Assets put money in your pocket....right?

[Dis]

Lets say you found a prospective IP with the following characteristics:

Pros:
- 10% net yield (including deductions)
- stable long term tenant with almost no vaccancies
- history of steady rental increases
- tenant has agreed to 10% pa rental increase for at least the next 2 years
- the value of the property has had strong long term growth

Cons:
- market sentiment is bad in the area and the property has lost considerable value (30% over the last year).
- market sentiment remains poor and the value may go down further before it comes up again. Hard to pick the bottom of the market.


Question 1:
Would you buy it if you had enough equity in existing IP's to fund the purchase ?

Question 2:
Why aren't people buying bank stocks at the moment ? (The above scenario pretty much sums up many of the major banks). I appreciate that the sector may go down further but right now as a buy and hold investment they seem so much better than chasing the next IP. What am I missing......?

 

[MarkB]

Don't you think your 2 cons kinda knock-out your last pro completely?

 

[pjparker]

funny you mention that.

I entered back into the stock market last week with some bank stocks. Great yields. Will be watching the market and will probably buy some more.

Cheers
Paul.

 

[topcropper]

Question 2:
Why aren't people buying bank stocks at the moment ? (The above scenario pretty much sums up many of the major banks). I appreciate that the sector may go down further but right now as a buy and hold investment they seem so much better than chasing the next IP. What am I missing......?

I think current share prices have factored in not only a recession in the US, but also one in Oz as well. So investors are saying that even with 7% ff yields, that's not enough to compensate for falling profits if recession is the case. With falling profits, dividend yields will likely fall too. You can get that yield in a term deposit, without the chance of further loss.

If you think Oz will not have a recession, then banks are a buy.
If you think we are entering into a recession, then they are not.

Your decision.

See ya's.

 

[oasis1frog]

Lets say you found a prospective IP with the following characteristics:

Pros:
- 10% net yield (including deductions)

IP, 10% net yield, as rare as hen's teeth !!!!

 

[MarkB]

Remember Frog, it would have been yielding 7% net before it tanked 30% in the example.

M

 

[Dis]

IP, 10% net yield, as rare as hen's teeth !!!!

Thats sorta the point I'm making. If it was an Ip people would be jumping all over it .....

Don't you think your 2 cons kinda knock-out your last pro completely?

Don't buy a falling dagger by all means. Don't buy if future yields are likely to plummet (especially if yield is what is holding up the share price). I agree with that.

But to say that recent price "tanking" is a reason not to buy seems a bit miopic. IMHO anyway. Following that logic, if they fell another 30% they would be an even worse buy........?

 

[MarkB]

Dis

I see where you are coming from, but I'm personally not keen on the resi IP / equity comparison since, imho, they are not apples and apples.

Some people buy into a share knowing full well that it may actually lose value before it starts gaining.

But I'm yet to meet a residential property investor who seems as open to the idea of immediate losses in equity (even for the prospect of long term gain).

M

 

[BayView]

If you are looking for a cashflow investment and wanting to put instant dollars in your pocket, then a 10% yield IP (assuming it is cashflow positive) even after the value has dropped 30% is ok.

People buy investments all the time that have just dropped 30%; they even do it on liabilities such as cars, clothes and furniture, so don't let that factor bother you.

Given your 'pros' for the IP, my answer to your Question 1 would be "why wouldn't you buy it?"

Market sentiment is the investor's friend, as the majority of properties sold and bought are by owner/occupiers, who mostly don't consider the investment aspects of the market, their area they wish to live etc. Bad buyer sentiment means that cheap houses will be available shortly as the buyers disappear and sellers have to drop prices to achieve a sale.

I'm no shares expert, but I think people aren't buying Bank shares because of at least three reasons;

1. Cost - they are a relatively expensive share to buy generally.
2. Market Sentiment - because of point 1, people don't want to outlay big dollars for a few Bank shares when it seems like the market is going to tank.
3. More people than you think are cash-strapped, equity strapped and can't afford to buy them, as per point 1.