Thanks to all the experienced replies
Hi Alex, Simon and Mofra,
Thank you for all your replies and for expressing your views and concerns. I think I should have prefaced my first reply with the statement that I am suggesting a higher risk strategy that increase your chances of being wiped out in a market turned down and that you need to undertake detailed research before committing to the strategy.
(Hi Grant, thanks for the suggestion with First Permanent. Looked at it - they will not do the post code in Roxby Downs. In fact, the two mortgage insurers (GE and PMI) declined to provide mortgage insurance. I was approved by Homeloans Ltd @ 85% (with LMI from the third smaller Australian LMI provider) and Carrington National (aka - lender of last resort for prime mortgages) @ 90% but the LMI provider also refused, however the CEO of Carrington intervened on my case and waived the $4k LMI. I went with Carrington because of the higher LVR and no LMI (not saying the LMI waive can be repeated - haven't heard of it occurring before))
Your key feedback is:
1. You are not in a position to express an opinion on the subject
Given I am not an experienced investor; it is fair to say I can not represent myself as an expert. I'll flag the fact that I am starting out in future posts.
2. Higher LVR magnifies your losses
It magnifies your % losses but not your $ losses. While I make the point about greater % upside returns the lower your deposit, it is not a real comparison doing it the other way.
If we both have a $300k property and they fall in value 10%, what is the result? Well if you put in a $30k deposit, you've lost 100%. If I put in $3k, I've lost 1000%.
The above is true. But it is also true we have both 'lost' $30k. Neither of us are in a worst financial situation as we've both suffered the same financial $ loss.
However, if I don't have a $30k deposit and therefore do not get into the market and the market rises 10% what happens? Well you make 100% on your money and I make nothing because I never got in. If I waited to be 'safer' and saved my deposit and the market rose 10%, I still missed out.
So my strategy works in a rising market only. In a falling market, I'd say we both get hit the same way?
3. What about a downward /stress market situation
Alex, you made the comment that your stress test is:
3% immediate increase in interest rate, 6 month vacancy, 6 month job loss, general market mayhem
That's a pretty dire situation. Even assuming you mean separate and not cumulative events.
My contingency plan is save the deposit and use it as a buffer. If you have a 10% deposit, don't you think this will cover the above situations to some extent?
It sounds like you had both a 10-20% deposit for your first property plus another 10% buffer to cover yourself for six months job loss, which would be the biggest risk in your stress case. I didn't have 30% in savings and had to go with a 10% buffer to my 'riskier' strategy.
4. You can not pick 'hot spots'
I disagree. You can if you do the research. Specifically, I have
- flown and met with real agents in Roxby Downs (SA), Zeehan (Tas), Gladstone (QLD) and Penola (SA), inspecting an average of 8-10 properties.
-through
www.factiva.com done a 'press search' on all the press articles on these towns for the last year. To give you an idea, I have a 55-page press search on Roxby Downs, 16-pages on Zeehan, 81-pages on Gladstone, and 20-pages on Penola.
- charted the demand and supply forecasts for Uranium, Aluminum and Coal for the next 10-20 years, and the price trends for Zinc, Nickel and Copper. All point to demand exceeding supply over the medium term.
- looked through and read the presentations on the web sites of BHPBilliton, Rio Tinto, Zinifex, Santos, Protavia (pulp mill constructor for Penola), Arrow Energy (LNG plant at Gladstone), Gladstone Pacific, QLD Residential Tenancy Authority (for data on rising yields), Allegiance Mining, Zeehan Zinc, Metal X, Tasmanian Mines Council, Natural Resources and Mines (QLD Gov - "QLD's World-Class Coals: Mine Production and Developments"), Australian Coal Association Research Program ("Assessing the Social and Economic Impacts of Coal Mining on Communities in the Bowen Basin"), Duaringa Shire Council QLD ("Report on the Blackwater Housing Forum (04)"), Gladstone Economic and Industry Development Board, Real Estate Institute of QLD, REISA, REIT
- charted the population's age and income demographics for the towns based on Australian Bureau of Statistics for 2001 and then two months ago for 2006, which indicated high household incomes (eg, c50% with $100k+ annual incomes) in Roxby (and other areas like Blackwater, Port Hedland and Dysart) and high incomes in Gladstone
- secured 12 month lease contracts with 5-6% yields on the two properties I have bought (signing Gladstone one next week)
However, I need to do more research and am continuing to do it.
The research I have done to date includes data available up to two years ago. This all points to the same conclusion, I should have invested two years ago. I only did the research 7 months ago but had I done it 24 months ago the result would have been the same.
You can find 'hot spots' if you do the research. Alternatively, you can just pay a buyers advocate to do it for you.
5. I'm using expensive funding that exposes me to a credit crunch
It was expensive. I used Carrington National (8.7%) and Fundcorp (13.5%) because I wanted to invest in a mining boom town and they would be the only ones to come to the party (with Homeloans Ltd but @ 85% LVR) in a regional town.
I chose Fundcorp over a cheaper unsecured loan because I had already taken a $15k unsecured loan with a major bank and it didn't look like I'd get another to use as a deposit and I didn't want a series of CRA hits on my credit file. Fundcorp was happy to give me $45k as the deposit, secured by caveat and not 2nd mortgage (so Carrington was happy).
I have a $10k cash buffer to help with any cash crunch
6. Why haven't you saved a deposit?
Fair question but not really relevant. Even if I had a deposit, I would still have financed 105% and used the 20% deposit to let me buy even more properties.
However, to satisfy your curiosity I have worked for a US investment bank and management consultancy and have a relatively large disposable income. I've enjoyed spending that, knowing my skill set will always be in demand (relative to other professions), but have now decided - enough is enough - buy property, leverage up and cut all my disposable income so I don't waste it.
7. Have humility
I am admittedly very enthusiastic about what I am doing - working a demanding job and researching to 1am every morning for months on potential investment areas requires a little enthusiasm.
I'm also a little optimistic and this can come across as not being humble, so my apologies.
Haven't answered all the comments you've made, such as some of the calculations but I don't want to write too long a post.
Love your responses - they are valuable to my learning - this is a great forum!
Flynn