Buy only +ve cashflow IPs says Mark Bouris

[Rolf Latham]

According to a story in todays Sunday Telegraph in Sydney..............

Wizard Home Loans head Mark Bouris has warned that using equity in a home to buy an investment property can backfire in a cooler market.

"A lot of people are caught out using home equity to buy a property off the plan that doesn't have the value they bought it for," Mr Bouris said.

"You borrow money only if it's going to give you a yield greater than the amount of interest you'll pay."


His comment makes sense to many in the current market, I do wonder how many Wizard Mortgages are for -ve geared IPs ?

ta

rolf

[Glebe]

Yeah I can't imagine the bosses of the big 4 banks echoing his sentiments! Good on him though for speaking his mind.

[geoffw]

Some other "Wizard" today (maybe in the Sun Herald- I was just reading in the fast food place) suggested that property is a bad investment (he was an investment manager for Perpetual)- the "yields are too low".

But he also quoted shares for Perpetual (which he'd bought for kids or someone) which had had a fantastic capital growth, and were showing great yields based on initial purchase price.

Some people just don't get it.

[Glebe]

Geoff,

What don't some people get? I think you need to elaborate for me please because if you believe property is a good investment then that's your prerogative, and if he believes property is a bad investment, that's his prerogative.

I must say it seems a bit dubious if he's recommending the shares or managed funds of his former employer.

[geoffw]

Many people have done well in property- for me, and for many, it's a fantastic investment.

What many share advisers don't get (this one especially) is that property is largely about growth and leverage, and it really can offer very good financial rewards. But then many financial advisers don't get paid for recommending direct property investment.

[Glebe]

Yeah, each to their own I guess. Calling a market as big as the Australian property market "bad" is asking for trouble, it's such a generalised comment.

But if we can agree that capital gains have had their bull run and will relax for the next 3-4 years, then I can understand where the Bouris' and the Perpetual wizard are coming from.

I'm not a property investor per se, for me property is a vehicle to give me the leverage to buy big in my true love, shares and boutique managed funds. I can't wait to get a new PPOR so my wife and I can start sinking our teeth into the mortgage. Mmmm equity...mmmm. :)

[Corsa]

What many share advisers don't get (this one especially) is that property is largely about growth and leverage, and it really can offer very good financial rewards. But then many financial advisers don't get paid for recommending direct property investment.

Hi All

Just to add to what has been said here, I have a very strong opinion about this given that in 2002 when I first started my investing journey I was strongly advised against investing in property by my Macquarie Bank Financial Adviser due to the risks, lack of income, growth, costs etc and instead to focus on Managed Funds and Direct Shares.

I did them all Property, Managed Funds, Margin Loans and Direct Shares and I can honestly say that without a doubt that if I had not re-focused more energy into the property investing along the way, and pretty much disregarding my Financial Advisors advice I would be in no-where near the position I am today and I would be one of those people that the papers endlessly talk about, you know First Home Buyers struggling to get a leg into the property market to buy there own home.

Dont get me wrong, I think all the Asset classes have a place in one's investment portfolio, but hindsight has made me realise that once you identify people's monetary drivers (ie how your adviser gets paid) you quickly learn to interpret the advice that is given to you in the manner in which it has been made.

Reading between the lines, I think that is just what Geoff means when he says that some people dont get it.

Kind regards

Corsa

[bonecrusher]

Hi all

So true.....Monetery Drivers.

I went to a property financial adviser.......
The recommendations were as follows:

Only buy of the plan:..kick back
Only buy a particular type of property:...kick back
Only buy This insurance.....kick back
Only use this accountant....kick back
Only use this lawyer..........kick back
Only start buy borrowing the most you can...kick back
Only buy a property which can be used for short term accomodation re:4% building depreciation....He set up and owned the company that was going to lease this property. Of course this was not told at the time
Only ever buy when you can sign the lease before completion so you know your rental guarantee is in place...self serving
Only use 5+5+5 arrangements for peace of mind..kick back
Only accept low rents for long terms better for stability...self serving
Only deal with a company that can do mortgage monitoring for you so they can tell you when to buy again....self serving

To be able to access this you pay me $2000 up front or you miss out.

