Capital gains.. from where exactly?

[Bill.L]

Hi all,

Seech, Seech, Seech...

Never let the truth of the numbers get in the way of a good story.

bye

 

[NigelW]

Nigel

Given the figures I quoted earlier on , I fail to see why selling properties has to be inefficient ??

For me it would have been inefficient to hold that property untill the next property cycle. Sure I could refinance the property and draw down the equity but on that property it would actually give me access to less money than if I sell. Seriously ...

Purchase price 87500. Sale price 202500 . Assume purchase and selling cost around 15 K ( will actually be less than that ) . Gives capital gain of around
100K . Tax rates have dropped ( we sold it this year ) . Marginal rate distributed through wife ( I think around 40 % ) gives income tax of 20 K , gives 80 K post tax profit .
This is cash in hand , we can invest it in higher risk strategies or what ever because we don't have to worry about what happens if we loose it , but then have a remaining debt because we drew it down from capital.

On top of this we also now have access to the money that we drew down from a LOC to pay for the 10 % deposit and legal fees stamp duty when we purchased the property. So on top of the 80 K cash in hand , we have at least another 12 K extra that we can borrow from existing loan facilities.

Second senario , we refinance . Selling price is 202,500 , but because the market has been moving quickly and is nearing a perceived peak , the valuers are edgy , so guess what ,they don't value it at 202,500. They look at the settlements from 2-3 months ago . Because there are no direct comparisons they ere on the conservative side and value it at 180 - 185 ( if you think I'm joking you obviously havn't had properties revalued during a moving market ...) .
Ok ,. so refincancing in this situation, the chances are that you will be going for 80 LVR , because you're being on the conservative side. 80 % of 185 = 148 K . mmm. You've already got 78,500 borrowed , so you can only increase you loan by 67,500. This is less than the amount you have available by selling the property . If you're going to go for an LVR of higher than 80 % at this stage of the market I'd be suprised.
I've already stated earlier on that the property was borderline cash flow at the purchase price of 87500, so if you are withdrawing your 67500 , you not only have less money available in terms of capital available than if you sell the property, your also having to pay interest on the money that you've withdrawn ( the 67500 ) so affecting your servicability in terms of borrowing further money. Remember the 80 K has no borrowing attached to it. Also you don't have that extra 12 K that you would have paid off on the LOC is you had sold.

Oh , sorry , you're going to fix up your servicability by taking out a cash bond or investing in your money in a fund which generates you cash flow ...

Oops ... which gives you more money to buy your cash bond or invest in funds.

I think selling.

So tell me. Why is selling property so inefficient ? I'd love to know the answer .
I don't see why this way is more conservative . I only see upsides . Less risk and more money to invest and to borrow your phrase , less dangerous....

Please correct me if you see a flaw in my arguements .

See Change

Hi Seech & Bill

Of course you're correct on one point, the numbers don't lie. As a mere wordsmith I'd be loathe to match calculators with you both... but here's my back of the envelope calcs...

To be fair Seech I think you've overestimated selling costs...but perhaps you're paying advertising and auction fees etc

Seems to me the cash in is about $90k, being purchase price plus transfer duty plus mortgage duty and I guess some modest sum for legals

Your cash out would be about $197k being the sale price less agent's commission which I figure to be around $5.5k...

So you get let's say $107k. Given the 50% CGT discount you'll only get taxed on say $53.5K which at 40% is about $21.5K so after tax (and I accept there's a timing benefit cause the tax ain't due yet) you'll have about $85.5k left.

On the refinance side I don't doubt that valuers are peverse creatures *joking* but why couldn't you wait a few months for the comparative sales to flow through to get you your valuation at say $200k?

Assuming you can get a $200k val (oh no an assumption )

Then an 80% lend would mean total debt of $160k less the 78500 already borrowed gives $81.5K available.

At this point it's useful to pause. 78.5K is almost a 90% lend on an 87500 purchase. Yoiks! But to be fair that was more than 12 months ago when the market was at a different place so perhaps justifiable???

Secondly, the sell strategy seems to be in the lead by a cool $4k. So hats off to the sell siders!

