2003 BOOM Q/A

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From: Mike TheBloodyIdiot


Thank you people who requested my 2003 property BOOM Q/A, and especially to those who have sent feedback.

I regret to inform you guys, that despite your genuine and honest effort to please me by pointing out
my mental retardation and ignorance, that your attempt has failed. Being not only bloody idiot but lazy bastard as well,
I did not find solution to answering your concerns better than through the forum, as opposed to e-mailing each individual.

OK, concern #1 - There is not enough demand to fuel the boom. Property got out of reach for most people,etc,etc,etc.
Answer: Dream on. Reality is directly the opposite. Demand is stronger than ever, and is more genuine than ever.
I see mainly four categories of buyers fuelling current property market:

1. Working couples. Speaking of Sydney, is it that unusual when he gets $60K p.a and she $40K? Well, it gets them over the line of $300K "entry level"
quiet comfortably. Even singles - they still are able to buy units and even houses within commutable distance to Sydney.

2. Share investors deserting sharemarket. I actually expected mass exodus from shares to start 8 months ago, but it seems that fun only starts.
I know couple of dozen of those people who live in $6M waterfront properties. $300-500K for them it is a petty bargain,
they do not even give a damn negotiating. Believe me or not, number of those people grows day after day in geometrical progression.

3. Those who have bought property (right property, not Broken Hill airport) 2-3-4-5 years before. I had one guy fainted when
I told him briefly what he can do with the equity in his Frenches Forest property he has bought 3 yrs ago for $350K. Now it is valued at over $800K.
A year ago he did not want to hear anything about IP, and even couple of months ago he still was concentrating on paying off his loan.
Fortunately for him he was retrenched, got desperate and as a result became receptive to the idea that he can retire right now.
What do you think he is doing? Right, he is like hungry anakonda crawls on his belly through RE information and buys, buys, buys.

4. Contractors. If just a few months ago contractors were punished by substantially higher interest rates and substantially lower LVRs on lo docs,
now situation has changed dramatically.

So, as you can see, demand has been substantially improved.

Concern #2 RBA, BIS, Residex, Ros Gittings, whoever else know things much better than myself - they are professionals - you shut up.
Variation of Concern #2 RBA, BIS, Residex, Ros Gittings, whoever else are the bloody idiots they screw up like any other "professional predictor"
so it take them much longer to realise that we are in deep doodoo than I am estimating.

Answer: I think all those guys very well aware (just like myself) that our economy is already in deep doodoo and it can not afford any rate rises.
The only reason they lift interest rates is to stop exodus from sharemarket.
If they do not do it, there will be catastrophic consequences for managed funds/super industry, which bear potential for far more reaching political troubles.
This is why we have unleashed anti-property scare campaign in the media and interest rate bluff from RBA.

Cheers,

Mike-TBI
 
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Reply: 1
From: Jas


Hey all,
What's your ideas?

Jas
---------------------------------------


Residential Property

Is it a bubble?



I suppose I have never been seen as a great fan of residential property.
Having said that I wrote an article for the AFR in 1997, which tried to
point a more balanced picture on residential property investment at a
time when financial planners were slamming it relentlessly. I even
received a congratulatory letter from one of the real estate bodies in
response at the time.

Nevertheless, now on any objective analysis it is a time to be extremely
cautious about residential property investment. For the reasons I point
out in this paper I believe the broad property market is as vulnerable
to poor returns and capital losses as any time in recent decades.

Characteristics of a bubble

One approach is to simply think about the characteristics of financial
asset bubbles and ask oneself whether the residential market currently
has these. Such characteristics are:

1. Strong increases in prices irrespective of the underlying
investment fundamentals (particularly the current and future income
generation potential of the investment)


2. Very heavy use of debt by buyers of the asset and easy
availability of finance.


3. Widespread participation in the boom amongst the general
population


4. A belief that prices can only go up, not down (or at least that
if not up they can only go sideways)


5. Government policy that facilitates, accentuates or at least
provides a fertile ground for the bubble to develop


All of these elements were present in the technology boom that peaked in
early 2000. Today they are all present in the residential property
market. It looks like a bubble, sounds like a bubble and acts like a
bubble.

Of course all that we know about bubbles is that they eventually
collapse and cause significant losses, particularly for those that buy
in the "frothy" stages. Of course even bubbles in the frothy stage are
inclined to inflate further than people expect.

While no two bubbles are identical, it seems likely that a bubble has
developed in residential property (in cities at least) and like all
bubbles in investment markets, it will burst with the current (and
heavily geared) entrants the most badly burnt.


