Monday, February 9, 2009

My interpretation of personal leverage in appreciating asset

I would look at financing much like how we evaluate companies with sound fiscal health.
One of the things I looked at would be the debt/equity ratio of the company and the interest coverage ratio.

In the case of property financing, I would look at the company using debt/assets but will discount the asset value first (as I think you need to take into account the possibility that when you need to sell your property, it might not be the time and you might not realised 100% of the property value when you bought it).

For myself, I would consider it a good debt only if it does not over-extend my total debt/equity ratio (or
debt/asset) to over 50% (better if it's under 35%). I also need to ensure that my interest coverage is more than 12 months (preferably 24 months) and that can be obtained from my coupons/dividends received from the investment portfolio.

That way, you can be very sure that a failure in the property investment does not mean a total failure of your financial health as you can still service the loan on an on-going concern for a while till the credit market & renters return to service you.

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