Thirdly, where did the $12k to pay back your LOC come from? Sorry, maybe I'm confused but isn't there only $197k proceeds of sale out of which you must take the 12K to restore the LOC balance?

Fourthly, what about redeployment costs for the capital on the sell strategy? Transfer duty on buying a $200k property would be over $5.5k ignoring all those other costs involved in buying.

And what's the gross asset position now? Sell strategy about $85.5k, refi strategy $281,500. So if you could get a net 5%pa return from the sell strategy's assets it would be about $4.2k return in the first year. For the refi strategy that would be about $14k. Hang on...that's a lot more!

Now of course there's an additional cost to having that extra $81.5K. At 8% it would be about $6.5k. So if we take that off the $14k it leaves $7.5k after the first year. Much closer but still a whisker more than the sell strategy.

Where the refi approach comes into its own is over the years which follow via the miracle of compounding. In year two the results are assets for the sell strategy $94+k, i.e. anouther 4.5k versus for the refi strategy $310,275 i.e. about another $15k gross or about another $8k net. And the longer it runs the better it gets.

Now of course I'm assuming (damn I did it again!) that the dodgy property up north will get that modest annual growth. And as I think I mentioned in an earlier post, if you've formed the view that ain't gonna happen then what Seech has proposed can make sense. But the transaction costs with property are so high relative to other assets that I reckon it makes sense to try to just buy keepers...

One of the key benefits of property is the leverage you can obtain with it. To my mind you should leverage to the maximum extent you can safely service with a margin of safety. A bigger asset base growing for you is better than a smaller asset base growing for you.

Not quite sure what the relevance of the cashbond to the discussion is...nor the cashflow generation method to support the debt. If you can do it with your job, or with selling widgets, or seeing patients, or through high yielding property trusts or a share income fund or through your own direct share trading (by the way how is that going Seech?) then it doesn't really matter. There is no such thing as certainty (except for death tax and change).

I hope that's clarified why I think there's typically a better way than selling. Thanks for a very informative post Seech.

 

[handyandy]

Hi Guys

Can you both spread sheet your figures and list your assumption. The figures presented are all tied up with words so become a bit fussy to understand but I do want to follow your figures.

The other aspect of selling is the money leakage that people have after selling. Ah look, we have all this money in the bank we deserve a new car, new boat, new kitchen etc the list goes on with most things being doodads. I acknowledge the concept of paying down 'bad debt' and if used wisely is only washing the money for eventual drawdown.

Just another concept to consider in the sell versus refinance. If the intent is to invest in shares or managed funds then there is the option to margin loan against this investment as such with a reasonable draw down and then a margin loan you can achieve the same funds (if not more but, I am conservative) as selling and still maintain the growth, if any, in the realestate investment.

Cheers

PS I am in the hold for ever camp getting 'capital gain' (income) through reinvesting the drawn down capital.

 

[see_change]

Hi Guys

Can you both spread sheet your figures and list your assumption. The figures presented are all tied up with words so become a bit fussy to understand but I do want to follow your figures.

Cheers

PS I am in the hold for ever camp getting 'capital gain' (income) through reinvesting the drawn down capital.

Sorry Andreas

Neither myself or Nigel are spread sheet kind of guys. .. and I was reluctant to start quoting specific examples because of this reason .

I'm not saying that it's always better to sell, though when Nigel made his comment that selling property is " Somewhat inefficient " , I felt that needed to be challenged.

Nigel is assuming that property goes up on a regular basis . It doesn't . Even well located property in Sydney goes backwards.
I think his assumption about valuers not being a perverse bunch of people is also incorrect . They are . They will look at past sales and will not ( in my experience ) be prepared to accept current selling prices .

Once the market softens , they will say , Oh sorry the market is softer so even though the sales from 2-3 months ago say you might have got 200 , we have concerns that the market is softer so we only are prepared to value it at 180 , because that is all we think you woud get with a forced sale ( and that's what the banks are concerned about ) . I'd be interested in the opinions of the mortgage brokers on the forum as to that .

If I have enough time tonight I will revisit figures and present them more clearly with assumptions.