Is home ownership different?

Of course many of today's buyers of residential property are not
investors but potential homeowners. Surely, this cannot be speculative?
you might ask.

It is true that owning one's own house makes sense for most (but not
all) people and most (but not all) of the time and for sound investment
not just emotional reasons.

In owning a house you are effectively receiving the implicit rent
tax-free plus you have the benefits of capital gains tax free growth.
These benefits however, only accrue most effectively:

1. When you have paid off the property and own the property
outright (i.e. you have no borrowings, the interest on which is paid
from after tax dollars)

2. When the per annum rent that you would otherwise be paying for
an equivalent rental property is high relative to the value of the
property (i.e. it has a high rental yield)


Effectively, someone who has no mortgage is receiving the rent they
would otherwise pay tax-free. If and when net rental yields are 5-6% or
above this represents a sound after tax return for the funds employed,
even without any capital gain. This is particularly the case if rents
are expected to increase in the future.

The problem today is:

1. Those buying property today are doing so primarily with debt and
with more debt than probably at any time in history. Thus the rental
advantage is offset by the ongoing interest cost of 6-7% per annum on a
large mortgage and they have to pay this interest cost out of pre-tax
income.


2. With price rises outstripping rental increases, rental yields
have fallen significantly in recent years and the implied rent advantage
has become smaller. (Net rental yields on some highly sought after
areas have dropped below 3%)


3. With rental vacancies high in many areas and inflation low the
outlook for increases in rent in the next few years is muted.


Therefore while owning your own home makes sense, gearing to the
eyeballs to invest in something where the rent on such a property would
earn represents a small ratio to the price you pay does not.

Today the combination of these factors means that the benefit of taking
out a large mortgage to buy a residential home may be less than in the
past. A very heavily geared homeowner is losing on a cash basis
because they are paying 6-7% interest (which is likely to rise in the
short term) compared to the 3-4% rental yield they would pay to rent a
similar place. It is true that through the 1970s and 1980s high interest
rates were also above rental yields however those renters generally
experienced significant rent increases time. Such rent increases seem
less likely today. Of course buyers still receive the capital gains
tax free but the question must be asked, will the capital gain be there?


All investment is about cash flow

Property investors and home buyers seem to be forgetting that the
fundamental value of an investment always comes down to its ability to
generate cash flow and the discounted value of this cash flow compared
to the cost of borrowings and other investment alternatives. They seem
to be ignoring the mediocre (in some cases poor) investment fundamentals
on many properties and buying with a simplistic notion that recent
capital gains will continue. They just have to get in, is the common
mentality.

Any asset's long-term performance is driven primarily by its ability to
generate income. Of course, markets are also driven by sentiment in the
shortmedium term meaning that the valuation of that income flow may
temporarily be a less significant factor impacting prices. However,
there is a tendency for valuations relative to underlying cash flow to
eventually revert towards longer-term averages.

One way to look at the valuation of property is the multiple of average
prices to average rentals. This is akin to price earnings ratios in the
stockmarket. The PE ratio for residential property (average property
prices over average rent) is now at about 23 or close to the highest
level ever. This implies an average gross yield of around 4.5%. It is
lower in Sydney and Melbourne. History shows that Price earnings ratios
for property have generally tended to be around 12-15 over the longer
term (implying a 6-8% gross yield)

Of course the big argument for lower yields and higher PE's (in both the
sharemarket and property market) is that inflation and interest rates
are lower today than in the 1970s and 1980s. This makes sense at first
but there is an element of "money illusion" in such an argument. The
true fundamental value of an asset is based on the discounted value of
future net rental income flows. If inflation is lower, rental growth is
also likely to be lower reducing the value of future rental income.

Therefore while there is no doubt that low interest rates have
encouraged buyers (and lenders to provide funds) to pay higher prices
for property, the case for rationally doing so is not as strong. This
is particularly the case if, as seems likely, rents are likely to be
flat or may even fall because of high rental vacancies.

One barometer I have measured casually over the last 15 years or so have
been the number of pages of units and houses for rent in Saturday's
Sydney Morning Herald. In most market environments up until the last
few years' units for rent have averaged less than 2-3 pages. Recently
there have been over 7 pages. The official rental vacancy has been put
at 4-5% in Sydney. This is several times the level experienced in the
late 1980s boom when vacancies were 1-1.5% and inflation was also
higher. Rents are unlikely to rise and may even fall in this
environment. These are not good fundamentals for today's property
buyer.

