C2

The loss of $7k p/a is after negative gearing. Approx. figures are;
Rent +$16k
Loan Interest -$25k
Ppty Exps -$3k
= $12k real loss p/a
Tax rebate -$5k
= $7k net loss p/a

This situation would improve with increase in rent & decrease in interest rates.

All our 3 investment properties were negatively geared each purchased @approx $340k – $350k with 100% finance + costs.
All were built to maximize depreciation (& negative gearing) claims.

Total investment ppty value $1,050,000
Debt: $1,070,000
20% equity was from our PPOR ($300k with no H/L debt)
At the time my income was approx. $75k with tax $20k claimed on 221D to help servicing.
Our contribution (after negative geating was approx. $300 p/w)
Interest rates were approx. 6.8% with 2/3 fixed. Interest only repays

The plan was to hold 7-15 years with the ppty value doubling to $2.0mill. Net equity >$1.0mill + PPOR.

Flaws were;
 – Ppty values have not increased. Only approx. 10% in the Berwick area over 5yrs (all ppties in this area)
– Job changes (forced) reduced income & tax paid (we sold one ppty in 2007 to release equity to buy a business. Only broke even on this property. The second property was sold this year due to pressure on cash flow. The current economic conditions especilly in the used car market have suppressed s/emp incomes. We also broke even on the sale of this ppty)
– heavy reliance on both capital gain + negative gearing 
– We purchased all inv ppties in 2004/5 just at the top of the ppty cycle.
– All ppties were purchased as H&L packages at a 'fair' market price in an area with many similar homes being built with lots of land available.

As the majority of our debt was fixed interest rate changes up to now were not affecting our cashflow. However our second sale was partly due to coming off 6.4% fixed in Nov2008 to 8.5%. Increase of $7k p/a which we could not cover. Rates have since fallen so maybe we could have held the ppty…

Why do you think our investment plans were flawed?

We are still not sure whether to sell or not. I cannot see alot of benefit in holding apart from the ppty becoming closer to a neutral cashflow. Growth will be minimal over the next 5yrs or so + any gains will be subject to CGT.
If we hold it will be for the long term 10yrs+. Logic suggests some growth will occur in 10-15yrs????

The stock market & superannuation appear to better investments over the next 5yrs or so.

My only concern is a 15%+ drop in values over the next 2-3 years if we cannot service the debt. This is the worst case senario but I dont think it would come to that as we would find a way to make up the shortfall. (We still have approx. $50k of other debt to service as well)

To sell we lose $8k in agents fees & to buy $17k in s/duty + costs = $25k turnaround (7% loss).

Seems time is running out … hopefully we can make some correct investment decisions over the next few years!

Thanks for your comments C2.

We decided to invest in property in 2003 to try and create some $$$ for our retirement in the next 15 to 20yrs (we are currently in our mid-late 40's).

The plan was a long term one.

The mistake we made was to put our faith in a property investment company which sells H&L packages in the Berwick area. Although we felt the properties were good value at the time in hindsight they were not a good 'investment'.  We could have bought better with more research and better timing (2003-4 was the peak of the property boom).

Changes to my employment situation have (unintentionally) put a little more strain on our cash flow than planned which resulted in the sale of 2 of our 3 investment properties over the last 15 months.

We want to hold onto the last investment property for our future retirement & I think we can unless the economy goes into free fall in the next couple of years.

My main concern at present is will property prices continue to rise (in the outer S/E suburbs) over the next 5 years at a rate greater than the holding cost of the property ($5k – $6k p/a) ? If not we are paying out these $$$ each year for nothing!

What do other investors think?

We locked in a 5yr fixed rate of 6.85% in 2004 so rate changes have not been a concern.
The worry is income dropping to a point where loan payments cannont be made combined with a 10% or more drop in property prices.
James

Thanks suavemechanic,

We have just increased the rents by $10 p/week on each inv ppty increasing our annual income by $1000.

We could have asked for another $10-$20 but I did not want to lose the tenants as this could have caused more cash flow problems.

Apart from trying to stabalize our new business business income at a breakeven point (now just starting to get there) in Nov08 the interest rate on one of our inv loans ($360k) will increase from 6.44% to approx. 8.75%+. This will cost us an additional $8200 p/a ($160 p/week) in interest which we currently dont have. Further increasing the rent by $20 (x2) will only generate $2000 p/a.

In Oct09 our second inv loan ($360k) will come off its fixed rate of  6.85% to ?……………what then?

I dont see much light at the end of the tunnel. Looks like we will have to sell one ppty to keep our heads above water & hope we dont incur a capital loss!

