Bad economy good for investor with many IPs??

[sash]

I have been doing some modeling on my portfolio...and funnily enough with all this doom and gloom around the Euro zone and a slowing China and its impact on Australia...I see a silver lining.

Now this is probably only going to assist you if you are more of a CF+ positive investor with a LVR less than say 50-60%.

Many investors are worried about what will happen to them if they lose their jobs. If you are one of the above...sit back and enjoy GFC Mark 2 (assuming if arrives of course).

Why?...well I did some modeling with the following current assumptions:

1. Property portfolio value $5m
2. Debt of $2m with interest rate of 6.75% - I/O costs per annum is $135k
3. Over rent - 5% of value of portfolio - $250k
3. Other costs (stata, rate, insurance, management fees) assuming 15 properties at $333.33 each with a 5k allowance = $75k

Based on the above you would have a positive CF+ to the tune of $40k...not bad but not enough for a decent livestyle.

Now lets say GFC#2 hits hard and bank margins drop to 150 points from the traditional 225 point ( see this article http://www.news.com.au/money/bankin...and-shareholders/story-e6frfmcr-1226205587703 ).

Lets also assume that rates drops rate from 4.5% to say 2.5% (now things will need to be really bad..i.e. our unemployment needs to be over 8%). The we will end up with 4% IR.

Based on this the servicing of a $2m debt drops to 80k per annum instead of 135k....this will put 55k in your pocket. Add the 40k you are already CF+ and you have 95k.

Now assume depreciations allowances are conservatively 3k per property...you will pay tax on 45k......that is about 7k in tax.

So you get to keep about 88k...surely most people can live on 88k per annum?

Noice isn't it???.....bring on GFC Mark II

 

[TomW]

You don't appear to have factored in any losses in the value of your portfolio due to GFC II?

 

[skater]

You don't appear to have factored in any losses in the value of your portfolio due to GFC II?

What issues. Sash's assumptions are yield based.

 

[sanj]

my initial thought is if youve got $3m equity why not cash out, buy a quality commercial property and forget about dealing with 10 or so resi tenants

less work, significantly more rent

 

[sash]

No loss if you don't sell.

Given mine are low end....the demand in recession in Australia is here in this segment.

As for prices dropping like American....there is no glut of housing here. But one could expect a 10% fall. Which on a $5m portfolio is 500k in equity. So if you had equity of $3 (40% gearing)...you would have $2.5m.

Also....I think employment in Australia will be reasonably ok...because the Baby Boomers will retire in mass...particularly if the cost of living drops due to a recession. Where they thought they can't retire on say 30-40k...they would if they see no end in sight. I can't see unemployment getting much over 7-8%. We are in pretty good shape and out debt levels are low...so we can stimulate the economy again with govt programs....an option which does not exist with the US or the Euro zone.

You don't appear to have factored in any losses in the value of your portfolio due to GFC II?

 

[sash]

Hmmm....in the current climate no thunks!

Resi at the low end = Low Risk....Commericial = High Risk. Obviously....Dazza would disagree.

my initial thought is if youve got $3m equity why not cash out, buy a quality commercial property and forget about dealing with 10 or so resi tenants

less work, significantly more rent

 

[radelaide]

If housing prices drop the banks will be looking at you and will re-evaluate your LVR, so you could be in trouble there next time you want to pull more cash out.

Also rent could go down which wont help your situation, or stay stagnent.... hey if you are only making CPI then you arent making anything.

What is the interest on 3 million in the bank at 6% and 2%?

If property is not increasing then it may not be the best option for you on a short term basis.... ever tried to sell a property in a dropping market because you need the money immediatly for an emergency?

Having said all that, being CFP puts you in a position that if anything does start to go really wrong you will have time to bail out and probably still keep your nuts.

 

[sanj]

Hmmm....in the current climate no thunks!

Resi at the low end = Low Risk....Commericial = High Risk. Obviously....Dazza would disagree.

might be a highly simplistic comparison but even if you bought a fairly defensive commercial property yielding say8% to a couple of financially strong tenants -

price - $2m
rent - $80k each = $160k

even if one of your tenants moved out you would be getting more in your pocket than you do now

i have also used a figure of $2m on the high side if you did cash out and had to pay sellign fees, CGT and stamps on the new purchase (and did the new purchase entirely in cash).

youd have an asset fully paid off, returning you either $40k (if only one side leased) or $120k (if both leased) more than youre getting now

obviously highly simplistic example but i know undoubtedly which one i would choose if i did in fact want to replace income and wasnt in an accumulation phase (hence buying in cash etc). no pesky banks to deal with, revals/reviews, only 2 tenants paying all the outgoings and maintenance, i could certainly think of worse investments.

sorry for taking your thread on a tangent by the way, it wasnt my intention, merely a thought of mine

 

[sash]

$3 at 6% I/O is 180k.......2% is 60k...so 66.7% less in IR.