Nigel is also assuming that I'm not doing anything with my money in the mean time . Personally I think I can take it out of the market and buy back at a time where I can get better deals than I can get now. Would I do this with well positioned places in Sydney . No . I'd hold them , but I'm more than happy to trade on cheaper more volotile outer suburban and regional properties.

Maybe these arn't Nigel's typical properties , but they can profitable , and to mare a general statement that Selling properties is somewhat ineffiecient ( with no qualifications ) is incorrect.

See Change

See Change

 

[NigelW]

Sorry Andreas

Nigel is also assuming that I'm not doing anything with my money in the mean time . Personally I think I can take it out of the market and buy back at a time where I can get better deals than I can get now. Would I do this with well positioned places in Sydney . No . I'd hold them , but I'm more than happy to trade on cheaper more volotile outer suburban and regional properties.

Maybe these arn't Nigel's typical properties , but they can profitable , and to mare a general statement that Selling properties is somewhat ineffiecient ( with no qualifications ) is incorrect.

See Change

See Change

I think the first paragraph's highlighted text is the key here. I don't disagree with that. Similarly I don't disagree with Seech's assertion that these regional properties can be profitable. Through impeccable timing Seech has more than demonstrated that, as have others.

I guess the key question then is:

Personally I think I can take it out of the market and buy back at a time where I can get better deals than I can get now.

As I mentioned, the transaction costs of property are high, so that means you'll need to get a much better deal/return than you would otherwise need to in the absence of those costs. Can it be done? Of course. Is it hard? Time will tell.

Re calls for spreadsheets, well all the numbers are there so why not build one yourself and share the learning? I don't think the back of my envelope will scan too well

ps. belated thanks to Duncan for starting such a thought provoking thread

Cheers
N.

 

[AUSPROP.]

thanks to all the contributors to this thread... this is like a written internal debate that I am constantly having myslef. I particularly like this point:

"Nigel is also assuming that I'm not doing anything with my money in the mean time . Personally I think I can take it out of the market and buy back at a time where I can get better deals than I can get now. Would I do this with well positioned places in Sydney . No . I'd hold them , but I'm more than happy to trade on cheaper more volotile outer suburban and regional properties."

I think this holds true in more thn just the Sydney market. I have also been thinking about suburbs that go thru rejuvination.... old ones that have their war housing knocked down and have project homes replace them - I think it would be wise to ride the rejuvination yet get out when the project homes become older and daggy again i.e. the suburb is repeating its stock cycle. Not unlike fringe suburbs that go thru a boom as they are built into beautiful new estates,then they sit there and depreciate and fall out of favour.

 

[perky29]

I have rated this post excellent, some great contributions here.
Personally I have sold off 2 properties in the gold coast iin the last 18 months, also a couple in Ipswich as well - as I especially dont see much capital growth in the gold coast over the next 5 years (and taking the profit to invest in other things suits my purposes better) - and have kept the 2 more likely (an assumption I know ) good properties for capital growth in the future.
But great arguments all round.

 

[Jacque]

What a great thread - some food for thought for us all to ponder here.

What I want to know is how Nige and Seech (amongst others) have the time during the MIDDLE OF THE DAY to write such essays!! Are you two on leave at the moment or just ignoring your patients/clients??!!

Adding to the discussion, I've sold down properties in the past simply because I didn't see CG as going anywhere (and in one case it still had further to go- damn it!) and planned to use money to improve my PPOR (much like Seech with his dvpt next to his own home).

Have retained majority of my portfolio, however, and plan to do so until I feel the time is right to upgrade my PPOR (to my waterfront 5 acre lot overlooking Balmoral beach ) at which point I will (hopefully) use some fat gains out of a few sales to avoid having too large a non tax deductible debt. As Nigel has eloquently pointed out, however, such gains need to be well clear of all transaction and holding costs in order to be considered real profit. Weighing up such costs truthfully and realistically can be a sobering exercise in itself as well.

 

[see_change]

What I want to know is how Nige and Seech (amongst others) have the time during the MIDDLE OF THE DAY to write such essays!! Are you two on leave at the moment or just ignoring your patients/clients??!!

I'm a fast typer nowdays ....