Over the last 5 years I feel we have put everything into buying & holding investment properties (using negative gearing) but are getting nowhere fast as we are not financially better off. It is very disheartening.

I am still amazed by stories of investors who manage to grow a portfolio of more than a few quality inv properties using negative gearing methods due to inevitable cash flow shortfalls.

James

Thanks for your comments Kum Yin,

I realize that I am very highly geared & very reliant on future capital growth.
If all variables remain constant I can still afford to hold these 3 IP’s but will not be in a position to save or reduce the loan balances.

The question is should I continue to spend $15k per year to hold on to $1 mill of IP (with $1 mill of debt)?

I would be interested in the opinions of any other investors if they were in my position.

James

Thank You all,

I appreciate all the positive comments which reaffirm the reasons I started this journey in the first place.

Yet I still feel that no one has addressed my question on current (& future) affordability issues as reflected by devo76…

My loans are interest only & I am relying on high depreciation claims over the first 5 years (all 3 properties were newly built) so I do not expect to be in a position to pay much off the principal in the short term.

I am therefore heavily reliant on capital growth to get ahead.

Are there any factual reasons why property WILL double in value in 7-10 year periods?

Surely there must be a saturation point where property becomes too expensive? A property worth $300k today increasing to $1.2mill in 20 years would require a combined income of approx. $250k+ to qualify for finance (with a deposit of $300k = 20% + costs).

Have any of our more ‘experienced’ investors gone through any periods of low affordability in the past? If so how did the ‘property cycle’ over come these issues?

Maybe there is no answer….maybe historical returns ARE a indication of future returns (unlike most financial planners are prepared to say!)…never the less I still get the feeling we all are investing in HOPE to some degree…bit like winning Tatts!

James

Please explain….

The average wage in Australia in 2006 is approx. $56k p/a.
(http://144.53.252.30/AUSSTATS/[email protected]/Lookup/6302.0Main+Features1Feb%202006?OpenDocument )

To purchase a home @$350k with a loan $275k (LVR@80%) Deposit ($70k) + costs ($17k) paid by purchaser from savings, the income required to qualify for the loan is approx. $60k p/a.

Assuming property doubles in 7-10 years;
Same property is worth $700k
Income required to qualify for a loan of 80%LVR = $120k p/a
Savings required for 20% deposit + costs = $175k

Will the average wage also double in 7-10 years? If not what will be the effect on the property market?

If there are less buyers in the market wouldn’t this lead to less demand > keep prices down?

In 20 years will the same house be worth $1.4mill???? What sort of income will be required to service a loan of $1.1mill????

There is no way property can continue to double every 10 years!

Does anyone support or oppose this view????

[confused2]

James

Thanks Coopranos,

I just needed an injection of reality!

Because of being new to property investing I was having doubts about a number of issues;

– Will there be any capital growth in the next 5 – 10 years? Many “experts” predict the market will go backwards before going forward. If i had put my $15k p/a (negative gearing shortfall) into the bank or shares over the past 3 years i probably would have $50k+ that i dont have now.

– Whether my property “Advisors” are looking after my best interests or theirs. To be honest i accepted their recommendations without doing alot of due dilligence. I am reasonably happy with the end result though. I cannot see how property can double every 10yrs from now due to affordability issues. Buyer beware!

– Cash flow; I did take the precaution to fix interest on 70% of my total debt so I am not overly concerned about rate rises…yet. My main corncern is that I rely heavily on the tax rebates & therefore maintaining a minimum level of income (& paying tax) to make it work. If I want or need to change jobs I must maintain my current level of income. This is why I feel trapped by negative gearing.

– Inability to buy additional property; due to income & negative gearing limitations I cannot see how i can move forward (with investing) in the foreseeable future, although at the moment i have enough to worry about!

Overall I agree I am in a good position overall & can’t complain..we all have choices to make and have to live with the consequences of these decisions.

I agree with Dr.X about positive cash flow & rural properties they are not my cup of tea.

I will continue to hold as long as I can & hopefully expand my portfolio…maybe in 10 years I will be a millionaire!!!

Thanks for your contributions & GOOD LUCK to you all.

Keep [exhappy]

James

Thanks Dazzling for your comments.

My gut feeling was to hold, hold, hold…if cash flow permits.
The recent posts on doom & gloom in the property market were giving me second thoughts if this strategy was sound considering how high we are geared.

It’s always easy in hindsight…..

What affect do you think increasing affordability will have on future capital growth? Will less buyers mean less capital growth?
There are also a number of doom & gloom articles on the Jenman web site in this regard.
[smiling]

James