Forum Replies Created
Hi again,
Have been frantically organising and renovating rooms. We had to make some beds available prematurely for the recent Lions Rugby game, the town was absolutely packed.
Anyway, managed to get about half the rooms (10)painted, carpeted, new bathroom fittings, lighting and beds etc all spruced up for about $25k prior to the game and are now working on the rest.
We are still operating under the banner of “The Grand Hotel” but this will all change when we’re ready to officially open(??). There is still some major building work to be done to provide a modern entrance and reception area, and communal kitchen facilitiy etc etc.
And yes I agree, a theme is an excellent idea. Something that can be followed right through to make the stay an “experience” rather than just a bed for the night. There are many accommodation venues with Maori influences, most of the major hotels are riddled with Maori carvings and put on concerts etc. We would prefer to have a point of difference, we know our target market and we know how to reach them we just need to refine the image.
Will keep you up to date as things progress
Cheers
JeffOriginally posted by The Mortgage Adviser:I have done various calculated scenarios. It only works with large equity positions and low LVRs unless the funds are for investment. You won’t live long if you ‘live off equity’.
It works in times of high capital growth and rental growth as well. You still need a large portfolio but this can be leveraged. The strategy is also used by developers, home renovators and even share traders (as I doubt they rely on dividends)
Your scenario of Mum and Dad with an over valued, negatively geared portfolio, with no job, don’t know how to use a paintbrush, and no other sources of income, during times of negative growth, is a worst case scenario.
How do they live? I agree Rob, in such a scenario they couldn’t. So being unable to use the strategy of “living off equity” could you please tell us, how would they live?
The question put to you had changed to tougher times and I found your “I am good and pick investments that will continue to grow at sustainable levels” response as inadequate.Regarding this comment. Good to see you don’t get personal Rob but you know what they say about people in glass houses. Your arguments against living off equity have been backed up by inaccurate calculations and by placing unrealistic constraints on an example to prove a point. Not very convincing.
There’s plenty of info here for everyone to read and make their own minds up. I know you will want the last say, so I’m timing out of this thread and will let you have it.
Cheers all
JeffOriginally posted by The Mortgage Adviser:Jeff, how do you draw down 50% of negative growth?
Rob, the example we are discussing specified 10% growth and that is all I am explaining. In reality you would not draw down anything on negative growth, by the same token, when you have those peak years with say 50% growth you should only draw down what you need to live – the balance being rainy day stuff. Remember Rob, I did not say I approve of this stategy but it does have some merits
What do you live on in the negative growth years?
What you have accumulated from your early years of growth. If you haven’t had those years then you are not ready to use this strategy for any length of time
Just trying to beat averages does not mean it will happen year in and year out for you!
Then perhaps if one doesn’t understand how to spot value in a property and how to add value to a property then this game is not for them and they should persue another course towards retirement
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksFoundation, I have to concede on the turning point for a 7% difference between HPI and Floating interest rates. I applied a 3% growth rate to 10% interest rates and the turning point is around Year 7. At this stage the portfolio was worth $2.388m and debt was approx $310k. (This of course assumes absolutely NO rental growth and whether or not more competitive fixed rates were available.) At this stage you would have to sell part of your portfolio ($310k) to eliminate the debt and interest bill. This would then leave you with the original $2.0m to start again.
On that I’ll have to take back my Yeehaa but must stress that given different interest rates and growth rates then different amounts of capital and different configurations of the strategy maybe required.
I’ll have to leave you on that note. The skies have darkened and the lights are flickering and I’m sensing the storm might send a few power lines down in this neck of the woods.
Cheers
JeffOriginally posted by foundation:1. When $2.0m of capital compounds at 10% and an annual drawdown of $100k compounds at 7%, at what year is the “turning point”? (ie when your capital starts reducing)Jeff, surely you don’t think this is a normal situation (ie sustainable) do you?
