Building Wealth in Uncertain Times

[Ian Somers]

When we are talking about property, are these economic times all that different to the various economic crises that the world has experienced over the past 100 years or so?

Is it so easy to lose the big picture in the day to day media hype?

Doesn't "shelter" still remain one of our basic needs?

Has property in any of Australia's capitals ever dropped in value over any 10 year period in our history?

Doesn't a hypothetical doubling of the unemployment rate from 4% to 8% still mean that 92% of workers are still employed?

Does someone know something that I don't? Have there really been too many properties built to house Australia's current and projected population?

I don't know what others feel about property as an investment, but I have found that long-term investment in residential rental property has served and continues to serve me well. I do not expect or need capital growth of 10+% or more every year. I do not expect or need to have 0% vacancy rate or 5+% rental yields every year.

I do know that I have more control over my investment assets than if they were shares in a company run by people I do not know and vulnerable to a world economy that everyone says is in turmoil. I do know that my investments help people by providing them a decent shelter in a place and time that serves their needs. I also know that keeping all my assets in the form of cash would be a sure way to see my wealth dwindle over the long term.

For me, I decided a long time ago that long-term investment in residential rental property was my best option as it lets me sleep well at night. I do not expect everyone to share my view on the investment world and these days, I have no real interest in preaching the property investment bible. But I do feel sorry for those people with such a gloomy outlook on life or are so tied up in looking for the next get-rich-quick scheme in changing times that they apparently have no time to smell the roses.

Maybe I am getting a bit old and cynical but I also wonder why it is that people who have no apparent interest in sharing their knowledge about property investment, are so motivated to even visit this site, let alone publish such negative alarmist posts. Having said that, I do maintain my belief that you cannot read too many books or talk to too many people so negativity is not a justification for censorship.

I just hope that potential investors are not so paralysed by all of the negative stuff that they use it as a convenient excuse to do nothing. Long term, doing nothing is the worst thing you can do if your aim is some form of financial independence in your mature years.

 

[Witzl]

Very nice post Ian. Thanks for reminding us all that we are in property investment for the long term benefits, that long term gain will outlast and survive any short term financial crises.

Thank you kindly for re-centreing my mind on my loan term goals.

 

[devo76]

When we are talking about property, are these economic times all that different to the various economic crises that the world has experienced over the past 100 years or so?

Is it so easy to lose the big picture in the day to day media hype?

Doesn't "shelter" still remain one of our basic needs?

Has property in any of Australia's capitals ever dropped in value over any 10 year period in our history?

Doesn't a hypothetical doubling of the unemployment rate from 4% to 8% still mean that 92% of workers are still employed?

Does someone know something that I don't? Have there really been too many properties built to house Australia's current and projected population?

I don't know what others feel about property as an investment, but I have found that long-term investment in residential rental property has served and continues to serve me well. I do not expect or need capital growth of 10+% or more every year. I do not expect or need to have 0% vacancy rate or 5+% rental yields every year.

I do know that I have more control over my investment assets than if they were shares in a company run by people I do not know and vulnerable to a world economy that everyone says is in turmoil. I do know that my investments help people by providing them a decent shelter in a place and time that serves their needs. I also know that keeping all my assets in the form of cash would be a sure way to see my wealth dwindle over the long term.

For me, I decided a long time ago that long-term investment in residential rental property was my best option as it lets me sleep well at night. I do not expect everyone to share my view on the investment world and these days, I have no real interest in preaching the property investment bible. But I do feel sorry for those people with such a gloomy outlook on life or are so tied up in looking for the next get-rich-quick scheme in changing times that they apparently have no time to smell the roses.

Maybe I am getting a bit old and cynical but I also wonder why it is that people who have no apparent interest in sharing their knowledge about property investment, are so motivated to even visit this site, let alone publish such negative alarmist posts. Having said that, I do maintain my belief that you cannot read too many books or talk to too many people so negativity is not a justification for censorship.

