All Topics / Finance / debt vs equity

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  • Profile photo of Steve PollardSteve Pollard
    Join Date: 2004
    Post Count: 5

    Hi all,
    I’d like to canvas opinion as to what makes good overall debt to equity ratio across a portfolio of properties.
    The only way I can see to raise cash for deposits is to borrow against an existing property. But this leads to borrowing around 90% of the total market value of my (tiny as yet) portfolio with not much room for manouevre. Is this wise or is it like a house of cards that might well come crashing down any moment?
    What is a ‘safe’ level of debt vs value of properties

    Profile photo of DerekDerek
    Join Date: 2004
    Post Count: 3,544

    Hi NWM,

    It is all relative – while some people only feel ‘safe’ with a low LVR others are quite happy pushing the envelope as far and as fast as they can.

    Bear in mind some banks will lend up to 100% (with restrictions) and LMI. Obviously if you constantly rely on LMI to get your loans it is highly likely they will say no sooner or later anyway.

    There is nothing wrong with using equity in your properties as deposits for subsequent purchases. However for this to work effectively you need good growth or the capacity to add value or to buy undervalue.

    [email protected]
    0409 882 958
    Skype – derekjones2113

    Profile photo of lukis plukis p
    Join Date: 2004
    Post Count: 47

    I think you need to look at your circumstances and see what level of debt you feel comfortable with.

    For me i like lots of gearing. I am 29 and guess if my property portfolio dramatically dived in value and i lost it all… well i am young enough to start again.[agro2]…. but i look at as a low risk strategey and so far it has paid off really well (just bought my 7th proprerty), worst case senario I sell a few , reduce the debt, and end up owning the rest.

    do your research [dead2]on past growth estimate future growth, and if you can afford the repayments ( even with no tenants for a few month, a worst case senario), y not buy?

    property is a long term investment (in my veiw) and will pay off.
    Just my opinion

    Profile photo of grossrealisationgrossrealisation
    Join Date: 2005
    Post Count: 1,031

    hi new_world_monkey
    i’m in the high lvr box but with rentals to cover it.
    I am alittle with Derek but and yes banks don’t like high geared structures but I use developing to keep adding, with the help of growth and the built in profit margin in developing fuels you portfolio.
    via this method and by having each project individual and stand alone without any cross collateral I find for me works very well.this is not to say it will work for you and should not be looked at in that manner.
    I draw out as much equity as a lender will lend me so yes very highly geared.
    I then use that cash across different lending enviroments not just property( in this current market the majority is currently in this market but thats because is a buyers market for a developer)
    to give you an idea my structure has the ability to adjust to market change and for the last 2 years I have changed its direction to investing in development sites.
    I have taken it from a lvr of 30% to currently upwards of 75% and trying for 80% which is near impossible for me.
    I usually run two developments a year on average and have two in for lending this year already with green lights and I’m looking at another 4 by the end of the year.
    it not just gearing you look at.
    can you cover the cost of holding the project.
    return and is it worth holding
    if the worse happens have I got an out

    yes as I factor it in at the start
    min 23% or I don’t look at it
    and third
    mine have cash flow mins to cover for 3.5 years without a tennant.

    Hence I don’t worry about the lenders and there are a couple of thousand of them.
    so you have to hit alot of walls before you can’t get lending from anyone nor am I worried about lvr’s
    the other thing i don’t worry about but alot of people seem to want to know is net worth but thats another question.

    here to help
    If you want to get involved in some of the projects I’m involved in email to [email protected]

    Profile photo of Steve PollardSteve Pollard
    Join Date: 2004
    Post Count: 5

    Sound like you’re playing out the strategy that’s been brewing in my head.
    I’ve been kind of coming round to the idea that one or two developments a year might be the way to make my investing sustainable by bringing in a hefty dollop of cashflow every now and again to use as deposits or pay down debt and keep the banks happy. As I don’t really want to be strung out on 90-odd % debt levels forever!!!
    What would you say yourhas your experience been overall?

    Profile photo of wealthangelwealthangel
    Join Date: 2006
    Post Count: 12

    Hi Guys,
    My biggest problem at the moment is trying to find a bank that is open to investors buying and renovating. My bank told me the other day that my debt is getting too high and they would only loan me a small amount for my next purchase and when i say small amount i mean – yeah like im really going to buy anything except for a campervan with the kind of money that they were talking about…….
    All of my properties are CF+ and i have alot of equity so i dont see the problem. THey just dont understand the whole concept of “i buy a property, i make it look awesome, we make a great capital gain, the rent is covering all costs – but they still dont want to play the game.
    Is anybody else having the same dramas as me??
    Would love to know…..

    Wealth Angel

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