The funny thing is when things go that bad .....BANKS WILL NOT REPOSSESS UNLESS YOU ARE NOT MAKING PAYMENTS...it happened in Hong Kong and in continues in the US. They do not have the man power or the funds to do this.

As for emergency money....is 500k enough split across 4-5 banks in offsets???

This is what I call bullet proofing you ar$se!!!

If housing prices drop the banks will be looking at you and will re-evaluate your LVR, so you could be in trouble there next time you want to pull more cash out.

Also rent could go down which wont help your situation, or stay stagnent.... hey if you are only making CPI then you arent making anything.

What is the interest on 3 million in the bank at 6% and 2%?

If property is not increasing then it may not be the best option for you on a short term basis.... ever tried to sell a property in a dropping market because you need the money immediatly for an emergency?

Having said all that, being CFP puts you in a position that if anything does start to go really wrong you will have time to bail out and probably still keep your nuts.

 

[Token Funder]

I have been doing some modeling on my portfolio...and funnily enough with all this doom and gloom around the Euro zone and a slowing China and its impact on Australia...I see a silver lining.

Now this is probably only going to assist you if you are more of a CF+ positive investor with a LVR less than say 50-60%.

Many investors are worried about what will happen to them if they lose their jobs. If you are one of the above...sit back and enjoy GFC Mark 2 (assuming if arrives of course).

Why?...well I did some modeling with the following current assumptions:

1. Property portfolio value $5m
2. Debt of $2m with interest rate of 6.75% - I/O costs per annum is $135k
3. Over rent - 5% of value of portfolio - $250k
3. Other costs (stata, rate, insurance, management fees) assuming 15 properties at $333.33 each with a 5k allowance = $75k

Based on the above you would have a positive CF+ to the tune of $40k...not bad but not enough for a decent livestyle.

Now lets say GFC#2 hits hard and bank margins drop to 150 points from the traditional 225 point ( see this article http://www.news.com.au/money/bankin...and-shareholders/story-e6frfmcr-1226205587703 ).

Lets also assume that rates drops rate from 4.5% to say 2.5% (now things will need to be really bad..i.e. our unemployment needs to be over 8%). The we will end up with 4% IR.

Based on this the servicing of a $2m debt drops to 80k per annum instead of 135k....this will put 55k in your pocket. Add the 40k you are already CF+ and you have 95k.

Now assume depreciations allowances are conservatively 3k per property...you will pay tax on 45k......that is about 7k in tax.

So you get to keep about 88k...surely most people can live on 88k per annum?

Noice isn't it???.....bring on GFC Mark II

You can have it, but I'm no sure it will result in the land of milk and honey you might hope for.

If the economy is so stuffed that we've got 2.5% cash rates you might need to factor in some reduction in the frequency and reliability of rent payments. As a general proposition, increasing unemployment isn't good for enterprises that depend on people paying their bills.

As regards the drop in margins, allow me to ask a hypothetical question, "If the RBA moves 50 bp in February, will mortgage rates reduce by more than 50 bp, 50bp or less than 50 bp?".

Supplementary question, "Is your answer to the question above consistent with lenders increasing or reducing margins relative to the OCR?"

 

[Dazz]

Resi at the low end = Low Risk....Commericial = High Risk. Obviously....Dazza would disagree.

Well, you'll have to rely on Mr Average on his 50K pa job that's looking shaky, with Mrs Average at home with the 4 hungry kids. Their 12 months Lease has 4 months to go and they have no idea how to budget or feed the kids, let alone keep up with the rent payments. The money comes out of his pocket after tax.

I'll have limp along with a State Govt, or a Telstra or Coca Cola.....sitting on a 10 yr Lease, with 3 yrs down and 7 years to go. I'll have 12 months worth of rent and outgoings as a Bond to draw down on. They also pay insurance to cover my rent and outgoings if they don't pay. The money they pay me is tax deductible.

It took me over a decade, but I finally figured out which one is high risk.

 

[Rolf Latham]

that PAYG JOB

ta

rolf

 

[Shadow]

As a general proposition, increasing unemployment isn't good for enterprises that depend on people paying their bills

That's what Landlord Insurance is for...

 

[Aaron_C]

There's a time and place for both commercial and residential property investment. I'm of the opinion that it's not a good time for commercial in my State. Though I think your hypothesis is inherently flawed sash - if the Australian economy turned to rat-***** and we had to drop rates to 2.5% or less all of your properties would be empty because they are located in poor socio-economic areas. That's just a fact.

 

[sash]

What do you think happened in the last recession from 1990-1993???

Did all the rentals in the poor suburbs lay empty???

Acutally this what exactly happened......there an increased demand for the lower end of the market.....rents in the higer end suburbs dropped up to 25%....the mid suburbs dropped 10-15%.