I just checked my stats for median Melbourne house price (REIV) versus standard variable rate home loan (RBA) over the 34 years from 1971 to 2004 and found that the home loan interest rate was higher than nominal house price inflation in 15/34 years. IRs were higher than inflation adjusted HPI in 24/34 years with an average of -7% (HPI-IR).
Yeehaa. Where is the turning point in that scenario?When you drawdown no more than 50% of the capital growth there is still no turning point Yeehaa
Cheerio, F.[cowboy2]No, not at all F.
I was merely defending the example as it was given in Michael Whyte’s post from Steve Navra’s course. This was the same example used in the property developing thread. The variables were already given.
Before you can discount the method you must first understand the methodology. What I am seeing in this discussion is a lot of miscalculations which is all I am trying to clarify. Perhaps you might actually like to answer my 3 questions.
BTW, by persisiting to use averages and medians I suspect you will only ever get averages and medians. As an investor you attempt to beat the averages.
Cheers
JeffOriginally posted by The Mortgage Adviser:Jeff, there is no healthy discussion when you use the demeaning “Can you see that?” comments even after asked not to. I think I have proven my point that this ‘strategy’ is extremely restrictive in it’s use. No more repetition is needed.
Firstly, not many people can accumulate a $2,000,000 net position in their lifetime so at least we agree that you need a lot of equity to do this. (You do not need to have a net position of $2.0m to apply compounding growth, a gross position would suffice)Do you not see how you would run out of equity with capital growth running at 5% on average and the cost of funds running at 7% annually?
The demeaning nature of such comments must be contagious Rob, something I caught from you.By my calculations, I’m now over 100 years old and my equity is still growing. Can you please answer 3 questions
1. When $2.0m of capital compounds at 10% and an annual drawdown of $100k compounds at 7%, at what year is the “turning point”? (ie when your capital starts reducing)
I maybe under this misconception that 10% is not actually greater than 7%
2. With a growth at 5% and funding at 7%, if only 50% of your annual growth is drawn upon when would the turning point be for that?
3. When $4.0m of capital compounds at 5% and an annual drawdown of $100k compounds at 7%, at what year is the turning point?
Anyone???
Cheers
JeffHi Kay,
Lower sales numbers doesn’t necessarily mean lower supply, it could be lower demand. However the tightening of supply would have a positive effect on prices as you’ve pointed out.
I guess you need to “Watch this Space”, there could be some opportunities if the market has turned.
Cheers
JeffYour figures are wrong Rob
Formula is: Equity plus CGain -L/E -Ann Int =Closing Equity
Year 1 2.000m plus 200000 -100k -7000 =2093000
Year 2 2.093m plus 209300 -100k -14490 =2187810
Year 3 2.1878 plus 218781 -100k -22504 =2284087
Year 4 2.284m plus 228409 -100k -31080 =2381416etc etc
Year 15 3247358 plus 324736-100k -175903 =3296190The example given used a 10% growth rate and 7% funding rate. See how the net equity figure is still rising. At year 15 you are borrowing $100k to live on and 176k to pay the interest. Your portfolio will be worth $5.8m with loans of 2.513m.
The other points you raised regarding risk are valid, but then nobody is denying this.
So much for healthy discussion Rob
Cheers
JeffYes you’re right. Year 2 should have been 114.49k (being 7% of $207k) leaving $2.18781m.
Sorry, but I am not trying to torment you. If you don’t agree with my figures perhaps you could prepare your own and post them so we all can see otherwise.
You asked someone to ANSWER some questions perhaps this is why you don’t get any answers – you ridicule every comment someone makes but don’t post any evidence to the contrary.
I for one understand the concept. Whether I agree with it depends on the circumstances. There are many variables that cannot be pre-determined and hence the example given was only to show people the workings of the concept. By all means, set up a spreadsheet and put any rates you like in it.
The turn around figure will differ depending on initial capital, the rates you use and the amount of drawings.Cheers
JeffYear 2 $2.093m at 10% is $209.3k, less $100k less 7k funding less another 7k for previous year
So $2.093 plus 209.3k = $2.3023
Less $114k = $2.1883mCan you see that?
