Are we investors or speculators?

Hi All,

I don't know if anyone here knows Peter schiff, he's a guy I have followed closely since 2006 where he always talked about the pending economic crises. He is well respected and makes a lot of sense, so when he says people who buy homes and are losing money every month with the idea that they will recoup their losses through capital appreciations are not investors, they are speculators. I believe there is a real fundamental truth to that.

I am placing a link of a speech he gave before the collapse, I think you will find it interesting.

http://www.europac.net/videoblog.asp?id=jj8rMwdQf6k

Then on the right click on Video Blog Archive, for the first date of Thursday, 24th of September, titled "Mortgage Bankers Speech 2006". I would love to hear people's opinions on Peter's thoughts.
 
Most negatively geared properties turn positive within 5 years or so.

I believe investors hold property for the long term, speculators go for a quick profit. Not that there is anything wrong with either approach...
Marg
 
Hi All,
so when he says people who buy homes and are losing money every month with the idea that they will recoup their losses through capital appreciations are not investors, they are speculators. I believe there is a real fundamental truth to that.

So do I, if your only recouping your losses, your only breaking even.

With speculating, you have to sell at some time in order to make the gain, less costs, which probably won't be enough to replace it, and you've lost an income as well.
 
Hi Daniel

Most people who use words like 'losing' money actually don't understand property investing

There is more to investing in property than meets the eye. This is why so few people actually do it.

Property investing is talked about as if it is a national sport, but the truth is that few people understand it and have the emotional endurance to participate. Many property investors are actually accidental investors and at the first sign of trouble or first sign of profit bail out, never to buy another property for investment again.

Speculators, developers and others who buy property for other reasons than investment are using quite different techniques and generally would have different expectations of the outcome. Business activities are not investment activities, just because they involve property as stock in trade they are not the same thing.

We have bought quite a few properties with no money involved in the purchase, but money involved in the holding costs. This is not 'losing' money and does not make us speculators. After about 5 years the properties are generally paying their own way, so all we have done is trickled the money in rather than make a lump sum cash deposit. This technique does not make us speculators.

Everyone has a different way of working the same machinery.

Labels rarely serve any useful purpose.

Cheers
Kristine
 
Hi Daniel

Most people who use words like 'losing' money actually don't understand property investing

There is more to investing in property than meets the eye. This is why so few people actually do it.

Property investing is talked about as if it is a national sport, but the truth is that few people understand it and have the emotional endurance to participate. Many property investors are actually accidental investors and at the first sign of trouble or first sign of profit bail out, never to buy another property for investment again.

Speculators, developers and others who buy property for other reasons than investment are using quite different techniques and generally would have different expectations of the outcome. Business activities are not investment activities, just because they involve property as stock in trade they are not the same thing.

We have bought quite a few properties with no money involved in the purchase, but money involved in the holding costs. This is not 'losing' money and does not make us speculators. After about 5 years the properties are generally paying their own way, so all we have done is trickled the money in rather than make a lump sum cash deposit. This technique does not make us speculators.

Everyone has a different way of working the same machinery.

Labels rarely serve any useful purpose.

Cheers
Kristine

Hi Kristine,

Thanks for your input. Can I ask about your experience in property investing? I have owned 2 properties now for almost 3 years in February, and a few factors I am finding.

1. Rents increases are nominal when factoring in yearly increases in council rates, water rates, insurance, and repairs and maintenance. Any increase in yield through a moderate increase in rents are wiped out or heavily eaten into by inflationary pricing.

2. At the moment,we are all winners through the very low interest rates, but if you do your numbers based on the average percentage rate (7%), are you still doing well after 5 years of holding onto property?

3. I guess I just want to know that in 5 to 7 years time, even at 7% or 8% interest rate, does property (including the increase in costs) eventually make itself cashflow positive or do you need to pay down more equity to help you there?

Sorry for asking so many questions.
 
