- Originally posted by Moosehead:
I sincerely hope we never have another recession.
It’s the economy, silly… There is no ‘good’ and ‘bad’ in economics, there just ‘is’. And recession is just part of the normal business cycle. Hoping against a recession is fairly futile. Expecting and preparing for an economic contraction to compensate for a decade of massive excesses however, may prove prudent.
Here’s some reading for you:
investopedia.com
Definition of the business cycle, with useful links.
Mises.org
Particularly CHAPTER 11—MONEY AND ITS PURCHASING POWERCheers, F.[cowboy2]
<edit> One more point:
When a bank has a mortgage over your property you don’t own it?I believe that’s quite correct. Here’ s what Murdoch Uni’s Journal of law has to say:
The essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in property, with a provision for redemption, i.e. upon repayment of a loan or the performance of some other obligation, the conveyance shall become void or the interest shall be reconveyed.Sure sounds like the bank legally owns your house (or a proportion of it) up to the point when you’ve paid the last cent…
LinkWell thanks for economics lesson F
but I do appreciate the cyclic nature of economies and the somewhat inevitable process of growth & contraction. But to go as far to say that all debt is bad and borrowing against property is stupid, is where I disagree.Edit (in reply to your edit…)
With regards ownership. I’m no lawyer and have no intention searching for a reference that interprets mortgage law differently (and I’m quietely confident I could find a lawyer that would, given aruing is what they do right?) I agree the bank has a legal right to repossess or dispose of a property it has mortgage over, but only if the borrower defaults on the loan contract, or certain other conditions are met. That, to me, does not define ownership. It is still your name on the title, and you are free to use it as you decide. And, most importantly, you are free to use it as security with another lender, to leverage your assets more effectively and hopefully, create wealth faster!G’day all,
Wow, Moosehead. Talk about a young bull in a china shop.
Slow down. Take off the boxing gloves.
Mate, you come on strong.
Now, first to the banks. The mortgage is owned by the bank until the last dollar and cent have been paid.The banks name appears on the first page of your mortgage. In my case my name (trust) does not. So they’re the owners.
The bank can require you to repay in full, all outstanding monies when ever it suits them. You actually sign on the bottom of this page as this is acceptable.
So the fact is, you don’t own your home while there is a mortgage covering it.
The word mortgage is french and MORT part means ” to the grave”.As for lawyers ( I’ve been sued a few times) so i know one or two.
The ones I know would pennies off a dead man. They will represent you in court for any reason, if you’ve got the dollars!As for anti- borrowing for investing. NOT me. I love borrowing for my “wants”.
I just don’t believe you should be using the equity in your home.
when I started out investing, i used the best case senario and then the worst case senario.
I use trusts. One for residentual property. One for industrial property. Three for my business.
Each of my kids (two) have their own trusts. Paid by me. All contents paid by me.
Before you do anything make certain you are protected legally and financially. Un-doing your mistakes is very very costly.Dazzling,when I read your learned writings, I get the feeling that you and your little group of investors are looking for more members.
Is this my imagination?bruham.
I’m a member of this younger generation who have only seen the upside of things, but I actually think in a way we are actually doing it tough compared to the last few generations.
Sure.. luxuries are very very cheap compared to what they used to be just a few years ago, but guess what? The necessaties such as housing are more expensive.
Look at things like the fertility rate and the delay and decline of home ownership. What does this tell you? Is this really the picture you would expect from a generation who have it too easy? It seems to me that to get a start and accumulating wealth is just not as easy is it once was.
I’ll cite a few factors that worked against us :
– Asset price inflation waaaay ahead of wages , particulary property
– Continued casualisation of the workforce. Fewer “permanent” jobs – leads to higher risk for the same sized debt.
– Qualification inflation. Degrees etc, don’t carry as much weight as they used to. More qualifications are required to get the same job, and is cost the individual more to get that qualification. Means more years studying less time earning. More debt (hecs).I’m sure its tempting to to think that the reason for delayed or reduced accumultion of wealth is because of blowing our dosh on consumer electronics and cars with easy credit but think about it this way; you could buy a plasma TV, digital camera, ipod and DVD player and still have change for around out the cost of a SINGLE MONTHS mortgage repayment on a median house.
