Fiscal literacy and surviving the GFC

[turk]

WHO GIVES A **** about the details? I keep asking why you say that just because you don't believe his posts in their entirety (I don't either) you can totally ignore any of the risks he speaks about?

I will ask again: How does a fully leveraged property investor survive years of no growth? If you insist on using the +ve CF argument, explain how it is CF +ve. Is it because the return on your own equity is greater than the loss on OPM? Think about this because I think it is critical. If buying a property on 100% LVR isn't CF +ve in year one, it still won't be in five years time if values flatline and rents reflect the malaise which caused the flatlining in the first place.

Hi Sunfish

Let's see if I've got your question right,

I buy a $500000 property borrowing $525000(incl. costs) how do I survive 5years of no growth in both equity and rental income.

I'm fully leveraged into the property and it is not CF+

I could survive by having 1 or a combination of the following happening

-a cash buffer to cover the shortfall.

-income exceeding wages to cover the shortfall.

-liquid assets such as stocks to cover the shortfall.

-dividends from stocks to cover shortfall

-promotion, increasing my wage to cover the shortfall.

-taking in a boarder in my ppor to cover the shortfall.

-renting out my ppor residence and boarding cheaply to cover my shortfall.

-Taking a 2nd job to cover my shortfall.

I could keep adding to this list and no doubt others could add more ideas.

Although I strongly agree with you that if people want to post opinions they should be willing to answer questions relating to those opinions whether they are bulls or bears or anywhere in between.

Cheers

Pete

 

[Sunfish]

I could keep adding to this list and no doubt others could add more ideas.

Add to the list by all means but all your options have one thing in common: You must have equity/income outside the particular investment vehicle.

I'm a simple man. Each and every investment I make must stand alone. Cross-subsidation must not be allowed. I have no problem with cashflow between individual investments, that's OK.

 

[turk]

Add to the list by all means but all your options have one thing in common: You must have equity/income outside the particular investment vehicle.

I'm a simple man. Each and every investment I make must stand alone. Cross-subsidation must not be allowed. I have no problem with cashflow between individual investments, that's OK.

Geez Sunfish you're a hard man to please.

All you asked was how would a investor survive 5 years of no growth.

Never said it was a good investment.

Then again these are only details and as some one said,

WHO GIVES A **** about the details? lol

Cheers

Pete

 

[AUSPROP...]

a nice fiery debate. Isn't it the leverage of the investor not the asset that is the problem? Or do you consider all investments at 100% LVR? there wouldn't be many investments that measure up to this. Cash, bonds, precious metals, resi property in general, most commercial... pretty much leaves specialised shares, a job, or healthy low capital intensive business

 

[Sunfish]

It's OK Turk. Feel free to throw as much as you wish of your hard-earned into a failing investment. I am not a licenced financial advisor.

 

[Sunfish]

a nice fiery debate. Isn't it the leverage of the investor not the asset that is the problem? Or do you consider all investments at 100% LVR?

I do.

there wouldn't be many investments that measure up to this. Cash, bonds, precious metals, resi property in general, most commercial... pretty much leaves specialised shares, a job, or healthy low capital intensive business

Any and all investments must be compared to the "risk free" returns from sovereign debt issued by the treasury.

I, personally, will only borrow money if the apparent return on those borrowings (not including return on my own cash injection) is above the interest rate at the time. I have no idea what interest rates rates may be in the future. If you think you do, try your luck in the casino or the FX markets. The results are far more immediate.

Note that I did not say cap gains don't matter. I included them in "apparent returns".

 

[turk]

It's OK Turk. Feel free to throw as much as you wish of your hard-earned into a failing investment. I am not a licenced financial advisor.

No need to shoot the messenger.


It's not my investment, it was an answer your question of how an investor could survive years of no growth and as you can see there are myriads of ways, who knows after years of no growth it may actually come good and we know what leverage can do(and before you say it I know this cuts both ways).

However I am confused by what you said here

"Each and every investment I make must stand alone. Cross-subsidation must not be allowed. I have no problem with cashflow between individual investments, that's OK."

Is it that each investment e.g.

individual share
individual property
individual business

must stand alone, without cross subsidization

or is it each class of investment e.g.

share portfolio
property portfolio
business portfolio

Must stand alone, without cross subsidization

as I don't understand how you can have cashflow between each individual
investment at the same time.

Cheers

Pete

 

[AUSPROP...]

ok sounds good. tho cap gains are very much geuss work. There were guys on PI saying to get out of Perth property in 2005! I even sold property in Karratha in 2006... simply retaining them could have seen me retired. my point is how can you factor in such an unknown? on this board we have everything from 60% drops to blue sky

 

[AUSPROP...]

