350K house let for 300pw - madness??? Can you verify???

[JIT]

I am a sucker for punishment! Just keep swinging that bat.

I will try to give the counter argument to my insanity theory (just to prove I have been listening to you lot and aren't just here to be nasty):

1) There is an ownership premium that means rent remains below (sometimes well below) equivalent property prices in well located areas.

2) Therefore house prices can rise separate to rent for quite a long period of time because the markets are somewhat separate. i.e. people will pay a premium to buy in a particular area that renters won't pay. Call it "social status of owning in X suburb" if you like.

3) This ownership premium can grow. Where does the money come from for it to grow you might ask? A well located suburb might have people in the top 20% of incomes living in it when the population of the city is 1M people. As the city population grows to 2M people the population living in that area might now have the top 10% of incomes living in it (same number of people - they are just a different group of people - i.e. those with more money).

Ok, I guess that's one way of looking at it.

4) So if you believed this then yield doesn't matter. You buy in at a crap yield and sell at an even worse yield because the ownership premium has risen.

In your own personal example in Taringa, and in the example I just posted of inner Melbourne, I am arguing NOT to sell the property at all. In these examples, the property values have increased dramatically AND the absolute dollar values of the rents have increased too (even if in % terms the yield it is still low based on the current property value).

So, if you buy and time really well, very soon (and much, much sooner than you may think) you CAN get a positively geared scenario.

GSJ

 

[yieldmatters]

In these examples, the property values have increased dramatically AND the absolute dollar values of the rents have increased too (even if in % terms the yield it is still low based on the current property value.

So, if you buy and time really well, very soon (and much, much sooner than you may think) you CAN get a positively geared scenario.

GSJ

Agree timing is important. At the current market highs though people will be waiting a long, long time hence the question at the beginning of the thread ... do I bother holding this property?

Was my timing perfect? Definetly not. But I think the person who bought the apartment next door to my old one in Taringa is insane. It's hard to know how many more nutters are out there so its hard to time these things! I haven't worked it out but even if I am generous and apply 5% rent increases to the market rent on that place they will be waiting a very long time to breakeven. If might be positively geared in a reasonable amount of time but then they have to make back all their losses from the negatively geared period. (edit .. I'll work it out with the calculator I built if anybody is interested - we would have to come up with some agreed assumptions though! Might be tough)

The ONLY way I can put any logic into these type of purchases at this point in the cycle is that they are speculating on that "ownership premium for the suburb" I was talking about increasing in the future and therefore getting even further capital gain that is unrelated to yields. This might happen - we will see.

My problem at the macro level of more money going into housing than we actually earn though is a bigger picture problem that overhangs all of this. That isn't area specific however.

 

[JIT]

At the current market highs though people will be waiting a long, long time hence the question at the beginning of the thread ... do I bother holding this property?

That's what people said in 2005, and in 2002 and before that etc. etc...!!!

At any particular point in time that you enter the market, eg. 2007, if you are going to negatively gear, my view is that you need to aim to buy the property with the best chance of strong short-medium term CG.

So, today, this may no longer be that apartment in Taringa, as it's already gone up so much in the last couple of years...it might be something a bit further away from the CBD, a bit cheaper, and with a better yield...ie. think of the 'ripple effect', and understand local supply and demand factors...

This is the skill of selecting great properties and using the strategy of negatively gearing successfully.

Logically, yes, 'macro-economic' factors may eventually have some impact, but when and what sort of impact (if any) is anyone's guess...

GSJ

 

[Azza]

Sounds like Azza has jumped on board to subtly point out how insane the property market has become as an investment vehicle. I think Azza actually fully understands this but is just enjoying the conversation with you lot! So unless you want another "inspired conversation" thread best you consider how much you engage!

(Azza is not me if you are wondering - I am far more blunt about my thoughts!)

No, I am not a troll.
I am a real person, considering my options - sell the house vs. rent it out. I can even submit photos of my house if anyone really keen to see it.
I am trying to put together figures explaining why renting will makes sense.

Here we go. Projected increase in 350K house value, assuming 5% yearly appreciation.

year value increase from initial
1 5 367.5 17.5
2 5 385.875 35.875
3 5 405.16875 55.16875
4 5 425.4271875 75.4271875
5 5 446.6985469 96.69854688
6 5 469.0334742 119.0334742
7 5 492.4851479 142.4851479
8 5 517.1094053 167.1094053
9 5 542.9648756 192.9648756
10 5 570.1131194 220.1131194


Basically, on 5 years mark I've invesed 50K and the house appreciated 96K.
My yeild is still negative but if I sell I might break even.