There's a time and place for both commercial and residential property investment. I'm of the opinion that it's not a good time for commercial in my State. Though I think your hypothesis is inherently flawed sash - if the Australian economy turned to rat-***** and we had to drop rates to 2.5% or less all of your properties would be empty because they are located in poor socio-economic areas. That's just a fact.

 

[marg4000]

What do you think happened in the last recession from 1990-1993???

Did all the rentals in the poor suburbs lay empty???

Acutally this what exactly happened......there an increased demand for the lower end of the market.....rents in the higer end suburbs dropped up to 25%....the mid suburbs dropped 10-15%.

Plus properties were empty for 6-8 weeks before able to get a tenant.

It was common to have to offer the first 2 weeks free to attract a tenant.

Once you actually had a tenant, no rental increases for around 4-5 years.

And yes, we owned IPs during the early 90s.
Marg

 

[Aaron_C]

What do you think happened in the last recession from 1990-1993???

Did all the rentals in the poor suburbs lay empty???

Acutally this what exactly happened......there an increased demand for the lower end of the market.....rents in the higer end suburbs dropped up to 25%....the mid suburbs dropped 10-15%.

Sash, you are very defensive when it comes to your properties because of where they are located. I don't have to be defensive because my properties are located in areas that are universally considered 'blue chip'. In a bad year I might have to discount a little bit, but given the small amount of properties in that immediate area, I can always command a premium even in a ***** market, I just have to be realistic and meet the market. You can't.

If you invest in those areas, then that's fine, you always need people investing there to provide accommodation. But given the demographics of those areas, the people who live there will be the first to lose their jobs, the ones most likely to undertake crime, and the ones most susceptible to a recession as they simply have no savings. So that is why in a recession, I know I can still rent out my properties but you will have much more difficulty. There's no point having a significant rate cut if you can't even rent it out at a decent return.

 

[Bon]

Not so fast, Sash...

http://www.theaustralian.com.au/bus...s-and-homeowners/story-e6frg8zx-1226206619193

We've seen it before with the GFC as the banks cited "increasing funding costs" which actually bolstered their profit margins, so we'll see it again no doubt since the big 4 are secretly all in bed with one another.

edit: I apologise, I just read the article you posted in your original post... I doubt we see interest rates cut by 225bps and 150bps passed on, that's far too extreme IMO.

 

[devo76]

I have a similar view on this storm that may or may not hit Australia.
Yes values may get hit but I have a 20 year window minimum and job security through to 2026. So although I wouldn't like a lost decade for property investing it's not the end of the world to me.

I currently have a negative portfolio to the tune of about $250 pw ( including all ip and PPOR costs) I could survive on the dole.

Now if things tanked and rates dropped significantly I will be very comfortable.I could almost look at it as a blessing as I have my first child arriving in 3 months. My focus can change a bit to enjoying good times with my son.

I know not everyone is in a good position. High LVR low yield may hurt people. And those people reaching their " twighlight" years may not have the time to see the other side. But I invested for me with my risk profile considered. And this is why my concern is with my survival.
Either way I see great times in my life over the next decade. And I do not need booming house prices in that time to have them. Now I see mountains from my window and a dirt bike in my garage. Guess how I'm spending my Sunday ?
Cheers

 

[skater]

Sash, you are very defensive when it comes to your properties because of where they are located. I don't have to be defensive because my properties are located in areas that are universally considered 'blue chip'. In a bad year I might have to discount a little bit, but given the small amount of properties in that immediate area, I can always command a premium even in a ***** market, I just have to be realistic and meet the market. You can't.

If you invest in those areas, then that's fine, you always need people investing there to provide accommodation. But given the demographics of those areas, the people who live there will be the first to lose their jobs, the ones most likely to undertake crime, and the ones most susceptible to a recession as they simply have no savings. So that is why in a recession, I know I can still rent out my properties but you will have much more difficulty. There's no point having a significant rate cut if you can't even rent it out at a decent return.

I've been sitting here reading this thread and I really have to chuckle at this post.

People in lower socio areas don't all turn to crime when the chips are down. They don't all up and leave their rental accommodation. If you are renting something at the 'affordable' end of the spectrum, where are you going to go to find cheaper accommodation? There is nowhere else to go. You are already in the cheap accommodation.

Sure, singles living in units might get others in to share the costs, or go home to mum & dad, but if you are a family unit with 2-3 kids, you can't do that. Some may move out of the larger cities & towns and move to regionals, but there will be more people out there who are downgrading (through job losses) and looking for affordable rentals.

I know, that if every one of my tenants lost their jobs tomorrow, that they will stay right where they are. In fact I already have some on welfare payments who pay their rent each and every week.

Contrary to popular opinion, there is a high demand for rental accommodation in the lower socio areas despite the ecconomy. Welfare recipients get paid, rain, hail, good times and bad times. They have a stable steady income. Some supplement this with part-time work, others regularly get help from the various charities when they run into trouble (Christmas, for instance). Yes, some of these people aren't very nice, but hey, some people in the wealthier areas aren't very nice either.