Many home buyers seem to be operating under the premise that rental
property and home ownership are not interchangeable; i.e. they have no
choice but to buy. In practice though, renting is always an option and
at times when rental yields are low and rental vacancies high it can be
an attractive option compared with buying. Of course there is the
uncertainty of living under a short-term lease, but the reality is that
for almost any type or location for a house or unit you wished to buy
there is likely to be a similar one that could be rented

In such an environment potential homeowners should consider abandoning
the perception that they "have to buy" based on the premise that "prices
always rise in the capital cities". This statement is simply not true.
There is no asset price throughout history that always rose or was
guaranteed not to fall. The fact that most people have experienced price
rises over the last 20-30 years should not hide the real truth. In fact
the more people who believe in this fallacy, the less likely housing
prices will rise or be immune from falls (since by then almost everyone
has already bought and there are fewer buyers to take prices higher or
prevent falls). Just ask the Japanese who have been through a 10 years
period where residential property prices have falls at least 60%.


The property investor

Of course property investors are the other drivers of the market and
have become particularly active in the unit market in recent years.
Seminars promoting negative gearing into properties as the sure way to
wealth are being aggressively promoted. Perhaps a more difficult
sharemarket environment encouraged investors to consider property as a
"safe" alternative.

Property investors are in a different position to homeowners, but they
too are hostage to market fundamentals. While they receive a tax
deduction on interest, they require a capital gain because with net
rentals at 3%, an additional 3-4% is needed just to break even given
interest and other costs. Even if they are not borrowing these net
yields are below what they could get in safe bank deposit. Again the
scope for increases in rents in many areas is limited.

If the net rental yield is below 3% what can investors really expect?
The problem is with rental vacancies high there is a good chance that
rents will be flat and may even fall over the next few years. Where do
investors expect capital gains to come from if not ultimately from the
growth in rental income? Interest rates are not going lower. Further
price rises in this environment is more likely to be the components of a
bubble that will not be sustained.


Interest rates and household debt

While interest rates have fallen the interest burden has not because
borrowers have taken on more debt. Household debt has more than doubled
in the last 5 years. Thus while home affordability should have
increased with lower interest rates, this has been largely offset by
rising house prices and the resultant greater debt required to purchase
property. Today only a small increase in interest rates would have a
significant adverse impact on the ability of homeowners and property
investors to service their mortgages.

Of course, the increase in household debt may have been at least partly
soundly based (apart from lower interest rates). For example, the
Australian economy has been remarkably resilient. The resultant high
job security has encouraged people to take on greater debt. Even the
Australian sharemarket has been less volatile than other markets and
compared to history, and this has encouraged some investors to gear into
the market. However, the problem is that these conditions are
historical and there is no guarantee that such benign conditions will
continues into the future. There is little margin for error in many
highly geared households today.

Two possible threats to this benign environment are:

1. Rises in interest rates (and with debt so high these do not have
to be significant).
2. An increase in unemployment perhaps as a response to a renewed
recession in the US economy.

Either of these factors could be the catalyst for the unwinding of the
property market bubble.

Another factor impacting property market prices is its correlation (with
a lag) to the sharemarket). The property market tends to rise after the
sharemarket has begun a bull market and continue to rise even once the
sharemarket begins falling. Typically, however though, the property
market has peaked 1-2 years after the sharemarket and is followed by a
decline.


Conclusions

The cynics will say you could have been negative on property 2-3 years
ago and missed out on the recent gains. This is true to a point, but it
has only been in the last 12 months that the market has showed the
excesses that typify a bubble. Moreover, identifying a bubble does not
mean prices cannot go higher. The nature of bubbles is that they tend
to go higher than people expect, although they also tend to fall further
than people expect when the bubble bursts.

Therefore, when the bubble bursts prices could easily fall markedly,
perhaps even to below levels of 2-3 years ago. Remember also that
similar sorts of argument were also used to justify the technology boom.


If this is a bubble then like all bubbles it will end badly for those
who get in close to the top, who over-gear to get in or who spend their
paper gains. This is not to suggest that some properties cannot do well
or be bought cheaply in a difficult overall property market. The same
is true in a bear market for shares. Some companies and sectors can
still make money for investors although they are few and far between and
more difficult to find. In any case, it seems clear that the easy ride
for property is coming to an end. Housing prices, like any asset
class, are susceptible to speculative excess and can fall. Indeed they
are most likely to fall when the majority believes that they cannot
fall, as seems to be the case now. Is important not to confuse brains
with a bull market.


