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I currently have lots of equity in my house in Sydney. I am holding 2 investment properties that are negative and really draining my cash flow as we have young kids and wife only works part time. I have been looking at using some equity to invest in shares through a broker to help pay down primary mortgage ($400k). Likely mainly dividend shares, fully franked. I am not across shares so not sure what is possible and what amount of risks this will expose us to? Good or bad idea? What further questions should I be asking?

  • 4
    When did you buy the properties? What is your rental yield? What is your net loss on the properties? The more information you provide, usually the better answers you will get. – Victor May 30 '17 at 9:30
  • With upcoming changes to negative gearing (that also affect me) I would seriously consider losing an investment property. Hopefully your investments are in Sydney/Melbourne or somewhere else that has had rapid growth since you purchased them. – Mark Henderson May 30 '17 at 21:13
  • 2013 - Bris. Purchase $550k rents for $535 per week. 2016 - Cairns. $155k purchase rents $250 pw. Bris is the cashflow negative. – MJ.Gram Jun 1 '17 at 10:07
50

Buying individual/small basket of high dividend shares is exposing you to 50%+ and very fast potential downswings in capital/margin calls. There is no free lunch in returns in this respect: nothing that pays enough to help you pay your mortgage at a high rate won’t expose you to a lot of potential volatility.

Main issue here looks like you have very poorly performing rental investments you should consider selling or switching up rental usage/how you rent them (moving to shorter term, higher yield lets, ditching any agents/handymen that are taking up capital/try and refinance to lower mortgage rates etc etc). Trying to use leveraged stock returns to pay for poorly performing housing investments is like spraying gasoline all over a fire. Fixing the actual issue in hand first is virtually always the best course of action in these scenarios.

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    If I understand correctly, the OP would be using a mortgage debt to buy the shares. As such it wouldn't be directly tied to the share performance and would not be subject to a margin call. – stannius May 30 '17 at 18:32
  • The broker would select and manage share purchases in line with goal. I'm pretty uneducated on share types but assume it would be mainly geared towards diversified funds. – MJ.Gram Jun 1 '17 at 10:09
  • If the broker is managing it all you also quickly enter the usual free riding moral hazard problem if they are taking a cut for managing it: they want you to ante up as much as possible as they just get paid on capital/transcations regardless of results. It's been said a lot in this thread already, but this looks a very bad plan. You are much better off exiting the loss making house than trying to fight fire with an even hotter fire that could leave you with virtually nothing but huge debts. – Philip Jun 1 '17 at 11:58
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Don't do it. I would sell one of my investment houses and use the equity to pay down your primary mortgage. Then I would refinance my primary mortgage in order to lower the payments.

  • Will def seek a lower mortgage rate but selling investments at moment would be borderline loss given I have only had them short term. Might just have to get a better rate and ride it outside a bit longer. – MJ.Gram Jun 1 '17 at 10:10
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This depends on:

  1. what your mortgage interest rate is if it is fixed
  2. what level of risk you can tolerate

Here in the US where I am, interest rates were around 3.9% when I fixed my mortgage. This underperforms the market, e.g., a total market ETF like $VTI or an SP500 ETF like $VOO have expected returns of ~7+%, the current market growth rate. So, in theory I am better off paying into the market, and making returns greater than my interest rate, rather than paying into the equity.

HOWEVER, past market returns do not guarantee future market returns. The market could reset. It could crash. Are you willing to accept this risk? You have to analyze what happens if the market suffers say a 30% correction and you lose a lot of money quickly.

I would certainly not invest in individual (non-ETF) stocks, or you are really exposing yourself to risk.

  • At $400k, AUD or USD alike in this case, you are looking at enough money that you could in principle gather an index together yourself. You are certainly dealing with enough money that you could get significant diversification. Now, dumping all of that $400k into a small number of companies... that's probably a bad idea. – a CVn May 31 '17 at 7:49
  • Mortgage is currently 4.08 P/I on $400k and 4.58% I/O on investments – MJ.Gram Jun 1 '17 at 10:12
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It's generally a bad idea to use low-risk credit (low-risk in sense you're practically guaranteed to be forced to pay it off) to buy high-risk shares. In optimistic scenario, the profit from shares would be higher than your credit percentages. In less optimistic scenario you come with nothing. In worse scenario you have worthless shares and another credit to pay.

If your only problem is the non-profitable property, you can always sell it and get rid of negative cash flow. It won't affect your quality of life negatively. In your high-risk scenario you trade the opportunity for a bit better life with for a risk of turning it into disaster for you and your family.

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Maybe a bit off topic, but I suggest reading "Rich Dad Poor Dad" by Robert Kiyosaki. An investment is something that puts money to your pocket. If your properties don't put money to your pocket (and this seems to be the case), then they're not an investment. Instead, they drain money from you pocket.

Therefore you should instead turn these "investments" into real investments. Make everything to earn some money using them, not to earn money somewhere else to cover the loses they create.

If that's not possible, get rid of them and find something that "puts money into your pocket".

  • I have read it but might revisit – MJ.Gram Jun 1 '17 at 10:15

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