I just hope that potential investors are not so paralysed by all of the negative stuff that they use it as a convenient excuse to do nothing. Long term, doing nothing is the worst thing you can do if your aim is some form of financial independence in your mature years.

I admit as a bit of a newbie to investing it can be hard at times to keep property investing in a positive light. Many times over the experianced people on this forum with many cycles under there belt will tell us to look at the long term.Keep a safety buffer and choose well. This is still the case only at the moment there is a lot of external noise trying to sway our thinking in other directions.I still strongly believe that the so called gloomers do have something to offer. I have learnt a lot from them and i am greatfull for them opening my eyes to many other aspects of what we do here.To go into property investing without a balanced view is the wrong thing to do.But many of them tend to push to far and seem to want praise for there predictions like a gold star deprived preschool child during a quiz.For some the time they spend on here is clearly not in the interest of property investors or investing.So why be here at all.Times are bad but there is opportunity out there. This site is a wealth of information for all aspects of property investing including the risks involved. Use it to its full potential and use what you learn here and long term wealth creation will follow. We are in a time that most know as part of investing but to others it can be a scary outlook. But as i said ,use the information that is available here and in other areas and you should be fine.

 

[Player]

Well said.

Shelter is indeed one of our most basic needs. According to Maslow's hierarchy of needs and his theory of motivation, shelter is a basic need of survival.

Those who have donned their "opportunity eyes" will (in these economic times) find acres of diamonds under their noses, only if they seek with that perspective. Others, who see the half empty part of the glass, will only see rubble.

This does not imply that people should not be responsible and go out and buy everything in sight however, as Ian has mentioned above, in one of the most sensible posts I have read in a while, when viewed as a long term investment proposition, property will deliver. It will run the course of the cycle of up's and down's and as has occurred in the past.........this, too shall pass.

You may post selectively Ian, however this is a timely reminder for all of us to avoid the "chicken little" media frenzy. Kudos to you for introducing this thread and the conent above.

Well said Ian. A very logical and well expressed synopsis of the perspective we should all have in the current climate.

 

[Rob Williams]

I agree. Great post and each point is right on the money.
One observation, though. Having been following the "spruiker seminar" circuit for a year or so, now, I've realised that there are a lot of people out there who seem to almost rely on either bad news or their perceived need for further "education" as a means of enabling their procrastination.
I'm not sure that it's the negative media itself that's to blame in the case of such people who seem to find so many ways of avoiding action.
I've watched a particular group pf people over the last year or so. They go to ALL the seminars. To date, none of them has actually DONE anything.
I feel that these seminar spruikers know this and milk these poor people for all they are worth and I find it very disturbing.
OK. Rant over.

 

[evand]

That's a good post Ian true in principal. But i'd like to make one observation. And that is you are predicting the future for property investing to be the same as the past.

What do you think of the possibility that a paradigm shift can occur and the future of say, capital growth or yields or both maybe will never be the same as the past. Or of lesser impact, that we will have a very long period of no or negative growth (even relative to inflation) of maybe 10 years +. How many people can carry a portfolio in that case?

And that's beside the fact that property investing is artificially supported by beneficial ATO rules, government laws etc. If that ever changes for the negative, god help us.

 

[andrew_de_a]

evand, if we alll lived by your principal how can we be certain that any invetsment paramaters will remain unchanged?

 

[Ian Somers]

I do not intend to get into a debate over the prospects of property as an investment in the future as I certainly do not have a crystal ball. Furthermore, I agree that all of my thinking is certainly coloured by my experiences over close to 40 or so years of property ownership. However, there are a couple of comments that I would like to make in relation evand's post...

What do you think of the possibility that a paradigm shift can occur and the future of say, capital growth or yields or both maybe will never be the same as the past. Or of lesser impact, that we will have a very long period of no or negative growth (even relative to inflation) of maybe 10 years +. How many people can carry a portfolio in that case?

