Seriously I am very close to implementing this planned investment stratagy,I would value any veiws (constructive)on my thinking and implementation of it.
Im attempting to harness the power of Leverage through Marin lending and compounding from 2 areas,increasing equity in my property holdings and re investment of profits.Now I realise there are 2 areas of un quantifyable data.
(1) Expected capital growth/year on property holdings (I have adopted 3% as a researched likely figure)
(2)Return on share investments.(Here I have adopted what I believe is easily attainable from past experience 10%)
TO THE PLAN.
Take 3% each year from the total Property portfolio growth and invest it in Margin.
Compounding it each year both in addition of a further 3% each year and reinvesting the 10% gained on my trading (or whatever it turns out to be).Input.
Year 1
60K
Margin lending leverage 2.5* = $150K total traded $210K return 21KYear 2
Initial 60K + 21K profit + Further 3% 61K = total for margin loan $141K
*2.5 leverage = $352K
Total to invest year 2 493K return 10% = 49KYear 3
Initial 60K Plus next 61K and a further 3% 62K plus profits 21K and 49K = 250K total for margin loan
*2.5 leverage = $625K
Total to invest Year 3
$875K return 87KSo at the end of 3 yrs total return if I pay back margin and equity loans $21+49+87K = $157K less interest on both margin and Equiy loans approx
Year 1 3* 7% on 60K = $12.6K
Year 2 2* 7% on 60K = $8.4k
Year 3 1* 7% on 60K = $4.2kMargin
8.0% on 150K = $12K
8.0% on 352K = $26K
8.0% on 625K = $50KTotal costs $113K
Return 54K for putting my euity to work.
50% of costs tax deducatble so nett of around 100K plus dividendsNow if you increase equity by just 2% to 5% and Trading return by 5% to 15%
The return looks like this.Total return after paying back Margin loan
$2,208,000
Total interest costs
$328,000
Nett $1,700,000 before tax and not including Dividends.My thinking maybe well off beam here but even average returns will mean a better than average return in a year or 2 would be very nice indeed.
How do others see this? My risk is on the increased equity so Im attempting to preserve my initial equity I now have—-Just putting the properties to work.
Why would you not do this if you have even equity in one home?
Over 10 yrs the results are just mind numbing
on smaller amounts!!John
Hi Techa,
No doubt the power of leverage.The numbers you have assumed about capital growth of shares and property, how did you determine the 3%. Over the long term, many of the studies I have seen, pretty much have return on both investment classes very similar and around 8%.
The only difference being that you are able to borrow more on property than on shares.
Consequently, if you assume negligable difference on returns between asset classes, you can still implement your plan but on property alone.
Of course, if you have knowledge and skills in share investment, than maybe a 10% return can be achieved. I think that is one the high side to assume.
On the issue of leverage, you use 60k to get a margin loan of $150k. With property, you could potentially purchase property to the value of $600k (90% LVR). Even on your return assumptions of 3% for property and 10% for shares, the following outcome is
Shares – 210k @ 10% return = $21k
Property – 600k @ 3$ return = $20kOf course, there are loan margin calls for shares, which you would need to have spare cash. The only time it has happened in Australia, is in the early 90’s, although to commercial properties. (Happened in the UK during the 90’s to residential admittedly).The point is, the likelihood of a financial institution calling in a loan or asking for additional funds into a residential investment property is almost zero.
Ultimately, I agree with your concept, I think it would be far more profitable in property. However, that is me.
Whatever you end up doing, good luck.
James
Techa,
To be honest this isn’t really a plan, it’s more a set of investing principles. It is quite easy to say in theory if I do x I will make y dollars per year and mulitply it out for a number of years with end result z – I’m a millionaire.
Where are your contingency plans for if the market (shares or property) do not perform as expected each year? Where are the actual details of how you plan to do it?
It’s hard to offer suggestions when you have provided little detail. If I were you I would put some more thought into this and a lot more detail before you commenced down the path on this theory.
I wish you luck with your strategy though, starting to plan is a good start to wealth creation.
Thank you for your responses.
Ill come clean.I understand that this is my first post and I am certaintly nothing more than lines of type on a page.
I do have multiple property’s and I am genuine in my request.
I have been trading (Margin) for sometime and developing trading methods for many years (no this is not my profession I have a Civil Construction company it is an interest a profitable one.)
Since inception(8yrs ago)I have been posting on Reefcap which is a share/commodity version of this site.
There 2yrs ago I was asked to help find the answer to this question.
“Can everyday people develope a profitable trading method and trade it profitably”
I and a few others designed a longer term share trading method which has been trading live on Reefcap for 18 mths.From inception it has a return of 44% in 18 mths and on margin funds a return of over 100%.
So the answer so far is yes!Anyway all is there for public veiwing Ill post the link.
In answer to what plans I have if all turns pear shaped.
(1)Property doesnt increase or values fall,(I will not be adding to traded funds in that year and may add more in better years.
(2)If shares underperform or make a loss.I have run 1000s of models and am aware of maximum drawdowns in the methods I trade if these are breached and in the years I have traded them they havent!(That doesnt mean they couldnt)then I would suspend trading.This would according to the models be well before being called.Initially Im only placing 60K at risk if you like.Failure of the method would come at a total drawdown of 50% this is a “Risk” I could be prepared to take if the reward is sufficient—the jury is still out.
I have also asked the share fraternity the same question and the response is from a share prospective.
You maybe interested in the fact that I have in the same period as trading made 100s of % more from Property than Trading.
In fairness though I have invested vastly more in Property than Trading—why—Comfort of the known I guess.My return
now on the small amount I trade margin is exceeding property returns for the first time in years hence my investigation of an intergration.Thanks again for your interest.
Links if interested
http://www.reefcap.com/ubb/Forum8/HTML/000350.html
http://www.reefcap.com/ubb/Forum8/HTML/000287.html
John tech/a
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