Personally I hate cars, consumer electronics and widgets. All my clothes and furniture come from op shops. I only buy food and undies new.
But still there just ain’t no dilapadated 2 bedroom weatherboard within commuting distance from work for us to get started on (and then get double digit growth for doing sweet FA). Not for under 6 or 8 times the median income…
Hi all,I just joined this forum.
I wonder if someone could help me with my query? It’s not your usual property Q.Any way here goes.
I am thinking of buying a caravan + fixed annex in a caravan park to rent out (that’s all I can afford)
Is it something that I can look forward to in terms of equity like dwellings or is it a no go zone in properyt investing?
Any help is appreciated.
thanksWe just enjoy people spending big on plasma TV, home entertainment, going out on dinners, spending money on new cars and mag wheels. Fantastic stuff. Most of them will need to rent our properties a lot longer than they intend. The ‘now generation’ is great for us who have considered tommorrow and don’t want to be working then. Just managing out little IP portfolios, doing a little bit of maintenance here and there, tax deduction for the inspection and works thereon. Keep ’em speding I says.
Originally posted by brucemarg:Most of them will need to rent our properties a lot longer than they intend. The ‘now generation’ is great for us who have considered tommorrow and don’t want to be working then.
Just who are you lumping into this “generation”? And are the responsible, debt-conscious, youngsters (see splosh’s post above) really going to be happy supporting your generation when the burden of debt is crushing their hopes of a comfortable, self-funded retirement? Remember, the baby-boomers are only going to remain in control of this country’s policies for so long, then you’ll have to face the embittered “younger generation” who have been priced out of owning their own homes, forced to delay having a family, taxed highly to pay for the older generation’s welfare and healthcare, etc, etc…
Don’t be smug. Good luck with the near-certain 2 or 3 interest rate rises before Christmas. It may give you a taste of things to come.
F.[cowboy2]Originally posted by foundation:Originally posted by brucemarg:Most of them will need to rent our properties a lot longer than they intend. The ‘now generation’ is great for us who have considered tommorrow and don’t want to be working then.
Just who are you lumping into this “generation”? And are the responsible, debt-conscious, youngsters (see splosh’s post above) really going to be happy supporting your generation when the burden of debt is crushing their hopes of a comfortable, self-funded retirement? Remember, the baby-boomers are only going to remain in control of this country’s policies for so long, then you’ll have to face the embittered “younger generation” who have been priced out of owning their own homes, forced to delay having a family, taxed highly to pay for the older generation’s welfare and healthcare, etc, etc…
Don’t be smug… Good luck…
F.[cowboy2]Indeed, the young may be long on ipods and short on big ticket non-productive assets; but they are long on something else: education.
Every weekend, in the backyards of rental properties around the country, sitting around makeshift barbies, are young qualifed professionals (a typical saturday arvo at my place might include laywers, doctors, engineers, economists, statisticans, mathematicians, and a housing policy officer), and they are deciding the future policies of this country…
Originally posted by foundation:
Don’t be smug. Good luck with the near-certain 2 or 3 interest rate rises before Christmas. It may give you a taste of things to come.
F.[cowboy2]Bang! 5.75%
One down, two (?) to go…Hey Bruham,
Sorry if I came off a little strong, I guess I was venting a bit of transferred frustration built up from my encounters with the naysayers I have encountered since becoming a property investor
Didn’t realise you were only against borrowing against your own home. Not something I can really comment as I’m a renter (employer pays healthy subsidy).
Suprised to hear you borrow for your wants? Do you mean, personal loans etc for toys? More sacrilige!! (kidding)
g’day moosehead,
It’s good to have lots of passion.
You’ll need every bit of as you get older.
Keep it going.Yes I have “good” debts (lots) and one “bad” debt.
The bad debt is a continuing debt. As soon as I pay it off ,I borrow it again. It’s limit is fifteen thousand dollars. It’s used for my home renovations.
This way my house is always kept up to date.My “wants” is about being able to do what i “want” without having to check the bank balance to see if i can afford the “want’.
The “want” list contains property investments, shares, managed funds. Superannuation funds, taxi plates.
And last my business. I run a fleet of twelve taxis.As for your frustrations, i have the same ones. Bloody things !!!
