18% interest days
- Thread starter montreur
- Start date
I had 18% first mortgage owner occupied.
21% discounted to 18% on one investment loan (subject to on-time payments and LVR limits)
21% straight up Investment loan
33% bridging finance on a construction project.
I had a couple of positive cashflow places but that involved re-purposing the lease. Eg I rented one house out to a drug and alcohol recovery organisation to run as a halfway house.
Generally it was all negative cashflow. And it wiped me out.
Paul Zag
Dreamspinner
21% discounted to 18% on one investment loan (subject to on-time payments and LVR limits)
21% straight up Investment loan
33% bridging finance on a construction project.
I had a couple of positive cashflow places but that involved re-purposing the lease. Eg I rented one house out to a drug and alcohol recovery organisation to run as a halfway house.
Generally it was all negative cashflow. And it wiped me out.
Paul Zag
Dreamspinner
Hi Monty,
I was there! 18% interest with gross rental returns of 10 - 11% and I was on variable. Not unlike people buying in Sydney today at 6% interest with returns at 3.5%, hhhmmmmm.
Servicability was and is an issue, the major difference was the that property prices were chasing inflation and with about an 18 month time lag so did rents. If you could afford to hang on for the rents to rise you did very well thank you.
I do remember living very lean there for a while though
Had Paul Keating come through one my properties I was selling at the time - he was advising a friend of his (Geoffery Tozer a classical Pianist). PK was treasurer and advised his friend not to buy as "it's not a good time to be buying with interest rates the way they are" (I paraphase a little). I felt like wringing his neck and saying 'and whose bloody fault is that???', but decorum got the better of me.
Incidently the property sold that same week to an investor for $165,000, today it would sell for $450,000 - so much for the 'greatest treasurer Australia has seen'.
regards, Michael Croft
I was there! 18% interest with gross rental returns of 10 - 11% and I was on variable. Not unlike people buying in Sydney today at 6% interest with returns at 3.5%, hhhmmmmm.
Servicability was and is an issue, the major difference was the that property prices were chasing inflation and with about an 18 month time lag so did rents. If you could afford to hang on for the rents to rise you did very well thank you.
I do remember living very lean there for a while though
Had Paul Keating come through one my properties I was selling at the time - he was advising a friend of his (Geoffery Tozer a classical Pianist). PK was treasurer and advised his friend not to buy as "it's not a good time to be buying with interest rates the way they are" (I paraphase a little). I felt like wringing his neck and saying 'and whose bloody fault is that???', but decorum got the better of me.
Incidently the property sold that same week to an investor for $165,000, today it would sell for $450,000 - so much for the 'greatest treasurer Australia has seen'.
regards, Michael Croft
Hi Monty
Yes I was there too, and survived. Was badly burnt and somewhat bent but survived. If you want some different recipes for ways to prepare and eat baked beans, let me know.
I was also working for a large REA firm at the time and with a team of four PM's managed about $250M of other peoples real estate and learnt a lot.
The ones who survived the ordeal better were those who initially did their homework and kept their borrowings down to about 70% LVR. They listenend to the experts and heard that the rising inflation rates were going to continue around the world and this was going to produce problems, so they took evasive action early and reduced their exposure. I wasn't so clever so was caught in the early days until I learnt from the old hands.
The lower the LVR, the closer to a positive cash flow position is achieved.
Many did their homework, calculated on a modest borrowing of say less than 70% LVR but borrowed more, up to 80%, without attracting mortgage insurance. They then at settlement, immediately paid down a lump sum to bring the borrowings down to less than 70% and continued to reduce the mortgage as fast as possible.
Their thinking was that If the interest rates rose, and we now know that they did, they had a 10% point or more amount of principal paid down but sitting there and able to be redrawn and used in an emergency, and emergency conditions did arise.
The borrowings cost interest but this was immediately offset by reducing the principal, net cost zero but a great margin of fat to survive an ordeal.
When the rates finally came down, they were there, cheque book in hand and picked up bargains everywhere. They would find a badly mauled investor, determine that they were up to 80% or 90% LVR borrowings, behind in their payments and under pressure from the bank and make a mafia offer, one the mauled investor couldn.t refuse. This meant that they bought for what eventually balanced out at 70% of real value.
It's easy to be clever after the event.
Regards
Ross
Yes I was there too, and survived. Was badly burnt and somewhat bent but survived. If you want some different recipes for ways to prepare and eat baked beans, let me know.
I was also working for a large REA firm at the time and with a team of four PM's managed about $250M of other peoples real estate and learnt a lot.
The ones who survived the ordeal better were those who initially did their homework and kept their borrowings down to about 70% LVR. They listenend to the experts and heard that the rising inflation rates were going to continue around the world and this was going to produce problems, so they took evasive action early and reduced their exposure. I wasn't so clever so was caught in the early days until I learnt from the old hands.
The lower the LVR, the closer to a positive cash flow position is achieved.