What are the alternatives that provide better prospects for the average investor? Show me something that has a lower risk profile with a better return than your well-located median-priced residential property.

And that's beside the fact that property investing is artificially supported by beneficial ATO rules, government laws etc. If that ever changes for the negative, god help us.

Are you too young to remember what happened last time the Federal Govt removed the ability to deduct passive losses against active income? It lead to a short-term flattening of growth and steep increase in rents which in turn lead to a Government back-peddle and a steep increase in growth because of pent-up demand (or at least that was my take on it).

In fact I think that many of the rules discriminate against property (no land tax on shares, no stamp duty on shares, etc) as it is very easy for State Governments to target property investors. Yet property has still performed well over the long term (any ten year period you like to name).

 

[devo76]

That's a good post Ian true in principal. But i'd like to make one observation. And that is you are predicting the future for property investing to be the same as the past.

What do you think of the possibility that a paradigm shift can occur and the future of say, capital growth or yields or both maybe will never be the same as the past. Or of lesser impact, that we will have a very long period of no or negative growth (even relative to inflation) of maybe 10 years +. How many people can carry a portfolio in that case?

And that's beside the fact that property investing is artificially supported by beneficial ATO rules, government laws etc. If that ever changes for the negative, god help us.

To plan your life in preperation for all the what ifs on the negative side. To me means you may as well give up now. I assume most want to give it ago regardless.

 

[Rockstar]

What do you think of the possibility that a paradigm shift can occur and the future of say, capital growth or yields or both maybe will never be the same as the past.

This is a definite possibility but, as I remember, Jan's long term hold calculations on IP scenarios in her book WERE always based on lower than realistic CG and yields with still solid results.

Please correct me if my memory has failed me as I actually borrowed the book to read a couple of years ago.

 

[MichaelW]

Works for me. Ian's sentiment is right on the money.

Even if we do have average or below average returns for an extended period, property still works as an investment vehicle. In simple terms:

Yield 5% odd
Growth 3% odd per annum in line with inflation

Even allowing for no negative gearing cash back for the shortfall between yield and interest rate, you're still making a year 1 return of 8%. Token Funder suggested 8% is a good rule of thumb interest rate to use so that means returns equal expenses in year 1.

Then the time value of money kicks in. The yield increases in line with inflation annually as rents increase, but your interest expense is on a fixed capital loan at year 1. The loan principle does not increase with inflation, its fixed. So, assuming a constant yield and interest rate to take this complexity out, this means your holding costs depreciate over time, whilst your income increases in line with inflation. Awesome! Ian and Jan nail this in their books with nice worked examples as Jan was a math teacher. The real clincher for IPs is the time value of money.

So, in year 2 your return beats your expenses due to interest deflation. And year 3 beats year 2 and so forth.

Even with very conservative assumptions around yield and growth, IPs work as a long term investment. But that's the trick, they're a LONG term investment, not some speculative capital gain play.

Cheers,
Michael

 

[sash]

Well said Ian.

I too think that property will serve people well so long as they look at the long term fundamentals. I read Jan Somers book 17 years ago (give my age away..LOL)...and to this day some of the information still sticks clearly in my mind

Turmoils in economies come and go..having been through the early 1990s recession...I can vouch for this. And this GFC like other downturns will pass...and again property will grow.

However, there are times when certain types of property will grow and others won't ...but over the long term all property will grow despite what some people say to the contrary.

That is my 2 cents worth.......as i always say time will tell and it is the best teacher..

I don't know what others feel about property as an investment, but I have found that long-term investment in residential rental property has served and continues to serve me well. I do not expect or need capital growth of 10+% or more every year. I do not expect or need to have 0% vacancy rate or 5+% rental yields every year.

I do know that I have more control over my investment assets than if they were shares in a company run by people I do not know and vulnerable to a world economy that everyone says is in turmoil. I do know that my investments help people by providing them a decent shelter in a place and time that serves their needs. I also know that keeping all my assets in the form of cash would be a sure way to see my wealth dwindle over the long term.

