Firstly, that Steve’s scenario doesn’t make any sense otherwise, and he’s usually pretty thorough. Secondly because it’s clearly defined as a “PROFIT STRATEGY: Growth” rather than “PROFIT STRATEGY: Cashflow” or income… If I were assessing the value of a P&I investment, I’d certainly consider all income net of costs to be the return.
Anybody else have any thoughts? I don’t want to find I’m leading Dan up the path, and I may well be, because mainly I’m distracted by a memory of a decent cafe that used to be at 123 Smith St, Fitzroy…
F.[cowboy2]

Also, good news for those of us who didn’t want to be paying an extra 10c/l for petrol because of a declining Aussie dollar.
Bad news for those of us holding US dollar traded assets, or shares in companies which produce US dollar traded commodities.
And of course, bad news for the government.

Just who are you lumping into this “generation”? And are the responsible, debt-conscious, youngsters (see splosh’s post above) really going to be happy supporting your generation when the burden of debt is crushing their hopes of a comfortable, self-funded retirement? Remember, the baby-boomers are only going to remain in control of this country’s policies for so long, then you’ll have to face the embittered “younger generation” who have been priced out of owning their own homes, forced to delay having a family, taxed highly to pay for the older generation’s welfare and healthcare, etc, etc…
Don’t be smug. Good luck with the near-certain 2 or 3 interest rate rises before Christmas. It may give you a taste of things to come.
F.[cowboy2]

Perhaps I’m a bit old-fashioned for a young(ish) person, but I’d say “Save! Save! Save!” and I don’t mean it in the way Harvey Norman would.

Bruham, I somewhat agree, which is why I have a beef with people who refer to “using the equity” or “withdrawing equity” rather than “securing additional debt”, why I don’t like chatter about how debt-financed asset purchases amplifies capital gains without the flipside – that it also amplifies capital losses.

I sold off the 3 I was holding late last year when crude fell below US67, then bought just the one, ROC on 13/12 (crude @ US59). Currently up 25%, which is nice but relative to the rest of my modest, little, savings-funded portfolio is below par. LHG is up 41%, GDR up 140% and DEG (the rumour buy) down 12%, for an average of +49%, all within 6 months… but I try to be cautious when talking about such things, as I believe a decent correction is well overdue. I’d hate to see good people securing additional debt against their PPOR or IPs in the final moments before a 10%+ fall.

I agree with your comments regarding “the ravages of taxation and inflation”, and the inflation story is worrying. A recent IMF report has our money supply expanding at 8%, well down from the 14% peak a couple of years ago, but still I fail to see how over the long-term consumer price inflation can be expected to remain at <3% while this continues (here and abroad). Sure, a growing productivity helps, but I think big price rises and a coresponding drop in the standard of living are coming. It’s not just metal prices that are skyrocketing, basics like sugar have doubled (at the farm) recently, vegetables are up 7.9% for the quarter. Add fuel prices to the mix, and it would be tough to live from savings alone.

But I think the big stories of the year will be the interplay between US interest rates, the value of the USD, Aussie interest rates and the AU/US exchange rate.

Cheers, F.[cowboy2]

I agree, but many of them believe their futures will be secure if they can only manage to accumulate enough good debt to sustain a wealthy retirement. Sadly, this economics fallacy is also held in high regard by the majority (?) of PI.com forum members.
[laughing]
Oh darn, I thought I’d left this forum forever.
F.[cowboy2]

Well, perhaps…

At +5% per year, your ‘wealth’ as measured in Australian dollars would be increasing. But it is absolutely possible that your investment is losing value… while its price is rising[blink]

That house can now be traded for more $AU, but paper money does not have a fixed value. Try comparing it to a range of other ‘assets’ and items; oil, gold, silver, beer, iron ore, meat, vegetables, health insurance for just a few examples. You can now trade your house for LESS of each of these than you could have 1 year ago (assuming 5% pa cap gain on house).

