Get in or get out of the way!

[MichaelW]

Hi guys,

Probably a bit of a self-indulgent thread, but the more I read on here lately the more I realise a lot of people are sitting back and waiting for that perfect time to enter the market. I agree there's merit in that if your cash flow is weak, but for most here I'd think that isn't a limiting factor.

Hence, I thought I'd post a "why wait" thread!!

I'm off to Brissie to buy that first IP since buying my PPOR. Its revalued now and I've freed the equity as money down. I've run the numbers and I can purchase and hold a $350K property only 15km from the town centre for the measly total of around $4K pa after my NG tax breaks. $4K!! For that little I might even buy two or three of them. Even factoring some interest rate hikes its still well within my servicability threshold.

Now, there's no gaurantees she'll jump in value this year or even next year for that matter. But a modern 4 bedroom house with all the mod con's on a decent size block and only 15km from the town centre. She's a set and forget. In ten years time there's a pretty good chance she'll have doubled in value and I'll have returned a $350K profit for the token outlay of $40K in holding costs.

I have to agree with this forum's founder and reiterate that the correct time to buy is definately "as soon as you can afford to".

<rant off>



Cheers,
Michael.

 

[jimmy]

Will Property Double in the Next Ten Years?

Michael,

I think it is very optimistic to expect (or even hope for) property prices to double over the next ten years. This would imply a compound appreciation of over 7% per year. Even when Steve Navra uses the apparently 'conservative' figure of 5% per year in his figures, my alarm bells start ringing.

Over the long term, I can not see how it is possible for property value appreciation to climb much quicker than wage inflation. People look back over the trend of the last twenty or thirty years, regard this as the long term trend and extrapolate forward. Many people have made fortunes in property over this time but as they say "past performance is not a reliable indicator of future performance."

The reality is that we can only continue to extrapolate forward if the market conditions of the last twenty or thirty years also continue in the same trend. One of, if not the most important driver of all asset prices is interest rates. If you look at any graph of world interest rates since the second world war, you will see an almost symetrical shape as they trend upwards through to 1982 and begin trending down through to the current day through an extended period of low inflation. This has provided a huge boost to property prices (as well as shares and other assets) as holding costs come down and opportunity cost of being in cash reduces.

See graph here: http://www.rba.gov.au/Speeches/2004/_Images/140404_gov_graph2.gif

The question that must be asked is can we expect this downard trend in interest rates to continue? The obvious answer in the long term is no. Though in the short term they may continue down or go sideways, at some point in the not too distant future they must begin to start trending up again. Though their validity is still questionable, it is still worthwhile getting an understanding of Kondratieff waves. This will help to get an understanding of the fact that twenty or thirty years is not really a trend, just one arm of the cycle. A good book is Stock Cycles by Michael Alexander (not as focussed on shares as the title sounds) or Bulls Eye Investing by John Mauldin (which talks about the dangers of extrapolation over such periods of time).

Investing in assets such as property or shares at the moment is dangerous because they are starting off a poor base valuation wise (PE ratios, yields, etc). When combined with the fact that we may be starting a long period of shrinking earnings multiples and rising yields (as opposed to the appreciation of the last twenty or so years), it is entirely possible that we may see little or no appreciation in prices over the next ten years.

Many people see the last thirty years of asset appreciation as a long term phenomenon. It is when houses can be easily positively geared (even in capital cities) despite high interest rates that it will again be a good time for property investment. You won't be reading about it in the paper or on this forum that much though because everyone will be used to flat or falling property prices for an extended period and real estate will be an unloved asset.

You might see the $40k in holding costs as your max downside but it is a big opportunity cost. People who have been investing in property for a long (or even fairly short) time are used to going against the herd of people telling them what a bad idea property is. For a long period of time they have been proving them wrong. No doubt this rant can be put down as another comment from the nay-saying herd but it is my belief that the nay-sayers have quietened down during the last huge run in prices, providing the perfect indicator that now might not be the best time (or any time in the near future) for buy and hold investment.

Just my 2c, but I believe my comments deserve some consideration.

