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From: Mike .


Strategic advice on a worrying situation
From: Michael S
Date: 3/14/00
Time: 11:53:47 AM

Hi everybody

I made a residential property investment just under 5 yrs ago after reading Jan's book. I paid $119,000 for a 3-bedroom townhouse in Logan, Qld. About 18 months ago I learned that its value was about $85,000 and it seems it hasn't changed much from that since. I don't know if I paid too much or the value decreased after sale. Has anyone had a similar experience? What's a good strategy from here on? For info, I bought a second place in Canberra about 4 years ago which is now beginning to slowly increase in value. Would appreciate any advice please.
 
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Andrew G

Reply: 1
From: Mike .


How much is it costing you?
From: Andrew G
Date: 3/14/00
Time: 9:33:32 PM

How much is the property costing you BEFORE tax savings? This is a really important question. What I am hoping you are going to say is that you are making money every week (who is surprised to hear me say that).

If the property has a positive cash flow and the debt is greater than the $85,000 then hang on in there and let that dog pay for its self. If not then you have two choices and both involve pain.

Sell now, take the loss on the chin but walk away having learnt a $34,000 lesson. (I can't believe you don't know if you over paid 5 years ago...are you crazy. Didn't you get a valuation?)

The path of less initial pain but greater long term pain is to keep it and cross your fingers, legs, toes, eyes and anything else you can and hope that thing moves (do you believe it will and how long can you wait?) Yes you may get you money back and if it costs only $10 pw then over 10 years it is only $5,200 total, BUT what will it cost you in lost opportunity else where?

Think about this very carefully as the small weekly pain seems easier. BUT what if a miracle happened and you actually bought a good property to replace the dud (lets face it your record so far is fairly shocking). If it is worth $250,000 then doubles to $500,000 in that same ten years then you are up $250,000. You will get back the $34,000 and some change. In deciding what to do never forget the cost of opportunity, which you must include if you are to hold on to it.

Look with the info you have given it is hard to suggest anything. Important things like what are you trying to achieve? How much do you need and how soon do you want it? What are you prepared to do to get it? These are all important questions to devise an exit strategy that you will be happy with.


All the investors I model say that you make your money when you buy not when you sell. I have learnt that lesson from about $10,000 worth of books, seminars and lunches with good investors. Unfortunately this lesson cost you $34,000 (that is if you have learnt it). Another friend says that "we all end up paying for our education sometime." How true is that, my inlaws are going to retire in 10 years broke, how much is their education (or lack of it) going to cost them?

What other books have you read besides Jan's? I'm happy to recommend some if you are interested.

Andrew.

P.S. I'm really stoked that you are actually having a go. The only problem is that you are doing it badly. The good news is that you can learn to do it well so it isn't the end of the world. Losing money is never fun but if you can learn from it you will get it back with at least 1 extra zero on the end.
 
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Michael S

Reply: 1.1
From: Mike .


Re: How much is it costing you?
From: Michael S
Date: 3/15/00
Time: 12:39:31 PM

Hi Andrew. Thanks for your response and the good advice. I didn't have an independent valuation done if that's what you mean. I relied on the valuation done by the bank. It took a bit of work but I was able to ascertain what that valuation was, and it was just a bit less than what I paid for it. I guess what I am saying is I don't know now whether I should have relied on that valuation.

Int payments on the loan are $1210 per month and rent received is $580 (less management fee of 7%). No positive cash flow there.

I was hoping to retire in about 4 years time. Might have to revise that. Looks like I might have some hard decisions to make, but I really feel that I should hold on to the property and cross fingers. Hopefully the Canberra property will give me the gains to cover any losses, plus some.

Thanks again. Michael
 
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Les

Reply: 1.1.1
From: Mike .


Re: How much is it costing you?
From: Les
Date: 3/15/00
Time: 9:15:13 PM

G'day Michael,

I know the area first hand - I bought our first home there in 1984 ($44000), then watched as it peaked at around $95,000 in the early 90's. Today it shows as $75000 ....

