Forum Replies Created
Paleez, give us some credit, we vacillate around the low teens, 13th being the last I heard and we were as high as 6th somewhere in the 50’s-60’s.
We are an extremely wealthly nation and if you divide latent natural resources by population we are the potentially the wealthiest.
I’ve been meaning to add something to this for a few days now, but been too lazy [blush2].
My recommendation: buy exchange traded index funds
STW which tracks S&P 200
SLF which tracks S&P 200 Listed Property
for info http://www.streettracks.com.au/The basic premise is that you’re not likely to beat the market, so why risk being flogged by it? Settle for average. STW includes the largest 200 Australian shares and SLF is the same for Property trusts. Simplest starter portfolio is to maintain a 50:50 ratio and rebalance through contributions (never sell). You are significantly reducing the chance that your first foray results in disaster, even if by poor luck rather than lack of skill.
A good read is the PDF available on http://www.indexfunds.com. This is American info, but applies similarly. Don’t take the Farma and French conclusions as gospel and keep an agnostic mind to trading if you like.
Another site more specific to Austrlia is
http://www.travismorien.com/FAQ/main.htm who uses index funds for his personal portfolio
and another favourite article
http://moneycentral.msn.com/content/Investing/Simplestrategies/P38651.aspDown the track I also recommend international exposure again at a fixed % of portfolio, but there are no ET index funds, so you would have to use mutual funds, not so bad. This will be your safety net if Au turns sour. And a bet against the dollar which is a far way above its long term average.
Finally if you want to beat the market, as many funds claim to, you have the option of margin. Why take the unquantifiable risk of trusting a fund manager with you money in the hope of out performance when you can index and gear. You increase your risk, but also you prospective gains and most importantly you are in control.
My conviction to these incredibly simple strategies is that I have been implementing them for 3 years to amazing success (not through market timing or brilliance, just stubborn adherance). I have only 5 years on you so have been happy to gear (between 50% and 60%), but I suggest you do not take this step for at least a few months until you get used to the idea of your net worth vacillating daily.
I actually spent months researching and writing software to evaluate optimal gearing strategies, but can sum up the most important conclusion in one sentence: Don’t push it.
The gearing that is, remain well under the max. If you’d implemented the above 50:50 portfolio since 81 (i think when my Au data dated back to although I ran this from the 20’s on Dow), then at 60% you would not have had a single margin call. Although you would have been screwed at 20% interest rates [biggrin], so would just about every other strategy mentioned on this forum and given the conservative gearing (compared in absolute terms to most property investments) a case could be made that this is a relatively safe approach. If instead you’d been at 65% gearing you would in fact have LESS equity at the end of this term (i.e. to present) and have had more volatility. I will be more interested in property when I again live in Au and prices are more conducive to investing; every dog has its day.So, STW and SLF, no brainer, gear once you’re comfy. Worked for me. Sure in a bull market, but what the hell would you say of property last 5 years? [biggrin]
blah blah i have no quals, follow at your own peril, if you lose everything, bug**ger that means I lost it all too
abugslife,
I strongly disagree with your REIT shorting assertion. REIT’s are not, in fact, proxies for residential real estate and with an average yield of 7% how could they be? Holdings usually include hotels, retail, infrastructure, commercial, etc. Shorting such certainly would not be the bet you intend, given you have stated above that commercial remains fair value.But an aside, prices will only slide in real terms and will stagnate nominally for at least 3 years. So shorting and options are of no value if the prices do nothing nominally. I think the way to make money in this scenario is to profit from the yield differences between RE and mortgages… I.e. RENT [biggrin]
So ian’s point is that it is possible and foundation’s, that it is unlikely. No problem.
If you rule out high inflation (i.e. above 3%), I would add, that it would be “exceedingly unlikely” because such a scenario would result in 2015 prices being 1.5 times more expensive than today, in real terms. More than 10 times the average salary!!! Surely only the remotest of possibilities.
Seems the optimistic view is that appreciation will equal inflation. Lets, again optimistically (for property), put this at 3%. So the real cost of ownership over the next decade, assuming 7% loans and 1% rates, maintenance, etc. is 5%.
I.e. if you are paying 5% of the value you would purchase in rent, you are breaking even. E.g. my requirements will cost me roughly $400k, if I can rent this for 400pw I am square. Well turns out I can rent the same for considerably less than that.