Didn't Rocky suppprise every one with how far it went ....

See Change

 

[Jacque]

I'm a fast typer nowdays ....

Didn't Rocky suprise every one with how far it went ....

See Change

But it's the thinking required that goes with the speed typing that's most impressive

And, yes, Rocky gains were appreciated by more than a few of us

Mind you, I still think I offloaded a little earlier than I perhaps should have....

 

[House_Keeper]

Another Interesting thread started by Duncan.

I'm surprised that Michael Yardney hasn't commented, since he was arguing at his latest seminar in Sydney that now was the time to buy in Melbourne before the next big boom occurs.

Capital growth will always come from buyers demand and ability to pay. Though it is likely to be contained with higher interest rates, I believe that it will continue as it has always done, but perhaps with a slower rate of growth. I am less sure about cities like adelaide that have limited population growth though.

Some people claim that interest rates and property prices are not linked. Yet I was looking at a graph recently of interest rates in Australia couldn't help noticing that there was a large drop in interest rates throughout 2001, then large property price increases throughout most of Australia, that lasted until end 2003 when interest rates started going back up. Coincidence? I don't think so. Interest rates affect affordability, which reduces people ability to pay higher prices. As long as interest rates are on their way up, I see limited capital growth. However, when they start going down, I wouldn't be surprised in capital growth kicks off again.

I am not as gloomy about the impact of higher petrol prices though. I believe that our society will adapt. We are not as dependent on cars as the US, although we lag behind Europe in terms of public transport. Highly desirable places to live (near the CBD and near the coast) are likely to remain in high demand and restricted supply, driving prices higher.

Cheers,

 

[see_change]

Some people claim that interest rates and property prices are not linked. Yet I was looking at a graph recently of interest rates in Australia couldn't help noticing that there was a large drop in interest rates throughout 2001, then large property price increases throughout most of Australia, that lasted until end 2003 when interest rates started going back up. Coincidence? I don't think so. Interest rates affect affordability, which reduces people ability to pay higher prices. As long as interest rates are on their way up, I see limited capital growth.

Cheers,

I think the point that the people who disccount interest rates would make , is that it's not the interest rates per see that move the market , but the underlying conditions that move interest rates that move the market .

As an explanation , we have all seen interest rate moves that cause no effect on the market , but then a later change will appear to have a dramatic effect. If it was interest rates that were the prime mover, then all interest rate moves should have an effect regardless of the underlying settings . That is obviously not the case.

Interest rates are a reflection of the underlying economy rather than the other way around ( though I'm sure people will correct me if I'm wrong ... ).

See Change

 

[doreilly]

Interest rates are a reflection of the underlying economy rather than the other way around

Exactly. Interest rates are set now because of fundamentals from the past quarter(s), although they do impact the fundamentals later on.

That is why the growth (or lack of) curves are not straight, they undershoot/overshoot. Interest rates are based upon laggy data.

 

[landlubber]

I'm not selling anything !

Duncan,
If you're worried about "oil" ...don't . The oil WILL NOT run out . Other fuels will just become more common. (The North West shelf alone has natural gas for thousands ..or is it millions ..of years). Transport runs fine on compressed natural gas. (CNG) . "Google" on it and see for yourself.
Then there are the shale-oils and the oil-sands and after that thousands of years of coal. All these are simply just hydro-carbons ...basically the same stuff. But don't lay awake at night over "oil (energy) shortage"...just will not happen.

Next ...you worried about population growth ? ...don't. Can only suggest you travel a bit to Asia and importantly China. I don't think you realise JUST how good this country ( and our real estate) IS. China has 1.5billion people. Only a small portion would have a huge effect on our 20 million. (The problem if there is one will be limiting the inflow in my opinion.)

Consider our climate, our stable (if boring) government, our natural resources etc etc .

This is a great country. And we can own it free-hold !! Woo hoo !!
And 7 to 10 years from now ....it WILL have doubled in value again.

LL

 

[RichardC]

(The North West shelf alone has natural gas for thousands ..or is it millions ..of years).

Could you post a link? It's new to me.

