Australia is a leveraged time bomb waiting to blow

[13andcounting]

Maybe in 30 years time instead of $100 and $800 rocks we will be talking about $800 and $4000 dollar rocks...

Nicely put!

But...

If we extrapolate the last 30 years ($100 to $800) then should we start talking about $800 and $6400 rocks (nice round 800% increase)? And that is where we get to analysis and speculation... Should we use historic capital gains to extrapolate future returns? Having seen the changes in my balance sheet over the years, everything not connected to the increasing rental return (probably as much as 50% of the capital gains) has not come about from anything other than sheer plain and simple (mostly unexplained) luck! I still pinch myself at the estimated value of some of my properties.

Realistically it wouldn't really matter if Steve Keen's prediction came right.

 

[Deltaberry]

Assuming it doesn't go back down to $600k. Not a profit until it's sold.

Very true. Some of these sites we and other people bought for $3-4m, now worth around $20m or more, is not a profit until it's sold. Might be worth $500k when we do sell it. Better to stick with stuff where you can realise the profits (or losses) right away, like gold, eh?

 

[Deltaberry]

How do you know when to buy the rock? When it is sinking like (excuse me) a rock, when it is rising, or when it is neither increasing nor decreasing in value?

Buying for capital gains is always risky (in any market), because as many here would agree, it is a purely speculative bet on the hope that your analysis is right.

So now that there has been a relatively weak uptrend in some property markets, are we buying the $800 rock for $799, or more relevant in my case, selling some $800 rocks for $801 each? I really think that if you wanted to buy a $100 rock in the Australian property market you're probably about 30 years late!

By knowing your market. Probably bought around $10m of assets in the 18 months leading up to 2013 in the CBD or within one street of it. And look what's happening in market again.

Too much armchair hypothesising and not enough on the ground research and you'd never buy anything and sit there wondering, that's all I can say.

 

[Shadow]

I think you are confusing debt with equity. Just because you manage to draw down a larger loan against the property while it's valued higher than purchase price doesn't make those funds a profit. Also not sure how you came to the $120k figure... 80% of $200k is $160k.

As others have said - it's better than a normal profit, since you get access to the money without losing the asset (meaning the asset can continue to generate more profit), plus you don't have to pay tax. You do have to pay interest of course, but interest at sub 5% (often tax deductible) is better than paying tax at 30%.

 

[Intrinsic_Value]

I love all the 'debates' about the various technical terms in this thread.

What is 'profit'
When is 'profit' realised

etc etc.

It reminds me so much of all the armchair professors debating about whether an individual investor can 'beat the market' (ie efficient market hypothesis)

And why do I love it.

Because some just make money out of it, they are doing it.

Others spend their time debating it.
But debating doesn't effect ones own bank account, only action does.

 

[hobo-jo]

Might not be profit to you Hobo, but I bet you cant do that with gold. Where's the problem if one is never to sell...?

It's not profit to me or to anyone.

Don't know why the conversation always has to be switched to Gold.

All we are really talking about here is leverage.

There is plenty of leverage available in the Gold market for those inclined. Sure there's some benefits when borrowing against property that are not available for Gold and vice versa, where have I said otherwise?

Great idea, never sell... the answer to everything.

And Deltaberry, your big noting is noted. If you have tens of millions in net worth from your property investments then good for you. It far exceeds mine along with over 99.5% of the rest of the forum members also. What is your point?

It's amazing that a simple comment about what is and isn't profit can turn into a herd of property investors shouting down the house about all manner of other subjects

 

[The Fence]

Once again, I wonder why you are even here Hobo...?

You always come back to accusing many on here of this that and the other.

Why cant you accept that people are different and have clever ways of creating "profit" and not just by the basic buy & sell way of the financially uneducated public?

You win, I give up.

 

[hobo-jo]

Once again, I wonder why you are even here Hobo...?

Have answered several times. Do a search.

I am not "accusing" anyone of anything, simply engaging in discussion which is the purpose of such a forum.

 

[Deltaberry]

But debating doesn't effect ones own bank account

That basically sums up my attitude to these debates.

It's not about leverage, or big noting, or gold, or properties. It's about making money. Do I really care why Steve Keen got it wrong? I just care for the fact that he did get it wrong.

But of course, you'll tell me I never made money because I still haven't sold, yea?

 

[HotRod]

Look at it this way.

Let's make the numbers a little easier.

Original deal was say $600K with 20% plus fees or $160K (20%/$120K deposit, plus $40K fees etc just for argument's sake) in the deal and a $480K loan.

Property rises in value to $800K.

Now have two choices.

Sell for $800K and have a CGT event or refinance to 80%.

Assume it's held for more than 12 months and you have CGT of $100K and we'll assume that the seller is in the $80 to $180K tax range, so that's $38.5K tax, $25K agent's fee leaving a $161.5K ($200K less $38.5K CGT) profit plus $95K (160K less $25K agents fees and less $40K for upfront fees) left from the original $160K in the deal, so $256.5K all up.

So, all you're left with is $256.5K in cash.

If we decide to refi to 80% or $640K and take $160K out we'll be looking at an annual cost of say $8K (assume not deductible) plus say $1K up front for the refi.

Here you're left with say $159K in cash costing $8K pa but still have an asset worth $800K that at a modest 3% growth would allow annual redraws up to about an extra $19K to more than cover interest expenses.

Each one has it's benefits and downsides.

