澳洲Australia property Which is better... $1M LOC or $1M un-leve


在澳大利亚 The pool at of an IP needs to be resurfaced (or so the pool doctor says), the cost was estimated to be $10K ($10,000), after recoverying from my impresssion of a cat coughing up a fur ball, it just seems far too much. Its just a standard poo I need some advice regarding a property purchase. Property - semi-detached house Bedrooms - 2 Condition - average needs internal reno to modernise Street - one of the best in suburb Location - excellent Close to schools - yes Transport - 50m


Hi there,

Which is better... having a $1M LOC secured against residential property (IP's or PPOR), or, having $1M in cash in a bank savings account that is not leveraged against other assets?

Interested in your thoughts...

Thanks.  

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Umm well the million dollars that you owe, rather than the one that you can borrow from the bank.

Edit: Think I understand the question now. I want my money working for me with leverage,, however this million would depend on what other investments I had.

If I only had a million then I would want it leveraged, but if I had 100mil and this was the emergency fund then I would be happy with it just sitting there.  

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Let's say that this is the only $1M you have...  

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JIT said: ↑
Hi there,

Which is better... having a $1M LOC secured against residential property (IP's or PPOR), or, having $1M in cash in a bank savings account that is not leveraged against other assets?

Interested in your thoughts...

Thanks.Click to expand...
Is this the old savings returns versus investment returns debate?

An LOC that simply sits there not being used returns no money back to you. If you access it to buy other assetts then it can, and the return can be infinity, and with tax benefits, and the asset could increase in value above inflation..

In a savings account, $1M will get the interest, but then get taxed. The nett return could be quite small, and the capital is diminishing with inflation.

Many people would be quite happy to stick the $1mill in the bank, and live off the interest.  

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JIT said: ↑
Hi there,

Which is better... having a $1M LOC secured against residential property (IP's or PPOR), or, having $1M in cash in a bank savings account that is not leveraged against other assets?

Interested in your thoughts...

Thanks.Click to expand...
Hi JIT,

You always come up with interesting posts and this one is thought provoking. To answer the question directly:

1) Having access to 1M LOC secured against residential property would suggest at an 80% lend that the asset base would be 1.25 Million. (I'm assuming that the asset base is unleveraged before securing the 1M LOC).

2) This asset base - assuming the long term average growth of residential real estate of 7.2% p/a would return $90,000 in capital growth each year which would compound. Rental income on the portfolio would be conservatively 5% of it's value - $62,500 - less 20% ($12,500) to allow for IP running costs p/a = $47,500

3) The 1M in term deposit would return at current rates 6.5% p/a in income = $65,000. With no prospect for capital growth.

Advantages of having the 1M in a LOC as per the above scenario are as follows:

a) As Bayview pointed out the 1M could be used to springboard into further investments - shares or more resi property.

b) The 1M LOC can be used as a buffer to support the asset base should the need arise. Having this set up would reduce the need to sell off assets if there was a need to find cash.

c) The asset base is growing in value over the long term as opposed to setting up the 1M in cash in a term deposit which is being eaten away by inflation.

d) Rental income is rising over time - and may be enough to cover the interest bill on any personal use of the LOC.  

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The LOC is in second place and the cash in third place. As Jingo said the asset base would have to be greater to allow the leverage to occur in the first place, so I'll take the option with more assets.

In addition, if the IPs were in Karratha for example, the net cash flow could be around $80kpa straight up, which beats the return from cash in the bank considerably, plus depreciation benefits and tax effectiveness etc. etc.

In first place though would be taking the $1m in the LOC and using it to buy a $3m quality asset yielding, say, 10% nett nett to a quality tenant on a long lease requiring the tenant to do everything... With the cost of debt averaging 8.5% in this strategy (conservative), this would allow a free cash flow of 1.5% x $3m = $45k per year, in addition to the $80k above = $125k per year, plus a much bigger asset base growing every year, thank you very much!

All in an ideal world of course... :eek:  

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It's a bit like saying:

"What would you prefer - 1.25m in property (unencumbered) or 1m in cash?"  

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Having cold, hard cash is way better.  

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Here, here great response!  

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Bon said: ↑
Having cold, hard cash is way better.Click to expand...
BlueRidgeHomes said: ↑
Here, here great response!Click to expand...
And there I was thinking this was an investor's forum?

To me, having this amount of cash in the bank is a terrible idea. Poor post tax returns and inflation will eat it away like nothing else. No upside and plenty of downside in opportunity cost.

I would be looking for something attractive to buy quick smart to protect and grow the asset ASAP. But that's just me - I don't believe "cash" is an investment and should be avoided if anything.

BTW, the correct term is "hear, hear", for obvious reasons...  