Many did their homework, calculated on a modest borrowing of say less than 70% LVR but borrowed more, up to 80%, without attracting mortgage insurance. They then at settlement, immediately paid down a lump sum to bring the borrowings down to less than 70% and continued to reduce the mortgage as fast as possible.
Their thinking was that If the interest rates rose, and we now know that they did, they had a 10% point or more amount of principal paid down but sitting there and able to be redrawn and used in an emergency, and emergency conditions did arise.
The borrowings cost interest but this was immediately offset by reducing the principal, net cost zero but a great margin of fat to survive an ordeal.
When the rates finally came down, they were there, cheque book in hand and picked up bargains everywhere. They would find a badly mauled investor, determine that they were up to 80% or 90% LVR borrowings, behind in their payments and under pressure from the bank and make a mafia offer, one the mauled investor couldn.t refuse. This meant that they bought for what eventually balanced out at 70% of real value.
It's easy to be clever after the event.
Regards
Ross
When all this was happening I was running my business not investing so I have had little or no experience in tough times.
Could Michael and Ross share their experiences with us by commenting on where do we go from here.
Looking at the investment clock we seem slightly out of sequence. In theory, falling interest rates trigger a boom in investment, both shares and real estate. At the moment if we look at USA their rates are very low and yet the share market is wobbling along with little confidence.
In Sydney RE has performed well but is starting to look topped out, rental vacancies are very common with lousy yields if you have a tenant.
How do we handle the coming year?
Michael and Ross, and any one who wishes to comment please do so.
Macca
Could Michael and Ross share their experiences with us by commenting on where do we go from here.
Looking at the investment clock we seem slightly out of sequence. In theory, falling interest rates trigger a boom in investment, both shares and real estate. At the moment if we look at USA their rates are very low and yet the share market is wobbling along with little confidence.
In Sydney RE has performed well but is starting to look topped out, rental vacancies are very common with lousy yields if you have a tenant.
How do we handle the coming year?
Michael and Ross, and any one who wishes to comment please do so.
Macca
Hi Ross,
I'll swap you brown rice recepies for those baked beans ones
Macca, your crystal ball is as good as mine! The first boom I got lucky and after it was over asked what happened? The second boom I was almost ready, thought I had it figured out, almost lost my shirt but came out on top after some fancy negotiations and belt tightening. This time I was ready, but in truth I didn't see 9/11 coming or the super aggressive reaction of the US fed, so I thought the boom was running out of steam 15 months ago. We live and learn.
All I can say is I have had most properties revalued and topped up the LOC's and will sit it out for a while unless something to good to pass up lands in my lap (it usually does). I think I gave my opinions in a thread by Robert Forward "sweet music to my ears" or such like.
Stock market analysts are starting to say the US has bottomed and are less bearish by the minute. So maybe the time/psychological lag has caught up with thae rate drops? The cycles do look a little out of sync though. Perhaps another oil shock brought on by a minor middle eastern war involving a confused superpower will be the trigger to raise rates to curb inflation?
Traditionally the cycle went like this; interest rates fall = consumer confidence up = spend more on consumer goods = stocks boom = people feel prosperous = make larger purchases = buy houses = property boom = mean time consumers tighten belt after major purchase = stocks weaken (go flat) = investors look for alternatives and property looks good = investor demand for property up = stocks weaken further (stay flat) = property looks better = govt saying hey we have to put a lid on this or inflation will get out of hand = interest rate rises = property boom comes to an end = investors bitten by shares and now property looks a dog go for safety = bonds/cash = consumer/investor confidence low = less goods and services purchased = business suffer and unemployment up = govt lowers interest rates to stimulate economy = approx 7 to 11 years have past and the lessons have been forgoten and away we go again.
So where are we in this theoretical cycle?
That's it folk Economy 101. Yeah I know it's not perfect but what do you expect for free
regards, Michael Croft
I'll swap you brown rice recepies for those baked beans ones
Macca, your crystal ball is as good as mine! The first boom I got lucky and after it was over asked what happened? The second boom I was almost ready, thought I had it figured out, almost lost my shirt but came out on top after some fancy negotiations and belt tightening. This time I was ready, but in truth I didn't see 9/11 coming or the super aggressive reaction of the US fed, so I thought the boom was running out of steam 15 months ago. We live and learn.
All I can say is I have had most properties revalued and topped up the LOC's and will sit it out for a while unless something to good to pass up lands in my lap (it usually does). I think I gave my opinions in a thread by Robert Forward "sweet music to my ears" or such like.
Stock market analysts are starting to say the US has bottomed and are less bearish by the minute. So maybe the time/psychological lag has caught up with thae rate drops? The cycles do look a little out of sync though. Perhaps another oil shock brought on by a minor middle eastern war involving a confused superpower will be the trigger to raise rates to curb inflation?
