What did forum members make of the 4 Corners show – Betting on the house?
The episode description reads “Australians are carrying more personal debt than ever. We hold the second highest level of household debt in the world. Michael Brissenden investigates the forces driving our debt fuelled housing boom and the risks it poses”.
I was fascinated by some the case studies. Such as:
– The young couple with 1.2 million in debt (plus two builds to be added to this) with a net worth of $300K (They stated the portfolio is worth 1.5 million), which is a Debt/Equity ratio of 4 (that’s 400%.
– The older couple from WA who invested in Mildura and now face bankruptcy.
I really appreciate that the interviewee’s shared their stories, it is a great reminder to sharpen the pencil and to have realistic expectations.
Watch the episode here: http://iview.abc.net.au/programs/four-corners/NC1704H028S00
This episode got me wondering about two key issues:
1. What debt/equity level do forum members feel comfortable with?
2. What interest rate do you use in your calculations to determine if an investment makes the cut?For me:
Q1. I now keep a D/E ratio under 2.5 (or a max of 40% debt to equity) That results a few outcomes:
– a. I am not particularly active in real estate investment (I also invest in shares/managed funds and cash), as I need to let the D/E ratio adjust with each new purchase (I’m not the guy who makes 10 purchases in 1 year).
– b. I am not highly leveraged, so finance is quite easy to obtain, and loans are easily managedNote: I say ‘now keep’ as my D/E ratio was as high as 4 on my first purchase (80% debt – 20% equity i.e deposit).
Q2. I use 8.2% as my interest rate in calculations, and have done so since I made my first investment in 2003. Why?
– a. This gives me a large margin of safety (The interest rate on the investment loan I am applying for now is 4.3%)
– b. Rates have been as high as 7.5% since I have been in the investment market, and will return to these levels in time.Tom
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1. What debt/equity level do forum members feel comfortable with?
Feel comfortable with is 0% debt haha, but I stay around 60/40ish I think more importantly is being prepared in a bad outcome, the ratio dosnt affect me as much as how to survive in a crash or area issue or etc, understanding how I would navigate through such.
2. What interest rate do you use in your calculations to determine if an investment makes the cut?
I look at current rates, then a 2% add on and a 5% on top, but to be honest APRA raising interest rates to high isnt really something I see happening soon or quickly, them making tighter lending rules I can see.
I would like to end by pointing out, its all risk, all you or anyone can do is their homework and understand how to midigate and minimize but some things are actually out of our control if we are not cash rich and trying to build a portfolio. there is risk.
Jaxon | Jaxon Avery – Financial Adviser
http://www.jpafinancialservices.com.au
Email Me | Phone MeJPA Financial Services Pty Ltd
Hi Tom,
– The young couple with 1.2 million in debt (plus two builds to be added to this) with a net worth of $300K (They stated the portfolio is worth 1.5 million), which is a Debt/Equity ratio of 4 (that’s 400%.
Sounds like an 80% lend to me !!
Many start out that way (even you, but likely not on $1.5m eh?) In my case, my first was 86% – but also NOT on $1.5m. I agree with you, insomuch as I wouldn’t want to have an 80% loan on $1.5m for any great length of time. Maybe would for a short-term, well researched, profit-producing play with a large benefit at the end though.
Benny
I think the couple are doing a great job too, maxing out one’s lending capacity is quite a popular investing methodology.
My investment goals differ somewhat (not better or more right, just different), but if all goes to plan for the couple in the show they will end up much richer than I, and I think they deserve to rewards.
The topic of the level of debt to equity that forum members feel comfortable with, and the way we go about out analysis I find really fascinating.
Tom
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Just to clarify, I’m not sure if auto correct was up to it’s evil ways but the retired couple were not investing in Mildura, but Mandurah in Western Australia.
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