Please help another NooB with a “should I jump now†question…
My question is: Should I wait before I start executing my plan?
Current Situation:
Existing Investments: $100K (unencumbered acreage at Bundaberg QLD)
PPOR Equity: $670K (Value $850K, owe $180K)
Disposable Income: $3,500 pm (currently going as additional payment off PPOR mortgage at 6.5% var P&I)Goal: Build an unencumbered investment base of $2-3M to retire on in 15 years time.
Plan: Execute an REI strategy of buy and hold properties for capital gain, servicing mortgages through +ve gearing and using disposable income for marginal –ve gearing where capital gain justifies purchase.Note, I do not include my PPOR in my investment base as I consider this a liability and not an asset since it takes money out of my pocket and doesn’t put money in my pocket. So, even though I have equity of $750K I actually have only $100K in current investments.
My concern is that the market is softening and according to some analysts will stay soft until 2007/8 when it will start a gradual recovery. I work in the building industry so have access to a lot of market information on housing starts etc. So, if the market is soft and my capital gain is down, shouldn’t I clear the mortgage on my PPOR at 6.5%?
If I can do better than 6.5%, then pure mathematics suggests I should start executing my plan now and build a team of mortgage broker, accountant, solicitor etc. I believe I have significant borrowing power given combined incomes of $175K, and $770K of net asset worth. Borrowing power equals leverage so I should be able to leverage a large investment base for capital growth.
Sorry for the long post, but I’ve read a lot of other posts in the forums where the knowledgeable members request further information from the NooBs like me.
Any and all help gratefully appreciated,
Michael (REI NooB)
PS, resiwealth, feel free not to answer if this post fits your “repetitive question†category… [biggrin]
PPS I have done my homework prior to posting, reading up extensively on Kiyosaki and Burley and others, not to mention a plethora of forum posts…
personally I’d clear the mortgage, so you can replace bad debt with good debt when you re-use the funds for investment. I wouldn’t be in a hurry chasing quick CG in this market. Patience is the key.
What’s the zoning on your acreage near Bundy? Can you develop it in any way? I’d perhaps look at utilising that for cashflow if possible, maybe subdivide, sell some and keep some to build on and raise some capital/create cashflow…
cheers
rHi Michael
I agree with richmond. Clear your mortgage first as it is costing you. You will find it much easier then to move on with your other plans when you PPOR is unencumbered.Richmond and Calder,
Thanks!
I thought clearing the debt on my PPOR was the way to go and that’s the plan I’m executing right now. At current repayment rates I’ll be debt free in mid-2007 (2.5years). At that point I think the market will still be soft, and I’ll be well positioned to buy in before an imminent recovery. We’ll also have around $800K to $900K in equity and solid cash flow.
Richmond, we own 40 acres of rural land at Bundaberg but not sure of the current zoning (my wife bought it before we met). It is currently agisted (sp?) for cattle so we make a little money on it. It has new fencing all around and permanent surface water. We have been thinking of building a house on it for around $100K and then renting the property. 3Bdr on similar acreage rent for around $300 a week so I think the $100K improvement would be a pretty smart idea. We’re going to hold on to it as its getting encroached upon by infrastructure. A few years back they put in a tarred road straight past the property and its on the electricity grid and water/sewerage now too.
Thanks again,
Michael.I think you’ll achieve your goals standing on your head.. sounds like you’ve already done very well and know where you’re headed.
Cheers
rOriginally posted by MichaelWhyte:I thought clearing the debt on my PPOR was the way to go and that’s the plan I’m executing right now.
Initially we were of the same thought processes Michael – but after much thought and investigation we decided to follow the ‘bit of both approach’.
I think it was Noel Whittakker who did some calculations that indiciated that once you get your loan within 6 years of being paid out – more aggresive loan repayments do not make a significant saving to the interest to be paid. suggested – apologies to Noel if the reference and figures are a little rubbery.
The critical point is what sort of interest savings are you going to make with your current approach?
Related to this is the question (which only you can answer) is what cost to your long term investments will there be if you are ‘out of the market’ for 2.5 years?
As a consequence of the answers we obtained, relevant to our situation, we followed the continue to pay the home off faster than the usual basic repayment regime and at the same time release equity for investments in our future.
Judicious investing shouldn’t be expensive – so prudent decision making on your part will see you accomplish both goals, albeit with the possibility of a slightly different time frame. Certainly in our case this is the case – we have a ~neutrally geared portfolio that has releasing significant equity towards our future.