Traditionally the cycle went like this; interest rates fall = consumer confidence up = spend more on consumer goods = stocks boom = people feel prosperous = make larger purchases = buy houses = property boom = mean time consumers tighten belt after major purchase = stocks weaken (go flat) = investors look for alternatives and property looks good = investor demand for property up = stocks weaken further (stay flat) = property looks better = govt saying hey we have to put a lid on this or inflation will get out of hand = interest rate rises = property boom comes to an end = investors bitten by shares and now property looks a dog go for safety = bonds/cash = consumer/investor confidence low = less goods and services purchased = business suffer and unemployment up = govt lowers interest rates to stimulate economy = approx 7 to 11 years have past and the lessons have been forgoten and away we go again.
So where are we in this theoretical cycle?
That's it folk Economy 101. Yeah I know it's not perfect but what do you expect for free
regards, Michael Croft
thanks for that Michael,
yep!! the order of progression is what I have been reading up on and had got it sorted out (so I thought) but now we have commentators saying things are flat and interest should go down .
According to the "script" interest should be about to go up, to combat our inflation ??????
hmmm interesting times Michael !!
Macca
yep!! the order of progression is what I have been reading up on and had got it sorted out (so I thought) but now we have commentators saying things are flat and interest should go down .
According to the "script" interest should be about to go up, to combat our inflation ??????
hmmm interesting times Michael !!
Macca
Hi,
I think things are flat not because of economic fundamentals but because most are taking a breather after the last 4 years of growth. A kind of 'let's wait and see what pans out' type of thing.
The press are talking up a property bust (which isn't happening yet, much to their disappointment) and they love doom and gloom stories. A war is being touted as our path to salvation and this tends to make us mere mortals a little nervous.
So just where do you put your capital gains in this environment? Shares in the armaments industry? Ethically this is not for me - I'm in the wait and see camp.
regards, Michael Croft
I think things are flat not because of economic fundamentals but because most are taking a breather after the last 4 years of growth. A kind of 'let's wait and see what pans out' type of thing.
The press are talking up a property bust (which isn't happening yet, much to their disappointment) and they love doom and gloom stories. A war is being touted as our path to salvation and this tends to make us mere mortals a little nervous.
So just where do you put your capital gains in this environment? Shares in the armaments industry? Ethically this is not for me - I'm in the wait and see camp.
regards, Michael Croft
Hi Macca et al
I'd be interested in some of Michael's recipes for Brown Rice. Rice is carbohydrate and beans protein and I need to be careful about any excess carbo intake (damn the waistline) so maybe a hybrid blend is called for.
As Michael said, his ball's are as good as yours and mine too I think, crystal ones that is, and I think Macca is asking what we see in our respective balls as the similarities or differences between the late 80's and the last several years. A hybrid blend won't work here.
In the 80's, I recall that the stock market in Australia as well as around the world was climbing with the bulls gaining momentum, pushing the market up way beyond a realistic level. The "money market urgers" were saying keep going and it was not until later in the time scale that the more sensible issued warnings.
The New York market was going gangbusters, UK, Europe and Asia following. Japan was trying hard to control the trouble with the Japanese Banking industry and major companies (Japanese auto industry) borrowing beyond their asset backing.
Australia was similar. Remember that Australia constitutes only about 2% or so of the world stock/money market so our influence was and is minor. Bur still Australian banks threw money around like the proverbial drunken sailor and loaned money to the Bonds, O'Connells, Skases and others of this country to several times their asset backing. That is, LVR's of 200%, 300% even 400%. You and I could only borrow maybe 95% max then and now. Just what got into the banks heads? Greed I suppose and it is still there as we study the annual returns today.
Investors were pouring money into the stock market more so than into the property market, residential or commercial.
Confidence excessive, inflation rampant, investing unwise to stupid, savings down, bad debt increasing. Pressure on property and gold bullion had to follow. Interest rates were applied by the Reserve Bank but could not control inflation so up went the rates further until 18% was reached for normal banking rates. At one stage, I borrowed at 25% for five months to get out of a difficulty. That hurts.
Part of the upward property pressure was read by wiser stock market investors who saw the signs, heard the experts warnings and realised that the market could not sustain the bull run, sold their stocks at full price and pulled out and sat there all cashed up.
A little story.
One of my clients, who was caught in the Foreign currency borrowings scandal as urged by the banks, was unable to meet the rising interest payments (in foreighn currency) and was really being pressured by his bank. the Australian dollar exchange rate went the wrong way and was crippling him. He had fought the rising rates for over twelve months and did almost everything to pacify his bank. Which Bank? One day he sat opposite me in the office and gently cried as he begged us to sell his commercial property investments before the banks took him to the cleaners. It was hard to know where to look. He owed about $3M and had worked hard for every cent of assets he had. I am not being sarcastic, I genuinely felt for him.
When the crash came that fateful week, it really was too late for those still in the market, but many panicked and sold what stocks they had at reduced prices (the wrong time). And the market fell further. Panic. The correct thing to do then was to sit the crash out.
Investorswho bailed out now had to find an alternative and property was that alternative. So property was in demand, easy to sell, prices rose.
With the rising rates we were able to sell the above client's properties two months later. After outstanding debts were met, mortgages paid out, he was left with $2.5M. In my innocence I asked what he intended to do with the balance.