For me, I decided a long time ago that long-term investment in residential rental property was my best option as it lets me sleep well at night. I do not expect everyone to share my view on the investment world and these days, I have no real interest in preaching the property investment bible. But I do feel sorry for those people with such a gloomy outlook on life or are so tied up in looking for the next get-rich-quick scheme in changing times that they apparently have no time to smell the roses.

Maybe I am getting a bit old and cynical but I also wonder why it is that people who have no apparent interest in sharing their knowledge about property investment, are so motivated to even visit this site, let alone publish such negative alarmist posts. Having said that, I do maintain my belief that you cannot read too many books or talk to too many people so negativity is not a justification for censorship.

I just hope that potential investors are not so paralysed by all of the negative stuff that they use it as a convenient excuse to do nothing. Long term, doing nothing is the worst thing you can do if your aim is some form of financial independence in your mature years.

 

[Big Tone]

Thank you..........

Ian

Thank you for you post............
I personally have been procrastinating for about a year now to continue building my protfolio (thanks to all the hype) and finally I realised that my options for my and my childrens future were limited i.e investing options, any way to cut a long story short I actually bought a property this morning and as you can imagine my emotions were starting to get the better of me on the trip home, then to be able to come to this site and hear your words of experience and wisdom, I am now cool calm and collected and looking for more.

Thank you, thank you, thank you!

Big Tone

 

[Rob Williams]

I actually bought a property this morning and as you can imagine my emotions were starting to get the better of me on the trip home, Big Tone

Well done Big Tone!! Nice work.
Buyers remorse is well documented. It passes. It also lessens considerably on the next deal.
Maybe you can share some details of your purchase in another thread?
Congratulations.

 

[steveadl]

One observation, though. Having been following the "spruiker seminar" circuit for a year or so, now, I've realised that there are a lot of people out there who seem to almost rely on either bad news or their perceived need for further "education" as a means of enabling their procrastination.

Sad but true. I see regular people at seminars busily taking notes and listening intently, but after attending these things for years - are still yet to buy anything.

And that's beside the fact that property investing is artificially supported by beneficial ATO rules, government laws etc. If that ever changes for the negative, god help us.

That's a never ending path Evan. What if they remove negative gearing? What if they increase land tax? What if they triple stamp duties on business sales? What if they remove the 1yr + CGT discount for shares? What if they reintroduce stamp duty on all ASX transactions? What if they....

You deal with the market the way it is, not what could possibly happen if this law is changed and this new rule is brought in for this investment class, but changes for that investment class etc. For now negative gearing is a fact and let's be honest - it's here to stay for a long time to come, and even if it wasn't, it's not the end of the world. I've held 2 of my properties for just over 2yrs - properties the D&G'ers wouldn't have touched - and they've both now become positively geared without any tax benefits.

 

[Aaron Sice]

 

[want2bewealthy]

I believe there will be some people who are getting into the market now and in 10 years time will become very wealthy.

Its an interesting time and I see opportunity everywhere, fortune favours the brave.

 

[sash]

...or as they say in SAS ..."who dares wins"...

Its an interesting time and I see opportunity everywhere, fortune favours the brave.

 

[quoll]

There are always excuses to do nothing, very easy to find.

On a positive note.
Rents will continue to rise.
Long term inflation will rise, therefore value of cash will drop.
You can value add.
So even if property prices don't rise much I still think it's a good vehicle for wealth creation.

Business is not looking good short term, bad investment.
Commercial property?
Shares currently cheap might be good time to buy and hold?
Most of the other vehicles require more time and effort for return on your money.

Regards
Graeme

 

[VCDenton]

Thx Ian for clearing my thought

Last year I set myself the plan to buy my first property towards the end of this year or start of next but suddently all this mess turned up which really drove me into confusion as to whether I should wait till the end of 2009 as prices may drop....but right now I decided I am going in(sounds big but only planning a small purchase 2XXK)

Regards
Vince