"Even a journey of a thousand miles...

...begins with a single step."

Given the amount of time I've been spending here you could be excused for thinking me a seasoned investor. Oh contrare! Most would know that I'm a relative newbie in all things PI.

As such this wee little first step means quite a lot to me...

I've now finalised the LOC on my PPOR. My wife Kay and I built our house at Narrabeen in 2001/2002 for the princely sum of $650K all up. We recently had the bank valuer value it at $780K and authorise an LOC for $624K (80%), less existing mortgage of $210K leaves us $404K to play with! We're pretty stoked since it means we've realised a paper profit of $130K on our manufacturing costs too! Woohoo!!!

So that's step 1 done, LOC finalised.

Step 2, invest the dosh:

I've got Navra Financial Services (NFS) to do a financial plan for me which Mark Raymond reckons he'll have done in the next week or two. I'll post the recommendations then, but a phone call yesterday spelt it out roughly as follows:

$100K as 20% down on an IP (borrow the balance $400K)
$20K stake in NavraFund as a shareholder (mid term spec play, my suggestion)
$250K as 50% down on shares in NavraTrade Retail (borrow the balance $250K)
$34K buffer, plus $50K I've also got in the offset account at the moment.

So, I'll have an IP worth around $500K, shares worth $500K, a spec stake worth $20K and cash reserves of $84K. Of course, I'll still be holding my PPOR worth $780K too. Give it a few months and I'll probably put the $84K plus a bit more down on another $500K IP.

If it all goes to plan I'll have those 2 x IPs in 2005 as set out in my strategy (see sig), and be on the path to realising one a year henceforth.

I'll have RE assets of $1.8M (including PPOR) and shares of $500K and borrowings of $1.2M (only $600K net worth in PPOR)

Would welcome any feedback on this structure from the seasoned investors here at SS.

Of course, the IPs I source will have a big impact on my servicability model. I'm thinking a mix of neutral and negative gearing but will have a better feel when Navra run the numbers for me on servicability. I might turn that one big $500K IP into 5 x $100K IPs if I don't like the numbers too much. But that's the tweaking I need to consider now.

Cheers,
Michael.

Michael you've probably have a good idea what I'll say but I'll say it anyway

I've yet to have a speculative investment work out , so I'd scrap the shares in Navrainvest.

At the moment I'd be putting all of the money into managed funds , I'd put some in Steve's fund , but I'd also be diversifying that money into different styles of funds . Maybe a small cap fund for some and maybe some into a hedge fund. ( Purely speculating as I havn't got to that stage of doing the research myself ) . I have a friend who works as a headhunter within the funds management area and she has told me that there are some funds that get consistently good results , and there are trade publications where you can get info on these.

I wouldn't be buying in Brisbane at the moment as it has already gone through it's major growth spurt and any growth over the next few years will ( IMHO ) be minor.

I'd be happy to wait and watch for good buys in Sydney ( which is where the next cycle will begin ) . I'm seeing more morgtagee in possession sales and we havn't had a significant negative in the economy yet. I think things will get worse before they get better.

I think you'll do a lot better with a well timed buy in Sydney ( starting near the centre and then working out ) in the next few years, than a nice house in brisbane.

Have a look at this post
http://www.somersoft.com/forums/showthread.php?p=163356#post163356

See Change

see_change said:

I wouldn't be buying in Brisbane at the moment as it has already gone through it's major growth spurt and any growth over the next few years will ( IMHO ) be minor.
See Change

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See_change sounds like you are speculating. IMHO if the property fits Steve's rental reality why not buy in Brisbane ? You will still get a healthy CG over the long term. I think it will be a while before we see property in Sydney fit Steve's rental reality formula.

I just purchased brand new IP 13k's from Brisbane CBD for under $370K fitting Steve's rental reality. Rented to tenant in less than a week.

Not sure what you can buy for $370K or even $500K MichaelWhyte mentions that will yield 5% return in Sydney and is new.

New = Less headaches/ Healthy Depreciation benefit !

LearningMan said:

See_change sounds like you are speculating. IMHO if the property fits Steve's rental reality why not buy in Brisbane ? You will still get a healthy CG over the long term. I think it will be a while before we see property in Sydney fit Steve's rental reality formula.

I just purchased brand new IP 13k's from Brisbane CBD for under $370K fitting Steve's rental reality. Rented to tenant in less than a week.

Click to expand...

That's basing things on the assumption , at this stage , that I believe in "rental reality".

Steve is welcome to correct me if I'm wrong , but my understanding is that rental reality is something that Steve has come up with in the last 3-4 years and he has extensively back tested to see if it works.

