first time poster here, just want to say first off that i think this is a great resource, i ve learnt so much already.
im posting because i have a bit of a plan and would just like to bounce it off as many pairs of ears as i can.
basically im looking at accessing my fathers equity (in the form of a line of credit of $200,000) to kickstart my investing career. im looking at buying some shares ($130,000) and writing covered calls against them to provide income to meet the interest, making it cashflow positive. the remainder of the line of credit i want to use as a large “cash deposit” ($70,000) on a property worth around $200,000.
Therefore the property needs to rent out at about $250 to be cashflow positive after costs??? (this assumes that the shares income is covering the interest payments on the whole original line of credit (ie: $1166 per month interest))
the interest on the 130,000 borrowed for the property ($758 approx. before costs) is covered by the rent
i forecast the covered calls on the shares can produce 2% per month in income, which would cover interest at up to 10% interest rates.
comments, thoughts, confused? hehe
btw im 22 and earning about 45k a year.
Brad
just a thought; what does dad think of this plan???????
Sounds good in theory. I have examined the ‘throery’ of writing covered calls, but in practice I have heard that it is hard to make that much money as expected.
Just make sure you get a loan agreement drawn up. This will help you claim the interest and also clearly outline the terms of the borrowings from your dad.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
ummm he thinks its good in theory too. he has close to $1m in net equity in his property portfolio and he also knows im a good risk (he taught me half the stuff i know about property and shares). he suggested buying in slowly into the sharemarket and the covered call strategy. i have written covereds before but not on the scale im looking at.
he also suggested that i spend at least six months looking at, reading about and speaking to people about the property market before leaping in. both the sharemarket and the property market look to be in interesting times.
and terry thanks for that advice. i will look into it.
Brad
Dunnyboy,
I think you had better take a big deep breath before you embark upon this line of investing.Suggest you purchase and read CAREFULLY , Robert Kiyosaki’s “Prophecy” prior to buying a single share, especially with your well intentioned and obviously very devoted father’s hard earned equity.
Your age is young and I appreciate your eagerness and impatience to accumulate wealth ASAP, but do it on your own two feet. This “line of credit” suggestion is fine if you have a proven track record and are willing and able to accept losses.
This may or may not be the case when it comes to your father, who stands to do the loosing.Alarm bells are ringing.This in my opinion is not the foundation for future wealth creation. If you were my son, I would be showing you the way to save your OWN deposit!!
Brady5 agree totally with you! My personal opinion is when people personally have worked to achieve something, it is more valuable to them than when they “access a line of credit” which is simply invisible “other peoples’ money”
Dunnyboy, work hard and get a few grand saved, and learn as much as you can. Aim to double that money within a 12 month period…and then double it again. Knowledge will come, and possibly some mistakes too…but at least the skin is off your own nose. A strained relationship could be a painful price to pay for a line of credit.
Redhaven
Redhaven
thankyou brady5 and redhaven for your comments. now with all the humility one can muster, i think i am better than most at saving, budgeting and the like. over the past 5 years i have saved for 2 overseas trips, bought a car, all while going thru uni and working part time, and my debt level as of now is zero. i feel that saving for a deposit on a property, which may take a year or two (i still live at home), earning 5.25% in an ING or something like that would be somewhat of a step backwards for me. as i mentioned ive done my travelling and am not a conspicuous consumer.
saying that, there is alot of debt in my plan for someone my age. this is why the line of credit works for me, in that i dont have to pay interest on money i dont use. i dont plan to open the line of credit and draw the whole amount down immediately.
i agree that disciplined saving, spending and investng is indeed the road to long term wealth. this is not a get rich quick scheme.
using dads equity as a springboard is risky for sure, as is the sharemarket. i have examined possible and realistic downside risks and am happy that the upside compensates for it in the long term.
once again thankyou, your feedback is helping greatly.
ummm he thinks its good in theory too. he has close to $1m in net equity in his property portfolio and he also knows im a good risk (he taught me half the stuff i know about property and shares) <— If this is true, why are you asking us for advice? Why not follow your dad’s advice?
Good luck, for I can see your strategy is not something I would do, no matter how much my millionare dad told me to do it
And remember, the future doesn’t always equal the past!
Best wishes and God bless.
Hi Brad,
Congratulations for starting so young and for having the courage to look outside the “normal”. The risks may be higher but you are young and the best way to learn is to DO, even if you make mistakes first, just like most of us do when we are starting. Your father hopefully is fully aware of the risks and supports you on that basis.