7% - looks even better
year value increase from initial
1 7 374.5 24.5
2 7 400.715 50.715
3 7 428.76505 78.76505
4 7 458.7786035 108.7786035
5 7 490.8931057 140.8931057
6 7 525.2556231 175.2556231
7 7 562.0235168 212.0235168
8 5 590.1246926 240.1246926
9 7 631.4334211 281.4334211
10 7 675.6337606 325.6337606


So the yelds may stay negative but there is always someone buying property in hope of the future grow...

Doesn't it looks similar to a Pyramid scheme?
http://en.wikipedia.org/wiki/Pyramid_scheme

 

[yieldmatters]

Doesn't it looks similar to a Pyramid scheme?

Yes - that is another theory that fits the facts nicely. And those at the bottom of the scheme would be young people which gets me going on my social equity rant!

At the micro level (certain areas) you can make sense of this market - people on this forum have helped me understand it.

But at the macro level (all areas added up) it is completely illogical. I have been on a search for answers but can't find any. A giant pyramid scheme funded by enormous amounts of debt is certainly a theory that fits.

But if I keep going on about this I will get on people's nerves again - the big questions aren't normally what they are into.

 

[Sunfish]

But Azza, how can you expect a meaningful answer when you have not told us some important things (or I have missed them)?

Why are you moving? If it is for work and could only last a few years, then renting out your home may make sense. If however you are moving for a better life, then sell and buy another. I believe in living in your own home if you do not intend moving any time soon.

Do you know anything about investing in other assets? No point in selling and have it (your equity) wither and die in a bank account or be lost on some folly. I think I know other, better, investments than you present your house as being so I would sell, but I could not advise you to do so. But then, I haven't sold my own property because it is still doing well.

 

[Azza]

But Azza, how can you expect a meaningful answer when you have not told us some important things (or I have missed them)?

Why are you moving? If it is for work and could only last a few years, then renting out your home may make sense. If however you are moving for a better life, then sell and buy another. I believe in living in your own home if you do not intend moving any time soon.

I am moving simply because I want to live in a different area. Simple.
There is nothing wrong with my current location - Greensborough and I even believe it will appreciate because of massive development next couple of years. Remember Glen Wawerley? Maybe Gborough is next big thing...

I bought it for 267K just 4 years ago. After renovation, it's worth 350K now.

Do you know anything about investing in other assets? No point in selling and have it (your equity) wither and die in a bank account or be lost on some folly. I think I know other, better, investments than you present your house as being so I would sell, but I could not advise you to do so. But then, I haven't sold my own property because it is still doing well.

I know if I simply put money in my own mortgage I currently save 7.8% PA in tax-free money. That's hard to beat, because it's tax-free.

 

[alexlee]

I know if I simply put money in my own mortgage I currently save 7.8% PA in tax-free money. That's hard to beat, because it's tax-free.

That's not how I look at it. If you put $1 into your mortgage, your 'return' is 7.8% AFTER tax. If you put it into shares, say, it 'costs' you 7.8% after tax but you get a 'return' of whatever shares are (say 10%). It looks like the returns are about the same after tax, but it's not when you view it over time. The return on shares grows (price, dividends) while the return on the money you put into the mortgage stays the same.

Over the long term, this can be a significant difference.

Actually, Azza, how old are you?
Alex

 

[alexlee]

Azza, if you don't believe your property will give you adequate returns, go ahead and sell. As they say, no one ever went broke taking a profit, especially as it's CGT free for you! No point keeping something as an investment if you don't believe in it. Not worth the mental aggravation.
Alex

 

[Azza]

That's not how I look at it. If you put $1 into your mortgage, your 'return' is 7.8% AFTER tax. If you put it into shares, say, it 'costs' you 7.8% after tax but you get a 'return' of whatever shares are (say 10%). It looks like the returns are about the same after tax, but it's not when you view it over time. The return on shares grows (price, dividends) while the return on the money you put into the mortgage stays the same.

Over the long term, this can be a significant difference.

Actually, Azza, how old are you?
Alex

Well, I thought everyone on this forum assumes house prices will also grow
So apart of saving on mortgage interest, my asset should also appreciate...