Where you are going wrong with this example is the growth rate applied is 10% not 5%. The funding is 7% so you are actually capitalising just under 5% and living off just over 5%.
It doesn’t matter what the growth rate is, 5%, or 10%, the point being you only draw a portion of the capital gain and not the lot. Some has to be reinvested to account for the additional interest.
This was only an example given to show how it works. No-one can guarantee what growth rates will be achieved over the years nor what the interest rates will be. By the same token, what is the magic in the figure of $100k to live. Everything changes.
You said you have used it in the past to focus on ‘INVESTING’. This is totally different to my challenge to this ‘structure’. My challenge to using this structure ONLY applies to ‘living off equity’. My definition of ‘living off equity’ is spending on personal non-deductible expenditure without further investment. It is NOT viable.I focused my time on investing. I lived off the equity for almost 2 years and no longer needed to when the rent reviews from some commercial properties provided sufficient cash flow. The growth in equity over that time far exceeded what I drew on anyway.
Cheers
JeffOriginally posted by The Mortgage Adviser:I just wish those supporting this ‘strategy’ actually took the time to ask the many questions put to them regarding this. They seem to ignore the questions they cannot answer.
While I am not fussed on the strategy I have applied it in order to free up my time so that I could concentrate specifically on property investment. This is not unsimilar to taking out a student loan to study due to better prospects when qualified.
The strategy relies on being active in capital growth and I would not recommend it for a passive investor.
It works well if growth rates are in excess of interest rates and it also works well if your portfolio is large enough so that the “actual growth (not percentage growth) is greater than your living expense.
Your query that if growth was 5% and funding 7% then you would eventually run out of money. As I stated earlier $1.0m would take you 14 years based on those rates. I however read the example you referred to as 10% growth on a $2.0m portfolio giving a capital gain of $200k, less living expense of $100k, less $7k interest. This would leave $93k increase in net equity or 5% to $2.093m – can’t you see that?
I suppose the next debate is whether or not these rates are achievable. The point is, that you only extract a portion of whatever growth you have.
While one strategy is right for one it may not be right for another. Different scenarios will require different strategies and as your investments reach differnt levels you will adopt different strategies.
Do not keep a closed mind on this sort of thing. It has its place, all methods have their pros and cons.
Cheers
JeffIt is a balancing act SG, and sometimes you have to go backwards in order to go forwards.
Cheers
JeffTwo things I’d like to add to this:
1. You need to know the market you are buying in before making hasty purchase decisions.
2. Valuations are based on “historical evidence” and will always be behind in a rising market. Comparative sales analysis is used as evidence to justify a recommended value, that is, actual sales in the area. Keep in mind that the opposite is also of equal importance.
Cheers
JeffI agree completely regarding initial demand for rental accommodation and delayed demand for properties. I see potential opportunities in low priced homes and for wrappers in 2010.
I also see the intended objective for the Govt. being a waste of time and money. If someone saves $5k and qualifies for the FHOG they will have $10k towards a house. Then a house that would normally be $90k will become $100k as the buyer has 10% deposit and will be only be looking to borrow 90%. The scheme will fuel property inflation for low cost housing come 2010 and beyond.
Pretty simple really,
Don’t start living off equity until you have enough equity to live off. And if you don’t spend the equity in your lifetime, someone else will.
Michael Yardney has pointed out the tax advantages of living off equity
My reason for living off equity was to become full time in property investing until I established enough residual cashflow. It freed up my time from full time employment.
Everyone has different long term goals and comfort zones. Some may wish to be the richest in the cemetery, others do not wish to leave a cent when they die. Some require very little to live while others wish to have all the toys and holidays.
By setting you longterm goals you can determine where you would like to be when you die, how much you’ll need by when and which is the best strategy to achieve those goals.