Covered calls can be great, have done that myself for some time but generally work well in a rising market. Require more thought in a volatile market. Most advisors advise diversification whereas Warren Buffet is a focussed investor. Choice is yours because the risk is too.
With regards to “making a property cash flow positive” by paying a larger deposit does not change the return you are getting on the investment. Although it may be CF+, if you could do better with your cash then it might be wise to consider altering your investment plan. It really depends on what your investment strategy is and what your goals are.
Good luck and all the best for your future.
pr
The concept in theory sounds fine.
As someone who has been writing calls for over a decade I can tell you it is hard to get consistent result. A flat market with little volatity is one in which the strategy works best.
Other options rather than cover calls (which are great until the underlying value of your share falls) is to look at a combination of stradles and stangles. Dependant on your view of market direction.
If you are after +cash flow whey not consider wrapping and concentrate and make that your business focus.
Done properly i assure you will earn in excess of $45K PA
Cheers Richard
richard at castlewhite.com.au
Email me for details of our Qld wrap service.Richard Taylor | Australia's leading private lender
” ummm he thinks its good in theory too. he has close to $1m in net equity in his property portfolio and he also knows im a good risk (he taught me half the stuff i know about property and shares) <— If this is true, why are you asking us for advice? Why not follow your dad’s advice?
Good luck, for I can see your strategy is not something I would do, no matter how much my millionare dad told me to do it
And remember, the future doesn’t always equal the past!”
beyondabundance, my old man did not ask or tell me to look at this plan, i simply took to him as a request and ask he look at it. i am asking for advice here because everyone has their own experiences and knowledge which has already greatly helped me, by making sure im considering all issues and viewing my plans from different perspectives.
pete, yes i see what you mean in regards to positive cashflow, the yield doesnt change based on what you owe on it. i am finding it hard looking at property from any other perspective than good old buy and hold, as this is all i have been exposed to. another reason this website is so great, for example id never heard of wraps before i started browsing this website.
saying that though, i got lost reading the cursory explanation of them in the strategies section. they seem like you need lots of time, need to find lots of deals and hence lots of reliable people that can support this strategy. not an easy feat based on my experience. warren buffett made billions by staying away from companies he did not understand.
please everyone keep the feedback coming, its all great.
Brad
Hi dunnyboy,
Firstly I want to applaude you on your ‘get out there and do it’ attitude. I’m 26, and am kicking myself that I hadn’t made a move earlier with regards to investing. I’ve come close to investing a few times but I got ‘anaysis paralysis’ because I was too afraid of making a mistake.
I have 2 recommendations for you:
1. Listen to people and take correction (even though sometimes it can be a downer)
2. Whatever you do – invest!It may be risky, but you are young. Listen to people and take measures to minimize the risk. But you’ll never eliminate it entirely.
Dan Lewis
[email protected]beyondabundance, my old man did not ask or tell me to look at this plan, i simply took to him as a request and ask he look at it. i am asking for advice here because everyone has their own experiences and knowledge which has already greatly helped me, by making sure im considering all issues and viewing my plans from different perspectives.
please everyone keep the feedback coming, its all great.
the best feedback I can give a young person is:
Always stay humble and teachable and never get to a stage where you think you know it all. I have seen many with that attitude lose everything, for they were not humble and teachable and thought they knew everything and everything was right their way. Not saying you are like this, I was just saying in general.And have you heard of “copied success”? If your dad is a millionare and so successful, why not do as he does, and get the same result. In NLP this is called “modelling.”
And always remember, the future doesn’t always equal the past!
God bless and best wishes for your future. It’s wonderful to see the young having a long term vision and wanting to create and manage a plan so early on in life. Good on you
“And have you heard of “copied success”? If your dad is a millionare and so successful, why not do as he does, and get the same result. In NLP this is called “modelling.””
i could indeed follow in the footsteps of giants as the saying goes, or i could climb up onto the shoulders of giants… the view is much better
Hi Dunnyboy
Good luck and success to you and your Dad! Steve McKnight runs Property Masterclasses at various venues throughout the year. I have just been to one. We have a small number of property investments, but this class has changed my thinking completely and given me more focus. There’s no hype or pressure to purchase products or properties and they are great value for money. Try to get to one if you can.
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