Quote:
Originally Posted by Unregistered
At 50%, I'm hardly overleveraged. I get $250K in dividends versus $40K of interest payments. It's not a mortgage, just a loan facility, and the loan doesn't amortize. In any case, I have enough savings to sustain $40K interest payments for quite a few years, even if interest rates double. If the property market falls 60%, its still a $3.2m home.
Also, your view that REITs fall 90% is extreme. Even during the recent global financial crisis, they didn't go down that much. Take A-REIT, which is trading around $2.30, if it went down 90%, it will be worth 23c only. The dividend is 14c a year. So it's quite unlikely that it will go down such that 2 years dividend, you get your money back. Unless you say that A-REITs dividend will go down. Maybe, but REITs pay out 90% of their earnings, and A-REIT has very long rental contracts with MNCs, so it shouldn't go down that much. Anyway, I held REITS through the global financial crisis and their dividends were only mildly affected even though the stock price fell. Having been through that, I'm not worried.
|
Your loan to asset is only 33% (4/12) so you are right that you are not overleveraged. And you are also right to make use of current cheap interest rates to borrow at <1% into relatively stable assets that yield >5% and earn the difference.
However, there is a major issue of diversification of risk here. Basically you have all your baskets in 1 asset class which is property. REITs are also property plays. So if property prices drop significantly by say 20-30% (which is possible in a bad scenario), then you will find that your REIT value drops too and so will rentals which affect the REIT yield. And if really sway, the revolving 1 mth interest rates you are loaning can increase to 3% when fed stops taper and raises interest rates in 2015/2016.
The other major issue is that too SG centric. Singapore is a small part of world. If we screw it up, property will plunge even if world is growing well. Then you get the double whammy above.
So be careful. I would do the leverage but invest in equities, bonds and REITs and even alternatives with cash(not leveraged). You can still get about 5% returns but more diversified. And i would buy global assets not just SG ones.
BTW, this is from someone who is also leveraged about 30+%, but net worth above 25M.