Oliver put the yeild before costs (which is what is relevant here) at 3.1% late last year.
http://www.amp.com.au/au/3column/0,2338,CH4669%255FNI9451%255FSI56,00.html?via=AMPAUAlternateLeftNavBut again for conservative numbers, I will take 4% for Brissy. Therefore, if I rent I am 1% of 400k better off and I can in turn invest that $4000 each year (conservatively at 5%, but I’m not conservative).
The first thing one might counter with, is that there is the potential for house prices to appreciate faster. Ah, but prices can also fall and often do in real terms. I do not think I would be out on a limb to suggest that a fall is more likely now than at any time in the last 5 years (more specifically in Brisbane for my interests)?
So in conclusion [biggrin], if house prices do in fact track inflation, then home ownership will remain a poor financial decision.
Retirement for the working class is only a 20th century concept. For most of history it was ‘work until you drop’. Then age pensions and superannuation plans (incl. 401k etc.) were introduced and initially, based on average life expectancy, one could only expect a few years of retirement.
Now it is an assumed right that one enjoys a good 15 years of peaceful winding-down. But, medical science is at the knee of the exponential and I think only a fool would argue that life expectancy will not continue to rise.
So, at what point will it strike the general public that the current promises of super amount to a Ponzi Scheme? I.e. you deposit 9% of your salary for 40 years, then live off this for another 20, comfortable enough to support your ailing health. Does it not seem ridiculous when presented like this? Don’t be lulled into thinking compounding is the panacea. Like all Ponzi schemes, this one will only work while enough new suckers continue to come to the table at an increasing rate.
When life expectancy hits 100, with 25 years of schooling (say) and retiring at 65, that leaves 60% of it fishing on a secluded beach. Might then people concede, “this won’t work”? It is so patently obvious that, as a consequence of our longevity, working life will be extended.
So to be clear, superannuation is a sensible concept, but in its current form it will not work. If you absolutely have your heart set on retiring at 65 and you are a long way off (e.g. 40 years of potential policy manipulation in my case), then you should be taking care of yourself now.
Caveat emptor, my assumption is that robots ruling or controlling the earth is at least another two hundred years away.
Only means that the savings are reduced for the time being, since the government has taken no steps toward protecting this latest cut against inflation. Hell HECS and fuel excise tax are inflation adjusted, what about income tax?
I think the super surcharge elimination could have a more profound effect, as baby boomers close to retirement might find this a better alternative. Particularly as confidence in RE falls.
But I see no real indications that negative gearing is going anywhere, for all the rhetoric.
Originally posted by The Mortgage Adviser:and I am not influenced by the media like it seems can so easily influence you.
Cough, paleez
Originally posted by The Mortgage Adviser:The ‘Northern Beaches’ is but a pimple on Sydney’s butt and I don’t think dmichie’s attendance at one or two auctions resulting in a 7% auction clearance rate could equate to a Sydney-wide Morgan Gallop pole.
Would take at bare minimum 14 properties to come to this number, not 1 to 2. That’s a small, but not insignificant sample size. If only one property in 14 sold, I would consider that an extremely negative harbinger.
N.B. I am not a dmichie alias, nor do I believe dmichie has any aliases. I think it might be taking things a little far, undermining a posters integrity. Doom and gloomers are people too [biggrin] and you might be surprised to find that negative opinions on the economy can be derived from logic and not simply pessimistic outlooks on life. Hell I even love Mondays [blush2]
US: top rate of 35% starting at $315K
I need to jump in here and explain how useless this statistic is, as it is often quoted. Fact is US pays FAR more tax than Australia. California holds closer to 1/4 than 1/5 of the US population and has state tax capping at over 10%. NY is > 7% above 100k.
Then there is the social security tax of 6.2%. A flat tax paid on ALL income, even the US equiv of the tax free threshold. But here is a great one, all moneys above ~80k are exempt. A sort of upside down tax bracket. Comon this is America, can’t have the rich pay for the poor!!! [baaa]
And even after that we still have roughly the same medicare cost 1.45%.
Finally, just because they figure they can get away with it, each state can charge additional income taxes. Again for California, there are two:
State Disability Insurance
State Unemployment Insurance
Which total to 1.08%It’s not as simple as adding these numbers together due to the social security payment cap, but if you were to, for California it is ~53%
and if you take social security out it is ~47%.An all inclusive example: on 58k (chosen because it is the current kick-in for 42% in Aus) Australia pays ~13k, the US 18k! Yes 5k more on just 58k. The myth that US pays less tax is busted
Of course if you live in Nevada or Alasksa you end up paying less, but you can guess the big industries in each of those (gambling, energy).Yup the Aus dollar is worth less, but many domestic goods and services (incl. rent) are nominally the same or cheaper.
