I am seeking some educated comments on the following from what I have learned so far.
I have read some posts and done some calcs on creating cashflow from taking equity and investing in commercial property trusts .Peter Spann suggests an average return of around 12%.
Given interest rates of 6.5% currently gives a net return of 5.5%.Plus capital growth.
What happens to these trusts as interest rates increase ? Do they continue to perform ? Does the return increase or decrease ?
Based on the net of 5.5% and I am assuming a Margin loan also of 70%
1. Assume a property worth say $300,000
100% equity x80% =$240,000 plus 70%margin =$408,000 @5.5% net=$22,440 extra cashflow per year off this property.
2. New property to be built on land already owned.
Aprox borrowings to owner build $150,000 from exist equity @ 6.5%= annual cost of $ 9750
plus rates &ins$ 2000
Plus run &manag$ 5000
less rent $15000
Shortfall $ 1750
Less depreciation = aprox neutral or slightly positive cashflow so far.
Finished value aprox $350,000
100% equity x80%= $280,000 plus70% margin =$476,000 @5.5% net = $26,180 extra cashflow pos off this property.
3.Purchase adjoining land to existing ,resurvey and add land to new land portion creating 2 blocks . Total borrowing required aprox $360,000 new value aprox $600,000
Build 2 new residences for aprox $200,000 each
Total funds required $760,000 plus holding costs @6.5% ?=$49,400 year.plus rates insurance say $5000 =total annual cost aprox $54,000
Estimated finished value aprox $1,200,000.
Can this be set up so we can borrow 80% of the finished value =$960,000 up front less funds required $760,000 to be drawn down as required.
Invest remaining $200,000 plus margin @ 70% =$340,000 @ net5.5%=$18,700 year
net rent say $28,500 year
total income aprox $47,200 year
less costs $54,000 year
shortfall $ 6,800 year
If I could make this happen I would now have capital gain happening on $1,200,000 new property with aprox $440,000 equity costing $6800 year less depreciation.
Alternatively I could sell one or both new properties or ignor the building and go back to doing the land only with a gain of around $200,000 plus.
I dont know the requirements or impact of GST on these ideas.
There are probably lots of fees and traps I am not yet aware of .
Gurus and experienced people can you please give me some comments on my proposed strategies.
GregTerrywParticipant@terrywJoin Date: 2001Post Count: 16,173
I have not looked into these property trusts, but was intrigued when I read PS’s book. Do these really exist? And can you get margin loans at 70%?
You example looks good, but it looks like you already have a lot of equity to be able to do it.
You probably would not be able to borrow 80% of end value of your project. Maybe you could get 60% at an interest rate of around 12% though.
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Thanks Terry ,
I dont recall seeing an actual figure for the margin loan in Peter’s book , however I was under the impression somehow from figures i saw somewhere that he was possibly doing it at 100%.
I dont see why I cant use the equity in this situation to make the development self funding.
You might have seen I have asked in other posts about results from being attached to the various Gurus who offer mentoring /support services.
These are the sort of things I am hoping to get help on as like you I am making guesses and assumptions whilst searching for the whole picture.
Surely someone has been under the guidance of a guru.
Are they all sworn to secrecy ? Or have they passed us by and have no interest in forums ?
I’ll keep asking .
GregTerrywParticipant@terrywJoin Date: 2001Post Count: 16,173
I haven’t looked into these trusts before, can you really get a 12% return?
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[email protected]calvin_thirty4Participant@calvin_thirty4Join Date: 2004Post Count: 556
I would love to help you but this is soooooo far over my head and I can’t say as I’ve heard any-one else talk about this that you might be a pioneer at this stage! On one hand that’s whooping great! But on the other, you’re on your own unless you can catch up with the likes of Peter Spann himself.
I want to congratulate you on paving the way for others to come and want to learn what you do, but it makes me feel like a sponge and almost unworthy to be in your presence!
Naa, my ego wont let me feel that way!
I just wish I knew what you are talking about. Sorry to be this blunt. It just highlights my own ineptitude!
All the best, truely I hope you succeed! Take notes now, because this could be another income stream for you – a book. Not an original idea but it would work.