ENDS


Dominic McCormick is the chairman of the Investment Committee of the
listed financial planning and management company, Snowball Group
Limited, specializing in investment research and portfolio design. He
is a former head of research with Bridges Financial Services.
 
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Property growth

Reply: 2
From: Brett Burt


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Der Mike the Bloody Idiot. Noahs Ark was built by amateurs and the =Titanic by professionals. So I agree with you.

I think Brisbane has no where to go but up. It has been languishing for =so long now !

Sydney. Look what is available for rent. Don't just read newspaper =reports, actually spend a week or two ringing around. (Most haven't time =or cannot do this but I can in my job.) There is NOT that much more to =rent than last year or the year before ! Except for some stupid =oversupplying in areas, most of Sydney is in top shape from where I =stand. Look at the continued migratory patterns into Sydney. My opinion =is most good areas close to transport, shopping centres and services in =Sydney Statistical Region will go up 10% in the next year. You should =also be aware that we have billions of dollars trying to buy into this =country from VERY wealthy North and South Asian countries. My partner =fields dozens of Indonesian inquiries weekly with investors having more =than 5 million AUD to buy into Sydney real estate !
Melbourne. Have no idea here HOWEVER a large economic predictor company =said 18 months ago Melbourne would drop 20% and it didn't happen.

Heard a quote in a movie this week I had not heard for years but it is =still as true as ever

"In the land of the blind, the one eyed man is king"

Brett.



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Der Mike the Bloody Idiot. Noahs Ark was built by =amateurs and
the Titanic by professionals. So I agree with you.

I think Brisbane has no where to go but up. It has =been
languishing for so long now !

Sydney. Look what is available for rent. Don't just =read
newspaper reports, actually spend a week or two ringing around. (Most =haven't
time or cannot do this but I can in my job.) There is NOT thatmuch =more to
rent than last year or the year before! Except for some =stupid
oversupplying in areas,most of Sydney is in top shape from where I =stand.
Look at the continued migratory patterns into Sydney. My opinion is most =good
areas close to transport, shopping centres and services in Sydney =Statistical
Region will go up 10% in the next year. You should also be aware that we =have
billions of dollars trying to buy into this country from VERY wealthy =North and
South Asian countries. My partner fields dozens of Indonesian inquiries =weekly
with investors having more than 5 million AUD to buy into Sydney real =estate
!
Melbourne. Have no idea here HOWEVER a large =economic
predictor company said 18 months ago Melbourne would drop 20% and it =didn't
happen.

Heard a quote in a movie this week I had not heard =for years
but it is still as true as ever

"In the land of the blind, the one eyed man is
king"

Brett.



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Reply: 1.1
From: Mike TheBloodyIdiot


Unfnblvbl.

Just I mentioned "unleashed anti property investment campaign" - and there is a loads of this stuff get posted onto the forum.

Great Chief of world proletariat tovarisch Lenin said: "The only difference between journalist and a prostitute is that one sells her body, the other one - their soul".

Ask yourself couple of questions:

1. Who owns AFR ?

1a How much of personal income they earn and how much tax do they pay? Divide amount of income by amount of tax, this will give you "index of immorality". Compare it to your own.

1b Does the mor.. sorry, person who wrote this article do it for free? If not, will they be allowed to write something that is contrary to the intentions of the person who pays them?

2. What 'F' in 'AFR' stands for? Do you really expect that paper bearing this name will advocate property investments at the times when industry is so badly hurt by investors' exodus from the sharemarket?

3. How many times in the last 140 years there were talks about "property bubble"? How many times the "bubble" actually burst?

4. What was the capital growth at the time when "bubble" has burst?

5. What was the capital growth the year before "bubble burst"?

6. What classes of property suffered the most?

If you find correct answers to those questions and still are worried - please feel free to remain worried.

One more remark - if author expects higher unemployment and the whole host of other economic troubles ahead - how they can expect interest rate rises? Or they are so economically illiterate to know that these things are mutually exclusive?

