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Poll: Cash buffer

Discussion in 'General Property Chat' started by joel, 25th Jul, 2016.

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Cash as a % of Debt?

  1. 0-5%

    22 vote(s)
    45.8%
  2. 5-10%

    7 vote(s)
    14.6%
  3. 10-20%

    6 vote(s)
    12.5%
  4. 20-30%

    3 vote(s)
    6.3%
  5. 30-50%

    4 vote(s)
    8.3%
  6. 50-75%

    1 vote(s)
    2.1%
  7. 75%-100%

    2 vote(s)
    4.2%
  8. I'm rich as hell and/or I don't have debt

    3 vote(s)
    6.3%
  1. joel

    joel Well-Known Member

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    How much cash do you keep (in your offset account or whatever - your buffer, your emergency fund) as a % of total debt, and are you comfortable with this amount?

    Me personally, roughly 10% (this is cash only, it doesn't include the Picasso or my collection of classic cars).
     
    Fiona likes this.
  2. Big Will

    Big Will Well-Known Member

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    I think alot would have to do with the size of your portfolio.

    E.g. 50k on 500k is 10% and 50k on 1M is 5%.

    The other factor would be what phase you are in along with age.

    If you are like me (30yrs) and in growth then it would be a little silly keeping 500k in cash with 1M in debt.
     
    Bran and Perthguy like this.
  3. barnes

    barnes Well-Known Member

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    100% since I don't have debt.
     
  4. Fargo

    Fargo Well-Known Member

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    0% as I dont have cash, I like to keep at least $2 or 300 k drawings available on my loans. I don't think the size of the portfolio has much to do with how much income you may need if the usual source of income is reduced, it is probably easier to ride it out or rejig with a larger portfolio and more options.
     
  5. joel

    joel Well-Known Member

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    Yes but if you have a 1M or even 10M illiquid portfolio, and you have vanacancies, repairs, and you lose your job all at once, how are you gonna ride that out?
     
  6. chylld

    chylld Well-Known Member

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    Where's the option for "Calculated by another method"? :)

    I personally think the amount of debt isn't nearly as important as the resulting cashflow, and the impact on that cashflow from a worst-case scenario. I use that method and a buffer period of 12 months and it happens to work out at under 1% of total debt, but someone else with the same debt and without the right planning/structure would need a much much larger safety buffer.
     
  7. Big Will

    Big Will Well-Known Member

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    If you had 10M in debt you will likely have spare equity you can/should access. Unless your serviceability is amazing to have 12.5M assets 80%LVR = 10M debt with no share for quick release or cash then you are going extremely risky and you may have more in cash.

    However if you have 20M in property and 10M in debt (this is more likely) then you will have line of credits/offsets (or should). If you had 100M of assets with 10M of debt I don't think you would need to worry about having any cash reserve. Because if you are getting 3% rental yield that is 300k and with interest at 6% is 60k so you still have 240k after interest (less tax). Even if 1/2 of your portfolio all of a sudden crash/burned/vacant you would still have 90k (before tax) to live off. However the chances of 1/2 of a 100M property doing this is unimaginable bad luck and you should of have had insurance (obviously doesn't cover vacancies).

    An average person in their early 30s would likely be doing growth phase will unlikely have 10M in debt unless they have an amazing serviceability (but then they wouldn't be average). Once my new property settles and at the age of 30 I will have access to debt of over 1M and my wage is above average/median. With our household income being well above the average/median as both my wife and I have very decent jobs (nothing amazing). I am by far not an aggressive in my investment strategy but the level of debt compared to other 30 y/o that I know of is likely to be the top (just at a guess), I would most certainly have the most amount of debt in the office I work at however my bad debt is probably one of the lowest (cant say lowest as others might have $0 too).

    Also if you broke up the 5% to different amounts e.g. 0-1%, 1-2%, 3-4%, 4-5%, 5-10%. As most people will likely fall into these smaller brackets during growth however once they have a couple of properties it would likely become bigger cash buffers as the nature of the beast not to min/max their debt.
     
    Ace in the Hole likes this.
  8. Brady

    Brady Well-Known Member

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    I voted 0-5% because that's what it worked out to be. But my SANF isn't based on percentage, it's based on months. I like to have enough cash in the offset to cover 6 months of interest for my total debt. So in the case of all properties being vacant I could still cover the costs.
     
    chylld likes this.
  9. wombat777

    wombat777 Well-Known Member Premium Member

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    Currently 13% buffer in cash. 10% buffer in shares.

    If push came to shove could cover my PPOR and IP loan repayments for 4years and 3months ( although that is not realistic due to living expenses, in this case could cover repayments for 35 months ).
     
  10. tobe

    tobe Well-Known Member

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    like Brady, mine is based on time rather than %. I want 6 to 12 months expenses. I chose 5% cause that's a little more than current home loan rates, but to include living expenses as well as debt repayment I should have chosen 10%
     
    Perthguy likes this.
  11. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Yeah, I'd agree that the higher your asset base is, the lower your debt percentage would likely be.
    Got to be more conservative at the higher levels to not come undone, as there is so much more to lose than when starting from the bottom.
     
  12. sash

    sash Well-Known Member

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    Ideally...you should have 10-15% of your portfolio in hard cash......at the minimum 10% of your debt levels.....
     
  13. hash_investor

    hash_investor Well-Known Member

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    What is your reason for saying that is ideal. The ideal is to be able to service your debt for 6/12 months. Don't think you always need 10% for that.
     
  14. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Would vary from person to person and inline with risk profile as well as what you are setting out to achieve. A single person would need far less than a married person with children.

    I have young single clients that will go to high LVRs with only a small buffer, say a few months without any income and at the other end of the scale would be a mature age investor with equity / cash and 80% LVRs and some loans are fully offset.

    Me personally, I work on a time fame rather than a percentage and 5 years with zero income and still keep the boat sailing is where Im at.
     
    Perthguy likes this.
  15. joel

    joel Well-Known Member

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    Looks like the majority so far are risk takers!
     
  16. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Or relatively low total debt levels.
    If someones only got a mil of debt, an average salary can cover the shortfall if things go bad.
    Not much need to keep much buffer, if any at lowish debt levels when accumulating.