what buffer do you keep

Especially for those who have been in investing for a while, how much buffer for your serviceability do you give yourself for rate rises (ie i understand APRA gets banks to assess your serviceability on ~7.5% interest rates)? i am trying to work out what is wise/reasonable when working out our serviceability longer term, knowing that rent (although increases are not strong at present) will hopefully go up a bit over 5 years too.

 

Which is buffer?




Buff

Or



Buffet

 

Depends on your strategy, risk tolerance, cash flow & portfolio size. Also the intangible one, "sleep at night factor".

Personally my risk tolerance isn't high enough to copy the approach that a lot of people seemed to have success with in the somersoft era of huge amounts of leverage then repeatedly re-draw to fund further acquisitions. Which I see as a high risk / high reward strategy & far less doable after APRA changes.

At a minimum for me:

• Minimum 20% deposit / maximum 80% LVR per property
• Net CF neutral or better at 4.5% IO after other holding costs
• 8% of combined portfolio value in offset. I might shrink this as I acquire more
  
• No re-draws. Set and forget.

Reasons why this works for me:

• Time is on my side. I started young / I'm still young, I have plenty of time for further growth and recovery, which yes means I could be more aggressive, but I'm taking a slow and steady approach.
• I'm a pretty low cost of living kind of person, I'm not aiming for $100k+ passive / Ferrari wealth. I might end up getting there or I might pull the pin way sooner, its not really a goal for now at least.
• My market (QLD) is a lot more affordable for now at least than down south. I haven't broken the $1m debt mark yet but probably will in the next 3-12 months.

Work out what you want, how your going to get there & how much you need to cover any risks.

 

Also, I do think that the age of the properties are important. As for me I focus on established/old homes so constantly receive a maintenance request/ approval but hopefully no more HWS replacements because they have all been replaced!

 

" buffers " we have are

We borrow everything when we buy including stamp duty / legals but we don't revalue and drawn down further equity on individual investment properties as they go up. As a result the IP's we've held for a while have equity in them .

We have LOC's on our PPOR and weekender which are just over 50 % of their value . We could be more aggressive if we wanted to , but we don't need to do that to get where we want .

First buffer
Good paying job + sickness disability insurance . SWMBO could get a job , but then we'd have to do a lot more paper work in the evening . In the previous cycle we were both working full time and we seemed to spend most of our spare time on paper work . Much more time relaxing now . Better life style . In reality her job is looking after the properties .

Second buffer
LOC's with different banks with several 100k available .

Third buffer
I could work in a more remote location for higher pay , rent PPOR and get cheap local accomodation .

Forth buffer
Properties with significant equity which we could sell in worse case scenarios.

Cliff

 

As a readily accessible liquid cash buffer I would feel uneasy with less than 50k, but as others have said, on top of that you start layering more and more risk mitigating/exit strategies. Sell equities, sell IPs, rent PPOR and move somewhere cheaper, pursue more PAYG income for self or parter etc etc

 

Well that kind of depends.

I would personally work buffers on the following:

1. 6 months living expenses
2. 12-18 months of 3% of your total loans. So if you are repaying $1,000,000 of loans 3% on 18 months would be 45k.
3. 5k in emergency funds for unexpected repairs

So typically if you are say 80k you would need about 80-85k.

This is very conservative...as the larger your buffer the less likely you will get into trouble.

 

thanks Sash,
how do keep this type of buffer - LOC? in offset? or bit of both, or other?

 

Offset only...LOC's can be rescinded.

Offsets are transaction accounts.

 

Jeepers mister, ive never even seen 50k! I'd feel uneasy with less than 5 lol. Rent is my biggest expense so if I happen to F up I would just move. Without rent, i'd be saving more than 100% of my net PAYG income!

 

2 kids under 5, wife only part time, large PPOR debt, 50k wouldn't last long if I lost my job or big interest rate rises happened. At a different stage in life I would have a higher risk tolerance but for now I'm ok being a bit conservative and the possible lost opportunities that may come from that.

 

That would be close to $200k for me, which is more than my current buffer (and much larger than my buffer in four weeks' time).
I like to have at least $50k in an offset, ready to go. Ideally, I'd like $50k in a deductible offset account and another $50k in a non deductible account, so depending on what emergency pops up, you'll use the relevant account.

 

Another way to look at it is what is the amount you need to sustain your negative cashflow from IPs, provision for emergency fixes to property and living expenses.

If this figure is say 6k per month..I would look to have 6-12 months minimum in an offset. So would be 36-72k. I always like to have a lot more....

 

If interest rates suddenly tripled and everything else stayed the same, on 10+ mil of property, we'd probably just be hanging on.

 

Then you are bullet proof!

No way interest rates will hot 18% ....don't worry about yourself worry about the entire economy.

 

Nice

I prefer 12 months living expenses for 2 people instead of 6 so currently still saving for more buffer.

Minimum $100k buffer would make me feel better. Double that and I be happy

 

You guys are talking about buffers greater than my entire net worth.. if I had a few hundred grand I wouldnt be going to work tomorrow

 

My balance is minus at the moment there's difference between networth and access to cash tho

 

my buffer will be myself.. to work my butt off..! Now debt to the neck.. If I lost my current job, will have to go somewhere remote for casual work..

 

Our buffers are in the form of cash in offset accounts, Loc's and dividends from our share portfolio.

This year hasn't been great for us. Had to replace our car after being written off in an accident - used cash from offsets. A couple of our IP's have become vacant with money to spend on doing them up etc.

On the bright side, the IP's have increased significantly in value - much more than we could ever hope to save in cash....