Forums / Treasure Chest (Past Forums) / The Treasure Chest / Living with a high level of debt…

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  • Profile photo of jstuartjstuart
    Member
    @jstuart
    Join Date: 2003
    Post Count: 0

    This is my first posting, as as such, my query may seem a little oversimplified, but here goes…

    I’ve noticed that nobody seems concerned at the high level of debt they’re living with, or are intending to acquire…why is that?

    A single individual owning, say $6 million dollars worth of property, may really only ‘own’ about $600,000 (90%)

    This means that they are effectively ‘managing’ some elses’ $5.5 million dollars worth of property…why is this a burden that so many seem willing to take on?

    What ‘protection’ is available for the unforseen, simply selling off ‘bad performers’ and dumping whatever profit…if any…into the other properties?

    What about using the income to reduce the debt on a smaller pool of properties…thus increasing one’s own stake?

    I understand the use of debt, and do so to my advantage daily…albiet on a much smaller scale!

    Thanks….I welcome your opinions…;)

    Profile photo of aussierogueaussierogue
    Participant
    @aussierogue
    Join Date: 2003
    Post Count: 983

    good point

    i think most of us concentrate on +ve cashflow and servicability and forget a little about the overall debt issue

    i guess the point is that as long as you can service the debt then it shouldnt matter.

    ie if you have 20 properties worth 2 million and a debt of 1.5 million, it is ok because you have 20 income streams servicing that debt. thats whats good abt +ve cashflow properties is that you can have many of them and hence spread your risk (and therefore your income streams). if one or even 5 arnt leased you still have 15 that are.

    having said that, debt is debt and anything can happen.

    best to diversify amongst assets classes aswell

    cheers

    Profile photo of MelanieMelanie
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    @melanie
    Join Date: 2003
    Post Count: 382

    Welcome aboard![:D]

    Personally I don’t think I’d sleep too well with only 10% ‘margin’ over my debt either!! From what I’ve read of Steve’s great common sense philosophies it’s smart to keep your investing activities to around 80% debt from the outset with the intention of continued reduction, so by the time it’s up around $6M, overall debt is no more than about 50-60%. Of course if you earn Oodles of cash and wish to keep working, higher might be okay aka the 80’s & 90’s negative gearing investment style. Not a common one on this site I think!

    Happy investing,
    Mel

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    You may want to consider some life insurance and some sort of trauma insurance incase you get incapacitated and can’t work-especially if you are negatively geared.

    Terryw
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Stuart WemyssStuart Wemyss
    Member
    @stuart-wemyss
    Join Date: 2003
    Post Count: 598

    Welcome to the forum. Good post to kick it off.

    Some risk management strategies may include:

    1. Income protection insurance.
    2. Rental income insurance.
    3. Fixing a proportion of debt.
    4. Multiple income streams.
    5. Diversifying location of IP’s (and type).

    Perhaps the best stop loss is probably the bank. They would not lend you $5.5 million unless you had a very good income stream from more than one source.

    Cheers

    Stu

    Property & Finance News
    at http://www.prosolution.com.au

    Profile photo of Lawry73Lawry73
    Member
    @lawry73
    Join Date: 2003
    Post Count: 123

    Jstuart,

    There’s always risks involved in any kind of investment. Only you know your own risk tolerance level and we try to minimise risks, that’s the best we can do. We can wipe them out completely.

    So before taking on more debt, think about contingency plans or recovery plans.

    Profile photo of maximusmaximus
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    @maximus
    Join Date: 2003
    Post Count: 189

    Hi jstuart. I think it’s about living with a debt that you feel comfortable with. If you cant sleep at night because you’re worried about your debt, be more conservative with your approach to investing. I posed a question on this forum recently whether anyone was thinking of changing their strategy with talk of rate hikes in the future. I agree with trying to keep your debt at around the 80% mark, lower if possible. As I said, you have to be comfortable with it.

    Cheers

    Marty

    Profile photo of HameHame
    Member
    @hame
    Join Date: 2003
    Post Count: 16

    Hi all,
    Just a thought if the level of debt scares you as it does me put 100% of the rental income into the repayment for the first term of the loan. obviously it will restrict other investment options but it will get the principal down to a manageable level very quickly and help you sleep at night. once your level of debt is within your critera restructure the loan and move on. owning hundreds of properties is a nice ideal but if your not comfortable being exposed to interest rate hikes etc why make yourself a nervous wreck?
    There is more than one road to Rome!![;)]

    Profile photo of retired@31[email protected]
    Member
    @retired-31
    Join Date: 2003
    Post Count: 7

    It is a good question that jstuart asks. I am not seeing a lot of posts on the subject of a debt reduction plan.

    If we buy 10 homes @ $100,000 each at 80% lvr = $800,000 debt. If each house makes us $50/month = $2,000 cashflow/month.

    Money should be kept aside for tax, say 30%. (if tax is not eligible then one is spending money on tax deductions and so the money needs to be kept for that)

    If the remaining $1,320/month is put towards debt reduction, then it will take 50.5 years to pay off the 10 properties.

    Right now is not a good time to be spending that income on lifestyle or leaving ones job too early. It takes a long time to become financially free as opposed to becoming financilly independent.

    If one is hoping for capital gains, then perhaps we have just witnessed the biggest gains that we are going to see for a while. (see ’60 Minutes’ tomorrow night) Properties are not as cheap as they were four years ago and some of us are just getting into the market.

    Can I suggest that quality time is spent on establishing a realistic debt reduction plan as it is very easy to get excited about the income but if we are not disciplined it can be easier to finish up worse off, which I would not like to see happen to anyone.

    Best regards
    Tony

    Profile photo of samuroosamuroo
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    @samuroo
    Join Date: 2003
    Post Count: 2

    quote:


    If we buy 10 homes @ $100,000 each at 80% lvr = $800,000 debt. If each house makes us $50/month = $2,000 cashflow/month.


    Umm…

    10 homes x $50/mth =$500, not $2000.

    Did you mean 10 homes @ $200/mth ?

    Rob O.

    Profile photo of AdministratorAdministrator
    Keymaster
    @piadmin
    Join Date: 2013
    Post Count: 3,225

    On first sight of Steve’s famous 130 properties in 3.5 years I though “boy he must be hypersensitive to interest rates” I could see that $300,000 pa turning equally negative with just a few percent hike in interest rates. Having read Steve’s book I now assume that the majority of his properties are Wraps, in which I gather the client is locked into your prevailing interest rate plus say 2%. Perhaps this is why Steve so favours Wraps, apart from the obvious deposit & cashflow advantages. Is this how Wraps work? I guess it would still come crashing down if the clients couldn’t afford the interest rate hike either.

    Profile photo of retired@31[email protected]
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    @retired-31
    Join Date: 2003
    Post Count: 7

    Sorry Samuroo, it should be $50/week in the example.

    Regards
    Tony

    Profile photo of NessieNessie
    Member
    @nessie
    Join Date: 2001
    Post Count: 73

    Hi Jstuart

    Welcome to the forum.
    When I bought my first real estate property I struggled with the debt level. Couldn’t sleep – worried about repaying the loan quicker to save paying interest.
    Now some 20 years later and with debt 40 times that of my first real estate purchase I don’t care about my debt level now. Why? Because I have the cashflow to support the debt and any substantial increase in interest rates. I have learnt to live with the high level of debt, can “hold my nerve” and can control the emotional side of investing.

    The change didn’t happen overnight though – it took me 6/7 years to change my thinking about debt. All my debt is 80% LVR and I can live with this even though the $ are 7 figures.

    Cheers
    Nessie

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