# Alternative real estate investment strategy?



## mime (20 September 2006)

What I'm thinking of doing is instead of buying a house I'm thinking buy stock in a bank and heavly gear it. 

It would be much more liquid and no duties, land tax, insurance, vacancy time, no realestate agents fees, dividends would help cover the interest and interest is tax deductable. All benefits.

The downside is in the stocks drops dramatically I'll take heavy losses.

What do you guys think?


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## scsl (20 September 2006)

*Re: Considering think investment strat*



			
				mime said:
			
		

> What I'm thinking of doing is instead of buying a house I'm thinking buy stock in a bank and heavly gear it.
> 
> It would be much more liquid and no duties, land tax, insurance, vacancy time, no realestate agents fees, dividends would help cover the interest and interest is tax deductable. All benefits.
> 
> ...



I'm sure you've probably heard of this before, but isn't diversification the name of the game? Banks are quality defensive stocks that have performed very well over the years, but regardless, it is still too risky to be putting a majority of you money in the one place. 

You only have to look at the NAB forex scandal, the collapse of Barings Bank as a result of a rogue trader and the recent credit card accounting error by Westpac to see that banks are not always safe havens.

Also, heavily gearing any investment is fraught with disaster.

Cheers,
scsl


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## mime (20 September 2006)

Hmmm. Do you think spreading over a few banks would be a better choice?


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## Realist (20 September 2006)

I would not heavily gear at the moment. Simple as that.

Your first goal to investing is to not lose money, heavily gearing makes that alot harder.


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## wayneL (20 September 2006)

I have two words for any investor in banks to consider, going forward from here.

"Bad Debt"


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## mime (20 September 2006)

"bad debt"?

That's a bit vaig. Want to explain?


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## It's Snake Pliskin (20 September 2006)

mime said:
			
		

> "bad debt"?
> 
> That's a bit vaig. Want to explain?




Lots of borrowed money without a guarantee that it will be paid back. Research the bad loan problems of Japan in the 90`s etc. Overextended borrowers.


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## mime (21 September 2006)

?? There is a charge on the stock once it hits a certain price. How is that a bad debt???


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## wayneL (21 September 2006)

mime said:
			
		

> ?? There is a charge on the stock once it hits a certain price. How is that a bad debt???




mime

If more of the banks customers default on their loans than usual, it will affect the banks profitability.


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## scsl (21 September 2006)

mime said:
			
		

> ?? There is a charge on the stock once it hits a certain price. How is that a bad debt???



mime, I think you are slightly confused. Bad debt is not related to the actual share price of a particular listed bank (although enough bad debts can eventually lead to falls in the share price).

Bad debt is money owed which is unlikely to be recovered and may be written off by a company. Banks make a bad debt allowance since it is unlikely that all of their debtors will pay them in full. Also, there is no guarantee that actual bad debts will not exceed the predetermined allowance e.g. severe economic conditions could substantially increase the amount of bad debts.

I read in the paper the other day that Australia's borrowings to household income ratio was at its highest level in a long time. If we were to suddenly experience an economic downturn, Australia's banking industry would definately be affected. And so spreading a majority of your money over a few banks would not be wise.


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## Freeballinginawetsuit (21 September 2006)

scsl said:
			
		

> mime, I think you are slightly confused. Bad debt is not related to the actual share price of a particular listed bank (although enough bad debts can eventually lead to falls in the share price).
> 
> Bad debt is money owed which is unlikely to be recovered and may be written off by a company. Banks make a bad debt allowance since it is unlikely that all of their debtors will pay them in full. Also, there is no guarantee that actual bad debts will not exceed the predetermined allowance e.g. severe economic conditions could substantially increase the amount of bad debts.
> 
> I read in the paper the other day that Australia's borrowings to household income ratio was at its highest level in a long time. If we were to suddenly experience an economic downturn, Australia's banking industry would definately be affected. And so spreading a majority of your money over a few banks would not be wise.




Banks probably have insurance taken out against bad debtors. Hence it might be the insurance companies that take the brunt, but then again if you average out the loan insurance premiums you'd probably find that the payers outweigh the defaulters, by heaps.

All in all, banks are pretty canny and all those little premiums they hide in loans and CC cards, factor in the defaulters.


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## mime (21 September 2006)

Ok guys for this bad ass plan to work I'll need a line of credit that isn't vulnerable to volatle share prices. Is it possible to get a loan similar to a mortgage where the bank is happy as long as you don't miss payment of the interest rates?


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## swingstar (21 September 2006)

If this *punt* turns out badly, what effect will it have on your life? How much money are you thinking of borrowing? What if we have an 87 during the time you're holding?


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## nioka (21 September 2006)

swingstar said:
			
		

> If this *punt* turns out badly, what effect will it have on your life? How much money are you thinking of borrowing? What if we have an 87 during the time you're holding?



Don't think he will run into trouble. I doubt if he will get anyone to advance the credit. Lenders usually want a sound business plan and that one certainly isn't one.


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## mime (22 September 2006)

We'll see


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