Hi Steve,
I noticed you were online, and was hoping to get to ask you this question before you rushed off to do whatever for the rest of the day……
As investors, most people will have debts owing on their properties, but how much is “too much”???
I personally know one man who ran up a 2million dollar debt, and along with share trading, is on the verge of bankruptcy.Where does one draw the line?
JO
Hi Jo
Steve advised me not to take out too much equity in your ppor – 30% mortgage at most. You don’t want to end up losing your home. I have refinanced my IPs so they stand on their own and some are mortgaged 105%, so if anything happens I won’t be bankrupt.
I don’t think you need to put a figure on what you owe, just take care when you set things up.Yo Ho Samwise
Thanks Samwise,
I wasn’t thinking of borrowing anything against my PPOR – I would NEVER do that. I am lucky that I don’t have to worry about that for now anyway. I own my home, and 3 IPs outright, but was just curious to know what Steve considered to be an “acceptable” debt an investor should take on.
Cheers,
Jo
Wowsers.. you own your own PPOR and 3 IP’s outright? You’re doing better than most people here [thumbsupanim] With that many purchases I would have thought that you already had enough experience to answer your own question, unless all of the properties were bought upfront with no mortgages (?) I’m only a beginner (24yo with 2 properties) but to me, to be ‘safe’ with your loan repayments you should hopefully be able to make the repayments + any other expenses from your income even without rental income from the properties and still live comfortably (i.e. not surviving on 2 minute noodles
). It’s different from person to person though because everyone has different lifestyles and expenses so it’d be hard to say.Originally posted by NEWGEN:Wowsers.. I’m only a beginner (24yo with 2 properties) but to me, to be ‘safe’ with your loan repayments you should hopefully be able to make the repayments + any other expenses from your income even without rental income from the properties and still live comfortably (i.e. not surviving on 2 minute noodles
). It’s different from person to person though because everyone has different lifestyles and expenses so it’d be hard to say.You’re absolutely spot on Newgen. It is definitely a matter of one’s choice of lifestyle.
To answer your question, I only ever had one mortgage which was minimal, but a mortgage nonetheless. I have been buying and selling since I was 18, and I always purchased properties in high growth areas, where rentals were good and there was profit to be made.
The reason I asked the “how much debt” question is, that so often people who invest, over-extend themselves and go into huge debt, so-much-so that even the water for the 2min noodles is pushing it!!!
You have (and obviously are continuing to do) well. Keep up the good work; you will outshine me in years to come I’m sure.
Cheers,
JO
Why does a person that has so little debt ask this question ?
Would the answer make you take on more debt? The more debt the higher the return, the higher the return you can take on more risk. Thats why you shelter some money and have reserves.Rob
Hi Monopoly,
I believe the more important issue is how much is value of the assets compared to the debt.
For example I would argue, all things being equal, that someone with $2m debt on a portfolio worth $5m is better placed than someone with a debt of $400K on assets to the value of $450K.
Now whether or not you can sustain either level of debt financially and emotionally that is a question only answered by the person directly involved.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Rob,
Reason for asking the question; simple CURIOUSITY. Would it make me take on more debt? Not necessarily; I make decisions based on what position I am in at the time, no because others say it’s okay or not okay. Your strategy is fine, so stick with it, it makes perfect sense.
Derek,
I couldn’t agree more with your views of what is and isn’t to much debt, based on overall property/asset value. I agree, better 2 million debt on 5 million in property, as opposed to 50K debt on a 450k property.
Cheers,
Jo
Originally posted by Monopoly:Derek,
I agree, better 2 million debt on 5 million in property, as opposed to 400K debt on a 450k property.
Sorry, I meant 400k (not 50K) on a 450K property.
Jo
Hi Monopoly,
IMHO, i find the more debt you have, to allow you to gear further, the more money you can make, as long as your investments are returning more for the dollar, and are, out peforming interest rates repayments and other expenses, a large debt can still look quite considerably small.
… just find what your comfortable to be exposed at and use the power of leverage…
Cheers,
sisMonopoly,
Let me ask you this question… If you knew of an investment that would return you 10% relatively safely, and I offered tto lend you money at 7%, how much would you borrow?
Different people have different risk tollerances (I can’t spell), but personally, I would borrow as much as they would lend me. What you need to do, is find an investment that is CF+ as they say, that you are comfortable with, then the sky is the limit.
Dan.
Looking for positively geared property? Check out http://www.positivelygeared.com.au
Heres a good question.
There are 2 familes and both families have kids, and both owe the bank $100k.
… first kid from 1 family says, were poor because were in debt…
… second kid from 2nd family says, were rich because of the power of leverage…
… different people have different opinions, but there is no right or wrong answer…
Cheers,
sisStill in School has been reading Rich Dad Poor Dad.
I too think its amatter of personal comfort.
80% debt to equity would be a reasonable maximum -thats why the banks and LMI use it.
As was posted 2mill debt on 5mill equity with capacity to repay – no problem.
rgds
AndyI am in the states. I have borrowed to 97% LTV.For my personal residence.
I am of the firm belief that the only paid off property you should have is the one you live in. Thats not until you have excess cashflow. Had a discussion that even if I was rich I would still buy property using opm. I havent passed the million in debt yet. On the million dollars in debt figure I would have 30% equity. Still working on it.