Well he took his settlement money, walked across the road to the opposition bank and placed it on fixed deposit for 5 years at 16% and then brought back a case of chilled export Moet et Chandon complete with wine waiter and two waitresses (sexist) with enough food for the office. $2.5M @ 16% is $400,000 pa or $2M total. Kept him rolling until 1995.
The point is that the stock market led the upward gallop, the rise in inflation and the subsequent interest rate rise, here and around the world. Property had to follow.
Come forward a decade to the late 1990's. Economy buoyant, stock market strong, property rising. Olympic 2000 had a stupid and unecessary affect on the Sydney market. Inflation pressures apparent, so the Fed. Reserve applied some brakes by increasing interest rates. Now Australia was out of balance with SYD leading the way and the rest of Australia NOT under the same pressure but the Feds had to do something to slow down SYD.
It worked and then the stock markets around the world started their slow but steady decline from 2000 onwards. Not all stocks at first but the market generally has declined for ALL of this year. The same old "money market urgers" were out in force saying it is only temporary and the market will turn. It didn't, so they then started this story of "property boom, property bubble" it is all going to "burst" etc., and urging people to stick with the market with dire warnings of remember the property "crash" of the late 80's.
The position is the REVERSE of the 80's. There has just been a steady decline in the stock market and people have once again used property as the hedge and no amount of talking by the urgers will turn it around.
What of the future? Let me polish my crystal ball and tell you what I see.
Rub rub, polish polish. The crystal ball is fairly clear and I see that the property market has softened and may decline a little BUT there will not be a crash, or bust, or collapse. There may be a little decline in places until rental yields and prices stabilise near to 5% return on investment. SYD is the largest market in Australia and is currently returning about 4%, MEL a little less at 3.5% and other places up and down on this. This stabilising and rent levelling will take up to two years which means in real terms a decline in values. BNE is the exception. It started rising 6 months ago and rental yields are around 5.75% and going strongly. I see good returns in BNE for the next two years or so.
More rub, more polish. The crystal ball has some cloud hanging over the stock market which is still unsteady. We have seen a progressive decline in the market for all this year with a little upward movement this past couple of weeks, BUT it is a dead cat bounce and the market will still decline a little further. Even the urgers are quiet. Maybe still some profit for short stock traders. I see that it will be well into next year before new life appears on the trading floor.
The crystal ball sees uncertainty and doubt in the Aust. Federal Reserve Boardroom. They would like to slow the property market and this good but the market will not slow for a while yet. Maybe not until the first quarter of next year. Interest rates will be under great pressure from many quarters. There is sufficient worry in investors minds to produce a lack of confidence and this will hold things back a little. The biggest worry is O/S markets. They are still poor, worse than the ASX and showing little sign of recovery. Even DR Greenspan of the USA Fed Reserve has expressed some reservations. I must chat with him sometime.
Rubbing, rubbing. Aus. interest rates will hold for the balance of this year and may even decline a little, say 25 points, by early next year. I don't see a big increase following. The current drought has as yet to really bite the economy and we have difficulty forecasting interest movements but interest rates will be modest. No 18% on even the most distant horizon. Current inflation is modest so no great interest rate pressure.
The crystal ball sees some opportunities for the investor. Investors who are prepared to look more carefully at the opportunities when presented and who don't over extend now, or if they do then only for a short while. As rent levels move and change the fickle tenant may want to debate rent levels and even move from your castle. A replacement tenant will be harder to find, more discerning and will want bargain basement rent. The crystal Ball says be cautious, look after the tenant and don't try and screw for the last dollar or it might be the last dollar for a month or two.
If you negatively gear, that's OK but try and have a minimal negative cash flow or none at all and get into a position which is as near to balanced as possible. A positive cash flow now will not be positive if you lose the tenant for any extended period.
All this crystal ball rubbing has made me sweat. Well I've stuck my neck out. Right out, but if it opens up any debate, that can only be good for all of us and hopefully we may all learn something, all of us even if its Brown Rice and Baked Bean Recipes. I invite your comments, any at all. I am brave but please be gentle with me.
Regards
Ross
I'd be interested in some of Michael's recipes for Brown Rice. Rice is carbohydrate and beans protein and I need to be careful about any excess carbo intake (damn the waistline) so maybe a hybrid blend is called for.
As Michael said, his ball's are as good as yours and mine too I think, crystal ones that is, and I think Macca is asking what we see in our respective balls as the similarities or differences between the late 80's and the last several years. A hybrid blend won't work here.
In the 80's, I recall that the stock market in Australia as well as around the world was climbing with the bulls gaining momentum, pushing the market up way beyond a realistic level. The "money market urgers" were saying keep going and it was not until later in the time scale that the more sensible issued warnings.
The New York market was going gangbusters, UK, Europe and Asia following. Japan was trying hard to control the trouble with the Japanese Banking industry and major companies (Japanese auto industry) borrowing beyond their asset backing.
