General Discussion, page-784

Hi MTV,

Sounds like a good plan.

A bit of advice from my experience. Never borrow money against equities and avoid companies that have a lot of debt even if they are in the top 100.

With property avoiding too much debt is the secret to long term survival. If you can't pay the interest on a rainy day it's curtains. I've lived trough a 6 month period after GST came in when it was near impossible to sell property and the banks wanted all their money back. Lost half of a lot but learnt a very valuable lesson about being forced by debt to sell stuff at the wrong time.

When investing in REITs there are a couple of things to watch out for.

It's good to know what those who thrive on duding others are up to.

* Above market rents. Developers who target REITs as the purchasers of their developments are prone to offer very significant incentives in terms of paying for tenant specific fit-outs and very generous rent free periods to get tenants on a long lease with a high face value rent. As you would know commercial, industrial and retail investment properties sell on a multiple of net annual rents. When the real underlying rent is substantially less that the headline rent the buyer is paying over the odds. Valuers of course should take this into consideration but at the fringes the "no deal no job principle" plays a distorting part. As Joh BP famously said never hold an enquiry unless you know the outcome. Shonky valuers are abundant.

* Gearing. Borrowing against a property investment is reasonably safe provided the debt to equity ratio is low and you can pay the interest when times get tough. You need to leave even more than the lenders insist on in reserve if you don't have other income streams to rely on.. The lenders conditions are designed to ensure they get their money back and may have nothing to do with protecting your equity. Lenders have two criteria that they look to satisfy to ensure they can get their money back. Debt to Equity ratio which covers them if they have to sell the property as mortgagee in possession and accept way below what it used to be worth. Interest cover (net rent as a multiple of interest) to allow for unexpected vacancies.

The big problem with some REITs is they tend to operate at the upper limits of the possibilities to make the resulting yield of their trust as attractive as possible to investors. The best yield is often the worst investment.