On the other hand Steve's Share trading program is something that he has been personally traded for many years ( around 20 ) and has shown that it has worked. Given his profitable experience over many years , I think it is perfectably reasonable for him to promote his share trading in the form of a managed fund and as I have said on this forum on several occasions that I would only be too happy to invest in his share fund.

I've developed a share trading system , that on back testing averages over 50 % / annum , however I've only been trading it for a brief period of time and Dec last year was not a good time to start with the type of system I'm using ....

On the basis of my back back testing I'd think some one would be crazy to ask me to invest their money in my system , but if I could show a consistent track record for a long period of time , the situation might be different. ( PS I have no intention ever of doing that ... )

I wouldn't expect Steve to promote a share system that he hasn't actually traded for a long time.

Me speculating...hehe . Given that property went sideways for over ten years in brisbane after the last peak in the early 90's ( and went backwards in many , many places ) , and given that the market has already peaked and is softening in Brisbane I wonder who is speculating in Brisbane. You or me.

I bought in Brisbane about three years ago , and I've already sold four properties that all have made over 100 % capital growth. The other properties I've kept are all returning over 11 % . I don't have to worry about negative gearing. Interstingly, at the time , Steve specifically mentioned the area I ( and many other forum members ) made very nice profits as the sort of area not to invest in. ( Logan )

It may well be a long time before I see a property that fits rental reality in Sydney. Actually a very long time , because I don't check rental reality . It may be several years before I buy in sydney , at this stage I don't know what the market will be like , in six months time , let alone 2- 5 years time. I'll wait and see what happens.

If I had spare money at this stage, I think the return that I can get in Steve's fund ( or in other funds ) is better than I can get from any property I could easily locate in Sydney ( I'm lazy ) though I did see some thing last night on the net near the Center of Sydney ( pyrmont I seem to remember ) that was returning over 7 % nett.

If your gear your money ( 100 % ) into Steve's fund you are looking at a return of over 30 % which to me is more attractive than x % ( you didn't say what you return in Brisbane is ) in Brisbane , in a market that IMHO is unlikely to give good capital growth over the next five years.

LearningMan said:

Not sure what you can buy for $370K or even $500K MichaelWhyte mentions that will yield 5% return in Sydney and is new.

New = Less headaches/ Healthy Depreciation benefit !

Click to expand...

If you actually read my reply , I'm not suggesting investing in Sydney at the moment. If you're hands on people like Skater and Bargain Hunter , I can understand their reasoning more , but I get tired of people who keep saying you should do something now .

One person who inspired many people on this forum is Robert Kiyosaki. If you wade through all his books you will know that he made his initial money through cash flow positive property. Once he worked out what he wanted to do , it took him five years before he found a property that fitted his criteria.

I think the market is going to get worse before it gets better , and those who are prepared to wait will get some really nice deals. ( * sigh * )

See Change

Hi all,

Michael,
See_ch makes some very good arguments here, and I pretty much agree with everything he says.

One aspect that I always find amusing is how people equate capital growth and new dwellings. I know of no data that specifically shows that NEW dwellings appreciate at the rate of growth of "the median". I feel that this is overlooked by many, because all they see are the tax benefits which make the property closer to cashflow neutral.
The assumption is that the new appreciate at the same rate as the established.
I recently had a look at some new housing (the display homes of Mirvac) in Mulgrave in Victoria, one was for sale for $622,000. Now for that money you get a 4 x 2 home on a small block of about 450 m2 (from the look of it).
http://www.realestate.com.au/cgi-bi...0&p=30&t=res&ty=&snf=rbs&ag=&cu=&fmt=&header=
(no not this one but pretty much the same)
About 1 km away from this new development are older houses on 650-700+ m2 blocks (these houses are 15-20 years old). They are closer to schools, shopping centres etc. Like the one below.

http://www.realestate.com.au/cgi-bi...0&p=30&t=res&ty=&snf=rbs&ag=&cu=&fmt=&header=

Ask yourself what the picture will be in 15 years time. Will the house that is 15 years old, on 450 m2 be worth as much as the 30 year old house on 924 m2 (that is arguably in a better area)???

Michael, you now have money burning a hole in your pocket (borrowing power), don't rush into any investment, no matter how good it looks on paper.

bye

See Change and Bill,

Thanks for the words of caution. See Change, I hoped you'd pitch in, and yes, I did figure that would be the tone of your post too. I'm pretty much at the same point in my thinking, just a little bit more upbeat. In my original post I said:

MichaelWhyte said:

I might turn that one big $500K IP into 5 x $100K IPs if I don't like the numbers too much.

Click to expand...