Of course in such a scenario, higher gearing works in your favour.

Cheers, F.[cowboy2]

I switched off after the bit about water responding to various messages / thoughts. What they didn’t tell us was that the water had been left outside in sub-zero temperatures and the photographs were, in fact of ice crystals. Naturally, different sources of water have different chemical properties, thus the different crystals… nothing to do with water being able to ‘remember’ messages. And what this had to do with the rest of the rubbishy pseudo-scientific claptrap I’d already endured was rather beyond me.
After watching it, I had a bit of a google, and came up with these corkers:

Abc Science

SkepDic

’nuff said.[angry2]

F.

Apologies for the length of this post.

Firstly, a disclaimer. I am not a financial advisor, nor do I profess to be. Any advice herein should be considered general in nature, as no or little consideration has been given to the specific financial position of the original poster.

Hi Andy, straight up, let me sincerely wish you all the best with this matter. Unfortunately, your situation highlights the darker side of the ‘boom’.

Thoughts of renting out the property are admirable. At least you’re ‘thinking outside the box’. But realistically, this unit would be so negatively geared that you’ll still be paying a third of the mortgage, leaving you looking for lesser place to rent… I doubt you’d come out much in front, but somebody better versed in taxation and with knowledge of your situation could do the maths for you… Speaking of taxation, do not underestimate the tax breaks given to families. You may be pleasantly surprised by how little impact there is on your family finances.

Let’s look at your situation from an outsider’s point of view. As far as your unit is concerned, why assume that anything has changed? Presumably, your reason for purchasing this property was that you liked it. Hell, it’s got to be good, you’ve promised to pay the bank somewhere between a half and a full million dollars (once interest payments are considered) for it! So, we’ll assume that you bought it because you wanted to live in it as your home, no? If not, if it was seen as an investment decision, I’d suggest the deposit and purchase costs could have been a tidy investment in alternative assets… but like I said, it must be a sweet place to live!

Sure, the resale price is not now what it was. You’d lose in excess of 10% plus costs if you sold now (although the quoted valuation is likely an additional 7-10% higher than expected sale price given current conditions). But you bought it because you wanted to live in it, and were prepared to pay the weekly/monthly cost of living there to the bank. Had the ‘new addition’ not come along, surely the repayments would not have been an issue? This is the price you WERE prepared to pay to live in your unit, and it really hasn’t changed.

So the problem is simply that you’ve lost a second income for a limited time. This is just a meagre 10-12 months. Not significant over a lifetime.

Before I go on, I need to stress as those before me, that IT’S ONLY MONEY. Your number one priority at this point has to be the support of your partner, and to fully committing to taking part in the joy AND troubles that come from bringing a baby into the world! Please, please, do not let concerns over money divert you from that course. And don’t hide your worries from your partner either. Be realistic, be honest, but be positive.

So, this 12 month ‘problem’. How do you tackle it? Sure, there are plenty of schemes offering to make you a quick buck, but at what cost? At what risk? There’s an old saying (often quoted for clearly the wrong reasons) that goes something like “If you want to get out of a hole then first you must stop digging”. The reason you are facing difficult times is all due to the debt burden you are currently carrying. By taking on additional debt, you are effectively “digging”. I would urge you to steer clear of any such ideas.

There are ways to cope with a 12 month shortfall in income. They tend to be old-worldly and unfashionable, but quite reliable. I’m assuming that you and I share a generational space commonly known as Gen-X (correct me if I’m wrong), and I recognise that these strategies are fairly distasteful to our peers whereas our grandparents might consider them the ‘norm’. But before I go there, another consideration.

