YM, sorry just one more thing...were you expecting
rents to drop too???
Using your own property example, if you bought at $187k in 2002, and say this was at 90% LVR, this means borrowings of $168300.
If you use an interest rate of say 7.57%, that is an interest of $12740 pa.
If the current rent is $300 pw, this is a rent of $15600 pa.
That means you would now have been
'cash flow positive' by
$2850 pa!
And, with a current valuation of say 349k, that means your net equity would now have been
$162000!
So...you would have gone from being negatively geared to being positively geared in just 5 years, and have generated $162k in equity in the meantime.
This property would now be costing you nothing to hold, and in fact be giving you cash in hand, and may continue to grow further in value in the
medium to long term.
If in the
short-term property values don't increase or even fall (eg. the property market crashes or a property armageddon occurs
), who cares! - it's costing you nothing to hold anyway.
The extra cash flow can be used to reduce the principal on the loan and bring your LVR (which started at 90%, and is now just
48%!) down to an even more conservative level.
This will in turn reduce you interest payments and make the deal even more cash flow positive.
Further, if you did what most other property investors here already do, you would have established a redraw or LOC facility against that 162k equity (to
'lock in' that equity increase) which you could tap into in case you can't service the holding costs...oh hang on...I forgot, there are NO net holding costs, it's cash flow positive!
Well, anyway, if interest rates went up so high that the whole deal became negatively geared again (ie. this means a
>1.7% increase in interest rates in one hit - to
>9.27% pa - when the RBA has been increasing rates at just
0.25% at one time, and also note that investors can
fix interest rates to protect against this too), you could still tap into this huge redraw/LOC facility you've set up to tide you over in the
short-term.
Further, if you really did your due diligence and understood the
local supply/demand factors, seeing that this was actually a pretty good IP at the start, would not have been too hard at all.
Not trying to rub it in mate, just completing my point...which you've greatly assisted by sharing your personal example.
To me, this is ALL there is to residential property investing - it's THAT simple.
I've used an example with numbers from just
one property...but many people on this forum, including myself,
replicate this very simple process and do it cumulatively and progressively by buying several properties over time.
Alex is right in saying that until you get a few IP's under your belt, it's hard to really see just how powerful (and quick) this remarkably simple strategy for wealth creation can be.
GSJ
PS: If I haven't swayed you to my point of view after this post, I never will.
PS: I've just given you all the residential property investing 'secrets'
.
PS: Don't you just love bold, underline and smilies, there's actually a maximum of 5 per post!