Brenda Irwin,
Filling up my seven year old ex- taxi. It took forty dollars (LPG).
The fellow next to me was filling his four wheel- drive that cost him one hundred and eighty dollars. When i asked him how long between refills he said ten days.
Now that’s pain.bruham.
Doing it tough? No not really. In fact I have to say that 2005/06 has been the best 18mths of my adult life both personally and financially (both intrinsically linked). My partner and I are now starting to reap the rewards of a plan that has been over a decade in the making starting with when we moved from Qld to WA to make a new start. We both became adult students, got our qualifications, got better more highly paid jobs, managed our careers, bought our first home, built our equity, upgraded to a larger home and started a family. We now have two beautiful children and I’m back at work 30-35 hours a week after 5 odd years of irregular, part-time income. We own our 4WD, campertrailer, boat, have sustantial equity in our PPOR, have 2 IP’s and a growing superfund. We are able to enjoy the fruits of our labour guilt free because at the same time we balance our spending with investing activities and are steadily building a nest egg for our family. Last year we took an extended family holiday (8 wks) which was the culmination of many years of dreaming. We have 4 weeks holiday every year (cheap camping holidays but we love it). Because we find it too expensive to pay babysitters we prefer to do something that involves the kids so our family treat is lunch on the weekend ($25) and that is about all we spend on entertainment. We don’t have the widescreen TV, don’t exchange extravagant gifts and only bought our first DVD last year ($80). I don’t have much in the way of jewellery, applicances, clothes etc and apart from the grocery shopping you won’t find me hanging around the shops. We buy strictly on a “as needed” basis. We’ve never entered an interest free purchasing arrangement, bought our fridge 2nd hand when the 26 year old one packed up. And yes, we watch every penny.
So I guess my message is this – decide what you really want in life and then make a plan and stick to it. Eg. If you’re a young couple who want to have children, plan for the financial effect in advance and don’t overcommit on a huge mortgage. If you want more than you can afford either revise your list of wants or figure out some way of making it affordable without resorting to oppressive, option limiting high levels of consumer debt. But just make a plan – there’ll be hiccups along the way but there’ll also be unexpected bonus and best of all is the satisfaction of achieving your dreams.
Flatout
Thanks for that flatout,
That was very inspiring. Seriously. In terms of goal setting and seeing a long term plan come to fruition.
I can only hope that our plans flows as smoothly as yours did.
We (my partner and I) are planning on having a family in about 4yrs time, and we have agreed for this to happen, we wish to replace her income with passive income from investments. We have only taken the first few footsteps along the path, and we know there will be lots of potholes along they way (like this new rate rise [comp]! Oh well, we budheted for it anyway…), but we can take some inspiration from your success.Thanks and best wishes
Originally posted by Chris.R_WA:Thanks for that flatout,
That was very inspiring. Seriously. In terms of goal setting and seeing a long term plan come to fruition.
I can only hope that our plans flows as smoothly as yours did.
Chris.R
Pleased to help…but no, it hasn’t been smooth sailing. We’ve had setbacks along the way including a health scare that near crippled us financially, unexpected job losses and a child who at age 5 has already undergone 6 surgeries and another to go. But we’ve also had some good fortune such as the WA property boom. But if you’re committed to your goals when bad times hit you just pick yourself up, dust yourself off and keep going and then you’ll be able to create opportunities and take advantage of them when they come along.
I think the problem with a lot of people is getting sidetracked. For instance when we wanted to buy our first home, we were gobsmacked at how much money the banks would lend us – certainly enough to buy a fancy home in a prestigious suburb (for our area anyway [blush2]. It could have been very easy to throw common sense away and go for it but the huge mortgage would have put paid to any plans of starting a family , holidays and no way could we have afforded to invest as we have. I’d be lying if I said we weren’t tempted for about 2.5 seconds [ohno]
Sometimes lately hubby and I have had to pinch ourselves and say “can you believe…” It still seems almost surreal to actually take stock and realise that we are now at that far off place that dreamed about so long ago. We are now setting new goals and making new plans – the things we didn’t dare even dream about way back when are now on the agenda. PPOR paid off in next 2 yrs, 5 or 6 investment properties, a share portfolio and the 28 ft sports cruiser is looking “do-able” [thumbsupanim]
Flatout
An updated look at 'good' debt.
foundation wrote:Case Study – Max and Penelope (not their real names)
Age: Mid 50s
Income: 60k + 15kInvestments:
PPOR – valued at 350k in 2003, based on uniqueness. Unfortunately it is so unique, they would be very lucky to now find a buyer at 220-240k.
