generational housing problem

[alexlee]

Buying an asset that you expect to turn cashflow positive in the short term is what real estate investment is about.

So I buy a property, making a cashflow loss on it. As the value increases I keep refinancing and cashflow keeps going down (though offset partially by rent). I keep doing this for 20 years and build a big portfolio of properties, which by the end of year 20 will have zero cashflow but a BOATLOAD of equity. I sell enough to pay off all the existing loans, resulting in a smaller portfolio that produces a nice chunk of cash. This is after 20 years.

If this isn’t real estate investment……. Not that I would care what people call it. I'll be happily doing whatever I want to do.
Alex

 

[HiredGoon]

So I buy a property, making a cashflow loss on it. As the value increases I keep refinancing and cashflow keeps going down (though offset partially by rent). I keep doing this for 20 years and build a big portfolio of properties, which by the end of year 20 will have zero cashflow but a BOATLOAD of equity.

Do you think that there is a chance, any at all, over the next 20 years when house prices will cost less in interest-only payments than to rent?

If that is the case, then you will be bankrupt following the above plan.

That plan is called going double-or-nothing. If you keep doing that for long enough, you'll go broke. Guaranteed.

 

[yo yo ma]

If that is the case, then you will be bankrupt following the above plan.

That plan is called going double-or-nothing. If you keep doing that for long enough, you'll go broke. Guaranteed.

That is like saying that "interest rates under Liberal will be lower than under Labor."
You can't prove it so just say it anyway!

If that is seriously your opinion (which I doubt it really is... just a bit of jealously really), maybe you should use, "you could be broke..." or preface the statement with, "I believe."
Steve

 

[HiredGoon]

No, it is a mathematical fact.

a) The whole plan involves keeping leverage so high that after 20 years cashflow = 0.

b) Thus rents and interest for all of their portfolio are in equilibrium.

But if the property market exists so that interest costs less than rent on a given property, then the only way (b) could be true is if the debt is greater than the price of the house.

Thus they are in negative equity.

A cashflow negative property is a LIABILITY not an ASSET. The idea of constantly refinancy liabilities as they go up in purchase price relies on future buyers being willing to take out more and more debt to buy the right to lose money. And never in 20 years have the market become rational.

 

[BoatBoy]

Do you think that there is a chance, any at all, over the next 20 years when house prices will cost less in interest-only payments than to rent?

If that is the case, then you will be bankrupt following the above plan.

That plan is called going double-or-nothing. If you keep doing that for long enough, you'll go broke. Guaranteed.

Where is your proof of the above "Guaranteed" comment?

And yes I do believe that in 20 years everyones average IP interest payment will be less than the rent coming in,(On IP's purchased today) as long as we stay at somwhere between 6 and 9 %.

Ours are cash flow neutral now, and will be positive with the next increase(well the 3 that are locked in now anyway).



Dave

 

[yo yo ma]

No, it is a mathematical fact.

HG
Mathematics is based on numbers? You don't know how much they cost... You don't know how much they rent for or at what interest rate... How can you say it is a mathematical fact??
Steve

 

[jingo]

If you purchase a property, you are the person who is willing to pay the most of anyone in the world for it. Otherwise the seller would sell to someone else. Thus whatever you paid IS market value..

There are many instances of investors picking up undervalued property due to the vendor needing to sell. This does not mean that the price an investor has paid for a property is market value. It is possible for an investor to gain instant equity upon purchase. (Why don't you try it? It's fun!).

Also, please provide proof that investors pay less than OOs for similar properties. If that was true, for the same reason as I mentioned above, then investors would ALWAYS be outbid by OOs.

A successfull investor will always look at the yield and the return they are to receive from a prospective property purchase. If the sums don't add up, they won't buy. An OO, however, will become emotional over a purchase, and will push up the price of a property they they really want to live in. An investor will walk away and move onto the next deal.

Yes, but they have a lower servicability than investors, because their interest is not tax-deductable. Also, with only 1 property - they cannot use another one as collateral for a loan.

In many cases the serviceability of an OO will be higher than an investor. An investor may have multiple properties to service, an OO only one. Thus meaning that the OO will have more money to service this one property that they really, really want! They will then push up the price of the property.

Why don't you try observing a few auctions in inner Melbourne and see who really is pushing the price up? I think you may find it is the OO's, and not an investor.

Better still, why don't you buy a property and find out yourself? I'm sure there is one property out there that would really take your fancy and you would like to drum up to an almighty high price - just to beat an investor! lol!!!

Regards Jason.

 

[HiredGoon]

HG
Mathematics is based on numbers? You don't know how much they cost... You don't know how much they rent for or at what interest rate... How can you say it is a mathematical fact??
Steve

Dear god, take an algebra class.