I wonder what drove this guy.... :rolleyes:


regards
BC

[Aceyducey]

Yeah, each to their own I guess. Calling a market as big as the Australian property market "bad" is asking for trouble, it's such a generalised comment.

But if we can agree that capital gains have had their bull run and will relax for the next 3-4 years, then I can understand where the Bouris' and the Perpetual wizard are coming from. Glebe,

you missed it!

If you have $50K to invest you can either buy $500K of property (around 90% LVR) with most of the holding cost covered by rental.

Or you can buy $200K of a blue-chip stock (75% margin loan), paying most of the cost of your margin loan via the dividends.

Or you can buy $50K of a managed fund - cash.

Let's say that for the next three years the following CG occurs:

Property 4%
Blue-chip 8%
Managed Fund 16%

After three years the value of your investments would be:

Property: $500K -> $562 = $62K profit
Blue-chip: $200K -> $251 = $51K profit
Man. Fund: $50K -> $78 = $28K profit

Which are you better off buying?

Actually you can buy twice as much as property as illustrated above, but I thought I'd leave a margin for costs.

The share purchase is the most you can borrow on a blue-chip margin loan....and if your shares go down in value you have a BIG risk of a margin call which doesn't exist with the other options.

Of course you can buy & sell shares constantly - but that's cashflow investing & an orange to buy-and-hold's apples.

Cheers,

Aceyducey

[Peter 14.7]

Hi All

Just posted to say this is great thread. Acey’s example should be shown to every financial adviser who claims otherwise.

As for the "Perpetual Guy" all he had was the Perpetual shares. No IP, super stuffed (his own words), all his eggs in one basket and he was financial professional.

Sometimes I wish one of us who has been successful like Brenda would call the paper and be invited to interviewed. It would be something like this.

Name: Joe Average
Strategy: Buy and Hold Property

Return: Positive and Growing :)
Capital Gain: Huge and Growing :D
Risk: Minimal I control it and no-one can lose it (shares) ;)

Debt: Minimal, banks loves me. :cool:
Lifestyle: I don't work anymore, my wife loves me, my kids see me, I do what I want. :p

Best Decision: Buy Property :)
Worst Decision: Not to buy enough when I knew I should :(
Diversification Strategy: Buy lots. ;)

Peter 147

[Bill.L]

C'mon, you guy's. I've already tried to keep Kristine quiet on another thread. It didn't work :rolleyes: :p

On perpetual funds, I came across a table that proved how much better off you would be if you had invested in their industrial fund in 1982.
The figures showed that $76,100 invested in both their fund and a median priced Sydney property would have had the following results.

Industrial Fund (in 2001) $699,708 distribution $35,350

Sydney house (in 2001) $325,300 income $9,932

Of course this is what all the financial planners who want you to go into funds show you.
Only when you read the fine print do you find that all distributions were added back into the industrial fund, but there was no such use of the income from the IP. They also failed to show that you could use a lot of leverage to purchase the property, hence could have bought 2 or 3 properties with that type of money in 1982(using leverage and remaining neutral cashflow).

bye

[Corsa]

C'mon, you guy's. I've already tried to keep Kristine quiet on another thread. It didn't work :rolleyes: :p

....if you had invested in their industrial fund in 1982....The figures showed that $76,100 invested in both their fund and a median priced Sydney property would have had the following results.

bye

Where is one supposed to get the $76,000 in the first place, particularly in 1982?

In 2001, I started with $0 then worked up to $10k with a managed fund regurarly saving and then went to see the Macquarie adviser. With this $10k and not yet in the property or share market, I had to prioritise and make sure that this limited capital was working in many ways.

I am ambivalent to what any figures are tabled either from a Financial Investor or anyone on this forum who wants to try and tell me that Shares are better than Property. I know from my own personal experience and making some mistakes along the way that Property (at least in this last/current market) has provided me with the greatest leverage which would not simply have been possible if I had of invested my limited capital of $10k in Shares on a Margin Loan so total exposure to growth and income would have been $20k back in 2002. Does anyone want to try and run the growth and income numbers against that?

Acey's example speaks a thousand words.