IPS – 120k (70k 2001), 110k (70k 2002), 100k (98k 2004), 175k (180k 2006)
Super – 120k!!Thanks to the generous valuation of their PPOR mid-boom, they were able to not only borrow 100%, but also capitalised some costs. The IP vals are from mid 2005. Their situation as of today is:
Total realistic value: 680-720k
Total Debt: 445k
Income: 105k
Expenses: 35kTheir portfolio is 'cashflow neutral'… or so they believe. The interest-only payments are almost covered by rent minus PM costs, but they are paying insurance and rates and property tax out of their income. The country town they have bought in currently has a rental shortage, and all properties have been fully tenanted. Max and Penelope are committed to funding their retirement through these property investments, and adding another 2 or 3 over the next 5 years before leaving full-time work. Their faith in their process is so strong that they are not saving cash (outside of super) despite living quite frugally (except for the drain of their leech-children).
So how are things going to look in 5 years?
Scenario 1) Best case – House prices appreciate 7% pa, steady interest rates, fully tenanted, rents increase 4% pa
Value: 950 – 1000k
Debt: 445k
Income: 37k
Expenses: 35k (plus any increases in rates, insurance, tax etc)Scenario 2) Worst case (?) – House prices appreciate -4% pa, interest rates rise to 7.5%, 20% vacancy, rents steady.
Value: 555 – 587k
Debt: 445k
Income: 24k
Expenses: 45k (plus any increases in rates, insurance, tax etc)Scenario 3) Half Way – House prices appreciate 1.5% pa, interest rates rise to 6.5%, 2% vacancy, rents increase 2% pa
Value: 732 – 775k
Debt: 445k
Income: 32k
Expenses: 41k (plus any increases in rates, insurance, tax etc)Entirely simplistic, I know. I did not even bother to mention a recession, or a credit tightening.
Ok, so here's where I'll put my credibility on the line and I know and accept that many of you will laugh out loud. I think that in 5 years time Max and Penelope will realise that they would have been better off selling their first 2 IPs in 2004, paying CGT, and investing the 55k odd they had left in a 6% no-frills saving account. It will by 2011 be reaping a massive $4400 per year in interest. Sure, in the 'Best case' scenario they have half a million dollars of equity to draw from, but more than half of this is their PPOR, and another large chunk will be untouchable without a huge mortgage insurance bill. Oh, and of course this is a PIE IN THE SKY scenario. The likelihood of this occurring as opposed to not occurring is minute, and certainly not worth the risk premium. In fact, if you go through the figures, they would only be marginally better off!
Obviously, Scenario 2 sees this couple in financial ruin. 'Nuff said…
Scenario 3 (which I see as quite plausible) doesn't look like a rosy retirement to me. There's a bit of equity there, but what bank will let them 'withdraw it'… as in TAKE ON ADDITIONAL DEBT when they're retiring? Perhaps, but they're also now CF-. They could sell their portfolio, but of course that would trigger CGT, and sales costs and… oh dear, they'd come out with around about… zip, zilch, nada, nothing. A bit of creative accounting may net them a positive return, but it will not be anywhere near what that cash in the bank has compounded to! Not to mention all the money they will have wasted on rates, insurance and property taxes over those 7 years…
Sure, there are plenty of other ways to invest in property, just as there are other ways to make, store, invest and compound money, but the above scenario is real and it has and is being replicated around the country.
Rant over. F.[cowboy2] * I reserve the right to amend any dodgy numbers from this post[mellow]
Just thought I'd post an update on 'Max and Penelope's' situation. IP2 which was valued at $110k at the time of writing has now been on the market (and vacant) for 10 months at a lower price. It has been 'sold' but the sale fell through. No offers for months, now priced at $95,000. They can't go lower because they'll only just break-even at that price (having used $25k to fund subsequent purchases). 'Max' told me recently that the house purchased for $180k last year is still "worth less than we paid for it… much less".