 

[RichardC]

Like Dunc, I find the argument that we have already reached peak oil to be compelling. Also like Dunc I see this having far more serious repercussions than just the cost of driving our cars.

The world's largest oil field, Gawar has been in decline for years and it is said that it could collapse quite suddenly. The second largest field, Cantrell is producing 18% less this year than last. The North Sea and Alaskan Shelf fields have also peaked. Bass St. peaked years ago.

If a benevolent God were to miraculously replace all the oil we have pumped in the last centuary, it would only extend "The Oil Age" by 20yrs at today's rate of use. So let's be clear about one thing: Cheap oil will come to an end soon, probably in my life time and definately in that of most of SS's members. Ref: http://www.somersoft.com/forums/poll.php?do=showresults&pollid=337 So the $1mil question is: Why do I seem more concerned about this than most of you? I have the option of buying some oil shares and retiring to the beach. I don't even have grand-kids to weigh on my mind.

I think the argument that getting out is too expensive WRT costs and CGT is a primary argument against property itself, not justification not to sell. Ten years is a long time in investment terms and I can think of other investments with brighter futures. There are a couple of "bright" commodities I like as well as a couple of black ones.

Thommo

 

[doreilly]

Duncan,
If you're worried about "oil" ...don't . The oil WILL NOT run out . Other fuels will just become more common. (The North West shelf alone has natural gas for thousands ..or is it millions ..of years). Transport runs fine on compressed natural gas. (CNG) . "Google" on it and see for yourself.
Then there are the shale-oils and the oil-sands and after that thousands of years of coal. All these are simply just hydro-carbons ...basically the same stuff. But don't lay awake at night over "oil (energy) shortage"...just will not happen.

Next ...you worried about population growth ? ...don't. Can only suggest you travel a bit to Asia and importantly China. I don't think you realise JUST how good this country ( and our real estate) IS. China has 1.5billion people. Only a small portion would have a huge effect on our 20 million. (The problem if there is one will be limiting the inflow in my opinion.)

Consider our climate, our stable (if boring) government, our natural resources etc etc .

This is a great country. And we can own it free-hold !! Woo hoo !!
And 7 to 10 years from now ....it WILL have doubled in value again.

LL

Try making plastic, bitumen, cosmetics, polyester, detergents, dyes, waxes etc from gas though.

Oil is a lot more than just a fuel.

http://www.anwr.org/features/oiluses.htm

The high crude price just makes LNG, oil sands, coal liquification etc for fuel more attractive, it is not a cure all.

 

[landlubber]

Some house-keeping ...

Richard C ...I'm sorry , but I don't know how to post links. But the NW Shelf is THE huge natural gas project off the North coast of West Australia. Woodside is the major Australian shareholder (ASX code WPL). There's huge gas reserves and they keep finding more. They liquify it and ship it to China (& others) for a "few cents a litre". Cars in NZ have been running on CNG for years. Buses in our capital cities also run on CNG.(Compressed Natural Gas)

doreilly ...all that stuff can ALSO be made from coal and/or gas. Oil , coal, gas etc are ALL just hydro-carbons. (Combinations of hydrogen molecules and carbon molecules). Currently, we only use oil because of (a) it's the cheapest and (b) it's more convenient as a liquid. But "coal to oil" technology has been around since WW2.

It's not the "cost" in general, it's merely the availability. Europe petrol has been (roughly) twice the price of our fuel "forever" and yet Europe functions just fine. Smaller cars, more diesels etc . But the economy still works and house prices in the UK , for example, continue to rise .... and rise. Once again, the UK would be a great place to reside compared to many countries.

If you want to "worry" about something, worry about the air we breathe and the environment and the HUGE development, cars, electricity etc in China ...all done with fossil fuels so far! I think that will be the weakest link ..and I'm sure glad I live in the Southern Hemisphere !! But the "other half" is fun to visit from time to time .

LL

 

[Andrew_A]

Very curious if there are any updates to add to this thread?

 

[Sunfish]

What happens to posters like Dunc! Prolific poster, positive and heavily invested in property one moment and then not heard of for three years. Have things gone bad or has he moved onwards and upwards?

He is not the only one either, there are dozens like him. I am genuinely curious.