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Bon said: ↑
Having cold, hard cash is way better.Click to expand...
So you win a prize and have the option of $1m cash, or $1m or resi IP's ?

Perhaps I'd take the cash too


But then again, I currently have neagative geared IP's and can't think outside my situation  

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JIT said: ↑
Hi there,

Which is better... having a $1M LOC secured against residential property (IP's or PPOR), or, having $1M in cash in a bank savings account that is not leveraged against other assets?

Interested in your thoughts...

Thanks.Click to expand...
What do you want to use the $1M for? I believe that qualification will determine which is 'better'

Living expenses, luxury expenses, cover a cashflow shortfall (say on a new business) - I'd prefer the cash.

To invest further, I'd vote the LOC, as this would then be OPM.

Also, where did it come from? ;)  

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Bon said: ↑
Having cold, hard cash is way better.Click to expand...
That's a saver mentality, which is fine for some. No-one who is seriously rich though. Seriously rich people are in business, and property and/or shares.

Only if you have loads of it (+$1mill cash) and no other debts, and can be disciplined enough to live off only the interest after tax and not touch the Principle.

Most people can't do it.  

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Hi there,

Interesting replies.

I agree that the LOC is better.

jingo's example is good.

It's even better when the gross assets securing the $1M LOC are much higher.

eg. $4M gross assets, at 80% LVR, with $3.2M total loan, with say $2.2M already drawn down and $1M as the LOC.

With say 10% capital growth in 1 year you would get...

$4.4M gross assets, at 80% LVR, gives you $3.52M total loan, with the $2.2M already drawn down and now a $1.32M LOC.

So in this case, the LOC has gone from $1M to $1.32M (subject to valuations/finance/serviceability of course).

Whereas the $1M in cash has just increased to about $1.065M with the interest accumulated (say at 6.5% pa).

Even with more conservative capital growth assumptions, the LOC is much better...

Even though it comes at a cost (ie. the cost of borrowing), being secured against other higher value assets means that it can "grow', whereas this is limited with the cash in bank.

ADD: Though, to be acccurate, you could get minus 10% growth in one year and the LOC might not look so good after!  

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HiEquity said: ↑
To me, having this amount of cash in the bank is a terrible idea. Poor post tax returns and inflation will eat it away like nothing else. No upside and plenty of downside in opportunity cost.

I would be looking for something attractive to buy quick smart to protect and grow the asset ASAP. But that's just me - I don't believe "cash" is an investment and should be avoided if anything.Click to expand...
Nothing wrong with holding some cash. How else does one make the most of arising opportunities as they present themselves? As for inflation eating it away - true but not if the interest is reinvested.

I would probably take the 1.25m property over the cash personally, BUT only if it was quality stuff.

BTW, the correct term is "hear, hear", for obvious reasons...Click to expand...
Whenever I see someone write "Here, here!" I always think to myself "Where, where?"  

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bene313 said: ↑
Nothing wrong with holding some cash. How else does one make the most of arising opportunities as they present themselves? As for inflation eating it away - true but not if the interest is reinvested.

I would probably take the 1.25m property over the cash personally, BUT only if it was quality stuff.



Whenever I see someone write "Here, here!" I always think to myself "Where, where?"Click to expand...
One makes the most of rising oportunities by using a line of credit, you have yourr cake and eat it too. Money it self is useless it what you do with it that makes it valuable. I think money in the bank is a waste.  

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buster said: ↑
One makes the most of rising oportunities by using a line of credit, you have yourr cake and eat it too. Money it self is useless it what you do with it that makes it valuable. I think money in the bank is a waste.Click to expand...
You are actually allowed to USE the $ in the bank for things ?!?! :confused:

Including borrwowing against it to invest in larger assets just like you might an LOC  

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The question is a no brainer to me.

$1M equity
PROS You must have a substantial asset base that grows over time, how big? poster doesn't state.

CONS To use $1m of borrowings will see you in more debt to lenders.
You will require much more than $1M in equity to sell and still have $1M after all taxes and fees.

$1M cash
PROS You have a large amount in cash that most people do not!

CONS Can't think of any. The world is your oyster.  

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investor2009 said: ↑
The question is a no brainer to me.

$1M equity
PROS You must have a substantial asset base that grows over time, how big? poster doesn't state.

CONS To use $1m of borrowings will see you in more debt to lenders.
You will require much more than $1M in equity to sell and still have $1M after all taxes and fees.

$1M cash
PROS You have a large amount in cash that most people do not!

CONS Can't think of any. The world is your oyster.Click to expand...
My thought too...

Of course, if it?"s between:

Having $1m loans and $2.5m propeorty, in a cashflow neutral or positive portfolio (particularly positive) - therefore $1m equity available (at 80% LVR)

or

Having zero assets & $1m in cash

Then I'd take the equity position - for the other assets LOL  

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