Property values drop by X%… So what?

Correct in that it doesn’t affect your Rental Yield.

HOwever, does affect you if you wish to sell or if you wish to use the property as security.

Because you have positive cashflow, it won’t make that much of a difference, however if you were negatively gearing it wouldn’t be good (as you are pretty much reliant on Capital Gains to make money).

Rgds.
Lucifer_au

The only concern would be if the reduction in property values is followed by a reduction in rents or a difficulty in finding a tenant (maybe no one wants to live in that area any more, hence the decrease in property value).

In this situation your position would obviously be affected (but not until your current lease expires), otherwise, as the others have said, a decrease in property values is a book reduction only and will only have an affect if/when you want to sell.

Clint

Nobleone

Don’t put this discussion to bed just yet. To me, the pivotal point is a spread of +ve cashflow (to help you survive and pass the bank’s servicibility test or DSR: Debt Servicing Ratio) with high growth but -ve CF (to keep giving you what Peter Spann calls “The Endless Deposit” for your future property purchases).

I guess it depends on:
1. How fast you want your portfolio to grow and
2. How big you want your portfolio to get.

There’s a lot more study needed on this question, Oh Noble One.[biggrin][buz2][cap]

Cheers
Greg

All of the above plus:

Say you borrow money from the bank to buy your property. Say you borrow a lot of money. Say you borrowed 95%
And there is a drop in prices of 15%.

Your property is now worth 85% of the original value paid, yet you owe the bank 95%.

If you think that is not a problem, think again.

May God prosper you always.[biggrin]
Marc

Hi Nobleone

Brilliantly done!!! 3 +CF properties in 5 months!! Excellent!! Now the hard work really begins. As long as you can keep the “Endless 20% deposits” coming, your portfolio will be rocket powered!

Have a look at Michael Whyte’s recent posts for an example of a newbie who’s clearly got his head screwed on. Why do I say that, when I’ve never met the guy?
1. Because of the quality of his posts, but more importantly…
2. …Because he’s taken the trouble to write down his goals.
All the guru’s recommend it; so few actually do it. Go figure [biggrin]

You’re obviously well read in IP literature, but how extensively have you networked with the real achievers? Been to any seminars? Put your money on the table to buy the classy kits which paint the more complete picture for you?

Here’s what I wrote to Michael, on a different issue, but I feel it’s relevant to you as well because you’re heading confidently down a solidly travelled path. And, like Michael, all you need is a bit of “fine tuning” to make yourself into a real property tycoon:
“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 reading

Have 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 cycle

Spann’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.”

My point, Nobleone, is to keep reading, refining your knowledge, adding to your bank of due diligence research websites, read Spann, Otton, McKnight, Somers, (her books as well as her brilliant forum at http://www.somersoft.com.au), Burley, and the countless, bullet-proofed professionals you’ll meet on these forum boards. Keep in touch, and when you’ve made it, or while you are well on your way to making it, give back, okay?

Cheers
Greg

Hi again Nobleone

Brilliantly done re your $2 company, trust, LOC, “go-get’em” attitude, research, involvement in mentoring group etc etc.

And again, please accept my apologies if anything I said above came across as trying to teach you to suck eggs.

There are a couple of mini-refinements I’d suggest re your intention to not buy anything for 18 months: “I like your “212” mnemonic, it’s very apt given that I believe the market is now at the beginning of the first 2 years stage”:
1. My summary of Peter Spann’s 212 strategy is very, very rough. Have you read Spann? Great stuff!! I’ve re-read his chapter on practically applying median price data many times to get the fuller picture.
2. I’m not one of those who intends to sit on my hands and not buy any properties for the next 18 months. Why? Because there are both
a) mini-markets and
b) mini/major market segments
which are still performing attractively. And if, like me, your 5 year plan involves giving up your job courtesy of IP incomes, 18 months out of a 5 year plan is a big chunk of precious, precious time.

One key secret I’ve picked up is that certain strategies are virtually guaranteed to make you a profit irrespective of the state of the market, or what stage of the market we’re at. And to optimise that realisation, another discipline I’m trying to adopt (and I keep “falling off the wagon” lots of times)is to refine my language whenever I’m tempted to talk about “the market” and replace it with phrases like “plethora of mini-markets”. Fussy, but important.

So my tip is to tweak your strategies, or move across into a different market segment, rather than sit quietly for the next 18 months.

Cheers
Greg

Hi Nobleone

You’re from Qld’s Sunshine Coast? Me too!! I’m from what is euphemistically called “Hinterland Sunshine Coast” [biggrin][bonjour][cap] and have some nice IPs in Mountain Creek, Mapleton, and Gympie.

Given that a large part of this journey is about networking, how about you pop over for afternoon tea sometime soon and “chew the cud” re RE strategies /opportunities?

Re “secrets”, you’ve already substantially answered your own question with what you said about thinking laterally and outside the box:
“I might have made a good start into IP’s but I still need people like yourself to give me reasons to think laterally and out of the box.”

Perhaps “secrets” is too strong a word, given that this forum is frequented by wrappers, flippers, lease-optioners, developers etc etc etc (from extremely experienced to relative newbies).

I’m a longtime fan of the subtle use of words to get across “hidden” and “not so hidden” truths:
“Success comes from doing things differently”

My tip is to REALLY chew on that one, because there’s a lot more wisdom and experience in there than meets the eyes of most people.

Looking forward to meeting up with you.

Cheers
Greg
PS: How was the beach? My wife Niki and I were out dancing and partying last night, so we’ve had a lovely “veg-out” day in front of the tele watching the Australian Open Golf.

Doh!

Now I wish I was on the Sunshine Coast too!!

Just reading this thread has given me a new injection of enthusiasm (and a little blush, Greg you are far too kind). [blush2]

What I have realised is that I’ve fallen a little behind in my readings. Off to the bookstore for me to pick up $10 Mill in 10 years for a start (Thanks Greg!). I was already also considering Steve’s books and Jan Somers too. Time to get specific!

I just have to say, to all of the successful and energetic REIs out there, thank you so much for your time and contributions on this forum. It certainly doesn’t go unnoticed by us NooBs.

Nobleone, care to share your NZ market secrets with an enthusiastic noobie? I’d love to invest in the land of the long white cload if I could yield positive cash flow. I’ve already got $50K in my mortgage offset account which I could draw down for a 20% deposit.

Regards and many thanks,
Michael.