It is possible to release your equity – just in case – without it costing you anything apart from the usual loan establishment costs. Who knows you may find a ‘steal’.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Michael,
Thanks for asking this question because my wife and I are in a similar position to you.
We spoke to a financial adviser at the start of the year who advised us to pay off the home loan first. The “guaranteed” after tax benefit (given that debt is not tax-deductible) of paying off the mortgage is quite high (interest rate / marginal tax rate?) so investment returns would have to be extraordinarily high to make it worthwhile putting the return “at risk”.
So for now we’ve sold off our other investments and are paying off the home loan as fast as possible (ETA mid-2006). I want to have a pool of money to draw on by 2007/2008 in case your prediction of a more attractive investment environment at that time is right!
It’s encouraging that more experienced investors endorsed your strategy, I thought perhaps people on an investment forum might be in favour of more aggressive strategies.
Originally posted by Derek:The critical point is what sort of interest savings are you going to make with your current approach?
Related to this is the question (which only you can answer) is what cost to your long term investments will there be if you are ‘out of the market’ for 2.5 years?
Derek,
These are exactly the two questions I was weighing up. Its a question of cost versus opportunity cost. That is, what cost I would incur in interest on the mortgage if I were to direct the money to investments instead of paying off the mortgage, versus what opportunity cost I would incur from not doing so. The opportunity cost is the potential return I could generate from investments.
My mortgage is on a standard variable rate of 6.5%, so for me to decide to direct funds elsewhere the investment would need to generate more than this to be a better place to direct my funds. In my first post i said “If I can do better than 6.5%, then pure mathematics suggests I should start executing my plan now”, and I guess this is the dilemma. Can I do better than my variable interest rate?
But it gets complicated by leverage. Obviously, I could put $20K down on a place worth $200K and it could appreciate 2% pa. If its cash flow neutral then this would be a $4K return, but on only $20K invested. So the actual return in simple terms is around 20% pa on the $20K. This is arguably much better than parking the $20K in the mortgage offset account to offset 6.5% interest on that amount.
I know the internal rate of return formula is more complex than my simple example above, but it paints the picture anyway. The simple question is one of projecting the market. Do I believe my investments will generate more than my (increasing) variable interest rate?
Smethem, my current analysis tends to agree with that given by your advisor and adopted by you. I am personally projecting an unfavourable REI market for the next few years and improving in around 2008, so see this as a good time to clear the debt on the PPOR and be well positioned to make a move when the market is ready to turn upwards again.
Thanks again everyone,
Michael.I know it is better to pay off your home loan asap, but i wouldn’t be too worried about doing it too fast at the exclusion of investing.
If it was me, I would borrow to invest first and use the extra cashflow to pay off the homeloan. eg. Something simple, if you could borrow another $100,000 secured on your home, invest this into something like a Eurofinance interest bearing securities at about 9%. You will make about 2% on your money which you could then plough back into your home loan. There are many ways you could even beat this.
Terryw
Discover Home Loans
Mortgage Broker
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
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TerryW,
Thanks. I guess its the “many ways” that I’m looking for. In my ignorance of these I have locked in a worst case of owning my home and being debt free in 2.5 years. If I can improve on this then I’d love to do so.
Any ideas of how I can find some info on the other options such as the Eurofinance securities. I’m time poor (as is everyone I guess) so I’m trying to learn as much as I can in the odd hour at work I steal from my boss. I’m paid a hefty salary so I really can’t steal too many of these. [biggrin]
Some details on the Eurofinance would even help me get started with a Plan B.
Thanks again,
Michael.Maybe this is a dumb question. But does Michael have to beat 6.5% (the interest rate on his mortgage) or 12.6% (the rate pre-tax assuming he’s in the top tax bracket and paying Medicare levy) given that money borrowed to purchase his PPOR is not tax-deductible?
Are you saying he can borrow money to buy fixed interest securities (f/ Eurofinance) using his PPOR as security and still claim the interest as a tax deduction?
howdy,
interest on money borrowed for investment is tax deductible
cheers
rthanks richmond, I realise that, but if your home is the security doesn’t that make it a loan for the purpose of buying a home? who determines what the money has been used for? is it as simple as redrawing on your home loan, investing the money elsewhere and deducting the interest on your tax return, or do you have to change your financing? I get the feeling that I’ve missed something important?
If you redraw your money from your home via redraw facility or line of credit, and use it for investing, then the interest on the loan is deductible… all you have to do is prove to the ATO what the money was used for.