Once your partner/wife returns to work, will the added financial burden (sorry, can’t concieve a more appropriate/less negative word right now) of your child make the mortgage unmanageable or will things get more-or-less back to normal? If you’re not going to be able to make the repayments at that point, I think your choices are singular…

Back to practical ways to make ends meet. Are you aware that there is something of a ‘frugal living’ trend taking place? Many people our (?) age (but still a small minority) are turning their backs on the current consumer / affluenza afflicted world. We look for real value in everything we do and buy, and ignore those who would look down on us for not subscribing to the MTV/VISA/Nokia/IPOD hype-inducing cultural vacuum. Let’s look at some frugal basics:

Do you have:
– a car loan? or 2?
– credit cards?
– mobile phones?
– broadband internet?
– a restaurant habit?
– worse habits? (ciggies & alcohol)
– an aversion to buying cheaper equivalents to branded products based on name rather than content?

Would you laugh if I suggested it is possible for a single person to live exceptionally well on $300/fn for food, petrol and clothes? For a couple to live on $500/fn? If you’ve answered yes to any of the above, you can be helped!

The existence of car loans provides a great opportunity. If you bought a car on a 5/7/10 year plan then your car is probably depreciating at a higher rate than your interest repayments. Sell it, buy an old clanger (it’s amazing what you can get for a few small grand these days), drive it for twelve months, and you’ll be able to re-purchase a similar car to the one you had (albeit 12 months older) and come out well in front. Got 2 car loans? Even better!

Credit cards… “Oh, I get 1-for-1 rewards….” Whatever! These are about the dumbest thing you can have in your wallet. Can’t afford it? Don’t buy it! Get an old one from the salvo’s! Sure, it doesn’t have widescreen/flip-front/25 megapixels/pockets below the knee… err, excuse me. You get my drift. Got to have it? Get an old one, otherwise save until you can afford it. And don’t get me started on ‘rewards’ schemes. Does anybody know how much you actually need to put through your card per month to get one lousy interstate flight per year? Trust me, it’s more than the entire PRE-TAX income of the median income earner in this country! Plenty of suckers are paying more in ANNUAL FEES than that flight would have cost them in the first place (if they were prepared to shop around, frugal-like!)

Mobile Phones. Are you a doctor? Firefighter? SES? No? Then you don’t need to be contactable 24/7. That 22/7 that you currently spend either at the office or at home should be enough. Besides, why would you WANT people calling you when you’re out with your friends, family etc? Isn’t it a little rude to interrupt your time with people who care enough to be with you, just to talk to those who don’t? Trust me, I have a 24 000 word essay in my head on the evils of mobile phones and how ‘cheap plans’ are being used to brainwash the masses and particularly children into an addiction… what happens when everybody (and many people already do) thinks/says “oh, I couldn’t live without my mobile”. Yup, the cost goes up.

Do you have a broadband connection at home? What for? Can’t wait 1.5 seconds to read what’s happening in the world? Sheezuz, they only update the news sites every ten minutes! Need to download the latest episode of ‘Lost’ or Britney CD? Leave your dialup running overnight, hell, if anybody needs to call you they can always try your mobile… Bingo, you’ve just spent $10 per month, a saving of 30, 40 or 70 dollars over broadband.

Go out to dinner once a fortnight instead of 3 times per week. Buy some cookbooks and have friends over. Make them bring the wine! Make cooking a fun activity with your partner, try new things… When you do go out, it will be a reward (particularly if your skills are still below par), and you’ll appreciate it more. Try that quaint italian/chinese/thai joint down the road instead of the flashy place with the stupid name, funny ceilings, weird and uncomfortably odd shaped couches. Let’s face it, the food’s not that good anyway, and your new-found skills will soon be producing finer foods for a fraction of the cost.

Finally, put your pride out with the recycling, and embrace the world of tag-free, parallel imports and ‘just like’. Take a trip down to GoLo/Reject/$2plus, and fill a trolley with cleaning products, toilet paper, soap, shampoo, toothpaste, toothbrush, detergent, washing powder and other necessities that you normally buy branded (hell, some of them will still have brands or even come from the same factory). Savings up to $40/month, cost – a little pride. Buy your wine/beer in bulk once every month or three, sticking within your budget. If you run out, you wait till next month. Try cleanskins if you’re into wine – chances are you’ll find something you like, and if your friends are likely to turn up their noses, open it in the kitchen and decant it – they’ll never know… or get them to bring their own.