The amounts required can be calculated out on a simple spreadsheet
eg $1.0m invested at 5% gives you a $50k income for the first year, less $100k drawing would leave you with $950k to invest at 5% for the next year, less another $100k. It would take you about 14 years to run out of money.Cheers
JeffYeah
Buying a property investment – you’re mad
Borrowing all that money – you’ll go broke
Make any money – you were lucky or you’re a crook
Make any more money – you’re rich you can afford to pay more when you get contractors to do work for you.
Established – those who knocked you on your way up are now seeking advice, or a loan so they can make YOU a lot of money – yeah right
It’s a funny old world we live in. People are scared of the unknown. When they don’t understand something they automatically form a negative opinion. Almost everyone will tell you how to make money, my opinion – ask someone who has already done it.
Cheers
JeffThe other problem is you can’t join the scheme until 2007 so that means you won’t be able to draw on it until 2010 (3 years).
I think it’s a bit of an insult. While I agree with the encouragement to save to qualify for the entitlement, it is too restrictive.
Labour had a similar scheme about 20 years ago. You paid into a Post Office Home Ownership account for x? period and were entitled to a very cheap loan for the deposit on a house plus a grant towards fees etc. That didn’t work either.
Then there was the Housing Corporation First Home Loans – interest rates were 7% when everyone else were 17%. You had to earn under a certain amount in order to qualify.
Cheers
JeffYou are entitled to $1000 for every year you have saved with Kiwi Savers upto a maximum of $5000.
Problem is, by the time you’re entitled to it the properties would have gone up $10,000
Cheers
JeffAjax and Michael, thanks for your discussion.
Regarding the 4 P’s there are some aspects I am stuck with such as the physical position of the building. The rest of the marketing mix has to revolve around this. The place was originally called The Grand Hotel but today it would be difficult to compete with more modern complexes without major structural work – hence the backpackers.
Product – yes, backpackers but remembering that a product is actually a “bundle of perceived benefits”. Security, cleanliness, private facilities, bar, restaurant, services, funky, image etc. We can’t just sell a bed for the night we have to position the product to be more acceptable than our competitors.
Price – generally governed by the competition however, our overheads are low. Rather than discounting to compete I would prefer to provide add ons as part of the package, especially regarding entertainment. Bar snacks, happy hours, comedy, drinking competitions, wooly stuffed pets.
Promotion – this is where the name is important. Websites, brochures, advertising all require a name that attracts a persons attention, is easy for them to remember, and does not deter them from wanting to stay. It is the first point of contact and the first chance to get customers in the door.
Placement – the physical position of the property is Rotorua CBD. Close to cafes, bars, tourist attractions, tourist centre. Walking distance to most places. The position I cannot change but the backpackers and inexpensive tourist accommodation has to be better than the boarding house as it was being run.
We will be targeting the 18 to 35 market segement. This can be broken down into further segments such as group tours, FIT’s (Free Independent Travellers), DINKS etc. This market segment generally have more disposable/discretionary income, no dependents, less commitments and are generally out for a good time.
So would you want to stay at a place called something like, the Sheep Shaggers Inn or Beds for Ewes? Not something you’d want to tell your mates about anyway. If we keep the name subtle we can always throw in some gumboots as part of the package.
Cheers
JeffInteresting.
Some years ago I visited a friend who had recently bought a large house in Auckland, NZ. There were 7 or 8 properties within a secured area with a video monitor at the gate. Extremely lavish and secure, each property was on approx 2000m2 of land and then there were some common facilities such as tennis courts and gardners shed.
I also recently read about a lifestyle subdivision with each lot a triangular shape and the houses situated in the centre. The reasons for this were security and it was also less costly to provide the necessary utilities when all the houses were close together.
Cheers
JeffHow many units are there in your motel?
Is there any room for further expansion?
What other facilities are there – restaurant, swimming pool etc?
Can the occupancy rate and/or room rate be improved?As a rough rule of thumb, Moteliers work on 1/3 of turnover for rent, 1/3 for operating expenses and 1/3 for profit. As you increase your turnover you also increase the rent and hence the capital value of the property.
Have you approached the vendor regarding second mortgage finance?
Cheers
Jeff