FWIW I like (and doesn't mean I actually achieve) to get the properties neutral... by development or subdivision and sell down. that way there *shouldn't* be any risk but it seems all bets are off now days. some dude says your property has dropped in value and you can be forced to liquidate

 

[BoatBoy]

Factor in a 40-50% fall in values and your closer to my position. .

Yet you are still OK holding your property even though it's value will be halved?

This is the bit that amuses me.

Dave

 

[willair]

Yet you are still OK holding your property even though it's value will be halved?

This is the bit that amuses me.

Dave

You know that's the question everybody has to ask themselves,has anybody in this site or people they know ever seen property drop in value by 50% over the years from 1992 till 1998 some that we bought were up too
40%off the vendors entry price from 5 years previous,but that was in a very rough inner southside small flood prone high crime area and the entry price was just around the 50k mark 14% net yeild from day one,and those same now sell for above 400k, so over time it make no difference at all..willair..
http://www.reuters.com/news/video/popup?videoId=101624&videoChannel=5&pos=0

 

[chilliaa]

WHO GIVES A **** about the details? I keep asking why you say that just because you don't believe his posts in their entirety (I don't either) you can totally ignore any of the risks he speaks about?

I will ask again: How does a fully leveraged property investor survive years of no growth? If you insist on using the +ve CF argument, explain how it is CF +ve. Is it because the return on your own equity is greater than the loss on OPM? Think about this because I think it is critical. If buying a property on 100% LVR isn't CF +ve in year one, it still won't be in five years time if values flatline and rents reflect the malaise which caused the flatlining in the first place.

I actually agree with some of your points regarding property, i dont like to HAVE TO rely on capital gains to make the system work, its too uncertain, and relies on the assumption that people will pay ever higher prices (especially as a % of incomes).

However it can work where the cash flow is positive from day 1: For example
$100,000 property with ylds of 8% and expenses of say 25% gives net ylds of 6%.

With a 25% deposit it would generate cash of around $900 per year on initial equity of $25,000 (assuming borrowing cost on a 10yr fixed loan of 6.8%).

Now obviously the 6% net yld is less than the 6.8% on the 10 year fixed loan.
However rents WILL increase over time as wages increase (also rental growth significantly underperformed capital growth over the last 10yrs, so we cant say rent values are inflated).

So the cash return becomes like a bond with 'step up' adjuster to reflect increased rent over time.

Development projects can purchase an intial piece of property that is less than 8% so long as you can be confident that the final project will produce returns around 8% gross on total development costs.

This is the approach i have always used when determining the buy in price for a property. Its simple, low risk, and i know over time capital gains will come from wage inflation.

 

[Sunfish]

Thanks for the reply Chilly. We now have a scenario to discuss.

Is 8% gross rental achievable in the broad market? I ask because I claim no expertise beyond my own patch and we can't achieve that here. You also talk about a 25% equity which, while spoken about quite a bit now, was not considered necessary, or even desirable, just a couple of years ago.

People who believed the collective teachings of SS back then are still investors today, one assumes. With 90% LVRs and IO loans they won't be happy with no growth for a few more years, especially if they have already "only" had a 10% fall in value.

 

[chilliaa]

Thanks for the reply Chilly. We now have a scenario to discuss.

Is 8% gross rental achievable in the broad market? I ask because I claim no expertise beyond my own patch and we can't achieve that here. You also talk about a 25% equity which, while spoken about quite a bit now, was not considered necessary, or even desirable, just a couple of years ago.

People who believed the collective teachings of SS back then are still investors today, one assumes. With 90% LVRs and IO loans they won't be happy with no growth for a few more years, especially if they have already "only" had a 10% fall in value.

If 8% isnt achievable (actually 8% is not key factor, i use net ylds vs 10yr fixed rates) then just have patience. Warren Buffet kept much of his additional savings from 2000 - 2007 in bonds, he was happy to wait on the sidelines until the right opportunity came along. But when it does he comes in with all guns blazing.

Not every year is a good year to be investing in residential property.

But there is also a difference between disposing of property you already have and buying additional property.

 

[Shadow]

Do you have an insecurity complex and a need to attack everyone who casts a shadow on your vision of the world?

No I don't have an insecurity complex. You seem to be getting a bit emotional Sunfish. I'm not attacking anyone, I simply asked nonrecourse a question. I think my question was quite polite actually. It certainly wasn't an attack.