Cheers,
Todd

 

[Kiwi Investor]

Nice one Michael, what a great positive thread !!

I worked with a bloke called Michael White at IBM in NZ, he was a top bloke too !!

Anyway good luck with the purchase, you could possibly pick up a nice new place in Upper Coomera near me for that kind of money.

Good luck anyway Michael !

 

[thefirstbruce]

Which burbs you looking in Michael?

Does the $4kpa cost include rent?

Considering we are still in spring fever weeks, do you think it's worth waiting till a week or two before Chrissy when vendors tend to be more flexible?

I am going to an auction tonight. Interesting concept. The REA saves aucion costs by auction multiple properteries at the local RSL. Gives them a competitive advantage against other agents. I swear the guy told me they don't charge auctioneering fees, just standard commission.

 

[Cheeks]

Great positive post.

Michael - keep your foot note up to date so we know how you are going.

Jimmy - So what are you doing now?

In Perth prices are still moving very nicely. I was told by an agent last night that a villa I hold in Como has probably gone up 30K-40K (15%) in the last 3 months.

Like anything, you have to select value in your market.

Sometime it's hard to see the ore for the dirt, but if you look hard enough you'll find it.

 

[markpatric]

Of course I`d like to believe that your right, but when so many are onto the game, I`m not waitin` on the fat lady.

 

[jimmy]

Jimmy - So what are you doing now?

Admittedly not that far into my investment career so I'm not dealing with hundreds of thousands of dollars. Like most have been doing well on the sharemarket but using stop losses so won't get burnt when market turns, definitely wouldn't be buying say an index fund atm and holding indefinitely. Have been stopped out of all of my large positions so only a couple of small positions in shares at the moment (minerals explorers). I'm also trying to make a bit of money through arbitrage on Share Purchase Plans.

Have a fair amount in cash (ING/Citibank) waiting for an opportunity and will pay off all consumer debt in the next month or two (using some of the cash from recently sold shares). Also keep getting burnt going short GOOG shares in the US (due to stops, fortunately only small losses). Have been tossing up the idea of building a house or two for resale in specific coal mining towns but nothing concrete on that thus far. Other than that the only other idea I have would be gold shares (might look at Croesus Mining once it stops the slide).

I'm trying to research what works best in an inflationary environment when asset multiples are sliding. All I can come up with is commodities at the moment. That would indicate mining companies but I'm a little hesitant on getting on that bandwagon seeing as my career is already leveraged to the mining industry. And although I'm bullish on commodities over the next twenty years or so, that doesn't mean there won't be troughs along the way. I would expect a slowdown from China after the Beijing Olympics in 2008.


Cheers,
Todd

 

[MichaelW]

Jimmy,

Thanks for the post, its always good to have the contrarian view. But to be honest, even if prices stay flat I'm still going to do OK out of IPs up north. Rents are on the rise and time value of money and inflation alone will make me neutral in pretty quick time. The yield is already around 5.5% odd so it won't take much of a rise to get to neutral with my tax breaks. I don't buy the argument that the last 20 years is not a good indicator of the next ten too much either. I can't see any huge changes afoot that will buck the trend. You could well be right, but I'm not going to sit on the sideline and wait to find out.

thefirstbruce, yep my $4k is my net holding cost factoring all my costs and deducting off my income and tax deductions. I used one of the funky spreadsheets someone posted on this forum to get all the detail I needed to estimate the true holding costs.

I figure that shares and property normally run counter to each other so instead of trying to move between categories I'll just load up heavy in both and be sure to be in the right one at the right time that way. I'll happily take the average of the two knowing that one of them should be working really hard for me at any point in time.

Cheeks, will definately keep that footnote up to date. And I'll post my steps in the thread I started a while back on my first step. Today I filled in all the application forms for Lenders Equity so I can leverage into Navra's Retail share fund. I'm putting up $309K of my own equity on my PPOR and leveraging $250K of their cash to get me $559K of NavTrade. I only mentioned property up front here, but had I been in Navra with $559K for the last 12 months I would have netted a $100K profit after expenses from the fund. Sure history is not a gaurantee of returns and 25% is unusual. But, if I have even one year like that then its funded 30 years of my holding costs on one of my IPs in Brisbane.