Cheers
rOriginally posted by MichaelWhyte:
My concern is that the market is softening and according to some analysts will stay soft until 2007/8 when it will start a gradual recovery. I work in the building industry so have access to a lot of market information on housing starts etc. Michael (REI NooB) PPS I have done my homework prior to posting, reading up extensively on Kiyosaki and Burley and others, not to mention a plethora of forum posts.Hi Michael
Great post, and congrats on your determination.
For my money, I can’t for the life of me see why you’re prepared to wait so long when this magnificent country of ours doesn’t have one single property market, but rather a plethora of mini-markets, many of them at vastly different stages of their OWN, PERSONALISED PROPERTY CYCLES.
You’re clearly very professional and methodical in the way you go about things; all you need is a bit of “fine tuning” to make yourself into a real property tycoon. To this end, I’d urge you to set aside $5,000 – $10,000 for your personal professional development, and get yourself off to a few highly-regarded seminars / “boot camps”. I hate the term myself, but they REALLY DO WORK, and the networking contacts they bring into your life are awesome.
But back to your questions. I’m particularly interested in:
1. Your comments about TIMING
2. Your access to statistical information
3. Your breadth of PI readingHave you read Peter Spann’s “$10 Million Property Portfolio in just 10 Years?” (published 2004) or ever gone to one of his seminars? If “yes”, I’m thinking about Spann’s brilliant tips on how to PRACTICALLY APPLY Median Price Data to time your entry into the markets at the most advantageous point of a particular suburb’s cycle (Ch.13, pp56-66).
I was so impressed with this chapter, I even invented a “212” mnemonic to help me remember and apply it:
2 years + 1 year + 2 years = 5 year cycle
2 = 1st 2 years of cycle: RELATIVELY FLAT GROWTH
1 = 3year of cycle: STARTS MOVING UP
2 = 4th and 5th years: MAJOR GROWTH SPURT
ACTION/MORAL: Buy at the end of the 2nd year or early on in the 3rd year of the cycleSpann’s talking city suburban cycles here; I doubt it works so clearly in regional/rural towns, which are so sensitive to regional employment factors etc. Spann gives an example of suburbs which have risen ON AVERAGE 8% over a decade:
“You’ll see that property growth comes in spurts…. many suburbs follow this pattern: two years flat, one year up, two years jump, followed by a repeat – two years flat, one year up, two years jump. Let’s look at this suburb’s growth and plot it. The first year is coming off a flat period. Very frequently a big growth spurt will follow a flat period like this. Then the growth rate kicks up tp 7% in year 2. This is our warning of the growth spurt to follow. If we had bought then we would have picked up the natural growth of the next couple of years. Year 3 the growth is 16% and year 4 the growth is 20%. If we had bought a $100,000 property at the end of the SECOND year in the cycle, it would be worth $139,000 at the end of year 4, or a growth of just over 39% in 2 years. And this is all pure profit to us. The growth rate then stagnates for a couple of years – no problem, we just sit and wait – and then it moves up to 8% for year 8. This is our warning of the next big jump, and we see 14% and 21% over the next 2 years. That would mean our $100,000 property would now be worth $233,000. Pretty exciting! While you don’t have to be this precise in timing property to make money over the long term, it will shorten the time it takes for your property to double in value and it saves you buying before the stagnant years.”
Please forgive me if I come across as if I’m trying to teach you to suck eggs.
Cheers
GregGreg,
Thanks for the excellent post, and no you don’t come across as someone trying to teach me (or others reading) to suck eggs.
Funny you should mention bootcamp, as this is something on my radar and in fact I’ve spent a lot of time reading John Burley’s forum and others in the MasterMind forums. However, it is quite expensive and not something I would do until I was already a REI. Once I’ve read all the books I can and applied some of this by actually entering the investment market, then I’ll be in a better position to truly leverage an investment of that magnitude.
Thank you for the reference to Peter Spann’s “$10 Million Property Portfolio in just 10 Years?”. I haven’t read this book and it seems precisely the sort of specific information on how to select and invest in optimum properties that I’m looking for. To date my reading has been limited to the more generic authors such as Robert Kiyosaki’s “Rich Dad Poor Dad” and “Retire Young Retire Rich”, as well as John Burley’s “Money Secrets of the Rich”. John is a bit more specific with his Level 5 investor analogies, but still lacks the specifics I would like for investing in the local market.