 

[HiEquity]

Nice example HotRod. Another way of looking at it is:

Sell Case:
Assets = $256.5k
Liquidity (cash in the bank available to spend on whatever your like - deductibility and serviceability impact depends on what you spend it on) = $256.5k (it's all liquid)
Debt = $0k
Net Worth = $256.5k

Re-Fi Case:
Assets = $800k
Liquidity = $159k
Debt = $480k
Net Worth = $320k

It gets even more interesting if you wait until the property grows to $1m (assuming $30k in agent's fees)

Sell Case:
Assets = $1m - $480k - ($38.5k x 2 for CGT) - $30k agent fees = $413k
Liquidity = $413k
Debt = 0
Net Worth = $413k

Re-fi case:
Assets = $1m
Liquidity = $159kx2 = $318k
Debt = $480k
Net Worth = $520k

We can all make up our own minds which we consider most attractive and the implications as we move through time but I know which I prefer... but of course the clincher for the re-fi case is whether the asset is paying you for owning it in cashflow or whether you are supporting it - big difference. And whether you use the liquidity to buy doodads or to buy quality investments that pay for the servicing costs of this new debt.

 

[Aaron Sice]

it's not about profit. it's about the game.

he/she who dies with the most toys, wins.

 

[13andcounting]

it's not about profit. it's about the game.

he/she who dies with the most toys, wins.

If your life flashes before your eyes before you kick the bucket, I reckon it will be the experiences and travel that will give you the *winning* feeling. I doubt I'll visualise a quick tour of the garage and a trip to the marina when it all comes to a swift end!

NOt meaning to sound too hippy, but maybe that is the profit: not the cash, not the equity, but what you do with it while it lasts (the experiences).

 

[nhg]

If your life flashes before your eyes before you kick the bucket, I reckon it will be the experiences and travel that will give you the *winning* feeling. I doubt I'll visualise a quick tour of the garage and a trip to the marina when it all comes to a swift end!

NOt meaning to sound too hippy, but maybe that is the profit: not the cash, not the equity, but what you do with it while it lasts (the experiences).

I think it's about personal growth (and spending time with loved ones of course). The reason I do some 'risky' things is for the thrill of knowing I grew beyond what I thought I was capable of.

Wether it be investing, travelling, throwing myself into community work or walking up to that ridiculously good looking woman at the bar. It's all about knowing I can push my boundaries and die knowing at least I gave it a go.

 

[Deltaberry]

If your life flashes before your eyes before you kick the bucket, I reckon it will be the experiences and travel that will give you the *winning* feeling. I doubt I'll visualise a quick tour of the garage and a trip to the marina when it all comes to a swift end!

NOt meaning to sound too hippy, but maybe that is the profit: not the cash, not the equity, but what you do with it while it lasts (the experiences).

Having profits and cash helps you experience. Otherwise you're in a job making ends meet.

 

[Intrinsic_Value]

If your life flashes before your eyes before you kick the bucket, I reckon it will be the experiences and travel that will give you the *winning* feeling. I doubt I'll visualise a quick tour of the garage and a trip to the marina when it all comes to a swift end!

NOt meaning to sound too hippy, but maybe that is the profit: not the cash, not the equity, but what you do with it while it lasts (the experiences).

Nope not at all, if it was I wouldn't be bothering to spend my time on Somersoft. No offence to the mods but somersoft is not the ideal 'life experience and travel' site

When it comes to the end, the fact is I enjoy making a quid out of investing.

After providing for loved ones, as well as the personal pleasure from maybe financially guiding others out there through the knowledge I have gained, I am sure that the beneficiaries of some future charity will be more than happy with the financial wealth created by me (even if they didn't know who was giving it or who I was).

The only real people I actually feel sorry for are those that spend endless time on a financial/wealth forum arguing 'armchair' theories.

 

[Ausprop]

The only real people I actually feel sorry for are those that spend endless time on a financial/wealth forum arguing 'armchair' theories.

why? I enjoy it. I use economics and making money as a form of puzzle solving / sport. As I hate traditional sports, I like to think of it as the thinking persons sport

 

[hobo-jo]

In this thread we have those that value profit in life over all else, others think toys, others lifes experiences, others personal growth and some enjoy debate / discussion. There is no need to feel sorry for anyone, if anything that just shows arrogance and lack of understanding that most people have different values and get enjoyment from different things. I would say most on SS put their money where their mouth is, so who is in the armchair without a position?

 

[HotRod]

Look at it this way.

Let's make the numbers a little easier.

Original deal was say $600K with 20% plus fees or $160K (20%/$120K deposit, plus $40K fees etc just for argument's sake) in the deal and a $480K loan.

Property rises in value to $800K.

Now have two choices.

Sell for $800K and have a CGT event or refinance to 80%.

Assume it's held for more than 12 months and you have CGT of $100K and we'll assume that the seller is in the $80 to $180K tax range, so that's $38.5K tax, $25K agent's fee leaving a $161.5K ($200K less $38.5K CGT) profit plus $95K (160K less $25K agents fees and less $40K for upfront fees) left from the original $160K in the deal, so $256.5K all up.

So, all you're left with is $256.5K in cash.

If we decide to refi to 80% or $640K and take $160K out we'll be looking at an annual cost of say $8K (assume not deductible) plus say $1K up front for the refi.

Here you're left with say $159K in cash costing $8K pa but still have an asset worth $800K that at a modest 3% growth would allow annual redraws up to about an extra $19K to more than cover interest expenses.

Each one has it's benefits and downsides.

Just realised I made a blue.

The actual taxable CG is $800K-$25K selling fee = $775K less $600K+$40K purchase costs = $640K, which is $135K and then 50% of that is $67.5K taxable CG and then taxed at 38.5% is $26K tax. Leaves $269K NOT the $256.5K.

 

[willair]

Not a great formula for social stability..