Estimating Net Worth - Real Estate

I have quite a lot of real estate assets - they actually make up a larger percentage of my portfolio than I'd really like (due my wife and I starting out buying a rental property while living with my parents, then later on buying our own place). As they form such a large part of my investment portfolio, I like to be able to update the relevant asset and liability values each month, so that my net worth figure is a reasonable estimate.

The land valuations available via the council rates notices or annual state government land tax calculation are not really much use, as they are based on land value only, and are also only updated on a multi-year cycle.

My method for getting a reasonable monthly figure is to use the bank mortgage statement for the outstanding loan balance at the end of each month, and a simple algorithm for estimating the current valuation of each property. The algorithm is based on the MEAN value of sales in the relevant postcode area (obtained each month from the "suburb snapshot" available by postcode area on the homepriceguide.com.au website for example,2086). I use a simple multiple of the mean price, based on the ratio that applied when I initially purchased the property. For example, my rental property cost 0.9156 x the mean price for the area, so each month I estimate the current valuation as 0.9156 x the latest mean price value.

This allows me to update both house prices and loan balances, and track my progress against what I expected for my property portfolio - paying off the loans over 20 years and property values increasing by approx. 6% per annum in the long run:
It is interesting to also track the percentage change in prices each month, as this clearly shows the "boom & bust" of the Sydney property cycle - as it applies to the specific areas where my properties are.

Super Fund Managers are NOT our friends

Let's face it. Superannuation is a business, and Fund managers want to make as much profit as possible - by taking as big a cut as possible out of our money!

A typical example was the response to the Treasurer's proposed cut in Superannuation tax (to 0%) on end benefits. After an initial "any cut in superannuation tax is wonderful" reaction from the Funds (because it will encourage more money to flow into superannuation instead of other investments, and hence generate more fee income for them). It quickly became a unified call from the Fund managers to "cut the tax on money going IN to superannuation instead". Allegedly this will mean bigger end benefits for members, but the only detailed analysis of this I've seen showed that the difference between eliminating tax on end benefits compared to eliminating it from contributions is minimal.

The REAL reason (that no one has mentioned) is that a cut in tax on end benefits doesn't directly increase Super Fund profits, all else being equal (ie. ignoring any increase due to increased contributions into Superannation). On the other hand, eliminating the 15% contribution tax means that super funds will get an immediate 15% increase in the amount of fees they collect on contributions! And the bucket of money sitting in your retirement account (and subject to a typical 2% MER) would get 15% larger over time.

Funny that none of the Fund managers seem to have pointed that out, or have offered to cut their fees if the tax cut was applied to contributions instead of end benefits!

Personal finance, Money, Investing, Investment, Real Estate, Wealth.

How much do I save?

Reading a post on Canadian Capitalist's blog about how much he saves started me thinking about how much I'm actually saving these days. Beyond a glib "as much as possible" it's actually not that easy to work out, as the use of gearing can complicate things.

It's easy enough to break down my standard home loan payments into a saving (principal repayments) and an expense (interest) component, and the same used to apply to my investment property loan. But nowadays we've switched the rental property loan to interest only, and the extra payments that used to help reduce the loan prinicpal (ie. were counted as "savings") are now being used to pay the interest (an "expense") on loans used for 100% geared investments in US shares (via a Portfolio Loan line of credit from St George) and an investment in the Macquarie Equinox Select Opportunities Trust (funded entirely by a loan from Macquarie Bank).

So, even though my income has hardly changed (a very slight increase in dividend income from the US shares and 1% interest income from the Equinox trust) more of my cash flow is now going into interest payments (an expense) than into reducing debt (savings). So it appears my savings rate has decreased, even though I'm not spending any more than before on consumption and household expenses.

Similarly, the bit of dividend income that is getting reinvested (via a DRP) is counted as "savings", but I don't think share purchases made using an increased margin loan balance can be counted as "savings", as this increase in assets is totally offset by an equivalent amount of increased debt (ie. there is no change in net worth when the purchase is made).

The dividends received add to my total income, and the interest on the margin loan is an expense, but using reasonably high levels of gearing the interest expenses generally exceed the dividend income - ie. negative gearing. While the main goals of using gearing are to increase the returns and diversification of my investment portfolio, it also has the effect of reducing my taxable income and replacing it with (hopefully) some long-term capital gains. But from a savings point of view it is simply converting one form of expense (taxes) into another (loan interest).

This is why the use of gearing makes any meaningful calculation of percentage of income being saved very difficult, and make it meaningless to compare the "savings rate" of investors using gearing with other investors that save without any gearing.

The best approximation I can come up with for FY 05/06 is:

Savings -              32%
Taxes -                 9%
Mortgage Interest -    21%
Investment Interest -  21%
Other -                17%

nb. The tax figure is low as it is based on income tax assessed last FY as a proportion of my grossed up income, ie. before deductions such as superanuation (SGL and salary sacrifice) and margin loan interest. It also doesn't include any GST, fuel taxes etc.