Australia was similar. Remember that Australia constitutes only about 2% or so of the world stock/money market so our influence was and is minor. Bur still Australian banks threw money around like the proverbial drunken sailor and loaned money to the Bonds, O'Connells, Skases and others of this country to several times their asset backing. That is, LVR's of 200%, 300% even 400%. You and I could only borrow maybe 95% max then and now. Just what got into the banks heads? Greed I suppose and it is still there as we study the annual returns today.
Investors were pouring money into the stock market more so than into the property market, residential or commercial.
Confidence excessive, inflation rampant, investing unwise to stupid, savings down, bad debt increasing. Pressure on property and gold bullion had to follow. Interest rates were applied by the Reserve Bank but could not control inflation so up went the rates further until 18% was reached for normal banking rates. At one stage, I borrowed at 25% for five months to get out of a difficulty. That hurts.
Part of the upward property pressure was read by wiser stock market investors who saw the signs, heard the experts warnings and realised that the market could not sustain the bull run, sold their stocks at full price and pulled out and sat there all cashed up.
A little story.
One of my clients, who was caught in the Foreign currency borrowings scandal as urged by the banks, was unable to meet the rising interest payments (in foreighn currency) and was really being pressured by his bank. the Australian dollar exchange rate went the wrong way and was crippling him. He had fought the rising rates for over twelve months and did almost everything to pacify his bank. Which Bank? One day he sat opposite me in the office and gently cried as he begged us to sell his commercial property investments before the banks took him to the cleaners. It was hard to know where to look. He owed about $3M and had worked hard for every cent of assets he had. I am not being sarcastic, I genuinely felt for him.
When the crash came that fateful week, it really was too late for those still in the market, but many panicked and sold what stocks they had at reduced prices (the wrong time). And the market fell further. Panic. The correct thing to do then was to sit the crash out.
Investorswho bailed out now had to find an alternative and property was that alternative. So property was in demand, easy to sell, prices rose.
With the rising rates we were able to sell the above client's properties two months later. After outstanding debts were met, mortgages paid out, he was left with $2.5M. In my innocence I asked what he intended to do with the balance.
Well he took his settlement money, walked across the road to the opposition bank and placed it on fixed deposit for 5 years at 16% and then brought back a case of chilled export Moet et Chandon complete with wine waiter and two waitresses (sexist) with enough food for the office. $2.5M @ 16% is $400,000 pa or $2M total. Kept him rolling until 1995.
The point is that the stock market led the upward gallop, the rise in inflation and the subsequent interest rate rise, here and around the world. Property had to follow.
Come forward a decade to the late 1990's. Economy buoyant, stock market strong, property rising. Olympic 2000 had a stupid and unecessary affect on the Sydney market. Inflation pressures apparent, so the Fed. Reserve applied some brakes by increasing interest rates. Now Australia was out of balance with SYD leading the way and the rest of Australia NOT under the same pressure but the Feds had to do something to slow down SYD.
It worked and then the stock markets around the world started their slow but steady decline from 2000 onwards. Not all stocks at first but the market generally has declined for ALL of this year. The same old "money market urgers" were out in force saying it is only temporary and the market will turn. It didn't, so they then started this story of "property boom, property bubble" it is all going to "burst" etc., and urging people to stick with the market with dire warnings of remember the property "crash" of the late 80's.
The position is the REVERSE of the 80's. There has just been a steady decline in the stock market and people have once again used property as the hedge and no amount of talking by the urgers will turn it around.
What of the future? Let me polish my crystal ball and tell you what I see.
Rub rub, polish polish. The crystal ball is fairly clear and I see that the property market has softened and may decline a little BUT there will not be a crash, or bust, or collapse. There may be a little decline in places until rental yields and prices stabilise near to 5% return on investment. SYD is the largest market in Australia and is currently returning about 4%, MEL a little less at 3.5% and other places up and down on this. This stabilising and rent levelling will take up to two years which means in real terms a decline in values. BNE is the exception. It started rising 6 months ago and rental yields are around 5.75% and going strongly. I see good returns in BNE for the next two years or so.
More rub, more polish. The crystal ball has some cloud hanging over the stock market which is still unsteady. We have seen a progressive decline in the market for all this year with a little upward movement this past couple of weeks, BUT it is a dead cat bounce and the market will still decline a little further. Even the urgers are quiet. Maybe still some profit for short stock traders. I see that it will be well into next year before new life appears on the trading floor.
The crystal ball sees uncertainty and doubt in the Aust. Federal Reserve Boardroom. They would like to slow the property market and this good but the market will not slow for a while yet. Maybe not until the first quarter of next year. Interest rates will be under great pressure from many quarters. There is sufficient worry in investors minds to produce a lack of confidence and this will hold things back a little. The biggest worry is O/S markets. They are still poor, worse than the ASX and showing little sign of recovery. Even DR Greenspan of the USA Fed Reserve has expressed some reservations. I must chat with him sometime.
Rubbing, rubbing. Aus. interest rates will hold for the balance of this year and may even decline a little, say 25 points, by early next year. I don't see a big increase following. The current drought has as yet to really bite the economy and we have difficulty forecasting interest movements but interest rates will be modest. No 18% on even the most distant horizon. Current inflation is modest so no great interest rate pressure.