My wife and I are returning, end of this year, and we will have far superior AUD savings ability on Australian salaries, paying Australian taxes. Alas we sacrifice our snow addiction [wacko]. But kids need grandparents.
And keep the thread up guys
I’m actually inclined towards dmichies opinions, but it is always valuable to read both sides.“Assume 10% per annum growth in property value, 2.5% inflation per annum”
So it is exceeding inflation by 7.5% pa. And seems to be roughly neutrally geared. Even with 5% cost in and 3% out, it’s a truly inflation beating proposition. Unless I totally missed something [eh]
Hahahahaha this is great slapstick [biggrin]
One point… there are bulls and there are bears. Do you think a property investment forum should only have bulls? The topics would be rather banal don’t you think? And a bear forum would be worse than dull, it would be down right depressing. So stop questioning peoples motives for posting, they have as much right to as you. If you want nothing more than rally cries, create a new forum. Call it http://www.propertydoublesevery7years.com. But last time I checked, this site was more generically named propertyinvesting.com
“Assume 10% per annum growth in property value”
If you make this assumption then the rest of the numbers barely matter (within sensible ranges) and the answer is yes.
An exceptional investor could possibly achieve this, with luck on their side. But why not use sensible numbers that the average investor will achieve.
Rough math: (capital gain-inflation)=7.5%, by “rule of 72” (yes it’s not a rule per se, but a linear approximation to the exponential), that is ~ 10 years to double. So in a decade houses will costs 12 times the average salary in Brisbane. BUT… at todays rates, the interest would exceed NET income.
The long term trend is for property to appreciate with inflation. So 2.5% might be a better number for this exercise.
Yeh yeh, I’ve got a sharp tongue, my bad, again, my wife keeps me in check [biggrin]. Now as for this investment, if you’re in the top tax bracket (let me run with 50% this time would ya [wink]) then the depreciation tax benefit equals the true capital loss. So the return becomes purely the gross 20%.
Now since this is gross, this value means nothing to me until I understand the costs to subtract to get the net. Unless, as with the other investment form, the only cost is tax. Either way the 24% remains superior.
One thing I’m still trying to determine is whether or not it is possible to geae into either of these investments?
Oh I just saw it was a private message so I have it now. But it still sounds like 2% per month is the upper limit and this only compounds at 12.72% NET on the assumption of 47%.
I am not overly familiar with these instruments, so I really cannot pick at your numbers without my own research [biggrin]. However I strongly doubt they are low risk. If they were low risk, the banks themselves would be clawing at eachother to beat you to these opportunities, in turn driving returns down. My mind sees red flags. But back to Majoh, who is obviously interested in +vely geared RE, does it remain your opinion that through this alone his goals are resonable?
It remains my opinion that his goal is reasonable in 20 years not 8.
Actually I do appologize, I have been a little rude. [mellow] But I am enjoying the discourse and I’ll try reign myself in a little. [cap] N.B. ~ is generally accepted to mean roughly. So I don’t think it was terribly irresponsible of me to approximate 47% (+ medicare) to 50%.
Now, the reason I focus on NET returns, is that you cannot compound gross returns. So the returns in order to achieve Majoh’s goal must be NET.
But, if this investment in its own right (no gearing) returns 24%, then the required net remains possible. However, why is it that you do not borrow to extend your position? Is it that the investment is high risk? How much risk is being taken on for this reward? In order to achieve this goal Majoh will need to have well over 100% of his money invested (i.e. geared), so sensibly the investment cannot be too extreme.
Additionally if it takes 200k to get in the door it will be at absolute least 3 years before Majoh could use this vehicle and yet he would still need to be receiving high 20’s net returns in the mean time. Which I suggest is unrealistic in +vely geared RE, let alone just about any investment.
The problem with high returns is they are ephemeral. If 24% is possible today, the flood of demand will return the returns. This is how bond markets work and I’m sure you know all this perfectly well. But what I don’t understand is how 24% returns can remain in a stable state. Just such a stable state as required to compound sufficiently and achieve this goal.
Finally I did not receive your email, if you could send it again I would be very appreciative. I will keep an eye out for it. I have an exclusive filter and I must have deleted it from my junk mail accidentally. And if I get too cheeky, just slap me [biggrin] [blush2]. I usually need my wife around to keep me in check.