Cheers,

Mike-TBI
 
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Property growth

Reply: 2.1
From: Always Learning


Noahs Ark was built by amateurs and the =Titanic by professionals.
<p>
Hmmm, Noahs Ark is a story of fiction, Titanic was probably a very well engineered ship it was just humans wonderful capacity for self delusion to ignore the risks and proceed a full speed, that caused disaster.
<p>
So is it BOOM time or is it a bubble just waiting for a little prick?
<p>
As Mike TBI suggested we ask history. Lets unemotionally look at the busted bubbles from property busts in Europe, USA etc. What was the rental returns in those bubbles busts? What was the median price vs. median income ? Was poorly performing alternative investment sectors (eg. stocks and shares) a driving factor in the speculative bubbles? What types of property got hit the hardest ( just guessing here but I bet London to a brick that it was the build for "speculators" / investors market)
<p>
 
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Property growth

Reply: 2.1.1
From: Peter Troiano


Wow what a thread.
The two factors that I have seen that greatly affect property values and severe market changes is the status of the Incoming purchaser.
If Mortgage Insurers and Banks tighten lending practices, (70's and early 90's) then the property market nosedives for a few years and flushes the weak borrowers out completely. I have always had this circumstance affect my borrowers when I have had very aggressive negative gearers knocked on the head when lenders and LMI have tightened credit policy. My friend has just came back from Japan and there was a bloodbath over their with property prices. It was booming for 40 years.
 
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2003 BOOM

Reply: 2.1.1.1
From: Mike TheBloodyIdiot


Extremely valid point. Thanks for that.

I can only say that situation has changed since 90s.

There are so many new players in home lending, and there is so much more competition among them. There are many new ways to source loans that lenders simply do not give a damn anymore to RBA's desire to tighten lending criteria.

I do not remember where exactly I have read that, but there was an opinion that recent rate rises mostly triggered by the fact that RBA has no more influence over lenders' policies, so rate rise is the only tool left to scare investors away from the property market.

Cheers,

Mike TBI
 
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2003 BOOM

Reply: 2.1.1.1.1
From: Igs Kanny


...over the line of $300K "entry level"...

where is that?... in Sydney?

Great.. means that I have had this awful dream, like prices perhaps being now close to a million for a house (or a townhouse) in a decent suburb (not Blacktown or Penrith though).

Aren't Indonesians considered foreigners in this country? Meaning they can only buy brand new props. Well, good luck to them.

Igs
 
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2003 BOOM

Reply: 2.1.1.1.1.1
From: Mike TheBloodyIdiot


Hi Igs,

If you are after diagnosis - Answer is "Yes you are right".

You are asleep.

Suburbs where prices are now close to $1M were "decent" 7-10 years ago. Now they are "prestige" if you like, i.e. main motive to buy there to "make a statement", to "impress people you do not like" i.e. it is simply a tool for people with a low self esteem to tackle their inferiority complex.
Best example is my compats. There is certain class of people born in USSR who are buying predominantly in eastern suburbs and I tell ya mate - all of them suffer from this disease. Ironically, I dont know single one of them which is worth knowing.

"Decent" suburb those days is (in order of importance):

1. Located no closer than 4 and no farther than 16 km from the CBD

2. Railway line or major highway nearby

3. Shortage of land, established properties prevail

4. Infrastructure (schools, shopping, businesses)

5. 25 minutes maximum driving time to the water


I recall I have given $300K entry level based on Tibor's concern about Guildford. Well, it meets criteria -

a. Next to Parramatta (second Sydney CBD)
b. On a railway
c. No new land releases/estates
d. Infrastructure is clearly superior to that in east/lower NS
e. Close to Parramatta River

Not nice demographics - who cares. Undesirables will be pushed out of there sooner or later.

Well, do not like West? Neither do I. Have you ever heard
of Hornsby? This is emerging 3rd CBD of Sydney in case you do not know that. Again, entry level is at $300K, on 2 railway lines, run out of land ages ago, infrastructure development is skyrocketing. Arguably best private schools in Sydney. Water - Berowra waters, Hawkesbury, Northern Beaches.
Very nice demographics. Upside potential - unlimited.

BTW, to be precise couple on $60+$40K given $1000 credit card limit could get up to $400K.

Wake up, mate.
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1
From: Tibor Bode


OK guys, you got me moving. Firstly it is a great thread and I enjoy ALL the quite differing opinions as they make me re-think and re-evaluate mine.
Mike, I just run on realestate.com.au a Hornsby show all house by price order query and it shows to me the entry is a bit higher than 300K, something like 400K+ for houses and there is only 1 townhouse for 425K asking, but yes I have seen some units just a tick under 300K (299K and 299.5K asking). I was rather expecting these kind of prices in that area. I agree yes it is very good for investing and has good growth potential,

