starting from day 1 we are not increasing our original borrowing per security and also we have been using that same $250k equities so it won't affect the risk exposure of the portfolio even if property price cash as we are not heavily rely on capital gain.

Not too sure if I explain myself clearly as I'm the type of person where my ideas fly and pop everywhere and sometimes its hard to put them in sensible order lol, so I hope these make sense.

 

From what I can tell, your method is simply the same as keeping a lower LVR across your entire portfolio?

 

similar, but instead of doing unlimited top ups on the same loan betting on capital gain, you only need to start off with a decent amount of capital and it will work for you for the rest of your life without the risk of increasing your risk per security if that make sense.

 

I don't know. It honestly sounds the same as your "normal" scenario except not continuing draw out equity. So in effect, just keeping a relatively lower LVR exposure - which has the pros and cons of that strategy.

 

Who can save 250k in cash?

That's why I started at 40k, and haven't put in another deposit cent.

 

The reason why I came up with this idea is I'm thinking if I can switch my strategy from now on.

At the moment I'm like a lot of investors, using maximum LVR to acquire properties, but I've came to realize that this strategy only work in uptrend market, when it's in down turn I'll be stuck.

Instead, if I use my $250k equities that I got now, and implement this new approach, I only need to focus on my previous loans by apply for a portfolio loan on a property and put the full $250k equities into the loan so I have no holding cost on this property.

 

I'm not a numbers guy, but you are going to draw down $250k in equity on other loans/properties to buy another property outright?

Sounds fine, unless you wanted to split that 250k into multiple house deposits, albeit at higher LVRs. But this then leaves you with a 250k loan anyway, so what's the difference?

 

Im not buying the next property outright, instead of apply for a home loan, I apply for a portfolio loan/line of credit which have no time line on the repayment, it's pretty much you pay whatever you owe in that line of credit, so if I put the 250k equities into the line of credit, I owe nothing which means no repayment for me, while this new house still earning rental income for me, I can use those extra surplus to either (reduce my existing debt/ put it in my line of credit for future use/ put it in my offset account while I'm paying off my other debt)

And after 1 to 2 years of accumulating rental income from this new house, I'll have enough surplus cash in my line of credit which I can draw down the full $250k and proceed to purchase another house while the surplus on my line of credit helping me pay for the repayment.

 

So is this the scenario:

House one Loan 100k MV 500k - 400k Equity - Cash out 250k (new loan 350k)

Buy house 2 for 250k (0 LVR) rent for a year get 15k in rent

1 year later

Buy house 3 for 250k (taking 50% deposit from House 2) - Now houses 2 & 3 are 50% LVR and you gain 30k in rent.

Is this what you are talking about?

Reason why investors leverage is they take the 250k and leverage it out at 80-90% (1.25M -> 2.5M) worth of property and collect 50k->100k in rent pa (4% rental yield).

Using your 6% yield it would be 75k->150k.

 

Sumterrence, you could buy 2 properties at $250k each in the first year and the cash into offsets and be in exactly the same position (500k property with $250k offsets) as your year two example except you have had an extra year of CG exposure on the extra property.

Paying down deductible debt when you only plan on borrowing more doesn't make sense.

Your examples ignore income taxes and stamp duty along with other major costs.

You also need 20% deposits with each property so you will only be moving $200k to your second property, then $150k, then $100k. The rental return of $15600 (which doesn't include any expenses or taxes) will not be enough to preserve the capital to completely offset the loan.

Having a $250k buffer is a good idea, though unrelated to your original post and ideas.
Consistently purchasing good properties when cashflow and equity allows has been shown to provide solid long term results by many people.

 

You are basically paying cash for the first property and then borrowing for the second and using the rent of the first and the second to pay off the loan quicker on the first property.

 

Yes pretty much, it's hard to really explain it with words, in the next meet up I'll try to use pen and paper to draw a picture of what I actually mean.

ultimately I'm looking for a way to reduce my risk through down trend market by not relying on capital gain on properties for equities.

and to put my idea in simple terms, I want to have my IP1 pay for itself after 1st year by accumulating surplus cash flow, then draw down on my IP1 line of credit and proceed to offset IP2 in 2nd year, 3rd year IP1 and IP2 will be paying off itself because I didn't do any top up on my loans, I now proceed to purchase IP3 on the 3rd year and draw down the full line of credit on IP2 to offset IP3 and do the same thing accumulate cash surplus on IP3 while IP1 and IP2 is paying off itself.

Continue to do this for 20 years, and I will have ultimately have my IP1 fully paid off and on year 21 I will have my IP2 fully paid off and so on.

 

This is not really different to paying cash except that you will have the LOC limit available to assist with cashflow if need be. You could do the same thing with buying cash and then setting up the LOC later, but in this lending client it will be hard to do, so your way does have merit.

The other way is to just borrow 80% and fully offset the loan with a 100% offset account full of cash. The advantage here is tax as it you take money out for a private expense there is no loss of deductions whereas if you used the LOC approach there is.