Forum Replies Created
- Originally posted by resiwealth:
One interesting point I would like to note here is this, people/we/me/others are very good at reading an analysing the past yet we struggle to get the future right, go figure.
Phil,
Maybe I can help, or more accurately, maybe Bill Evans (Global Head of Economics at Westpac) can help…
Very interesting document (only 4 pages long) and well worth the read. Basically holds to my outlook of 2006/07 being flat through a gradual recovery in 2008 then back to party time! [drummer]
If you don’t want to read the lot, just read the last page before the rate projections…
Cheers,
MichaelGav,
I second Derek’s call on Steve Navra being good value. I met him at SIG where he presented his view on financial structures and making your money work three times.
His next course is May 14 in North Sydney and only costs around $170 (he only covers costs as he is independently wealthy and doesn’t like the sprukers who charge a motza for so-called education). I’ve booked to go already.
Cheers,
Michael.Originally posted by resiwealth:3. I was disapointed the interest rates did not go up higher, creating more opportunities.
Phil,
Me too! But, even at current levels there’s enough jitteriness in the market to start opening opportunities. I’m not the deft hand that you are, but I am still looking and will let you know how I get on in the next couple of months…
Good on ya,
Michael.Originally posted by Ibuycashflow:what do you do when “the WHOLE market is headed for a prolonged period of stagnation”?
??Put your money in the bank???
I think that was exactly my recommendation…
You’d be better off putting the cash in to a fixed interest deposit with a big bank or some other investment option (so long as the after tax return exceeds the inflation rate)If you can find a CF+ investment option with true IRR returns (allowing for potential capital losses) greater than lower risk alternatives such as money in the bank then go for it.
You’re obviously personally on a winning strategy, well done! If I were in your position then I’d just keep cutting those cookies. But not everyone can always pick the winners in the current market. And my personal opinion, as stated before, is that market conditions are only going to deteriorate for the foreseeable future.
Sometimes sitting on your hands IS the correct approach…
Cheers,
Michael.Jeff,
I agree that you can make money out of cash flow alone, but my point is that regardless of which strategy you adopt, CG/CL is far more important than marginal cashflow considerations. Cash flow might make 1-2% difference on equity employed depending on the selected property, but CG/CL can make 10-20% or more difference on your ultimate IRR.
I agree that cash flow is important when considering whether you can service the loan, but my “primary purchasing criteria” is always the potential medium to long term capital gain/loss. If I can select a portfolio of quality properties which can return 10% pa on capital employed then I consider this far more beneficial than 3.4% positive cash flow with no capital gain. This is even more exacerbated when you consider the after tax returns of each approach whereby your 3.4% becomes 1.7% and the CG remains 10% untaxed.
As always, its horses for courses, but to overlook the impact of capital gain/loss in your IRR calculations is to ignore the most significant potential lever of personal wealth creation in my opinion.
Cheers,
MichaelJeff,
Good worked example, and I admit I didn’t factor that it was an IRR return on your money, but considered your money employed, but I think money employed is important as the leverage increases your potential gain/loss.
My concern with the example given is that you’re making only $3.4K on your $100K employed. One of the real benefits of real estate as an investment vehicle is leverage. ie you can borrow big money from the banks at 80% LVR which you can put to good use to make you more money. As you put it using OPM!
I’d say 3.4% is not such a great use of this leverage. Sure you’re making 17% IRR on your 20% down, but there’s a lot of risk involved. If the interest rates go up by 2% then your neutral (virtually). If you get some prolonged vacancy then this hurts too. And, if the property drops in value to say $80K then you’re net return is -$16,600 for the year! In that case your IRR is -83% and not +17%.
Leverage works both ways, and I think the CG/CL is not given the amount of weight in the calculations that it should. I think this is because the cash flow is easier to predict and doesn’t rely on some estimated projection of value.
I agree that if you can lock a $3,400 return on $20,000 down then this is nice, but it ties up $100K of your borrowing power and is quite risky without due consideration of future CG/CL etc.