Ok, I'll try and put this in another way....

Person has 20 properties so that:

interest(debt) = rent

but we know

interest(price) < rent

therefore:

interest(price) < interest(debt)

thus they are in negative equity. Get it? This is why you don't keep leveraging up your gains forever!

 

[jingo]

Dear god, take an algebra class.

His name was yo yo ma, not God!

 

[yo yo ma]

but we know

interest(price) < rent

therefore:

interest(price) < interest(debt)

thus they are in negative equity. Get it? This is why you don't keep leveraging up your gains forever!

No we don't know that interest is greater than rent... What if it is a positively geared property?
Giddyup

 

[rastus2]

I'll disagree, those starting out will just have to buy smaller dwellings, or cheaper dwellings.

Wages will go up.

It's just they things work.

Inflation.

cheers
quoll

Actually (from your post) I suspect you agree...

House prices will not double in the next 10 years (unless we get a wages blowout)....

The simple fact is that we can (and quite possibly will) get a wages blowout as employers chase the employees, and the employees demand remuneration that gives them the ability to buy into a better house...

Only the Fed and the Gov. can stop this endless cycle of inflation once it begins... and the Fed has made it very clear that if the Gov. does not, it will. (Election year or not).

 

[rastus2]

No we don't know that interest is greater than rent... What if it is a positively geared property?
Giddyup

My understanding of the example (sequence of houses bought over 20 years) was that there was zero chance of a positively geared property in that mix.

The 1st house's equity was going to appreciate, and then be refinanced (and redrawn) to help pay for the 2nd... etc. etc.

If you can find me a set of houses today that gives me positive gearing using that tactic then sign me up and I'll buy them as I go ....

Prices are largely not being based on Yields (right now), but rather mostly expected capital gains. (anyone really looking to buy for Yield in this market ?).

 

[rastus2]

Those who bought a few years ago did well. Those who bought 10 years ago did well. Those who bought 20 years ago are doing even better. Those who bought 50 years ago are laughing. Those who bought 100 years ago are dead, and presumably their children are laughing.

The trend is your friend.
Alex

This is 100% correct...

Quick question for the group... has property ever lost value over a 10 year period ? (or has it always doubled ?).

 

[HiredGoon]

No we don't know that interest is greater than rent... What if it is a positively geared property?
Giddyup

They said originally, and I quoted it before my maths and I'll quote it again:

....making a cashflow loss on it. .... keep refinancing and cashflow keeps going down .... which by the end of year 20 will have zero cashflow

Better take a reading comprehension class along with the algebra one.

The fact that they lend money so much money to people here on the forums who can't do simple sums, calculate yields, recognise pyramid schemes or unsustainable trends the more I'm 100% convinced we're going to see massive credit contraction and asset price deflation. So long bulls, I'm going back to bear land where people can count.

 

[Ausprop]

This is 100% correct...

Quick question for the group... has property ever lost value over a 10 year period ? (or has it always doubled ?).

hardly!

http://reiwa.com/res/res-salesgraph-display.cfm

1989 to 99 is nowhere near a double.

Important to note though that they are talking about this fictional concept of a static median priced home. I would hazard a guess that about 70% of median homes today did not exist in 1989.

 

[landllort]

hardly!
1989 to 99 is nowhere near a double.

7% interest compounding in a savings account would have doubled in 10 years. Those were not good years for capital gain, but 60% of the money spent by landlords went towards building.

Now only 6% of spending by landlords goes into building anything. CAN'T YOU SEE THE LINK???

The trick is - _don't build anything_ we WANT a rental crisis. If you build more houses then supply goes up and prices go down. So only buy houses from other investors.

We spend 1/10th the amount of spending on building things and now we're seeing capital gains go through the roof! STay on this course and we'll all get rich! Every body wins!

 

[Bandita]

7% interest compounding in a savings account would have doubled in 10 years.

.....presuming you pay no income tax on that interest earned.....which would be a difficult scenario for the everyday investor - meaning it would take much longer than 10 years to double those funds....

Cheers,
Jen

 

[jingo]

This is why you don't keep leveraging up your gains forever!

There are a number of other techniques that can be used:

1) Pay rise

2) Purchase equities to offset the -ve gearing

3) Wait for longer between purchases so that rents begin to cover -ve gearing.

All these things are possible and they do work HiredGoon. You just need to be creative and think outside the square and not be locked inside a forumula. If you keep thinking the way you seem to think, you will not acquire any assets. You are over analyzing. We call this information paralaysis.

Regards Jason.

 

[skater]

So long bulls, I'm going back to bear land where people can count.

Good!!!!!!

 

[steveadl]

Good!!!!!!

Don't count on it Skater, they always come back, although probably with a different user name