Do you kinda see where the numbers are taking me? If you do your homework and pick the right assets in the category then eventually those assets will work hard for you. I think Navra is a winner in the local equities category so are placing a bet with that fund. I like Brisbane for IPs and think the ones I'll get there will do well by me in the coming decades.

Basically, I'm a set and forget kind of investor. Invest heavy in quality assets balanced between categories and see what happens. My servicability allows me to do about $1M in IPs and the $600K in shares quite comfortably so I've got a fair bit of "gold coins" in my "army" out there fighting battles for me. Once they win a few battles and bring more coins home then I'll put them to work for me too. I want about $3M in properties in 10 years time and won't get there by watching from the sidelines.

Cheers all,
Michael.

 

[Panic]

MW,

Why not putting the 620K in managed fund at 10% and cashing in 62K extra per year?

Thx
V

 

[monoply]

Yep V, there are plenty of good investments around besides property, although it also comes back to personality, and what your comfortable with.

But I think most professional investors look to make minimum 10% on there money.

And while I have no problems with property been a good investment long term (nothings 100%) there are always plenty of choices around, to make your money work for you and compound.

 

[WillG]

Hi Michael,

Good on you for taking the plunge. It sounds like you have done your homework and you should do okay.

Have you read the Jan Somers book 'Building wealth Story by Story'. Very inspiring stories about ordinary people buying IP and keeping it simple.

Some people will always find a reason not to buy.

How amay years before the IP becomes neutral (assuming interest rates are fixed and it is fully tennanted).

Cheers

 

[MichaelW]

MW,

Why not putting the 620K in managed fund at 10% and cashing in 62K extra per year?

Thx
V

Panic,

I assume you mean instead of investing in an IP in Brisbane? In that case the answer is because I don't want all my eggs in one basket, and the diversification across asset categories lowers my risk as well as giving me access to income tax deductions. I haven't written off property as some have and believe I can still return a comfortable capital gain on the property or properties in the short term. And CG is all tax free. If my holding costs are only $4K due to tax breaks then it would only take a 2% CG to turn me a tax free profit. Long term I think that's a very conservative expectation.

I don't need to try and pick the market turning and can just "set and forget". If it all works as planned you can expect a book from MichaelWhyte in years to come entitled "The Lazy Investor: 7 easy ways to make your millions with minimal effort"" Well, once the IPs and shares are in place the obvious missing ingredient is the business and investment advice seems to work for some of the more senior forumits like Peter Spann and others...

Cheers,
Michael.

PS And I forgot to mention leverage. I can hold $350K worth of property due to the amount of leverage banks will allow, but could only hold $200K of shares.

 

[MichaelW]

How amay years before the IP becomes neutral (assuming interest rates are fixed and it is fully tennanted).

WillG,

I'm on the home computer now so don't have the spreadsheet but I think it was only about 6 years. Seems like a long time, but I'm only up for $4K from year one and reducing year on year. My net outgoing should be minimal then I'm in neutral or better territory and its all upside.

I agree people always seem to find the "yeah but" excuse when it comes to investing. I also like the "this time its different" excuse too. I know my strategy may not be perfect but its well considered and a good fit for me. I'll keep you all posted on my progress and let time be the judge of my wisdom. Watch this space...

Thanks,
Michael.

 

[Merovingian]

Good on you Michael.

I share your views about buying when you can comfortably afford, as outlined by Jan Somers in her books — I just wouldn't want to be paying too much out of my pocket each week, or it may be harder when properties 2 and 3 come along.

I haven't got any yet, just saving and getting rid of a small personal loan at the moment.

Anyway, I believe that if you buy when you can comfortably afford, considering the property choice is good, (financially and fundamentally), then it'll take care of itself in the long term.

Good stuff.

 

[Glebe]

Best of luck Michael, I'm sure you'll be fine.