Hi Daniel

I bought my first property for investment in 1994, at the bargain interest rate of 8.75%.

I have, as they say, been around the block once or twice.

I bought my first business in 1989 with an ANZ Better Business Loan at 24.25%.

I had that business for five years, and bought the property with some of the proceeds when I sold and moved on to another business.

Our investments cover standard residential, and commercial. At a rough estimate I reckon we have now notched up about 100 Landlord Years. Our three children are all active property investors. We are a Property Investing Family!

With a bit of experience.

I would not pay down the balance of any loan if I could avoid it.

I bought the first property with a $68,000 loan and the balance is still about $65,000. The property is now worth mid $300s and the relative value of the outstanding balance of the loan is no longer significant.

A common mistake made is the perception of each property as a 'stand alone' investment. It is not. Our portfolio of investments is what counts. Of course, if each property is a 'winner' that's great, but I have one place aka The Bomb Site for which I have paid the whole mortgage for six years. However, eventually that property will become very important financially and to the neighbourhood ... in the meantime, it owes me, big time!

I have had offers over the years to sell it but it is irreplaceable and I am not passing the opportunity over to someone else just to relieve myself of the debt.

I personally believe that debt is an extremely important tool to grow wealth.

Debt is a commitment.

Without commitment, most of us are 'gonna do it' but rarely get around to doing it.

Taking on a debt forces us to live us to our own dreams. Debt creates wealth because there is never an easy way out, just the way forward.



Interest rates are neither here nor there.


I have known people to not buy a property because of a half a percent difference in the interest rates. Great excuse! What they really meant was that they were uncertain of their own ability to live up to their dreams, so the dreams remained dreams.


So don't worry about the interest rates, or the council rates, or the cost of cleaning the gutters.

Property is the greatest creator of wealth throughout history.

Make your own history and look to your own future and ignore the labels.

Cheers
Kristine
 
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Hi Daniel,
good to see that you are keeping your eyes and ears open. I wonder what that guy did at the end of the speech. Did he take Schiffs suggestion and sell out, or did he slit his wrists.
Schiff had some balls to get up in front of that group of mortgage brokers to explain what was coming.
Obviously Schiff was never called back in 2007 and 2008 to be laughed at again.
 
I don't know if anyone here knows Peter schiff, he's a guy I have followed closely since 2006 where he always talked about the pending economic crises. He is well respected and makes a lot of sense, so .

Well I for one think he's full of crap and only talking up his own bizness.
So I ask you:
How many years has he been predicting this "crisis" for? (afaik since 2002)
Did you follow him and buy the sell USD vs AUD? (just before the aud sunk like a rock)
Did you follow him and buy oil at >$100 ?


1989 with an ANZ Better Business Loan at 24.25%.
Those late 80s were definetly interesting times...
 
At a very basic level, I tend to agree with the inference of that original question.

Buying a property that costs more than it returns on an ongoing basis, with the blind hope that it will either increase in value or become positively geared, is at least to some degree a form of speculation. The main thing against this theory, in my mind, is when we follow a trend; in some ways, a longer-term scale of what some of us do on the sharemarket.

There isn't necessarily anything wrong with this approach; so long as it works.

Being proactive and deliberately taking steps to increase rents or value, is a step away from speculation. So is buying property that is already positively geared, either due to higher rental income or a higher deposit.

The aim of investing, fundamentally, is to create wealth. Wealth, I believe, is measured in time; how long can your investments support you without other forms of income?

It's hard to stop working (in the current lending environment) if your portfolio is still costing you more than it returns.
 
If property didn't have the track record it does then you could refer to it more as speculating.

However rents do increase, even if you ignore for a moment that values also increase. As other have said, they start off negative and after a few years go positive - though how soon would depend on your purchase yield. One I bought in 2007 has already gone positive with the rent increasing 33%, another one I bought last year on a much lower yield will take quite a while longer I'd say. But they're both increasing my overall net worth position and will continue to do so with each passing year so I don't consider it speculation.