The crystal ball sees some opportunities for the investor. Investors who are prepared to look more carefully at the opportunities when presented and who don't over extend now, or if they do then only for a short while. As rent levels move and change the fickle tenant may want to debate rent levels and even move from your castle. A replacement tenant will be harder to find, more discerning and will want bargain basement rent. The crystal Ball says be cautious, look after the tenant and don't try and screw for the last dollar or it might be the last dollar for a month or two.
If you negatively gear, that's OK but try and have a minimal negative cash flow or none at all and get into a position which is as near to balanced as possible. A positive cash flow now will not be positive if you lose the tenant for any extended period.
All this crystal ball rubbing has made me sweat. Well I've stuck my neck out. Right out, but if it opens up any debate, that can only be good for all of us and hopefully we may all learn something, all of us even if its Brown Rice and Baked Bean Recipes. I invite your comments, any at all. I am brave but please be gentle with me.
Regards
Ross
Well done Ross! I think this post should be moved to the general discussion forum but I don't know how to do it
I agree with your summation of whence we come and go.
Another story. I had a partner in the 80's who did the foreign currency loan thing at the urging of one of the majors. It was just before we floated the dollar and his interest rate was better than the locals could do. When the dollar floated it halved in value but he was locked into the foreign currency and it doubled his repayments. He was forced to sell his share of 81 units to stay afloat.
A decade later he was part of an out of court settlement with the bank for an undisclosed sum which was very close to $10m. Those units today are worth approx $17m.
We live and learn.
Michael Croft
I agree with your summation of whence we come and go.
Another story. I had a partner in the 80's who did the foreign currency loan thing at the urging of one of the majors. It was just before we floated the dollar and his interest rate was better than the locals could do. When the dollar floated it halved in value but he was locked into the foreign currency and it doubled his repayments. He was forced to sell his share of 81 units to stay afloat.
A decade later he was part of an out of court settlement with the bank for an undisclosed sum which was very close to $10m. Those units today are worth approx $17m.
We live and learn.
Michael Croft
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Thanks Mike
I don't know how to move a post either. It needs someone with more computer / software knowledge than I have.
I have noticed from the questions and responses that there are many who are relatively new to investing or perhaps do not have the breadth and experience of others and may be looking to gain.
I say this with the full knowledge that we are all grassy green and lack knowledge in all matters at some time. I lack computer knowledge today. e.g. I can't move this post either.
My thoughts were to put something down as a very broad brush of the past 10 or 15 years in investing and then to talk about it. If in so doing we are able to learn something then we as members on the forum all benefit and will be a jump ahead of our competitors.
We only need to be one step ahead.
Regards
Ross
I don't know how to move a post either. It needs someone with more computer / software knowledge than I have.
I have noticed from the questions and responses that there are many who are relatively new to investing or perhaps do not have the breadth and experience of others and may be looking to gain.
I say this with the full knowledge that we are all grassy green and lack knowledge in all matters at some time. I lack computer knowledge today. e.g. I can't move this post either.
My thoughts were to put something down as a very broad brush of the past 10 or 15 years in investing and then to talk about it. If in so doing we are able to learn something then we as members on the forum all benefit and will be a jump ahead of our competitors.
We only need to be one step ahead.
Regards
Ross
Ross ,
a very polished answer!!
I bailed out of the stock market last year and went into real estate so I am quite happy at the moment but in the real world things are always changing and I am trying to formulate a plan of action for 2003.
Is there any history of real estate rental yields coinciding with official interest rates. With official rates being 4.75% at the moment (I think) can we expect this to be a guide?
Are expected yields of 5%+ needed to attract RE investors?
If int rates were to fall to USA levels would money flow out of the money market and into RE seeking better returns?
When official interest rates were 10% in Australia were rental yields of 10% attainable on residential real estate and has there been a link as interest rates have fallen , rental yield have followed.
I agree with you that interest rates look like falling, the rest of the world is so weak at the moment. Consumer credit in USA is so maxed out that the warning bells are ringing (hence the sharp drop in USA rates). This url is a long read but these guys are very respected internationally and serious doubts are being raised over the enormous deficit being run in the USA
http://www.kitco.com/ind/puplava/nov162002.html
thanks for your thoughts, I hope others come on board and have their say as quite often gaining a cross section of opinions will turn a light on for some.
Macca
a very polished answer!!
I bailed out of the stock market last year and went into real estate
so I am quite happy at the moment but in the real world things are always changing and I am trying to formulate a plan of action for 2003.Is there any history of real estate rental yields coinciding with official interest rates. With official rates being 4.75% at the moment (I think) can we expect this to be a guide?
Are expected yields of 5%+ needed to attract RE investors?
If int rates were to fall to USA levels would money flow out of the money market and into RE seeking better returns?
When official interest rates were 10% in Australia were rental yields of 10% attainable on residential real estate and has there been a link as interest rates have fallen , rental yield have followed.