Following these frugal principles (and these are just a sample), the average 30-something year old couple can easily save $500-$1000+ per month over what their friends do. I kid you not. You do the sums.

If this is still not enough, try negotiating with your employer for a pay-rise or overtime or extra pay over the next few months in return for less later. Discuss a ‘repayment holiday’ with your bank (tell them the alternative may be bankruptcy leaving them with the negative equity). Take a paid break and moonlight with a second job. Swallow your pride and ask the oldies for an interest-free loan.

Now if you’re prepared to make the sacrifices above, and you’re still $10 short per week, let me know and I’ll help if I can. But if you’re living the high-life while I’m contentedly achieving a high standard of living on my $250/fn living expenses, don’t bother.

Slow but steady. That’s what real financial stability is all about. Sure, the quick buck is nice, hell, I’m in excess of 35% up on my investments already this year thanks to junior resource stocks, but I could be many multiples better-off had I used other peoples money (OPM/gearing). Why don’t I? Because I sleep much better at night knowing that I only have my surplus cash to lose, rather than risking my future financial stability. And I’m a semi-single kind of guy (for now) – if there was another involved, I’d be twice as careful.

Best wishes,
F.[cowboy2]

I can tell you exactly how to do it. Build yourself a time machine (see Here), strap yourself in and go back to the day when CF+ deals were plentiful. Here’s the trick. 1995 to 2001 were prime years for such deals. 1987 to 1990 – not so good. 1982 to 1985, pretty good. ’78 to 80, difficult. The 70s were a wild time for inflation, both in asset prices and wages, so CF+ deals came and went…
Do you catch a pattern here? Buying off-the-shelf CF+ deals with small deposits is easy, but depends on timing. Shortly after the end of the biggest boom in history is probably one of the most difficult times to be looking.
Sure, there are plenty of people who will tell you that “you’ve missed the good-time-to-buy boat”, that house prices bear no relation to wages or rental return, that we’ve entered a NEW PARADIGM of perpetually expensive house prices… but I don’t buy it. Houses, just like any other tradable asset or item are CYCLICAL. In the long term, everything will rise in price, just as long as the government and reserve bank continue down the path of deliberate, measured inflation. They overshoot their ‘fair value’ range in relation to this inflation as people get carried away by investment mania, then when they’ve peaked in relation to that ‘fair value’ range, they return to their long term trend. By this time people look at real-estate as a poor-performer relative to other investments, and poor neglected house prices fall below their long term trend. THAT, my friend is the time to be looking for CF+ houses.
So, why doesn’t everybody recognise this as the time to buy? Because providing inflation is still pumping things along, that ‘fair value’ range, along with the over-valued and undervalued ranges are RISING CONSTANTLY. It’s a bit like shooting at a moving target. I guess one way of testing where the market is at is to see how easily you come across CF+ deals…
What? I’ve made a circular argument? True, but think about it – that fair-value range is NOT CF+. It is probably slightly CF- to CF= at best. So where are the markets at this point? Off-the-shelf CF+ houses are next to non-existant, therefore, the residential real-estate market MUST be either fully-priced or OVERPRICED in relation to rents and wages.

Rant, rant rant. Rant over.
Cheers, F.[cowboy2]

… perhaps he was assuming you were looking at buying another loss-making asset? The first house appears to be costing you around $60/week, so buying another similar house would double your cost… although given the recent price rises, it may be even more. Servicability I believe its called.
Remember, a property that will bring around $200 per week is only really worth $155k from a yield perspective. Subtract 20% deposit, and $125k sounds about right![biggrin]
Doesn’t it?[blink]
Oh, apparently not. Yield is irrellevent in this new world where house prices double every 7 to 10 years.[eh]

F.[cowboy2]