BUT

I am a number person (I don't care about the physical property apart from how can I add value to it, to me it is a number game)so,

the rent ranged $190 to $695 (there was 1 bedder studio for $155), for units $220 to $385. I arbitrarily took $260 which gives 4.5% gross yield on the 300K unit. Our young couple who earns 100K (bit above -around 20K - mr and mrs average) can commit 30% (33K) and 80% of their rent (lets say 44K) for repayment. They need to have 60K (plus 18K for expenses) equity available to borrow 240K. Let say they fix it for 5 years @7.5%. Their repayment now is 18K (Interest only) so they are well within their limit. They just loose about 9K to 10K per annum ($173 to $192 per week) on this deal, less their depreciation benefit (lets say 5K) which makes it around 4.5K to 5K loss annually ($86 to $96 per week). Please correct me if my calculations are not OK (I can't count either). So, this what supposed to grow by x% (let say 6%) per annum. The rent will not go up by as much, the wages are not going up either. So next year the new buyers will buy it for more, have more equity to contribute, get less rent, and losing more. And I should call it investing and expecting that prices to rise. I'm sorry, but I am either missing something or just have to question where the buyers (lemmings) are coming from. To me it is insanity.

Anyway, it is just another point of view and while this is going on I am making good gains on cash-flow positive properties in QLD.

Tibor
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1.1
From: Mike TheBloodyIdiot


Tibor,

You are right, this range is disappearing very quickly there. Keep in mind though that best bargains never make thir way to the websites. Nevertheless, you were not looking hard enough.

http://www.realestate.com.au/cgi-bin/rsearch?a=d&t=res&c=61854998&tm=1025258054&ag=&s=nsw&f=20&p=10&snf=bs&cu=


http://www.property.com.au/cgi-bin/ppmsg/ppsearch/ppview.p?propertyid=3780996&option=bres&bymap=no&parent_region_id=2&p_layer=0&iregion=2,0&post_code=2079&target_property_type=All&primary_property_type=1&from_price=0&to_price=999999999&no_of_bedrooms=All&sortresults=2&idsearch=&methodofsale=All&resultdisplay=40&IncomeReturnPerAnnum=&yield=&saledate=&min_build_size=&max_build_size=&page=1&count=12

On the subject of "cashflow positive" I am already tired to explain, that if property after longest boom in history is "positive" it simply means it is mildly speaking mediocre investment.
The only thing that matters is total return, which roughly equals cap growth plus HALF of the rental.

Why it is so hard for the people to understand that rental income is taxable, while cap growth is not?

Anyway, Gail has demonstrated excellent explanation on the subject, I totally agree with her.

Cheers,

Mike
 
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Reply: 2.1.1.1.1.1.1.1.1
From: Kevin Fielding


Mike can you please explain why a cash positive investment would be mediocre after x number of years?
Is it bad to be too highly geared in negative?
Is it better to neg gear in moderate sense if investment may be good for cap gain and not worry about it being positive from start??

your thoughts please.

regard,
Kevin
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1.1.1.1
From: See Change


Mike TBI

If you hadn't noticed, both those examples you quote are in Mt Colah , which is not the same as Hornsby and is cheaper . One is on Pacific Hwy ( the MAJOR through road ) and the other one has one bedroom . While I'm not an expert I'd have a guess that the returns on these would not be particularly great. I have seen houses for sale on the pacific Hwy in Mt colah which have been split into units . These might be a viable alternative to get a reasonable return , but they don't occur frequently. Personally I wouldn't buy on the Pacific hwy as it would be considered a big negative. Driving around the area I have been seeing many "for lease " signs and they are almost invariably on small houses on busier roads.

Mt Colah is an area of interest to me as it has access on to the freeway so is a lot closer to sydney than it used to be. However it has already almost doubled in the last years and I think it would be optimistic to expect a a lot of movement in the next few years.

I have been talking to agents in wahroonga ( two suburbs closer to syd than hornsby ) and the interesting thing is that there are a lot of vacancies in the bottom end of the market. To buy you'd be looking at a minimum of 550. When you look at the rental market this is where the vacancies are. One window I looked in had about 8 properties to rent under 400. The PM there said that currently to work out the rents there you take 100 of the purchase price and that gave you your weekly rent, so a house selling for 550 K would rent for 450/ wk . On the basis of what I saw in the windows I thought she was optimistic.

Personally I'm with Tibor, having purchased four cash flow positive properties in Brisbane in the last month.

There will be a time to buy IP's in sydney. I'm just not convinced it's now but having said that we did buy a PPOR in Sept last year which has already been revalued at 100 K more than we paid for it BUT we did make a good purchase on a house that was poorly marketed and we spent several months looking before we found it.

see change

it's better to be guided by your dreams than your fears
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1.1.2
From: Tibor Bode


Mike,

I am far from being someone who watches / familiar with the Sydney market. It was only a half an hour exercise, very far from something I would call a due diligence. Just a quick snapshot. Yes, I am fully aware that only around 5% and usually not the bargains (albeit I managed to pick up some via the internet) reaching the web sites. Several cases agent give it to their favourite clients even before it is advertised.