I'm 34. Still far from the retirement

 

[Sunfish]

I am moving simply because I want to live in a different area. Simple.

That sounds like you are moving for a better life. In that case sell and buy a new home, enjoying the pride of ownership. Then you will able to do as you said here:

I know if I simply put money in my own mortgage I currently save 7.8% PA in tax-free money. That's hard to beat, because it's tax-free.

But don't rest there. When you get settled keep learning about investment generally and start planning your next move.

 

[Twitch]

Well, I thought everyone on this forum assumes house prices will also grow
So apart of saving on mortgage interest, my asset should also appreciate...

I'm 34. Still far from the retirement

Don't believe everything said on the GHPC forum about this forum. That's one of the dumbest ones.

 

[alexlee]

Well, I thought everyone on this forum assumes house prices will also grow
So apart of saving on mortgage interest, my asset should also appreciate...

I'm 34. Still far from the retirement

Yes, and how will it affect the appreciation (or not) of your property if you decrease the mortgage or not? Do you increase the appreciation on your property by paying off the mortgage?
Alex

 

[Azza]

Yes, and how will it affect the appreciation (or not) of your property if you decrease the mortgage or not? Do you increase the appreciation on your property by paying off the mortgage?
Alex

Yes, you're right. It doesn't affect property value if I payed off whole mortgage.

But, it's just makes me feel more comfortable if I'm not overexposed to unfortunate events...
Taking a 240K loan is quite scary if you have nothing (5K in savings...).
The very same loan is a joke if you already have 200K in equity.

 

[WillG]

Well, I thought everyone on this forum assumes house prices will also grow
So apart of saving on mortgage interest, my asset should also appreciate...

I'm 34. Still far from the retirement

Just out of curiosity ... When do you plan to retire (aka stop working for a living)

Are you planning to fund your retirement through super, investment income or a mixture of both ?

I would imagine your next 10 years will be your peak earning years where you will be able to buy your biggest investments. What other forms of investments have you been thinking of ? Would keeping your existing property help you get to where you want to get ?

Note: I am not trying to push property. I am trying to help you see the bigger picture

Hope this helps

 

[Azza]

Just out of curiosity ... When do you plan to retire (aka stop working for a living)

Are you planning to fund your retirement through super, investment income or a mixture of both ?

I would imagine your next 10 years will be your peak earning years where you will be able to buy your biggest investments. What other forms of investments have you been thinking of ? Would keeping your existing property help you get to where you want to get ?

Note: I am not trying to push property. I am trying to help you see the bigger picture

Hope this helps

I probably will retire at 65 or so. In 30 years...
I think mortgage fully paid off is not a bad position to be. I also paying 12% salary in super.
Apart from that, I know it's a bad tone to mention this.... but by the time I retire I should have some inheritance as well.

Getting into serious negative cashflow today is actually more scary comparing to my distant retirement future.

I don't mind investing. But turning my family house into investment is probably not the best idea.

 

[alexlee]

Each to their own, of course. But personally, I plan to 'retire' much earlier than 65, so I'm going (and am, currently) taking more risk.

Still, if you plan on retiring at 65 and expect an inheritance, putting as much as possible into the super fund and aiming to pay off the PPOR is a good, conservative plan.

If you want to achieve more faster, though, stick around........
Alex

 

[VYBerlinaV8]

I don't understand this rule. Was it typed correctly ?

i.e. take the purchase price (or in this case loan value) of the property, drop off the last 3 numbers (ie divide by 1000), and the number that's left should be your target weekly rental.

Folowing the rule I would take loan amount of of 320,000. Drop 3 figures off = 320. This is the weekly rent.

Where does the $480 come from ?

You are correct - it was typed incorrectly! What I should have said is drop the last 3 figures, multiply by 1.3, that's your answer:
320,000 becomes 320, multiplied by 1.3 = 416 per week.

I seem to have had a complete brain fade!

 

[Sunfish]

Azza, You will have noticed a difference of approach (or haste) between Alex and I. On this we must agree to disagree.

 

[JIT]

Still, if you plan on retiring at 65 and expect an inheritance, putting as much as possible into the super fund and aiming to pay off the PPOR is a good, conservative plan.

Suppose it is a 'plan'...but sounds to me more like a 'default' position that most people just have and accept...not that there's anything inherently wrong with it of course.

GSJ