My concern with one big IP at the moment is servicability. I was thinking about leading off with a bit of a doer upper so that I can get it neutral or slightly positive. Then I'm not relying on CG to make my money and it doesn't impact my borrowing power. I've got some time up my sleeve until Sydney turns around so I figured I'd spend it buying some little CF+ style prop's to build a portfolio without locking me out of the quality CG stuff when the market turns.

I think this is the sort of approach that Kieran Trass mentioned in his Property Cycle book too. Basically the idea of different approaches given the stage of the cycle.

I know Steve will probably come back and suggest a growth IP that meets his Rental Reality guidelines. I agree that they're great over the long term, but I don't want to be stuck paying holding costs on a growth asset going nowhere for 5 years. That's why I said I'd let Mark run the numbers and then see how my cash flow looks.

If I can get in now neutral or better then that might be the go, otherwise I might just wait until those lead indicators of recovery start to show themselves in Sydney then set that money free that's burning a hole in my pocket.

Learningman, I still think you're on a winner too. Depending what happens (and I won't speculate) Brisbane could continue to grow quickly or it might go soft for a while. Either way, long term you'll do well if you hang on to that property IMHO.

Thanks heaps for the posts!

Cheers,
Michael.

Michael if you can find a cash flow positive property in a reasonable area , go for it but you really need to get minimum of 10 % .

I think you will find it hard to find.

Outside WA , which almost sounds too hyped up, the one area I'd think about looking at is Townsville, which has a lot of capital investment going into it at the moment and seems to be making consistent capital growth , though I havn't spent any time talking to agents recently as we're not planning on buying or selling. I'd avoid the unit market ( strand etc ) up there the supply appears over the top , and I worry about all the upper market units being built with reported rents which are outside the normal range for townsville. The house we bought is making good capital growth without going over the top.

See Change

See Change,

Thanks mate, I owe you one! It is pretty tough having this huge wad of cash burning a hole in your pocket and doing nothing for you. I could argue that its offsetting interest on my mortgage, so at least its doing something...

I'll scout around and see what's on offer that can get me close to 10% gross yield. I know there's not too much out there at the moment with the markets having boomed so far pretty much across the board. I agree that NG at the moment is not a smart strategy. You'll be losing money backing some CG, but doing so when all the indicators suggest we're in the slump stage of the market.

Otherwise, I might just lead off with the $500K into NavraTrade Retail and hold back my IP deposits until Sydney bottoms and turns. What's a few more years when I've already been waiting 15 or so since I started earning an income.

Thanks again,
Michael.

PS We really must catch up at the next SIG.

MichaelWhyte said:

PS We really must catch up at the next SIG.

Click to expand...

Yep. Looking forward to it . I worked out who you were at the last one, but you left before the end , so didn't have a chance to catch up.

See Change

see_change said:

Yep. Looking forward to it . I worked out who you were at the last one, but you left before the end , so didn't have a chance to catch up.

See Change

Click to expand...

Yep,

Sorry about that, but Kay was 8.999 month's pregnant and getting a bit tired so we had to make an early exit.

Would welcome the chat...

Cheers,
Michael.

MichaelWhyte said:

It is pretty tough having this huge wad of cash burning a hole in your pocket and doing nothing for you. I could argue that its offsetting interest on my mortgage, so at least its doing something...

Click to expand...

It is a point that has been made countless time before on this forum, but depending on your marginal tax rate and the interest rate payable on your mortgage, each dollar put in your offset account could be earning you as much as 13% pre-tax equivalent (remembering that PPOR mortgages are paid from after-tax dollars in many, not all, cases).

In a low-yield, low-capital gain market (perhaps what we have atm?), it certainly could be argued that parking excess cash in mortgage offset accounts is a very effective use of your money - and with close to ZERO risk too!

See attached a simple spreadsheet.

Mark

Pitt St said:

and with close to ZERO risk too!

Click to expand...

Closs to zero ...?

Overall doing that would decrease your risk profile.

See Change

see_change said:

Closs to zero ...?

Click to expand...

Very close to zero.

The vast majority of us (salary earners in particular) are able to forecast our taxable earnings and hence marginal tax rate very accurately and the interest rates on loans are also relatively stable. Hence, the pre-tax % return is very low risk.

see_change said:

Overall doing that would decrease your risk profile.

Click to expand...

Yes, it does decrease your risk profile.

But perhaps a more salient question is this - if you can earn (say) 13% pretty much risk-free on your money by using an offset account linked to a non-tax deductible mortgage - what % return (with risk) do you have to earn from IPs (or some other investment) to compensate for the higher risk?

Financial advisers will say that the government bond rate is as close to risk free as you can get, and at the moment, the 10 year bond yield is about 5.40%.

We all know that risk = return and that as you seek a higher return you have to accept greater risk (Investing 101, I know).