Both Max and Penelope are trying to make extra dollars to turn their situation around. One is considering a higher-paid job. They still hope to retire "in a few years". They still hope that house prices really do double every seven to ten years. No, that's not quite right. They still believe it, but sound a little less certain and a little more hopeful.
So far, they're sinking below what I called the "worst case scenario" on an annualised basis. Prices have declined, interest rates increased, council rates increased, the rental void has removed some of their income and 'cashflow neutral' has turned heavily negative (by $480 f/n).
A couple of thoughts:
* 'Good debt' can cause every bit as much harm as 'bad' debt. Debt is, after all… debt.
* Even properties that 'cashflow' aren't always good buys.
* 'Max and Penelope' did everything right, made very good capital gains, but then kept doubling down and doubling down until stagnation (which in hindsight was inevitable) hit their buying areas. Like taking all their winnings from a lucky streak in poker and 'investing' them until they were dealt an inevitable bad hand.Cheers, F. [cowboy2]
Heh, good to see this post again, a little trip down memory lane from last year!
F –
Every post I see from you just makes me more hungry to know, what strategy do you advocate to acheive financial freedom, and how is it going?In response to your Max & Penelope story, here's one of moosehead's. Oops used his real name… doh.
2003
Age 23
Income 50k pa
IP purchased $187 000 rented at $190 pw2007
Income 72k
IP sold $263 000, was renting for $250pwPrice growth roughly 10% compound pa, rental growth similar
Plan to buy two IPs with sale proceeds at highest LVR I can get on IO terms…
Moosehead wrote:Every post I see from you just makes me more hungry to know, what strategy do you advocate to acheive financial freedom, and how is it going?I don't advocate anything for others, save for something along the lines of “choose your own path, tread carefully, make sure you know where you’re going and question the motives and advice of anybody who proffers directions”. Which makes for kind of a circular argument… Hmm, maybe “question everything and be sure you’re always learning something new…” instead?
As for my own situation, I’m really in a win-win situation. Asset-satisfied with two homes (town home and beach shack), cash-sufficient (well over a years worth), and debt-poor. And a stimulating ‘Just-Over-Broke’ that pays well (above average), provides enormous scope for personal, educational and intellectual development, involves serious adventure and travel while being as stable and guaranteed as can be (dare I say recession-proof?)! Lucky? I think so. Or perhaps it’s just my mindset? I’ve known several others who hated this job! Shrug.
If house prices double over the coming years or decade (or as some promise, every seven to ten years forever), I’m laughing. If not, I’m laughing. Should they fall, I’m laughing. If interest rates rise over the next few years, ditto. Should they fall… I don’t care. If share prices ramp up dramatically (I’m 100% sidelined currently), don’t care. If they fall, I’ll look for bargains. Precious metals shoot for the moon, I’ll be minted, if they don’t, I’ve got a bunch of pretty, shiny, trinkets.
This is what financial freedom means to me. The freedom to choose whether to continue doing what I’m doing or chase a different goal. The freedom that comes from knowing there isn’t a big bad bank waiting to snatch everything I’ve worked for if I miss a loan payment. The freedom to only give a damn if I feel like it. Sure, others may consider me dependent on continuous income; after all, I’ll starve if I don’t work for a year and a half (two at a pinch). I’d argue that the slavish pursuit of leverage in the hope of ‘financial freedom’ at some dreamy point in the distant future actually leaves them less independent during the best years of their life!
The indebted masses (generalisation – apologies) can’t afford to rock the boat. Gotta keep on going. I can walk away to pursue a dream any time I like. If it doesn’t work out in a year or two, I can come back. Meanwhile, until I find or need that dream I’ll keep socking away 1 additional year’s worth of what I call ‘financial freedom’ every 2 to 2.5 years I work at my J-O-B. And if it comes to the crunch, my financial requirements are so slim (thanks to my debt-free philosophy) that I could survive quite comfortably on a couple of days a week farmhand or labourer’s wages.
To me, Freedom = Zero debt.
Cheers, F. [cowboy2]
Plenty to be said for downsizing living requirements, from a personal wellbeing, financial wellbeing and environmental wellbeing perspective too. That’s another topic though.
