9 Years of safety too much??

[dheath]

Hi all,

I have recently settled on my latest 3 bed 2bthrm IP in Scarborough in S.E. Qld, 1 street behind the cafes and beach for under 400k, (very happy with it). I have a LOC set up to fund the shortfall on this property with enough funds for 9 yrs not counting rental increases.

I am considering buying another similar property, although that would make my 9 yrs of safety net about 4.5 yrs after covering its shortfall as well, however I happen to think that we are moving into a upward cycle in property at the moment and believe that within a few years I would make enough capital gains to refinance and retake some more equity to prop back up my LOC before it dries up.

My longwinded question is,

To anyone else using this structure is 4 and a half years a decent safety net for covering shortfalls???

The Scarborough IP is my 3rd IP BTW, so I will have others to grab future equity from.

Regards,
Duane.

 

[Patosan]

I guess most here would say 4 and 1/2 years is probably 4 years too much, then if you asked my cautious sister she may say the opposite. I would like to ask why you feel you need such a large safety net.

 

[lizzie]

well done at such a huge safety net - can i have it?

we normally have a safety net of around 6-12 months - more than enough time to sell something if the poop hits the fan. however, when we're in the process of buying something that safety net falls to around zero, because we've just used our net to pay for deposits, stamp duty etc.

4 years is way to much - unless you are expecting to be long term unemployed in the near future. work at around 12 months max, imo. and make sure that safety net is also working for you - perhaps in blue chip shares.

remember to make your money work for you.

 

[bort]

i'd say you'll probably get the best answers from people who had a similar sized portfolio who have experienced those flat periods of 10 years or so .... how much buffer did they need then?

i dont have that experience so cant answer, although i calculate out based on a significant drop in the sharemarket (say 30%) .... is that safe enough? dunno ... but as my portfolio gets larger, my margin of safety percentagewise increases - as my salary income can only prop up so much of a drop ....

 

[evand]

Isnt the goal of investing to make money, not to stop losing money. Why do you want a 4.5 year or 9 year safety net?

I can see negative gearing to that extent has some advantages in a rising market and if you're on a high income.

By rising market i mean where a growth trend has been established over a substantial amount of time.

Beside that why bother.

Hi all,

I have recently settled on my latest 3 bed 2bthrm IP in Scarborough in S.E. Qld, 1 street behind the cafes and beach for under 400k, (very happy with it). I have a LOC set up to fund the shortfall on this property with enough funds for 9 yrs not counting rental increases.

I am considering buying another similar property, although that would make my 9 yrs of safety net about 4.5 yrs after covering its shortfall as well, however I happen to think that we are moving into a upward cycle in property at the moment and believe that within a few years I would make enough capital gains to refinance and retake some more equity to prop back up my LOC before it dries up.

My longwinded question is,

To anyone else using this structure is 4 and a half years a decent safety net for covering shortfalls???

The Scarborough IP is my 3rd IP BTW, so I will have others to grab future equity from.

Regards,
Duane.

 

[Maverik]

Firstly some questions need to be asked.
How old are you?
How secure is your income?
What is your overall LVR?
How is your cash flow? (ie, could you handle the shortfall without the LOC)

 

[dheath]

Thanks Maverick,

I am 35yo,
My job is as secure as any job these days???
we have 3 kids,
we have a combined income of just under 100k/yr.
we own our own home, have used the equity in the LOC however.

Regards,
D.

 

[dheath]

sorry forgot a few.

LVR with the LOC is just under 80%,
and the new Scarborough IP is totally reliant on the LOC (wouldn't have it without the LOC, not enough income left). The other IPs are covered with our income however...

D.

 

[tobe]

If it was me, I would buy more IPs until my borrowing capacity was reached. I might fix the rate, and I would definately get landlords insurance, and or income protection insurance to cover the kiddies if anything went wrong. I personally do these three things, and have enough stashed in redraw for 3 months living expenses, and mortgage payments. This way, if I am out of work, and all my tenants move out together and for some reason the insurance company doesnt pay up, and interest rates go up, and property values fall, I have 3 months to organise my newstart allowance, re-finance or sell up the IP's without taking the food from the kids mouths.

Would I prefer 6 or 12 months expenses in my account? Yes
Would I forego the opportunity cost of being in the market on a slight mitigated risk of the total catastrophy outlined above? No
In the end its a sleep at night question.

 

[Ausprop]

I would think it is too much... the downside is opportunity cost.

 

[sunshine]

I have recently settled on my latest 3 bed 2bthrm IP in Scarborough in S.E. Qld, 1 street behind the cafes and beach for under 400k

Congratulations - sounds like a great buy!

My longwinded question is,

To anyone else using this structure is 4 and a half years a decent safety net for covering shortfalls???

IMHO I'd say its at least 3 and a half years too much. BUT that is just my SANF.

Good luck

sunshine

 

[DavidMc]

Hey guys, I found this thread interesting and decided to create two polls.

You may want to check them out.

http://www.somersoft.com/forums/showthread.php?t=32846.
http://www.somersoft.com/forums/showthread.php?p=294793

 

[bort]

sorry forgot a few.

LVR with the LOC is just under 80%,
and the new Scarborough IP is totally reliant on the LOC (wouldn't have it without the LOC, not enough income left). The other IPs are covered with our income however...

D.

i think a few people in this post are defining their margin of safety differently. To some people the margin of safety is if they lose their day job ... others if they lose a tenant.

It sounds like your margin of safety .. is ... well you have no actual income to service the loan currently so are relying on future increases in rents/income to fund it.

So say you lost your job or were unable to work or no longer had a tenant for a period, this buffer would be significantly less than the 9 years right?

 

[Maverik]

Dheath,
...Just catching up after watching Origin and Champions leauge final at Star City!! Getting to old for that.
In my opinion from the information you gave it is a very big buffer. As you can see with very good varied feedback as well that most here see that as more than is necessary. Especially as Tobe mentions that a lot of the variables can be insured against. Also rents are forecast in a lot of areas to rise at twice that of inflation(BIS Shrapnel - pm me if you want the email with that data)
Bort also raises an important point being how you define the margin of risk. If you have insurances then the risk gets smaller and you can assess things more specifically.
There is also the option of putting some of that buffer into other investments.
Are your IP's in a similar area or spread in other states? That can be another form of margin ie particular areas going up when the others are not.
Chris

 

[Les]

G'day Dheath,

To anyone else using this structure is 4 and a half years a decent safety net for covering shortfalls???

Umm - yep!! Perhaps even indecent But then, can we put things into perspective here?

Your original post mentioned a "9 year buffer" covering the shortfall. To many, it might seem like $200k or so. But, depending on just what amount the shortfall is, this "buffer" might be only $20k.

I think seeing the ACTUAL number of $$ involved might well change some answers you've been getting.....

Regards,