Thanks Calvin ,
I don’t think I would be a pioneer .I’m sure this has been done before. I’m just hoping to hear from someone who has done it.
Basically my concept is that creating equity is easy if you can cashflow it . and perhaps creating cashflow is easy if you can create equity.
eg borrow to create equity through improvement or building then borrow the new equity increase it with a margin loan and invested at a higher rate than borrowing cost gives you the cashflow to hold without finding a tenant or in addition to rent depending on the figures.
GregfreedomfinderMember@freedomfinderJoin Date: 2004Post Count: 63
start small, think big,
not many paying 12% I could find but a few in the fin review, on your point 2 you may have forgotton your 150k to build, so maybe 80% of 350k = 280k less 150k = 130k to playwith, also I dont think you will be able to get 70% margin loans on some of the stocks as they are more readily available for blue chips, my opinion which seems to be less riskier is 50%. I cant see why this strategy wouldnt work, the only thing I woulg do is be VERY VERY selective and RESEARCH the stocks you intend on putting borrowed money into.
I like the strategy myself, actually started researching some of the higher yielding stocks.
good luck dood
in relation to your point 1
I can not see too many listed commercial trusts in Fin Review paying 12%. Deutsche Office Trust pays 7.56% (seems to be unfranked) Leveraged Equites permit 65% margin, Macquarie Office trust pays 8.4% (unfranked) Leveraged equities permit 70% margin. Commonwealth Property Office fund pays 7.73% (unfranked) Leveraged equities permits 70% margin.
The problem with this strategy is that dividends are only paid once or twice a year whereas you are incurring interest on the LOC and margin loan every day. Also the interest rates on margin loans (at least for Leveraged equities margin loans) are high at 8.15% pa variable. Not too sure why Peter Spann thinks this is a good strategy. Perhaps it was at one point in time when property trust div.yields were higher.DerekMember@derekJoin Date: 2004Post Count: 3,544
The approach you are seeking comment on is, on the surface, similar to an approach Steve Navra uses and recommends and one which we are using too – a little early to definitively give it the thumbs up – but compounding effect of growth is already having a significant impact on our ‘measly’ parcel.
Steve Navra is a financial advisor who recommends buy high growth properties and then as equity levels grow use these ‘funds’ to leverage into a share fund (he operates such a managed fund that only gets paid if it outperforms the ASX 200 (?)) to provide a cashflow supplement to assist with holding your growth properties.
Steve Navra also has a cashbond structure that uses your equity to generate additional income for your personal and or investment use. His seminars are certainly worth the cost – take a look at http://www.navra.com.au
Property Investment Support Available. Ongoing and never stopping. PM welcome.Steve McKnightKeymaster@stevemcknightJoin Date: 2001Post Count: 1,749
The message I believe Peter is trying to give, and it is one that I agree with, is to make good use of r/e equity to maximise profitability.
It’s the principle of ‘velocity of money’, in that you want to increase the compounding effect of your returns to maximise wealth creation.
In your example, provided your COCR is more than the cost of finance then you will be better off as you essentialy get ‘money for nothing’ as far as a cost of funds perspective goes.
Of course, there is always the risk of financial loss. Specifically, in respect to listed property trusts, just make sure that the returns are not annualised or averaged across 5 or 10 years. Like everything, you need to live through the bad years to profit from the good ones.
A point you don’t seem to have considered in your scenario analysis is the effort to payback ratio. For example, the listed property trust option is a lot less effort than a subdivision, although each have different risks.
Ultimately, you need to make your own investment decision for your situation that reflects your skill and risk profile.
Remember that success comes from doing things differently.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
Success comes from doing things differently
Thanks for a great response everyone .Great info for further research into this idea.
Freedom Finder if you read again my no 2 strategy I have factored in the $150 k from elseware and covered the cost with my rent .Which will leave aprox $350 k equity in the deal .
So if I can extract a reasonable cashflow out of the equity will enable me to live and do more the same.
Derek it sounds like you may have an insight into what I am looking to do.
I will send you a PM.
Any more info would be great as I intend find out the facts before acting .
GregDerekMember@derekJoin Date: 2004Post Count: 3,544redwingParticipant@redwingJoin Date: 2003Post Count: 2,733
It’s a pity we haven’t got one or two of Peter SPANNs Graduates here, his book only realy ‘touches’ on his property strategies, he has another book coming out in relation to shares.