“You only have to account for tax.” Only!!? Top marginal rate is ~50%, there goes half your return. 12% takes 6.1 years to double as opposed to 3.2 at 24%. I think it is valid to assume all +ve cash income is taxed at this rate given the savings potential of Majoh.
Secondly, you say the “investment you have outlined” exhibits the phenomenal returns Majoh3 would require, such that his goal is reasonable. But Majoh3 quite clearly plans to purchase cheap +vely geared properties. So his goals are unrealistic unless they borrow 80-90% against the investment you allude to.
Finally, please refer to the following link:
http://www.fido.gov.au/fido/fido.nsf/byid/A9F432CE4F18EA71CA256BB20024FBD6?opendocument
and perform a text search for the word “unrealistic”. You will find, “In today’s market, ASIC suggests that more than 15% per year should flash warning signs.” FIDO is a branch of the Australian Securities and Investments Commission. So with a 24% return, before gearing, I question the accuracy of your math.It is a disservice to inappropriately distort investor expectations.
Hehehe, np man, hey you’re up late [blink]. It’s 10:45am here.
Back on topic. 3k gross is not 3k earnings. Earnings are after costs. +ve cash must be post-costs. If you’re talking pre-costs, everything is positive, by taking interest as a cost.
The discussion point is whether majoh’s returns are realistic. We have established that your return, which I consider exception is ~24% before costs and tax. So then would you agree majoh’s expectations are unrealistic? This is all I aim to prove. And when I say unrealistic I mean to the point of delusion. [strum]
Also… 200k, can I guess at taxi plates? Do you not borrow, because loans are not available for the asset class? Or are these relatively normal RE investments? I’m interested in expanding my knowledge and options. [blush2] Oh and do these assets have capital appreciation? I would assume on average with inflation, but just checking. Ta
You paid 650k for assets that currently return >150k? Or you have assets currently valued at 650k returning >150k? There is a big difference.
If you paid 650k pre-boom, for assets now valued at twice that, then this is half the return.
But if you have assets at today’s value worth 650k, i.e. anyone here could pick them up for 650k (+ expenses) and get 24% without borrowing anything, then you have found the holy grail of investment vehicles.
I suggest one of the following is possible:
a) Your math is wrong, i.e. the 650k is what you paid, not the appreciated value of the assets. Or you are talking gross returns and your nets are half.
b) You truly have found exceptional investments, but, but then by the precise definition of “exceptional”, they are exceptions to the norm and our intrepid beginner investor will not have a chance of replicating their performance.
c) This is an infomercial, soon to be investigated by ASIC.Finally, if 650k could return 150k before gearing, and someone has 65k, they could borrow 320k at the cost of say 25.6k (conservative) and return 75k, or ~50k after loan costs. So now anyone with 65k saved can retire well above the pension. If you are to say that your assets are exceptions, then you are also suggesting that majoh really has no chance of seeing the required returns, which was my point. Also, if that 3k is truly +ve you’ll be losing so much to tax, you’ll be compounding far below the 24% you claim.
Now I’ll bite my tongue. [blush2]
Actually my previous calculation was based on 20k per year. My fopar, but here is the “in a vacuum” math, corrected for 25k pa.
0.28*(30000*1.28^8 + 25000*(1.28^7-1)/0.28)
= $176kSo the exclusion of taxes and expenses and the fact that this assumes no difference between rent and capital appreciation makes this the most conservative scenario I can imagine.
Now as for your scenario where you earn 150k on 650k. This is possible at, for example, 10% gearing, 7% loan cost, 8.5% return after costs. So if you are able to find 8.5% returns after cost in todays market you are an excellent investor and I do mean that!. But unfortunately, that is only 22% return on your money and falls a long way short of getting majoh3 to their goal. Remember all that +ve cash flow is also income taxable!
Before costs and taxes and if majoh3 were to truly live off the passive income, i.e. rent alone and not draw down on equity to make the 3k goal… that 28% would certainly reach into the 30%’s.
I feel compelled to point this out. [blush2] Are you aware that your goal passive income requires ~28% per year compounding on your money? I think you will need to leverage your first born to pull this off. I say why stop there, if you leave your money compounding, you needn’t even contribute beyond the 8 years and you’ll break 10 BILLION ~40 years later. [lmao]
At that rate I can retire by 30.
Of course if you live in Nevada or Alasksa you end up paying less, but you can guess the big industries in each of those (gambling, energy).