If you want to get technical then you can pretty much look at any asset purchase out there that isn't positive from day one as speculating. ie. buying Woolworths shares - the yield doesn't cover the cost of interest now. But I'm pretty sure Woolworths will still be there in 5yrs time, a stronger, more profitable company - and the dividend you'll be receiving will cover the interest.
 
Well I for one think he's full of crap and only talking up his own bizness.
So I ask you:
How many years has he been predicting this "crisis" for? (afaik since 2002)
Did you follow him and buy the sell USD vs AUD? (just before the aud sunk like a rock)
Did you follow him and buy oil at >$100 ?



Those late 80s were definetly interesting times...

I could see your point if Peter was constantly making these prediction without an explanation, but he accurately explained HOW and WHY this failure was coming. And it all came true. In many video blogs he also states that he was surprised by how long it took for the crash to come, and he explains this as being because he did not foresee the credit authorities being COMPLICIT in the activites, as in giving these assets AAA ratings. His consesus was that governement and agency support spurred the situation further than it otherwise would have, which has also compounded the problems.
 
I could see your point if Peter was constantly making these prediction without an explanation, but he accurately explained HOW and WHY this failure was coming. And it all came true. In many video blogs he also states that he was surprised by how long it took for the crash to come, and he explains this as being because he did not foresee the credit authorities being COMPLICIT in the activites, as in giving these assets AAA ratings. His consesus was that governement and agency support spurred the situation further than it otherwise would have, which has also compounded the problems.

It's up to you to decide on how likely/plausible a particular prediction is and act accordingly. You'll be offered up these predictions on all sorts of subjects by experts every week for the rest of your investing life. Do you think the days of property prices continuing to rise are over? Or is it something that may happen one day, but nothing you have to worry about in your life time?

Here's another prediction for you; our sun will turn into a red giant in the future and we'll all be burnt to cinders - guaranteed. I don't know when it'll happen though. :D
 
Here's another prediction for you; our sun will turn into a red giant in the future and we'll all be burnt to cinders - guaranteed. I don't know when it'll happen though. :D

Thanks for the heads up, Steve. I'm putting the IP's on the market before this happens.
I'll spend half the proceeds on women and the other half on booze. Or I could just waste it :)
 
It's up to you to decide on how likely/plausible a particular prediction is and act accordingly. You'll be offered up these predictions on all sorts of subjects by experts every week for the rest of your investing life. Do you think the days of property prices continuing to rise are over? Or is it something that may happen one day, but nothing you have to worry about in your life time?

Here's another prediction for you; our sun will turn into a red giant in the future and we'll all be burnt to cinders - guaranteed. I don't know when it'll happen though. :D

Well, Peter is predicting the crashing of the US dollar and inflation that will rival the weimar republic. If this does occur within the next 5 years in the USA, will you then be converted?
 
Well, Peter is predicting the crashing of the US dollar and inflation that will rival the weimar republic. If this does occur within the next 5 years in the USA, will you then be converted?

I'd love it if he were right, especially if the inflation carried over to Aus. Inflation is a great friend of mine. $US going down big time is even better news for me personally. Remember inflation is good for a property investor.

Having said that, I won't be basing my investment decisions on his predictions. In the end what happens is usually somewhere in between, and life generally tends to go on with a little hiccup here and there along the way (for instance the last year or so). Remember I'm thinking of my personal perspective, not the good of the country etc - which is what I thought your original post was about ie. is buying a house investing or speculating.

If his predictions happen, sweet, but I'll just carry on as usual until then and make adjustments when and if necessary.

Listening to people like this is fine and can be educational - nothing wrong with it. But let me ask you this, take a step back from his lectures and writings etc and think small term for a minute.