Great post all

Kind regards

Corsa

[Thommo]

Ref. Acey's post:

I am always amazed how easily you guys borrow large sums for property. I could sign a contract for a $250k home today and have $50k at settlement date ie 80% LVR. The property would return $250/wk, but here's the rub I couldn't get the finance! in spite of the fact that I have no private debt and nett worth in excess of the loan amt.

How do I know this? My last two apps have been knocked back. One was for a piddlin amount on a CF +ve proposal and the other a re-fi to pay interest in advance.

This is not a request for advice, merely a statement of fact.

Thommo

[Jas]

thommo,

go low doc or no doc.

there's money out if you pay a bit more.

Jas

[Corsa]

Ref. Acey's post:

I am always amazed how easily you guys borrow large sums for property.

This is not a request for advice, merely a statement of fact.

Thommo

Hi Thommo

I can understand your point, it can be difficult once you reach a certain point to obtain finance from finance institutions particularly depending on your debt servicability ratio (DSR) and current loan to value ratio (LVR) for your portfolio. I am yet to get my head around this particular issue myself.

But I see this issue as being mutually exclusive of Acey's point that has been highlighted about Property providing more leverage than Shares. Assuming you can get access to the finance then Acey's point illustrates the potential benefits and the magnitude that this kind of leverage affords over Property vs Shares.

In a way, I am kind of turning this post into a Property vs Shares argument, and as I have said earlier I think both have a place in ones portfolio at different times/markets, but I wanted to ensure that Glebe/Others understand the point that myself and some of the other contributers have been making in relation to the comment made by Geoff about some people (more specifically Financial Advisors recommending Shares/Managed Funds and possibly not Property) just not getting it.

Good luck Thommo, I hope you also find away around the finance dilemma

Kind regards

Corsa

[Glebe]

I'm not a property investor per se, for me property is a vehicle to give me the leverage to buy big in my true love, shares and boutique managed funds. I can't wait to get a new PPOR so my wife and I can start sinking our teeth into the mortgage. Mmmm equity...mmmm. :)

OK I think I need to defend myself after 2 people now have said that I don't get it! As you can read above, I do understand the power of leverage. But leverage works both ways, particularly in this stage of the property cycle where people are wondering how much more capital growth (if any) is left over the medium term. This is effectively what Mark Bouris was saying and I applaud his conviction to say this despite the potential repercussions to his business. And in regards to the comments of the Perpetual advisor, whilst I don't take pride and joy in defending people of his ilk, his comments need to be taken in the context of the financial situation in which he was responding to, and then, like has been noted, taken with a grain of salt.

I have no desire to turn this into a shares vs property fight, in the above quote you can see that I believe they work best in tandem.

[Aceyducey]

I am always amazed how easily you guys borrow large sums for property. I could sign a contract for a $250k home today and have $50k at settlement date ie 80% LVR. The property would return $250/wk, but here's the rub I couldn't get the finance! in spite of the fact that I have no private debt and nett worth in excess of the loan amt.
Thommo,

I think I can see your issue.

You simply have to show your bank more leg.

If your legs aren't that great, work with a mortgage broker with good legs.

I can recommend Rolf L.

Cheers,

Aceyducey

:D

[Corsa]

OK I think I need to defend myself after 2 people now have said that I don't get it! As you can read above, I do understand the power of leverage.

Hi Glebe

I understand what you are saying, I hope that your reference to "defending" yourself was not meant seriously :)

Sometimes it is difficult to get ones point across via this method :o so hopefully you can appreciate how the post and discussion has evolved and that nothing was meant to offend anyone, I appreciate very much your input to the post.

Kind regards

Corsa

[Glebe]

Heh, I'm good Corsa, I've enjoyed all the comments, I just felt the need to clarify my position :)

[Thommo]

Thommo,

I think I can see your issue.

You simply have to show your bank more leg.

If your legs aren't that great, work with a mortgage broker with good legs.

I can recommend Rolf L.

Cheers,

Aceyducey

:D
Bluddyell! 60yr old legs! Don't tell her I said this but I doubt my lady's boobs would have much Zing left in them either.

"Know thy limitations!"