Why are you putting $559k in Navra's retail fund? Shouldn't you be in the wholesale fund?

 

[alexlee]

Hi, Michael. You mentioned that all the capital gains will be tax free. How does that work?
Alex

 

[Merovingian]

Hi, Michael. You mentioned that all the capital gains will be tax free. How does that work?
Alex

You don't sell the property, I suppose. You just redraw on the extra equity and put that to use somewhere...

Unless you have something up your sleeve, Michael?

 

[MichaelW]

You don't sell the property, I suppose. You just redraw on the extra equity and put that to use somewhere...

Unless you have something up your sleeve, Michael?

Merovingian,

Nope, you got it. I aim never to sell a single property so will never be up for CG. Just keep accumulating and drawing down equity for deposits on the next one. At some point I'll have enough properties under my belt that I can just leave the growth alone and start building passive income. But that's a ways off yet. I would like to have $2M in net worth of assets other than my PPOR in 10 years time. That would require 6 of this sort of $350K to double in value or 12 of them to go up 33%. Now if I had 24 of them I'd only need them to go up 25%. Can you see where I'm going with this...

Cheers,
Michael.

 

[alexlee]

Surely, though, the 7% average growth is a long term average? In other words, it's been approx 7% over the last 30 years, but during different 10 year periods the rate would be different.

In other words, Michael, I agree that Oz property is going to track the long term average (due to population growth, and it's such a great place to live). However, what is the average rate for just the next 10 years?

My own view is that we're in for a flat if not down market for the next 3-4 years, then the market will track up again.

That 'time in the market' is better than 'timing the market' theory works if you have a long enough horizon. 10 years is not a very long horizon for property, especially as we've just come off a massive boom.
Alex

 

[jimmy]

House Price Capital Appreciation is Overestimated

Surely, though, the 7% average growth is a long term average? In other words, it's been approx 7% over the last 30 years, but during different 10 year periods the rate would be different.

In other words, Michael, I agree that Oz property is going to track the long term average (due to population growth, and it's such a great place to live). However, what is the average rate for just the next 10 years?

My own view is that we're in for a flat if not down market for the next 3-4 years, then the market will track up again.

That 'time in the market' is better than 'timing the market' theory works if you have a long enough horizon. 10 years is not a very long horizon for property, especially as we've just come off a massive boom.
Alex

Alex,
I just tried to quickly look up some long-term house price data to support my argument but the best I can find is 1901 rents for a 3 br home compared to 2001 rents for same. I would expect it to be a safe assumption that rental yields should remain constant over the long term and therefore it should give us an idea of expected house price appreciation. This data indicates the 100 yr compound rate is 5.4% pa nominal and 1.3% pa real.

What I am saying is that even though prices have gone up 7% compounded (or higher - can anyone verify what the figure actually has been over the last twenty/thirty years, or point me to somewhere this data is available), this is not the long term trend. Prices have been increasing above the long term trend during this period because of falling interest rates. If you account for the fact that it has been a period of relatively low inflation, then real returns have definitely been above the long term trend. Therefore, to make up for this prices must go flat or fall for some time to get back to trend. And once a downward trend is in place it usually falls to below the long-term trend level.

The other main issue is that price data uses the median price. If we compare the median house in 1901 to the median house today, it is obviously much better. Therefore, price appreciation for the same housing stock must be even lower than the real 1.3% rate. Even if we used a repeat sales index it wouldn't account for the improvements in housing (renos) that is still capital out of owner's pockets.

I suppose my main point is that twenty/thirty years isn't enough data to use it as the long term average, especially when interest rates have been improving in that whole time.

So, in summary, we've gone through a period where house prices have increased faster than the long term average (this period isn't just the last few years, it is the last twenty or so). To get back to this average we must go through a down/flat period (the length of time depends on how quickly it goes down). And this still doesn't account for the fact that the long-term trend we have includes capital improvements to housing and new stock coming online being constantly improved (so the rate that a real property appreciates in price would be less than this already lower rate).


Cheers,
Todd