I agree with you that interest rates look like falling, the rest of the world is so weak at the moment. Consumer credit in USA is so maxed out that the warning bells are ringing (hence the sharp drop in USA rates). This url is a long read but these guys are very respected internationally and serious doubts are being raised over the enormous deficit being run in the USA
http://www.kitco.com/ind/puplava/nov162002.html
thanks for your thoughts, I hope others come on board and have their say as quite often gaining a cross section of opinions will turn a light on for some.
Macca
Macca
Thanks for your comments.
Coinciding rental yields
I have some graphs on this but can't lay my hands on them at the moment but will keep lookng. I think that there are too many factors to consider - Rent, interest, Supply and Demand for stock, stock market itself, investor confidence and so on. Now add lag times and an out of balance situation and you're left with a mess.
Yields of 5%=
Older investors of several decades ago used the 5% return as the yardstick and didn't challenge it or change it. Rental yields are easy to calculate and can be considered in real time but Capital Gain is different. I think it should be considered on a moving decade basis, yet both need to be considered in the overall estimation of return on investment.
If the yield is lower, I would want to have some guarantee of increased gain. But there are no guarantees in this investment world. Many investors would only consider property as they understand less about the market and therefore would be ttracted to property if the yield is right and the interest rates modest or low.
USA Rates
The US Federal Reserve has cut interest rates twelve times consecutively now and this has failed to keep the US out of recession. People are still investing in property but an increasing amount of US property investment is from overseas investors weakening the USA even further. If interest rates were to fall in Oz, there would be some movement but many who invest in property do so because they don't understand or like the stock market.. They trust property even in poor times.
The US is in trouble, big trouble and we will get some of the wash.
Jim Puplava
This was a great reference. It blew me away when I read it. He not only has the knowledge but makes his points so that even I can understand him. Straight forward and simple. I am going to watch for his part two of Crashmaker. Brilliant.
He made many points but a couple to comment on.
The great crash of last century. The market crashed in 1929, but the Banks and major leaders from Rockerfeller (how do spell it), the US President, Fed Reserve, etc., kept talking things up and it was not until 1933 that the Banks collapsed. Four years.
Puplavas says the US is in crisis. The nation is in deficit and showing no signs of recovery. Australia can't help but be affected by their economy.
Another thing he said. We work in a linear financial system, yet in the last decade we have a number of crises which have blown this wide open. S & L Crisis, Peso Crisis, Asian Crisis, LTCM, Russia, Y2K and last year the 9/11. What next?
Regards
Ross
Thanks for your comments.
Coinciding rental yields
I have some graphs on this but can't lay my hands on them at the moment but will keep lookng. I think that there are too many factors to consider - Rent, interest, Supply and Demand for stock, stock market itself, investor confidence and so on. Now add lag times and an out of balance situation and you're left with a mess.
Yields of 5%=
Older investors of several decades ago used the 5% return as the yardstick and didn't challenge it or change it. Rental yields are easy to calculate and can be considered in real time but Capital Gain is different. I think it should be considered on a moving decade basis, yet both need to be considered in the overall estimation of return on investment.
If the yield is lower, I would want to have some guarantee of increased gain. But there are no guarantees in this investment world. Many investors would only consider property as they understand less about the market and therefore would be ttracted to property if the yield is right and the interest rates modest or low.
USA Rates
The US Federal Reserve has cut interest rates twelve times consecutively now and this has failed to keep the US out of recession. People are still investing in property but an increasing amount of US property investment is from overseas investors weakening the USA even further. If interest rates were to fall in Oz, there would be some movement but many who invest in property do so because they don't understand or like the stock market.. They trust property even in poor times.
The US is in trouble, big trouble and we will get some of the wash.
Jim Puplava
This was a great reference. It blew me away when I read it. He not only has the knowledge but makes his points so that even I can understand him. Straight forward and simple. I am going to watch for his part two of Crashmaker. Brilliant.
He made many points but a couple to comment on.
The great crash of last century. The market crashed in 1929, but the Banks and major leaders from Rockerfeller (how do spell it), the US President, Fed Reserve, etc., kept talking things up and it was not until 1933 that the Banks collapsed. Four years.
Puplavas says the US is in crisis. The nation is in deficit and showing no signs of recovery. Australia can't help but be affected by their economy.
Another thing he said. We work in a linear financial system, yet in the last decade we have a number of crises which have blown this wide open. S & L Crisis, Peso Crisis, Asian Crisis, LTCM, Russia, Y2K and last year the 9/11. What next?
Regards
Ross
Figures from the top of my head in 1988.
Purchase price $112,000
Rent $140/ week
Loan $87,000
Int when purchased 12.5%
Repayments $695/m
Peak int 18.5%
Repayments $1395
Out of pocket costs went from $120 or so per month to $620 per month. My wages back then was around $25,000/annum.
As the banks back then reviewed repayments every 6 months, the repayments did not cover the interest repayment when they peaked, so the loan got larger every month.
Things were tight for a year or so, but that was my only IP then so the debt level was managable.
