Risk and LVR

Hi All, just after peoples thoughts on the risks associated with having a high LVR portfolio.

I have 3 properties (PPOR & 2 IPs) and a little in funds and agribusiness (or should I say zero in agribusiness? ). The LVR is around 81% across the board taking into account offset savings. I am looking to buy another capital growth property at 95% (by using savings/refin/both) which would take the portfolio to about 86%. Getting the finance is not an issue.

I've been told by my planner and broker that once you have a few properties it is high risk to purchase or have the portfolio above 80%. I am trying to get my head around what the risks/mitigations are so thinking out loud a bit:

Extra holding costs - have crunched the numbers and I am comfortable with this including 2-3% rate rises
Interest rate rises - over a third of the portfolio is fixed at a very good rate for a few years yet, tax also picks up some of the rises as does rental increases
Property value drop - not fussed, in for the long term and paper loss only
Everything goes to poo - buffer is in place to allow for around 1 year of interest payments for the whole portfolio
Loss of job (which is critical to holding costs) - see above point and I am comfortable with the demand in my industry
Loss of rent - insurances are in place and vacancies budgeted for

I'd be interested to hear how others have aggressively grown capital growth based property portfolios. Did you refinance / use savings where possible and buy more with LMI or play it safe and only buy at 80%?

Thanks

 

I have written extensively about some of the things worth considering when it comes to using debt (though I am more bearish than most):

http://www.invested.com.au/85/leverage-strategy-37587/

 

Thanks - interesting read. I see the discussion is still continuing today I agree it is very personal based on age, risk level, income, goals and so on.

 

I think the most important thing to remember when using leverage, is making sure you have something worth leveraging.

 

I've been told by my planner and broker that once you have a few properties it is high risk to purchase or have the portfolio above 80%. I am trying to get my head around what the risks/mitigations are so thinking out loud a bit:
Extra holding costs - have crunched the numbers and I am comfortable with this including 2-3% rate rises Interest rate rises - over a third of the portfolio is fixed at a very good rate for a few years yet, tax also picks up some of the rises as does rental increases Property value drop - not fussed, in for the long term and paper loss only Everything goes to poo - buffer is in place to allow for around 1 year of interest payments for the whole portfolio.



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There are conservative planners and brokers and there are others who look at a longer term view. I have found brokers that persuade investors away from LMI tend to be ex-bankers with that conservative bankers mindset. Planners are mostly ex insurance salesmen (not all by any means) and do not see the benefit of paying LMI.

For an investor, LMI is simply a cost of doing business, being able to borrow and use more of other peoples money to your gain. If it enables you to purchase another decent IP now rather than having to wait 2 years to save or refi and if you are able to do so, I would suggest you do. LMI is tax deductible over 5 years anyway, so the cost is mitigated to an extent.

That said, wealth is assets less debt, so at a point in time in your investing career, you need to move your emphasis from asset acquisition to debt reduction. It is understanding your goals, your timing and where on that journey you are sitting. You seem to have considered risk insurance with income protection critical and safety nets available for tenant or vacancy issues so you have put the strategies in place and if you are comfortable, then purchase again and build your portfolio.

It ultimately comes back to lenders and mortgage insurers, if they are comfortable with your position and will lend you the money, don't worry about what a planner or broker says. Find a better one to suit your needs.
Good luck
Greg

 

I can't emphasise this enough.
Would you buy something which will be worth the same in 5 years time?

Time is in your favour so 5 years later rents would have gone up and your holding costs should be lower but you're leveraging to make your money work harder and you need capital growth so make sure you know what you're buying.

Properties in many areas are already expensive and demand is slowing due to affordability so have this in mind when you consider where to buy and what to buy.

IMHO