I don’t have access to too much in the way of statistical projections, but I am the Demand Manager for one of Australia’s largest MDF businesses. This is a lead team role reporting to the Business Manager. Every month I sit with our Sales and Marketing business unit and review the strategic projections of demand. They present information on housing starts based on projections from BIS Shrapnel and others. We are projecting 160,000 starts next year which is pretty close to 2004, but then declining through ’06 and ’07 recovering in ’08. At the moment BIS Shrapnel is the most conservative of the projections and we are adopting a marginally more aggressive projection. We use housing starts as a key lead indicator of demand for our product.
Just to wrap up, are you suggesting that these micro markets are not subject to the dynamics of the macro Australian RE market? And, if I use targeted analysis at the micro level I might still spot an opportunity for an informed investment even in this nationally depressed market? That’s an interesting concept, and I must admit, I thought all of Australia would be subjected to the dynamics of increased interest rates and reduced sentiments.
Thanks again for your informative post,
Michael.
Originally posted by MichaelWhyte:
Greg, Funny you should mention bootcamp…. However, it is quite expensive and not something I would do until I was already a REI….A friend of mine spent approximately $25,000 going to Burley’s Bootcamp in USA a few years back. He says it was money very well spent, and who am I to question him on that one. Today he’s a very experienced multi-property wrapper. Myself, I’m more like you, Michael, than you might think…. I won’t be spending anything like $25,000, but I will be going to one of Rick Otten’s Boot Camps towards the end of next year with my JV partner who went to one this year. Apart from the information sharing, it’s all about the networking with the real achievers, not the talkers and/or people who’ve psyched themselves into analysis paralysis (that’s clearly not you, in case you were wondering) [biggrin]
Thank you for the reference to Peter Spann’s “$10 Million Property Portfolio in just 10 Years?”. I haven’t read this book and it seems precisely the sort of specific information on how to select and invest in optimum properties that I’m looking for.
Enjoy Peter’s book. I know you’ll devour it. I suspect you’ll also LOVE his tip about how to get a bank’s Panel Valuers working for YOU instead of your bank (amongst stacks of other juicy tidbits he has included in his book).
A good compromise re seminar affordability and effective networking might be for you to go to one of Peter Spann’s seminars (I believe he’s quite $$$ reasonable. His website is something like http://www.freemanfox.com.au If this link doesn’t work, do a google search, PLUS a search on this forum under “Peter Spann” for a long, mega-inspirational thread which ran from July 2004 – October 2004). I’ve never been to one of Peter’s seminars, but he’s DEFINATELY ON MY SHORT LIST. Let me know if and when you’ll be going, and I might be able to meet you there (depending on how sales are going in our rural subdivision). [cap]
I don’t have access to too much in the way of statistical projections, but I am the Demand Manager for one of Australia’s largest MDF businesses. This is a lead team role reporting to the Business Manager.
Okay, expose my ignorance publically, why don’t you Michael? [confused2] (Just joking, my ego can take it!) What the hell is MDF (is it something to do with Mortgage Finance?)Just to wrap up, are you suggesting that these micro markets are not subject to the dynamics of the macro Australian RE market?
Maybe, but it’s more to do with the evolution of my thinking / experience / growing expertise as an IP investor. One of the real secrets I’m in the process of still learning more about is that “full blown success” really does have EVERYTHING to do with your thought processes. When you use language like “the dynamics of the macro Australian RE market” this is a very impressive and precise use of technical terms, but you flirt with the possibility that you become mentally REACTIVE (ie., you start seeing yourself as a passive victim of market realities way beyond your control) rather than PROACTIVELY searching for, and then confidently applying, strategies which WILL GENERATE (albeit smaller in the down times) profits which are at least partially independent of market cycles.20 years ago, I was just one of the -ve gearing mugs who went for the good old fashioned “Buy and Holds” because I didn’t know any better. Boy, did I suffer: 16-17 years of negative gearing before the market paid me back!! Then I finally realised there are many, many alternative
a) Strategies…
b) Markets and…
c) Market segments…
out there. And even though I knew all other businesses buy wholesale and sell retail to make a profit, the penny only dropped a few short years ago that this applies to the Real Estate industry just like any other industry. What did this mean for me? That I, too, could start buying real estate WHOLESALE, instead of paying RETAIL price for it. So yes, Michael, I’m devouring all I can about wraps, flips, lease options etc from both Steve McKnight and Rick Otten’s Wrap Packs, but more significantly I’m getting into sub-divisions and will be applying all sorts of strategies along the way. The secret? To me, it’s the subtle sub-text in Steve McKnight’s motto: “Success comes from doing things differently.” My tip is to really chew on that one. There’s so much hiding in there that escapes most of our minds.And, if I use targeted analysis at the micro level I might still spot an opportunity for an informed investment even in this nationally depressed market? That’s an interesting concept, and I must admit, I thought all of Australia would be subjected to the dynamics of increased interest rates and reduced sentiments.