Yes, I agree with your view on the total return which is important, but just a silly question. In the really long term how do you wish to get the money out of the deals? I am aware one way (Keving Young's) to re-borrow the increased value as tax free (non deductible interest of course), but otherwise
one day you will need very strong rental income, meaning real cash, not locked away gain which is not accessible except when you sell then pay CGT, which after 600% to 800% will still leave you with plenty of dough, but need very large increases, which takes a long time.
Yes rents are taxable, BUT this is where depreciation can help. I have cash flow positive properties (majority without depreciation is positive), but the tax man will still refund to me money due to the depreciation, so I don't pay tax on it. And when I start to run short on it, just buy another property, maybe even a negatively geared, but with a cash flow positive overall portfolio. But I am not gambling on something I don't know for sure. I still need to meet one negative gearing / growth champion who is willing to put the expected / promised growth amount into a trust account, so if it does not eventuate, I will get it from his trust account. I offered it to some, but firstly they thought I was joking and when they realised I was not suddenly the usual "I know it will happen, you are just holding up the seminar,I fave to answer to other people as well, talk about it after the seminar, etc" treatment was given.
According to RK the rich take risk, but very calculated ones when they are almost sure about the outcome or visionaries. Unfortunately, I am not in the latter category so I try to minimise the risk. What are the risk factors?
1) Growth might or might not eventuate within the timeframe I need it (ie. I could need the money urgently after 2 years) and could be really stuffed if I have to sell at a loss or with no gain and it compound if I have also lost money during that period of time having it negatively geared.
2) Negative gearing might or might not exist in future. I don't know, but trusting deeply our pollies, they will do whatever is required to get elected. If negative gearing is to go, so be it. Worry about the consequences later. In the US they got rid of it an never bought it back. So if it happens as you wrote about the Reserve's wisdom (on which I completely agree with you) we shall see 'who has not got trousers'.
3) If the interest rate cycle (assuming you fixed it or the same applies if you are on variable, just will hit earlier) catches you
in the wrong time, meaning you come of from your 6.5% and the reserve in its infinite wisdom to crush the property boom raised the cash rate to 7% (9% for retail lending) then what are you going to do with a nicely negatively geared property? Sell it? Hmmmmm, lot them will be around. Re-fix it? Hmmmm at 10.5%? Being good sucker and pay it?
Hmmmm. How much loss is enough?
4) You reach a mature age (we all will unfortunately) when you don't wish to be active in the property market, just want to get the income and no dealings with banks.
Then you will have to sell it and pay CGT as mentioned above. Yes Dale, I know using a trust can help, but I did not meet with you earlier and as you said it is not worth now to switch over, but leave with it. So you need a very good planning how to get the money out and turn it into a income cashflow without you worrying / getting involved / whatever about it. I know it is a long shot and will not apply to everyone, but it is still something to consider.

Again getting back to RK. The definition of wealth (according to him) is the number of days you can survive without working, that is your passive income (did not say capital gain) exceeds your expenses. If you can make it forever, then you are very wealthy. The vast majority of the population would not be able to survive more than 3 months.

Based on the above, I basically accept that for my strategy the cash flow positive property is the go. I try to smarten up how to add value, exceed normal growth, increase ROI (both cash on cash as well as on equity)
and using this strategy I am very weary of the Sydney and Melbourne market. The risk is just far to high to my liking, especially when I am borrowing several hundreds of thousands (or millions) of dollars. Not even talking about that with a strongly cash flow positive portfolio you can always get additional finance at acceptable terms, which in turn can fuel your growth.

Sorry about the rambling, I hope it explained the why of my opinion.

I still very much appreciate your and all other contributors view as it makes me think.

Tibor
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1.1.2.1
From: Terry W


Tibor

Please ramble some more!

I know that you have purchased a number of properties in a very short period of time. Could you please let us know how you overcame the too rent reliant line that banks try to pull. I assume cash flow +ve property helps heaps with your borrowing capacity.