IMHO,
Michael.Originally posted by Ibuycashflow:
Sorry Michael, I can’t agree with you here. Buying on a 9% yield and borrowing 80% at 7% gives you 2% on everything you borrow. It’s this variance which provides us with excessive returns on capital employed.Jeff, My point is that a 2% net yield on money employed will not cover your cost of capital. That isn’t even keeping up with inflation, so in real terms you’re going backwards.
If you have to rely solely on Capital Gain then you either need to have all the capital in the first place or a good alternative source of disposable income to service any finance.That was my point about servicability. Your cash flow calculations are important, and do need to allow for any potential vacancies/interest rate increases etc. But at the end of the day that’s all just so you can “keep” your asset. You make real money out of it through its untaxed “capital gain”. (I get an LOC against any equity built up as deposit on the next IP, so “spend” my CG without being taxed on it). I believe cash flow is important, but only in servicibility calculations.
My personal gearing preference is for neutral or even slightly negative. This allows me to buy the quality properties near the city centres in postcodes with prices just above the city median. These perform well over the mid to long term in CG relative other market segments. But, as others have pointed out, everyone has their own strategy and should execute it accordingly. This is my strategy and I post it just as an insight to others considering getting into IP. IMHO, too much emphasis is placed on cash flow insted of potential CG.
Cheers,
Michael.Originally posted by foundation:… just before they start going up again![biggrin]
Stay tuned Padmaa, I’ll let you know.And just like that Foundation you become a “Valued forum contributor”. The big 300 hey. [biggrin]
I’m with foundation on this one.
[sarcasm] Despite popular belief, the real estate market really is cyclical! [/sarcasm] [biggrin]
People who say that if you can afford to hold for the long term then why not buy now are not allowing for the current value of money impact. Inflation will erode any negligible medium term returns leaving you effectively worse off in buying power. Sure, you can buy and hold and still have those houses in 5 years time, but there’s a good chance you’ll be worse off in NPV real terms. You’d be better off putting the cash in to a fixed interest deposit with a big bank or some other investment option (so long as the after tax return exceeds the inflation rate).
Cash flow is only really of concern when you’re looking at servicability. You won’t make your millions out of five bucks a week on $20K down. Its the CG where you make your bucks, and the WHOLE market is headed for a prolonged period of stagnation.
If you can pick the eyes out of it and turn solid returns immediately out of informed buying then that’s a nice approach, but I’d advise flipping it or such then so you don’t get stuck holding it whilst it underperforms for the foreseeable future.
All a bit doom and gloom, but in every cycle there is a downturn! If you’re patient then this will be a good thing in a few years time!!
Ciao,
Michael.Yep, and some motivated sellers! But, if this is just the tip of the iceberg then those sellers are only going to get more motivated if you let the game play out as its headed.
Ciao,
MWAngel,
If servicability of the three loans is becoming an issue then it seems you are overstretched for your current means. The obvious answer would be to divest one of the properties and use the profits to pay down the mortgages on the other two until your cash flow position is more manageable. You don’t necessarily need to sell all three and branch in to shares. In fact I would strongly recommend against that approach, you’ve got better leverage in property and there’s some speculation that equities are overheated now too.
I underdstand that you can also take out insurance to protect you from poor payments on behalf of your tennants. Of course, if you don’t do this then you need to make sure you hold a cash reserve as a form of self insurance to cover for the occassions when cash flow is a problem.
Its easy to buy property, the hard bit is holding them through those unforseen eventualities.
My 2c would be to divest one to releive some of the pressure, but retain your two preferred properties so your still in the game.
Cheers,
Michael.Originally posted by resiwealth:How’s life Mike ??? regards to all … Phil[weird]
Phil,
Couldn’t be better! Trust you’re well too!! Just got back from 5 weeks in Africa living the high life. And of course, Kay is now 21 weeks pregnant, which is just insane!!!
We just about own our PPOR outright and are equity rich in a falling market. Will get the LOC in place over the next month or two then keep an eye out for the odd quality property to buy at discounted prices.
As you know, I’m a buy and holder, but IMO the bottoms not too far off so its gonna be my day soon (probably 2006 rock bottom).
I’m still holding those 40 acres in Bundaberg which aren’t doing much but I’ll talk to you about development options when the market takes off again in the next cycle.
Cheers,
Michael.JPD,
Ouch!
