Lending as an investment class

Good stuff mate.

Real return 3.6%, non trading entity 30% rate.

 

Just keep in mind that you are essentially lending to them and they are onlending the money to someone else. They will have the mortgage, not sure what security you will have but it would be less than a mortgage over land.

 

Definitely not comparing it to interest bearing bank accounts.

Though I personally don't think an 8% return is high return. its actual slightly lower than the average return of asx 200 over the last 10 years, or even over the last 5 years. So I personally wouldn't categorise this as high return high risk. I would put it in the moderate return / moderate risk category. That's how I see it anyway.

 

Hi @FXD
I have done some small scale development in the past ( Which went very well. Though in the market we had a few years a go anyone would have done well. ) but have no plans to do such thing anytime in the near future. My investment strategy moving forward is more of a passive style investment. Let the money work for me and not me work for the money. While I don't mind being active to a certain point developing property is more work then I want to be involved in at the moment.
I recently walked away from a development site that I went into about 18 months ago and got burnt on. Still licking my wounds. As much as I hate loosing money I am more angry with myself for following the lead of someone who had no idea. Property development is not really my field of expertise and I relied on others. Lesson learnt.

 

Thank you @Terry_w . You raise a very valid point. I will have to look into that one further.

 

Actually question about the 30% rate vs 27.5% rate. Probably more up @Terry_w ally.
What would constitute a trading entity?

I have a company which is a shareholder of an active business. It collects distributions and franking credits at the 27.5% rate. This same company also acts as a bucket company for a family trust. The income it collects from the above activities it invests in the asset class we are discussing in this thread. So it also earns further income from activity within the company. It also lends some of its capital to the family trust under a formal loan agreement and collects interest accordingly.

Is this company not an actively trading entity? I would think so. It is established as a investment company that holds investments and transacts in investments on a regular basis in order to earn a return for its shareholder. I spend time actively researching and transacting on investments that earn money. Investing in a company is trading is it not?

 

I might be wrong but I am not certain if there was a stock market crash that those developments would be unaffected.

 

AFAIK no more than 80% of earnings can be from passive sources, ie it’s supposed to be operating a business, not sure lending to related parties would count. Buckets are taxed at 30% @Terry_w is the man for this.

 

Generally I would say no. Now if there was a crash that was significant enough to cause a negative wealth affect through out the general economy then of course every asset class will be affected.

Again one major factor for me in this whole thing is the manager. Out of all the players out there offering this style of contributory mortgage investments this mob is the only one I would invest with. This is because they are not just a manager that provides capital. They themselves are a major property developer and manage many billions of dollars in investments. They manage one of the most successful health care property trusts which develops and manages assets. They are not some small boutique investment lenders who will make a quick dollar and disappear tomorrow.

If there's one thing I have learnt in the few years of experience I have in this game of investing, its that the manager you invest with is just as important if not more important than the asset your investing in. There have been managers who have invested in mainstream assets that have managed to burn clients money and there have been managers who can take a high risk asset and navigate there way through and bring home the pot of gold.

 

Yes if passive income from investments it would be 30% tax.

 

So - you invest in REITs = property.
You have a PPOR = property.
You have investment properties = property.
And you want to invest in private lending for development of property.

I don't think you have moved away from your comfort zone at all.

Not saying this is bad. If it works for you - great.

 

Are you suggesting i am biased towards property?
I’m a work in progress when it comes to moving away from property and into equities. In saying that a few years back I wouldn’t have even considered investing in equities. I’m now about 20% equities. My plan is to be 50% equities. And I’m actually keen to get there sooner than later but my advisor is suggesting we put a hold on purchasing any further equities right now.
If the market downturn that we are expecting comes around soon then I will be going full steam ahead with the 50/50 re balance.

If that downturn doesn’t show its head in the next 12 or so months then I might have to go back to my original plan of dca into the market with a monthly fixed amount into index funds.

 

@Big Al - you are heavy in property.

In your situation - I would listen to your advisor @Alex Straker and just wait.
You do pay for his advice after all.
It is hard to do something outside your comfort zone (like sit on cash for a bit).
But personal growth is part of the investment journey too.

 

Thank you @sharon . I appreciate the feedback.
Without turning this thread into strategy discussion , i am still keen to push a little further in this segment and increase the holding a little further. I will also set aside some cash to take advantage of the next equities downturn.

To put some context on the strategy though. I’m not trying to reach financial independence or building a retirement nest egg. I’m working towards building something much bigger that I can leave for my children to one day take over and build on. A legacy of sorts. Hence my aggressive strategy.

 

Consider also the potential future need to litigate when you chose the investment entity. An existing trust with assets might not be wise if there is a dispute that trustee may have to sue the fund it is investing in.

This sort of thing is generally not a problem when investing in shares on the ASX.

 

If you want to build something for long term, wouldnt you go for something with capital gains? Much more effective taxwise. Especially if you leave it to your kids via a testamentary trust. This is income with capped upside and no capital gains.

Asking the question another way, who would this investment suit? Probably someone looking for income, maybe a retiree using their super fund. Doesn't suit someone looking for growth, and is highly taxed.

 

Hey @Trainee , I am all for the long term capital gains approach. As I said at the start of the thread. There’s the 3 asset classes that I’m comfortable investing in. The other 2 have capital gain components but the price to buy into those assets right now is not compelling.

This investment does suit some one looking for income. And I am looking for income. I love income. Possibly in the near future I will need some of this income. The rest I will direct into equities.
Don’t get me wrong I want to increase the equities side of the portfolio but have been advised to put that on hold for now.

So the way I see it is leave this cash in the bank collect 2.5% or deploy it to this asset class which I feel is a moderate risk for a decent return. When the time comes and there is a great buy in opportunity in equities I can draw money from my PPOR loan at 3.6% if not cheaper real soon and pour that into equities. The lending investment paying me 8% can technically be used to cover the loan repayments and some for the funds I re draw.

I’m not arguing that it’s the perfect or best strategy. But it’s a strategy that I like because it’s cash flow heavy. I like seeing my investment return in my hand sometimes. Even if I end up re deploying it to further investment. I have started my building process being income heavy. Stage two will be to direct that income to growth assets such as equities. If my advisor gives me the go ahead to re start equities purchasing the plan would be to put all income flow straight into equities from this point on.

 

Another point to keep in mind is each individual loan I invest in runs for 12-18 months. So every few months one finishes and capital returned. If the equities market becomes favourable to buy into as these loans return the capital I can reduce holdings in this asset class and move it over to equities.

 

@Big Al great posts as always and I have been a fan of your posts, very clear and often provide balance of both positives and negatives!

 

Why thank you sir. Getting my thoughts down in writing isn’t something that comes naturally to me. But I do try and look at things from all perspectives and can see and accept faults in my strategy even though I might still stay on that path.

I have learnt a lot from this site and it’s participants. Especially regarding the physiological aspect of investing as much as anything else.