Andrew
Purchase price $112,000
Rent $140/ week
Loan $87,000
Int when purchased 12.5%
Repayments $695/m
Peak int 18.5%
Repayments $1395
Out of pocket costs went from $120 or so per month to $620 per month. My wages back then was around $25,000/annum.
As the banks back then reviewed repayments every 6 months, the repayments did not cover the interest repayment when they peaked, so the loan got larger every month.
Things were tight for a year or so, but that was my only IP then so the debt level was managable.
Andrew
Andrew,
Can you recall when the rent caught up with the repayments. Did it take a year or two or three???
I can recall my own h/l being about $100k (house value $135k)with repayments of $300 p/wk. If we had been renting that house out we could have got about $150 p/wk rent.
This was in 1990 I think. I doubt that we will see these rates in the near future, but it is possible.
It usually takes an abnormal event to trigger a financial crisis. Could we consider the fanatical Muslem movement to be an abnormal event? It would be quite simple for the terrorists to set up a trap for the inspectors in Iraq, allowing them to open a sealed area which has been infected with who knows what. The nasty escapes into the atmosphere and before we know it half of the worlds oil fields are unworkable. The fanatics don't seem to care if they hurt people who also follow their religion.
OPEC has caused world inflation simply by restricting supply, imagine the result if OPEC oil was not available at all.
OK, enough scaremongering, I have just received Metropole's latest report and his experience suggests we be a bit patient with an eye out for a bargain.
I can do that, it's just that when I see a reasonable deal I get an itchy pen finger.
Macca
Can you recall when the rent caught up with the repayments. Did it take a year or two or three???
I can recall my own h/l being about $100k (house value $135k)with repayments of $300 p/wk. If we had been renting that house out we could have got about $150 p/wk rent.
This was in 1990 I think. I doubt that we will see these rates in the near future, but it is possible.
It usually takes an abnormal event to trigger a financial crisis. Could we consider the fanatical Muslem movement to be an abnormal event? It would be quite simple for the terrorists to set up a trap for the inspectors in Iraq, allowing them to open a sealed area which has been infected with who knows what. The nasty escapes into the atmosphere and before we know it half of the worlds oil fields are unworkable. The fanatics don't seem to care if they hurt people who also follow their religion.
OPEC has caused world inflation simply by restricting supply, imagine the result if OPEC oil was not available at all.
OK, enough scaremongering, I have just received Metropole's latest report and his experience suggests we be a bit patient with an eye out for a bargain.
I can do that, it's just that when I see a reasonable deal I get an itchy pen finger.
Macca
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Macca,
Rent levels remained fairly stagnent for around 5 years, as did the properties value.
As with everything, supply and demand determines a properties value and rent. Demand is controlled by our economy whcih can (is) be affected by overseas events.
My feeling is Melbourne property values will remain stagnent for a few years unless interest rates or unemployment drives them down. There may be a few bargains at any forced sales?
I can't see any investor with any sense buying to get a 3% gross rental return with littlle or no capital growth expected, then again I thought the same at 5% return with limited capital growth. In hindsight the capital growth was way better that I expected.
When property starts to rise again that is when to buy, but a bargain is a bargain and if is a true bargain I would take it.
At the moment a true bargain to me would be fully self funding like 10% return in the metro area or a cheap property having a special feature like opposite the beach or corner block, you know what i mean.
Andrew
Rent levels remained fairly stagnent for around 5 years, as did the properties value.
As with everything, supply and demand determines a properties value and rent. Demand is controlled by our economy whcih can (is) be affected by overseas events.
My feeling is Melbourne property values will remain stagnent for a few years unless interest rates or unemployment drives them down. There may be a few bargains at any forced sales?
I can't see any investor with any sense buying to get a 3% gross rental return with littlle or no capital growth expected, then again I thought the same at 5% return with limited capital growth. In hindsight the capital growth was way better that I expected.
When property starts to rise again that is when to buy, but a bargain is a bargain and if is a true bargain I would take it.
At the moment a true bargain to me would be fully self funding like 10% return in the metro area or a cheap property having a special feature like opposite the beach or corner block, you know what i mean.
Andrew
There's a real difference with the Rserve Bank's interest rate policy compared to the late 80's.
Then, after floating the interest rate they were concerning not to see the $A have the stuffing kicked out of it. Now, they don't appear to sweat it too much. You can control interest rates or you can control the exchange rates but not both (at least if you want to export and import).
By letting the Aussie languish at 50c US and seeing that only the housing sector is overheated, interest rates are kept low in order to stimulate industry. 3 cheers for the RBA, and if they don't change policy, there is little enough reason to believe that we will see 18% again for a long, loing time.
Bob
Then, after floating the interest rate they were concerning not to see the $A have the stuffing kicked out of it. Now, they don't appear to sweat it too much. You can control interest rates or you can control the exchange rates but not both (at least if you want to export and import).
By letting the Aussie languish at 50c US and seeing that only the housing sector is overheated, interest rates are kept low in order to stimulate industry. 3 cheers for the RBA, and if they don't change policy, there is little enough reason to believe that we will see 18% again for a long, loing time.
Bob