Agree with foundation, , Freedom = ZERO debt. Too many play to close, how many people you know who say “I own 3 houses”, they do not, bank own them. How many say “ I have new BMW”, they don’t, they just kidding themselves, finance company own it.
The company I work for has owner with mind set like foundation. In last 15 years some of our opposition went down as industry fluctuated and they had no money to support the Business. Same story, new cars on lease, bank loans, renting buildings … and so on. But we survive and grown as we could sustain 2 years of low profit seasons we had no loans, business OWN everything. So our expenses where minimal.
It is all about your financial exposure and how defensive is your strategy. History indicates that you got to be careful, debt is your enemy. Take every opportunity to keep it down, always consider “worse case scenario” but be positive!
Just thinking aloud here… no offense meant
Brenda Irwin wrote:I am coming around to the thinking that we need a recession. Is anyone doing it tough nowadays with credit so easily available? Pay TV, plasma TV's, laptops, digital camera's, DVD's etc now seem to be the norm whereas once they were prized as affluent things which we could only dream about. When we drive along the motorway in our 16yr old Corolla, we seem to be the only ones who don't have a big new 4WD. In the newspaper today, someone going to auction with a staggering $800k limit to buy a house in Brisbane, ended up blowing out their budget and payed out $960,000! Am I missing something here, or has money lost all its value nowadays. Is any one doing it tough? If you want to get out of a hole, first stop digging.There was a report on tv over here not long ago that said that there were people on $250k per year incomes who were going bankrupt, having their homes foreclosed and generally not making ends meet.
Brenda, you have not missed anything from my perspective. Stick to the game plan and don't get distracted by the others.
We do it "tough" from the point of view that we don't buy anything on credit anymore and have no personal debt anymore. Self imposed consumer starvation and happy to do it. We still have nice things and live a nice life, but don't work our guts out to obtain them.
We still use the credit card (to build up frequent flier points) but pay the balance off every month, we own our cars.
We can easily wait up to 2 years to buy the "latest" technological advance for around half the price, and earn some more airfares into the bargain.I haven't bought a W.I.I yet; it's killing me (not). Maybe next year….after we buy another I.P
We have freed ourselves of the "keeping up with the Joneses" mentality long ago, and shake our heads and laugh as we drive along side the new Beamers and Mercs etc.
The good news is that doing it tough for a while has allowed us to now do it easy. We no longer have to work to service consumer debt; car loans, credit/store cards, label clothes ra, ra, ra.
F. – my next question is then, why participate in a property investing forum, when you are in essense idealogically opposed to the idea? You say you don't advocate anything for others, I find that quite a comical statement given your quite prolific promotion of anti-debt theories here. If you are trully happy with your own life and choices, I don't think you would feel the need to come here and tell people they are wrong.
To me your situation sounds much the same as the indebted masses you deride. You have 1-2 years cash saved up… so what? Most people would have the same if they sold their assets tomorrow, as is their option. What happens if you're injured and can't work? What happens if you wish to start a family and provide for a wife and child? How is your 1-2 years cash looking now? And good thing you like your job – you would want to, given you have to keep working at it (or one similar) for the rest of your natural life, to survive. Freedom, I think not.
On the idea of 'the bank owns your house' …
Yes legally they do, but you get to use it, and you profit from it's appreciation. Sounds like a pretty good deal to me. You don't need to own and asset to benefit from it, merely control it. Same goes for other items – cars, TVs etc… I would suggest most of the satisfaction is in the USE not the OWNING. If I was driving around in nice car I think I would prefer to know that it was leased, and my capital was invested somewhere else with a better prospect for growth. Yeah, the finance company technically owns the car – and good thing too, they're usually bad investments…
but I do appreciate the cyclic nature of economies and the somewhat inevitable process of growth & contraction. But to go as far to say that all debt is bad and borrowing against property is stupid, is where I disagree.
) I agree the bank has a legal right to repossess or dispose of a property it has mortgage over, but only if the borrower defaults on the loan contract, or certain other conditions are met. That, to me, does not define ownership. It is still your name on the title, and you are free to use it as you decide. And, most importantly, you are free to use it as security with another lender, to leverage your assets more effectively and hopefully, create wealth faster!
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