Thanks

Terryw
 
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2003 BOOM

Reply: 2.1.1.1.1.1.1.1.2.1.1
From: Tibor Bode


Terry,

I have purchased 8.5 properties in 13 months.
The cheapest was 41K and the most expensive was 128.8K. All but one are townhouses. Yes about 5 months ago I ran into the problem being too rent reliant (since then I have purchased another 3.5). As I am not the smartest thing walking on 2 legs, now I am out of further purchases (no more equity or serviceability left to play with) for the time being, but it allowed me to set up a very good basis for the future. This lag time will also allow me to reno each property and ensure that each asset will perform to its maximum before I will get back to purchase more. I know some really smart people can do it better (I am always interested to learn about their strategy), but this is mine and it suits me well.

When I got into trouble with my previous broker and his institution (who were quite helpful up to that point) I discovered this Forum and Ralf has mentioned Frank Shead as a trouble shooter finance broker. I called him and he came out on THAT NIGHT! What has he achieved? He helped to refinance (increase borrowing) of our biggest asset (just joking our home is owned by the family company and we pay rent) what was previously undervalued and refused by 2 well known financial institutions. He also helped us to buy another 3.5 property (the .5 property we actually paid CASH for). So I owe him a big bottle of his favourite French champagne (with a pleasure Frank and a BIG THANK YOU as well).

I am buying properties which are usually have a 10% plus gross yield, underpriced (or low end of market and can not usually replaced at the purchase cost and usually some investor paid more for in the past), neglected (ripe for a reno job) both physically as well as the tenant is paying less than the market price for rent. Some of these are pre 84 (pain as there is no building write offs, but it can be overcome by reno)others post 84(hurray more the tax man is gonna contribute to it).
Now, I do a partial or full reno and increase the rent and trying to put in tenants on a 3 years lease (annually CPI indexed). I do it for the following reasons;
1) Increase the rent to the max I can realistically, so I can outprice the trouble tenants (not cheap any more) and hence increase the ROI and the cash flow.
2) Insurance as when times bad high vacancy rate) better quality properties can be let out easier / faster.
3) Dramatically reduce maintenance cost as the majority of old and worn things are replaced with new.
4) Increase the depreciation allowance (I still haven't figured out in my strategy which is the better option leave it for 12 months with reviewed rent then renovate and write off the majority of the cost as repair or renovate immediately, but doing the latter on gut feeling) immediately, hence the ROI and cash flow.
5) Increase my equity in the property immediately. We just did an 11K reno on a 44K property, increased rent from $95 to $130 and the new value is close to or around 70K. At the same time with our managing agent's help (she is excellent) and with some smart tenancy clauses we got rid of a real PITA tenant.
6) Using the multi year tenancy I can very strongly argue with the institution (my broker can do it for me, bless his heart) to increase the rental income (on the increased rental income basis) they take into consideration from 80% to 90% plus.

So on this basis as I have real assets (money is coming into my pocket) and if there is capital gain (which seems to me happening in the area) it is excellent, but if the market stagnates I don't care. If interest rates rising, I am also cushioned more than if I would loose money every week.
I still receive money back from the ATO due to the depreciation. And I could not give a stuff if negative gearing is abolished or altered by any way or shape or form. In future it also will allow me to start slowly (1 property at a time) to reduce my debt completely (hence lower LVR, higher DSR and can buy more or just put my feet up) and allow me to get the hell out of the rat race quicker, which is my primary aim.

I hope this further rambling helps.

Tibor
 
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Reply: 2.1.2
From: Brett Burt


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Who says Noahs Ark is fiction ? Anyways, that is not the point.

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Who says Noahs Ark is fiction ? Anyways, that =is not the
point.

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Reply: 2.1.2.1
From: Igs Kanny


...their inferiority complex... certain class of people born in USSR who are buying predominantly in eastern suburbs ...I don't know single one of them which is worth knowing...

TBI,

what class would that be?
businessmen?
carpenters?
plumbers?
may be bankers?
U seem upset, "mate".
Although the question was rhetorical but thanks for your answer anyway. I shall certainly reevaluate my property selection criteria and steer away from the "inferior".

I was actually talking about the North side. But apparently U have a problem with the east. May that be a little complex of yours?

Igs
 
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Reply: 2.1.2.1.1
From: Mike TheBloodyIdiot


Spasibo, tovarisch!

Should you have taken a second to think why I spend so much of my precious time typing all this manure:

"...their inferiority complex... certain class of people born in USSR who are buying predominantly in eastern suburbs ...I don't know single one of them which is worth knowing..."

you would realise that I am full of suspicions regarding your origin (which you seem to be so ashamed to reveal), and I was just throwing in bait.

Not even bait, it was a bare hook that you have swallowed.

Do you still think that my psychiatric treatment will be more expensive than yours?

Cheers,

Mike
 
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