Therefore, taking 5.40% as a risk-free benchmark, you then consider other options and whether their increased return (better than 5.40%) justifies their risks.

But what we have really is a new benchmark (and it is alot more applicable and accessible for the vast majority of people) and it is that owing to the taxation treatment of PPOR mortgages as much as 13% can be achieved with minimal risk.

In a slow (slowing) property market this is a pretty high bar to have to hurdle!

I am not saying that it is impossible to achieve 13% at the moment, but what I am talking about is not smoke and mirrors and it doesn't rely on assumed capital gains, or occupancy rates (both of which are, imho, riskier than most individuals personal incomes).

Look hard enough and smart enough and yee shall find, but for many people perhaps the wisest, most profitable, and safest real estate investment they could make at the moment is their own home.

Mark

Pitt St said:

It is a point that has been made countless time before on this forum, but depending on your marginal tax rate and the interest rate payable on your mortgage, each dollar put in your offset account could be earning you as much as 13% pre-tax equivalent (remembering that PPOR mortgages are paid from after-tax dollars in many, not all, cases).

In a low-yield, low-capital gain market (perhaps what we have atm?), it certainly could be argued that parking excess cash in mortgage offset accounts is a very effective use of your money - and with close to ZERO risk too!

See attached a simple spreadsheet.

Mark

Click to expand...

Alert, seriously good advice above. Cash doesn't burn holes, loans burn holes, but you need a loan to live in the house - and so you invest your cash accordingly where you get the best return (for risk).

Depends if you view an offset account as 'investing' - I do. Where we are in the business/economic cycle always makes a difference, I'm pretty sure we're not in a trough...

Property - flat
Shares - we're close to 4500, i'm waiting for my 12 months to pass (1 more to go) then.... exit (maybe)

Mark and SC, lucid as usual....and concur greater opportunities in property are 1 to 2 years off, and stocks cannot rise much more...though I said that in December 04....

resources might run until China buys the Gold Coast and Cairns (like Japan did 20 years ago).

though our domestic economy is starting to crack. and everyone will run to the bank then......what other choice do they have to park their margin money....

As usual, entry points do matter........all about buying equity.....
to illustrate, work out how much ahead you would be if you had leveraged into the NavraFund (retail) in April 2005.

thefirstbruce said:

and stocks cannot rise much more

Click to expand...

I'm not saying they will rise , but I don't see any major negatives at the moment to stop the current moment that is driving the market in .

One of the basic principles I follow in investing is that it takes a lot more to change the direction of a particular market than to let it continue in it's current direction.

See Change

see_change said:

One of the basic principles I follow in investing is that it takes a lot more to change the direction of a particular market than to let it continue in it's current direction.

Click to expand...

SC

You know I like listening to you talk, 2 questions please:

1. What, in your mind, where the factors that caused the property market to change direction and head east-south-east (slightly negative)?


2. What, in your opinion, will be the factors that see the property market change direction again and head initially east-north-east (and then later, north-east, and then north-north-east).

Mark

Pitt St said:

SC

You know I like listening to you talk, 2 questions please:

1. What, in your mind, where the factors that caused the property market to change direction and head east-south-east (slightly negative)?


2. What, in your opinion, will be the factors that see the property market change direction again and head initially east-north-east (and then later, north-east, and then north-north-east).

Mark

Click to expand...

1. Fundamentally the returns didn't justify the investment.There was a lot of talk about this in the media ( as there was before the tech wreck ) , but irrational exuberance kept the market going past the point of logicality ( as it does in every cycle ) . It needed a trigger to stop it and that trigger was the rate rise in the end of 2003. There were / are still people who maintain(ed) their enthusiasm, which is why the market didn't tank over night. I think the market was over valued for a while prior to the correction but I was happy to ride with the herd.

2. Value returning into the market . This won't happen over night , and usually the market over corrects itself though things may be different this time ( ) .

See Change

see_change said:

I'm not saying they will rise , but I don't see any major negatives at the moment to stop the current moment that is driving the market in .

One of the basic principles I follow in investing is that it takes a lot more to change the direction of a particular market than to let it continue in it's current direction.

See Change

Click to expand...

Nor am I saying they won't rise. Am just saying they won't rise much more, relative to the last 2 years. The Madding Crowd are all jumping into margin loans now, which is sustaining upwards pressure. But most demand is still from OS institutions, and my guess is that they feel AUstralia is a stable and indirect way to invest in China's emergence. And that is true for resources, but the local economy certainly won't mirror resources, just ask your local Myer Store sales girl.

Actually, the one proviso I would put on stocks is that the banks may run up to PEs of 20 when things turn sour, as a lot of money will run to them for safe haven in the face of recession.