Except in Perth hey Shadow?

Dec07-Dec08
103 burbs fell more than 5%
41, 10%
15, 15%
7, 20%

not to mention regionals....or commercial....

Yes, I'm on the record as saying I expect falls in some cities. My question was addressed to nonrecourse, and specifically his claim that the 50% fall would be across the board in Australia.

Of course we can all find cases of individual houses or suburbs that experienced significant falls, in the same way we can find individual houses or suburbs that experienced significant rises.

However nonrecourse is talking about a fall of 50% right across Australia.

Anyway, thanks Sunfish and Winston for at least addressing my question. Nonrecourse on the other hand seems to want to ignore these hard questions at all costs.

Cheers,

Shadow.

 

[nonrecourse]

Change is dependent on unreasonable people

You know that's the question everybody has to ask themselves,has anybody in this site or people they know ever seen property drop in value by 50% over the years from 1992 till 1998 some that we bought were up too
40%off the vendors entry price from 5 years previous,but that was in a very rough inner southside small flood prone high crime area and the entry price was just around the 50k mark 14% net yeild from day one,and those same now sell for above 400k, so over time it make no difference at all..willair..
http://www.reuters.com/news/video/popup?videoId=101624&videoChannel=5&pos=0

Willair. Over a year ago on this site I spoke about the world banking system being insolvent. If you sat through that entire interview with George Soros you would have heard him say that the entire world banking system is insolvent. You would also have heard him say that the banking system is going to absorb most of the growth and that things will not return to what they were. Guess what? Who do you think is going to pay for the banking cartel's sins over the next 30 years?

Some investing truths with regards to property have changed and are not going to return to recent trends for a very long time. If you continue to gear up to 80% you are going to be severely punished. We have entered an age of deleveraging. That does not mean that property as an investment class is dead in the water. What it doees mean is that the gearing model of the last 50 years can no longer be applied without major modifications.

Life is about constant change. If you refuse to change the law of the jungle will apply and you and your investments will be put to the sword. Great opportunities will arise because of so many peoples inability to change.

My time on this site is coming to a close. I have had a very large business deal dropped on my plate. If it comes to pass I will have to let go of my free time including the snipets of time I have allocated to this site as it will require my total attention to detail to ensure my new income stream takes us to the next level.

 

[Shadow]

My time on this site is coming to a close. I have had a very large business deal dropped on my plate. If it comes to pass I will have to let go of my free time including the snipets of time I have allocated to this site as it will require my total attention to detail to ensure my new income stream takes us to the next level.

How convenient. I guess you won't be addressing my questions before you go then.

Good luck with the business deal.

 

[steveadl]

NR, if property prices drop like you expect, then your current leverage of 30% will move to around 50% LVR.

So if the recent times of 80% leverage are finished for a long time, then you're not exactly going to be able to buy a hell of a lot more are you, or you'll be pushing you 50% LVR towards the danger territory of 80% you're warning us about.

 

[nonrecourse]

LVR's continue to diminish even with deleveraging

NR, if property prices drop like you expect, then your current leverage of 30% will move to around 50% LVR.

So if the recent times of 80% leverage are finished for a long time, then you're not exactly going to be able to buy a hell of a lot more are you, or you'll be pushing you 50% LVR towards the danger territory of 80% you're warning us about.

Hi Steve
I work with four seperate investment pillars that include business income, rents, private income and if need be (unlikely) a transition to retirement income. So no there is no danger of going up to 80%. The rents are continuing to climb because of the quality of the assets held and the amount of gearing continues to fall on a month by month basis with fixed loans but increasing lumps thrown at specific assets as prearranged two years ago when we saw what was coming.

Like in the great depression if your business is sound you have no debt on it and you only reinvest a dollar in your business if it will generate another $3, then you can continue to acquire assets at absolutely firesale prices.

You make your profit when you buy, not when you sell

The new business venture will be 51% internally funded and controlled by us. The financial tragedy that is unfolding is also an opportunity. Provided you can continue meet the banks increasingly demanding equity requirements
you will not be sold up.

 

[keithj]

NR, if property prices drop like you expect, then your current leverage of 30% will move to around 50% LVR.

NR has only told us half the story behind his 30% LVR. That 30% LVR of his includes his SMSF. How easy is it to use the assets of the SMSF as collateral ?. His SMSF accounts for 40% of his assets. So his actual LVR on non-SMSF assets is 50%. If property prices drop as he expects, then his current leverage of 50% will move to around 100% LVR.

See his post #83 and my (as yet unanswered) questions in #86 here.