Have you visited his site?
he has information available on his “money magic’ “shares magic” and “Instant Income” seminars etc
I think his ideas have a lot of merit also, wish i had someone to ‘walk’ me through them though..
As far as 100% Margin Lending, i believe that would befor ‘selected’ stocks only.
50-70% would be better, beware the margin call also. Start small and work up i think..
Peter Recently had a prospectus out(expired Sept) maybe put yourself on the mailing list..
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow Calculator
A favorite topic of mine.
Margin is possible on stocks allowed by the Margin lender (I use BT–Bankers Trust)Oh by the way forward paid interest is as low as 6.5%and defered is 7.45%.
Now as part of the allowable stocks to trade there are a number of Property trusts–some out performing others.
I think Property trusts have been chosen because in general they have out performed the All Ords over the past years due to the property boom.
Their out performance is unlikely in the future and a knowledge of how to analyse a stock chart and in particular a sound grounding in RISK MANAGEMENT when investing would be musts.
The principal is in my veiw very sound and if used correctly can return astounding profits.
Although property trusts have been used in this example a portfolio of stocks will do the same.
Depending on your ability to choose and manage a portfolio you can return far in excess of the 12% offered as a bench mark here.
Ive been doing this now for 3 yrs.Having traded for 10 yrs now the opportunity hit me in the face just as it has others.The key ofcourse is your portfolio.
Having been involved in Trading System Developement for 6 yrs I and a few others decided to prove to ourselves if this could be done.(Develope a method which can trade profitably consistantly over a long period of time).
2.5 yrs ago we developed and trade live on the net at reefcap.com a method which has in that time returned around 80% and leveraged at 2.5:1 gives a return on INITIAL equity of 200%.
Figures like this are normally scoffed at.
So I will post the link here for you all to lookback on and watch as time goes by.
Infact the whole method is available to you at no cost if you have the software to make use of it.(Metastock).
I can also post on reefcap charts showing what I mean with regard to the Propery trust part of the discussion.Ill open a seperate thread under Traders helping other Traders this afternoon—just hopping out for an hr or so.
Lookforward to more discussion.
This link is the latest results sheet.
For those interested I can show charts and discuss easier here
I found this link for margin loan rates.
As far as I can tell no income test applies for a margin loan application .You simply need partial funds or stocks and the margin lenders will lend the balance up to their their pre-determined margin levels (if you wish to borrow that much) for various stocks
Just trying to get an idea wether there is any interest in this thread.
The question originally broadly asked about alternate methods of investment of equity in housing now that the market is somewhat flat.
Having equity that isnt working for you is really dead money and can be chewed up if interest rates turn you from a positive geared property into a negative.
I thought Id do some comparison work on the BT Margin list of ALL Property trusts that can be traded,over the last 5 yrs year by year to see the possible returns.
Managed Funds (Some) are also tradeable so if there was any interest I was going to run some comparisons on them.
Then ofcourse trading stock.
All this takes time and my feeling is that very few here have an interest,while it maybe a stratagy some have heard of it is something which most find too hard to comprehend and places them out of their comfort zone.
Similar to the feeling of buying your first IP—-remember that!
Anyway Im happy to put in the work if there is enough interest.
I’m interested if you’re willing to put the time into it. Am already using LOC funds to write put options for income but wish to mix my strategies.
Currently looking at a franked dividend strategy. I am not using margined funds (yet) though the potential leverage could be very large given LOC funds of say 200k and possible margin loans on a stock such as BHP of up to 75% (making total purchase of $800k in stock possible).
I also see that its possible to write call options using margined stock.
Cheers AjaxkpMember@kpJoin Date: 2004Post Count: 509
i too am interested in what you come up with…I am sure many others are too, they just don’t post to that effect
Writing puts are fine in a bull market,are you writing index options?There are some interesting stratagies writing puts or calls 3 weeks out 3 standard deviations from the mean.Your in the minority.
Im sure you are aware that your writing of call options while holding the underlying is a stratagy for flat or falling markets as a hedge.
Still a whole seperate topic which is beyond this discussion—I think.
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