If you buy a $250k house next week that rents out for $250pw, do you think that in 10yrs time the rent won't be at or around say $370pw with just minimal CPI'ish growth? Then ask yourself, will that house that now rents for $370pw still only be worth $250k, or will it likely have risen a bit as well to bring the yield back to the more normalised level? Or better yet, throw a bit of above average inflation in there and see where the rent and people's wages are, and that house will still cost......$250k?

so when he says people who buy homes and are losing money every month with the idea that they will recoup their losses through capital appreciations are not investors, they are speculators. I believe there is a real fundamental truth to that.

That's the question I'm trying to answer for you. If you want to debate the guys theories and the greater consciousness of the world markets and equilibriums, then I've misunderstood you and will bow out and leave the conversation for YM, Boz etc. :)
 
He is well respected and makes a lot of sense, so when he says people who buy homes and are losing money every month with the idea that they will recoup their losses through capital appreciations are not investors, they are speculators.

To me, an investor is someone who puts part of their income into some sort of vehicle in the hope that their money will grow over time.

There is no guarantee that it will, but we can make some assumptions based on our knowledge and experience and skill. Using past trends, patterns, statistics etc help to make the investors' decisions safer and provide better returns, and decrease the "hope" element of it.

They continue to buy investments that continue to grow in value, and throw off income through dividends and rental yields, business income etc.

This is the generic form of an investor.

Then, the different levels, commitment, skill, knowledge and strategies start to factor in.

This is usually in an attempt to accelerate the money-making process of the investment/investing.

A speculator is someone who is an investor who is using strategies and are hoping for very quick and very high return, but with a heightened element of risk attached to it. A crude word for this would be a "gambler" and/or "trader".

They are still investors, but they are playing a higher stakes, higher speed version of it.

With property - especially the type which "loses money" every month, the thing that needs to be remembered is that most people use some of their income for investing. Nothing wrong with this. No different to putting money into the Bank each payday (except the returns are different).

So, if a person buys a property, and has to put some of their income into it each month to hold it while they wait until it appreciates in value is not gambling or speculating in my opinion.

It is a proven fact that property continues to go up in value. The trick is to make sure that the end result is that the combined factors of the property's appreciation, the rent returns and the depreciation/tax deductions return far more than the initial outlay from the investor's pocket.

From my experience, this is as easy to do as falling off a log with a bit of knowledge and experience.

Therefore, even though the investment may "lose money" every month, there is not really much "speculation" about it if you hold it for the longer term.

Of course, if you have the skill to be able to put none of your own money into it at all in the first place, then there is no speculation - only making money out of thin air.
 
I'd love it if he were right, especially if the inflation carried over to Aus. Inflation is a great friend of mine. $US going down big time is even better news for me personally. Remember inflation is good for a property investor.

Having said that, I won't be basing my investment decisions on his predictions. In the end what happens is usually somewhere in between, and life generally tends to go on with a little hiccup here and there along the way (for instance the last year or so). Remember I'm thinking of my personal perspective, not the good of the country etc - which is what I thought your original post was about ie. is buying a house investing or speculating.

If his predictions happen, sweet, but I'll just carry on as usual until then and make adjustments when and if necessary.

Listening to people like this is fine and can be educational - nothing wrong with it. But let me ask you this, take a step back from his lectures and writings etc and think small term for a minute.

If you buy a $250k house next week that rents out for $250pw, do you think that in 10yrs time the rent won't be at or around say $370pw with just minimal CPI'ish growth? Then ask yourself, will that house that now rents for $370pw still only be worth $250k, or will it likely have risen a bit as well to bring the yield back to the more normalised level? Or better yet, throw a bit of above average inflation in there and see where the rent and people's wages are, and that house will still cost......$250k?



That's the question I'm trying to answer for you. If you want to debate the guys theories and the greater consciousness of the world markets and equilibriums, then I've misunderstood you and will bow out and leave the conversation for YM, Boz etc. :)

Can you explain how high inflation is good for an investor? Sure your house goes up in value but so do the costs. Rent is worth less as the dollar is worth less.
 
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