I offered you Peter Spann’s 212 mnemonic because I thought you’d relate to it as you’ve expressed above. However, in spite of your obvious professionalism, I suspect you’re still at least partially in the more traditional “Buy and Hold” thinking. Don’t get me wrong. I LOVE my buy and hold properties!!! After all, isn’t that what it’s all about? Increasing our net worth by owning tangible assets? Of course, but there are a few other important dynamics to this constantly moving equation. The key is the subtleity of our thinking, our mentality, our thought processes. You’re ruthlessly methodical and rational, Michael, and boy is that ever so refreshing!! My point is that there are 2 hemispheres in our brains, and it’s all about balancing both hemispheres and just “going for it”.
Hope I’m not being too vague or mystical [blush2][blush2]
Cheers
GregOriginally posted by Greg F:Quote:Originally posted by MichaelWhyte:
And, if I use targeted analysis at the micro level I might still spot an opportunity for an informed investment even in this nationally depressed market? That’s an interesting concept, and I must admit, I thought all of Australia would be subjected to the dynamics of increased interest rates and reduced sentiments.By the way, Michael, congratulations on your use of the adjective “informed” above. I LOVE that adjective!! [biggrin] One of my favourite sayings as a schoolteacher when I’m discussing controversial issues with my students is:
“Everyone has an opinion about everything, but how many people have ‘informed’ opinions?”If I can bring what I said above to a finely sharpened point, how about asking yourself one key, focus question:
“Can I see Peter Spann, Margaret Lomas, Jan Somers, Steve McKnight, Rick Otten and other RE guru’s doing NOTHING in real estate over the next couple of years?”I think you know what the answer to that one is. Why don’t you ask them? Try PMing Peter Spann direct.
That’s an interesting concept, and I must admit, I thought all of Australia would be subjected to the dynamics of increased interest rates and reduced sentiments.
Basically, I think your goal of $2 million-$3 million unencumbered so you can retire in 15 years is WAY too modest given your earning potential. I’m just a schoolteacher, and my 5 year plan involves hundreds of properties. Can I do it? Time will tell, but my amazing wife Niki and I are in the process of giving it a real shakeup.
I know you’re not one of those who say Steve McKnight and others were just lucky because they got their timing right. Peter Spann has an interesting story about getting started as a developer in a major recession. Why can’t you do the same given that you, more than many others, are in a position to focus on finely tuned market segments with a battery of proven strategies. It’s not rocket science, mate. [biggrin][buz2]
Cheers
GregGreg,
I’ve just got to say that I’m blown away by your support and assistance. It exceeds my wildest expectations of this forum.
A quick update…
I spoke to my wife last night and we have agreed to finally bight the bullet! She too is an amazing woman who has been instrumental in accelerating my personal development.
We’ve decided to enter the IP market with a very simple and low risk buy and hold strategy. We’ll look for a positive cash flow property in NZ at around the $50K mark. This won’t generate massive capital gains in the near term and the cash flow return probably won’t even beat our 6.5% mortgage, BUT it will deliver the following:
1. First and Foremost it will eliminate our procrastination.
2. I will get a Mortgage Broker on my team and know my true borrowing power.
3. I will have set up a trust.
4. I will have executed a strategy (albeit a small and conservative one) which will initiate my active learning process.So a big vote of thanks to all of you who’ve assisted me in getting to this point and I’ll definately post an outcome once I’ve executed. I know there are better strategies at present that a buy and hold for +ve cash flow in NZ, but its a start. Kay, my wife, also loves NZ and wants to move there one day so she’d love to start building a portfolio of properties in the land of the long white cloud.
I’ll continue to proactively search out other opportunities and mechanisms in the REI space. I’m going to read Peter Spann first and others to follow (Steve, you’re on my list too). I want to accelerate my plan to the hundreds of properties level, but I’ll never get there if I can’t even buy one!
I’ll be “off the net” today as I’m conducting an internal audit of our sales and marketing business so my posts will be limited so apologies in advance if I appear unresponsive. Greg, BTW, MDF = Medium Density Fibreboard. Its like Particleboard but is yellowish in colour and is made from wood fibres and not woodchip. Its used in many building applications including kitchens and cabinetry.
Thanks again to all who’ve assisted to date and watch this space…
Michael.
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