Good for you in fighting your way out of it as a 22 YO.
I think we’re on a bit of a sleeper with the land in Bundy but to be honest I haven’t valued it or looked at developing it recently. Maybe in the next cycle in a few years time I’ll look at my development options to capitalise on it.
Good lukc with your agistment if you decide to go ahead, and if you don’t then I’m sure there’s something else that will come your way!
Cheers,
Michael.Nat,
Nice post! Succinct and informative…
If I could give kudos (like you can on SS) then I would. [biggrin]
Interesting that demand for 100% LVR is low though. I know you need insurance as you pointed out, but would have thought that this would allieviate the “endless deposit” problem that Peter Spann talks about. In his book he claims the 80% LVR is the biggest impediment to building the multi-million dollar portfolio, not servicability. That’s why he looks at the “value addable” properties then revalues to create equity for the next deposit.
I guess there’s a limit to the number of 100% LVR loans an institution will extend even when insured…
Cheers,
Michael.FC,
I know that DD is active bird dogging in QLD at the moment and has received some positive feedback from other forum members.
Send him a PM or email with your requirements and see what he comes back with.
Cheers,
Michael.JPD,
Sounds like a good plan to me…
My wife and I own 40 acres at Bundaberg which she agists to a local cow cockie to run his cattle on. He only runs a dozen or so, and pays a small amount of cash to her as well as maintaining the property. It suffers from rag weed every now and again and he pays to have it cleared from the property.
Our plan sounds similar. Its zoned rural residential and we’re considering a subdivision at some point in the future. Its paid off so there’s no holding costs with it agisted and we can just forget about it and let it steadily appreciate until we’re ready to capitalise somehow.
Cheers,
Michael.Originally posted by Greg F:
Don’t keep us drooling, tell us about Africa!! (ie., make us drool some more [biggrin][cap]) With such high consumption, how can you and Kay afford to invest? (just kidding [cigar])Greg [biggrin],
The “high consumption” question is a good one, but in reality we backpacked to keep costs down and flew there on frequent flyer points so the whole trip cost around the $5K-$7K mark. That may sound like a lot, but we normally live conservatively and could easily afford this little extravagance.
As for the summary… Flew to Tanzania and did a 7 day safari in the northern game parks including the Serengheti. Saw all the big 5 as well as the great herds of wildebeast and zebra. From there we travelled to Zanzibar island for a week of R&R on the beach. Finished up by flying to Zambia and checking out Victoria Falls. An amazing trip, and something Kay has always wanted to do!
With her being 5 months pregnant now, we figured we better have one last hurrah before bub comes along and puts pay to any more long backpacking holidays…
Cheers,
Michael.Hmmmmm???
All I can say is that BIS Shrapnel have just revised their 2005 estimate of new housing starts in Australia from 160,000 down to 145,000. They were trailing HIH which had already factored a slump in 2005 followed by a minor recovery in 2006. Now the two are more closely aligned…
I’m in the building industry and we rely on these and other lead indicators to predict demand for our building products. Our sales division is now projecting a terrible 2005 based on a “worst on record” commencement to the year in Q1.
Sorry guys, but its all still doom and gloom in my neck of the woods and I reckon API is just trying to boost a flagging circulation in the down market.
Cheers,
Michael.Terry,
Here, here! Great contributions and obviously a lot of them!!
PS. I’ll be PM’ing or emailing soon to get a LOC set up on my PPOR. See, contributing here does have direct positive outcomes for those that do so. [biggrin]
Cheers,
Michael.Originally posted by Greg F:There you go again Michael, ANOTHER HOLIDAY!!! Last time we linked, you were off on a 2nd honeymoon. What’s this holiday in honour of?
Greg,
He he… Actually, the Africa trip was the “planned” second honeymoon, sailing in the Whitsundays over Christmas was just a repeat of the activity which was the first honeymoon, and was in reality just our Christmas holiday this year (if that makes sense). [biggrin]
Well, we’re back now (2 days ago)! Jaffa, any news on the meeting?
Being Sydney-siders we won’t be able to make it but I would be interested in opening up discussion on all things Bundaberg.
Cheers guys,
Michael.