Personal finance, Money, Investing, Investment, Real Estate, Wealth.

Margin Lender comparison

If you want to boost your investment returns, are comfortable taking on increased risk, have adequate resources to ride out any market downturns, and are investing for the long haul, then perhaps gearing is for you. Then again, maybe not. Reminder: This Blog is NOT financial advice ;)

The concept of margin lending is pretty simple - you buy some shares of mutual funds using some of your own money plus some money borrowed from a margin lender. Each share and fund is assigned a margin, which is the maximum percentage that will be lent against that security. Once you have a few securities in your margin lending account, the overall margin of the account determines how much your total loan can be. The "margin value" of your account goes up and down with the prices of the securities, so if you borrow close to the maximum and the market tanks, you'll get the dreaded "margin call" - which means that you have to bring your loan balance back within bounds. This can be done by adding in some more funds or securities, or selling some of the securities in your account. So it's a good idea to be conservative in your use of gearing (eg. use only 50% when the limit is 70%) and to have some funds to draw on in a real crash(eg. some redraw available from your home loan account). [One of the most infuriating features about using gearing is that when the market crashes and you keep your nerve and are dying to pick up some "bargains" is exactly when you're most likely to hit your margin limit and can't afford to borrow any more!]

Over the years I have moved my mutual fund and direct shares investments into margin loan accounts with three providers - Leveraged Equities, Comsec and St George Margin Lending. Although the basic product is similar, there are differences that set them apart and can be important.

A general comparison of available margin lenders can be found on infochoice.

I started out with ungeared share investments, then transferred my holdings into a margin lending account with Leveraged Equities. They have been around longer than most, and nowadays are owned by Adelaide Bank - not that they offer any sort of guarantee! Leveraged equities has a minimum loan balance of $20,000 - you can start off with less, but you'll still pay interest on $20,000.
Pros: They have an default loan limit of $1,000,000 but you don't have to get approval for a specific amount and they don't need your income details. They really do secure the loan only against the underlying securities (but you'd still owe them the balance if a market crash left you with no equity). This is different from Comsec and St George which have to approve a particular limit, based on your income ad other assets and debts when you apply. You then have to apply if you need an increased limit later on. Another nice feature is that you can transfer funds easily to and from your nominated bank account and the margin loan account. This can be handy if you want to borrow funds to invest in some other investment eg. An agricultual scheme. Beware: if you used the funds for something else (eg. paying off your car loan) the interest on that part of the loan balance wouldn't be tax deductible, which would make the paper work way too hard.
Cons: You can't trade directly, online - you have a broker linked to your margin account and trade through them. This means you have to trade by phone and tell your broker that the trade is on your margin account. Also, the interest rate is generally a bit higher than some other lenders.

Comsec: My second margin lender. I opened this account as you CAN trade on your Comsec Margin account via the internet, which is cheaper and, for me at least, is less hassle.
Cons: One feature I hate is that you have to have separate accounts if you want to trade options or overseas shares. In an ideal world you could do it all within the one account - they'd just assign zero margin limit to such securities. They also charge a $10 "transfer fee" to settle your online trades via the margin account, which seems a real ripoff as you are making the trade online from within the margin account! It makes the online trades less economical for small parcels.
Pros: You have your loan details, contract notes and access to research all within the one online account.

St George: Similar to Comsec, but, as a "Gold" customer (due to having my home loans with them) I can get a small discount off the standard margin loan interest rate. But you have to ask for it, the margin lending group seems to work quite independently of the rest of the bank. eg. Your margin loan doesn't appear with your other accounts when you do internet banking with St George. This seems a bit strange, especially when you have a "Portfolio Loan" with the bank.
Cons: As with Leveraged Equities, you have to trade via your broker, which is not ideal. You also get assigned a set loan limit when you open the account, so you have to apply if you want to increase the limit later on.

All three margin lenders have lists of "approved" securites that they'll lend against, and may differ in the margin limit assigned to each security. This may matter if you already have some shares you want to lodge as security. Their interest rates differ a little bit, with the banks usually a bit cheaper on the variable rate compared to LE. You can prepay the interest on a portion of your loan balance (up to 12 months in advance is tax deductible at the date it is paid) - the rates on offer can differ quite a lot, so it pays to compare rates.

Some drawbacks of having multiple margin accounts:
* The holdings are each under a separate HIN, so if you have the same secuity in two accounts you'll get two dividend payments, annual reports and so on.
* The margin utilisation is calculated individually for each account, and it's not practical to shift funds from one lenders account to another.
* You get multiple monthly statements, and have a bit more paperwork at tax time.

As their are no account keeping fees there's really no cost in using more than one margin lender.