I also look at it different. The numbers are just references not exact.I can buy a 120k house for 100k. I can buy it for 10% down. They havent been cashflowing great but they are positive. Let the tenant pay down the mortgage. Later refinance and get my money out or sell and move into something else. You can lease option them. Then you would have a higher cashflow and tenantbuyers and not just tenants.
Rob
Monopoly,
It’s not how much debt you have, it how much your assets are worth & whether you can repay the debt!
Personally I believe that when starting out 95% LVRs are fine. I get concerned when people start out with greater than 100% loans – particularly right now!
(that also goes for companies – I don’t buy shares that have more debts than assets!)
As time goes on it’s a good idea to reduce the LVR % and build your equity – after all you’re trying to MAKE money for you, not for the bank!
How low you take your LVR is really personal choice. Some people like owning outright, some keep their LVRs under 50%.
Personally, we’re now around the 70% mark ATM and more focused on diversity rather than reducing it further. In fact we may increase it slightly to use equity in other types of investments
Cheers,
Aceyducey
I love debt! [
]So much so that I’m about to take on another $840K. This will still keep my equity at about 30%, maybe drop it to 25% (I haven’t worked out the maths yet), so I’m comfortable that I have enough ‘spare’ equity if something bad were to happen.
I’m also not only relying on the rents as my cashflow to pay for the debt, so I’ve got it covered a couple of ways.
Cheers
MelHi all
Interesting discussion. When you have a PPOR and IPS do you use your PPOR in your calculations for the LVR calculation.
For example
say PPOR 200000…owe 100000
IP 300000…owe.290000
cross collaterised.If they were seperated would one increase the PPOR to reduce the IP to get it to an overall lower LVR?
regards
alfIMHO – NEVER cross-collateralise an IP with your PPOR is you can help it!
Cross-cat with other IPs if you must (or you want to simplify the account keeping), but cross-catting with your PPOR can increase the risk of losing your home
Using a LOC over your PPOR to finance a IP is A-OK in my book however….
Cheers,
Aceyducey
Looking at Samwise’s example, I am amazed to see such a statement which appears to imply that one’s house is safe. It isn’t.
Steve advised me not to take out too much equity in your ppor – 30% mortgage at most. You don’t want to end up losing your home. I have refinanced my IPs so they stand on their own and some are mortgaged 105%, so if anything happens I won’t be bankrupt.
The fact is that by the time things blows up one cannot protect one’s house. It is too late for that.
If one happens to run into financial strife and a particular property gets sold up by the mortgagee (or the receiver) then, in the case of a shortfall, he will eventually start looking at where else he can recover the shortfall from.
One’s house isn’t protected from someone chasing you for money unless one has taken steps beforehand to protect it.
There are a few ways to do so. Putting one or more unencumbered assets into a trust or into the name of a party who isn’t connected to a mortgage
is one way.Another way would be to look for a non recourse loan which means that the lender can only look to the security to recover the loan moneys and cannot attack the borrower for any shortfall.
Owing ‘only’ 70% to $ 80% doesn’t protect one if one were to run into financial problems and the properties get sold up and there’s a shortfall.
A firesale is exactly that. If you owe say 80% of what you at one stage thought the property was worth and you think you are safe because, after all, you’ve got 20% equity in the property, think again.
If the mortgagee in possession (or a receiver) finishes up selling the property for considerably less that what is owed you’ve got problems.
Guys, please note that there is however another danger putting one’s unencumbered home into one’s wife’s name. She may get so fed up with you that
she kicks you out [biggrin]Taking out rent protection insurance and having some cash in reserve may also go a long way towards providing, (albeit) s-h-o-r-t term, relief.
Ultimately one needs to make a decision to either build up one’s assets at a slower pace or risk losing it all.
The other way of course is to totally ignore the dangers.
Pisces
>>It doesn’t matter which name the property is in. I am sure the wife will kick him out in any case !!!<< [biggrin]
I don’t think it is very nice to take a delight in other people’s misery Rob. [wink]
But all joking aside there is a lot of truth in that Rob.
One day the guy is on top of the world, the next day he is bankrupt so it isn’t so illogical to see the poor guy become depressed. The depression in turn causes him to be impotent.
Now the situation before the bankruptcy was that he likely wasn’t too good in that department anyway and now it is of course even worse.
So, yes, you are probably right, ‘out’ he goes, onto the street, a useless piece of human being.
So what is the lesson there ? I think it might be to not put the house into one’s wife’s name but put it into your mother’s name.
After all, a guy may be the worse kind of person, a murderer, a thief, a robber. The only person who won’t stab him in the back, won’t ever desert him, is one’s mother.
She will still love you never mind how bad one is.
But what is that ?
Your widowed mother re-marries (damn).
She is so delighted that she soon succumbs to a heart attack and, whoops, the house, YOUR house, sails into another direction.
O.K., what about it if she doesn’t re-marry ?
Well your siblings who don’t like you, never did like you in fact, well, not since you acquired all that property and poked their nose out of joint, they are likely to want their share of THEIR mother’s estate when the time comes and you finish up with one quarter only of the estate (which may well itself dwindle to a quarter in turn because of the legal expenses incurred by the estate via the courtcase you instituted to recover YOUR house.
O.K., that ‘solution’ of putting the house into your mother’s name is OUT.
Back to a trust set up by you.
But what’s that ? You set up the trust too late ?Too bad, you cannot win them all. That’s life.
Pisces
). It’s different from person to person though because everyone has different lifestyles and expenses so it’d be hard to say.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