I'm fairly sure it was Jan (have lent the book, so can't check) that said "an area South of Brisbane" was over developed from 1990 thru 92 (rental shortage initially, followed by a rental glut after they had built hundreds of units). With first hand knowledge, it "stuck out" (to me) that she was referring to Logan City.

Anyway, to your figures - it sounds like you might be buying using P&I (if not, I can't equate how your mortgage cost would be so high). At (let's say) 7% Interest, a $120k property should only cost $700 per month. If you are going P&I, then I would suggest an immediate rethink. At least you wouldn't be putting After Tax dollars into trying to build the Equity on this one. Your cause could be better served by putting that extra $500 per month into another opportunity.

After 5 years any fittings Depreciation is now GONE - but you should still be getting Tax relief on the Capital Allowance (2.5% per annum on the cost of building the town house).

And check the rents being received - I have a rental in Logan that is receiving $150/wk - which is around $645 per month - and mine is a 15 year old house, not a new town house. Maybe you could be doing better with the rents (or maybe you need a new RE agent????).

At the end of the day, it is difficult to get a negative return in Logan - so take a close look at how things are structured in your case (above points). At least you can them minimise the pain while you wait for the value to grow.

Good luck, Les
 
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Gee Cee

Reply: 1.2
From: Mike .


Re: How much is it costing you?
From: Gee Cee
Date: 3/16/00
Time: 7:14:49 PM

Andrew I agree completely.

Over the years i have had some properties that have at the start looked great but after quite a few years have just ended up being dogs.

It certainly is hard to take a loss but if the money you free up goes into a better project or investment then you just have to grin & bear it. ( Also remember that Capital Losses can carry forward to offset future Capital Gains so that the hit to the chin can over time not feel so hard.)

A list of your favorite books would be much appreciated by all us Forumites.

Regards, Gee Cee
 
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Andrew G

Reply: 1.2.1
From: Mike .


Books
From: Andrew G
Date: 3/16/00
Time: 11:25:01 PM

Congrats on dumping those dogs, gutsy move. Were you better off for doing it? Have you kept track on the "stayed in" V's "got out" scenario? Were you the winner?

As to how good these books are depends on where you are going. As an example Paul Clitheroe's book "Making Money" is really popular with people who want to make some "retail" investments and get rich slow (as he says).I'm sure if you follow his advice you will never have any real money, sure you will retire on better $$ than most (not that this is an achievement) but your standard of living will drop after you stop working and you will be 60+. It just isn't the plan for me so consequently I think it is to be avoided at all costs. Actually I have changed my mind you should read it as a guide to what NOT to do. He even has the hide to have on the cover of the book "the best investments-latest information"

The best investment are NEVER in any book. Before it hits the press it is already too late. Books are great for systems and structures two things that will never change. The books below are for people who want to make big changes with big results so you may think they are crap.

I'm a big fan of the Kiyosaki books and games. I recommend them to everyone as the best starting point, without that knowledge you won't succeed.

Think And Grow Rich by Napoleon Hill (I've seen this stuff come true). Seven Habits by Stephen Covey (changed my life). Creating Wealth by Robert Allen (love his attitude to investing, go hard for a short time and retire). Crashes by ...I don't remember sorry I've just moved house and it is in a box some where (he examines many of the crashed throughout history and what causes them and how to see them coming. I think this is important as I am quite confident that one will happen in most peoples life time. You need to know how to survive one and relying on the property cycle isn't a strategy to get you through.)

This is just a start. I read 1-2 books a week so I could go on for quite some time. Your local library is one of the best kept secrets. James Rohan (US speaker)says there is enough there to make you rich..and he is pretty close to right.

I know I'll think of 5 other must reads the moment I post this but that is life. Yes,I do like What Works on Wall Street, it challenges the simple stock broker/advisor crap and shows you the facts...which you can then take this approach and move into real estate. I have read a lot of books on derivative trading and even studied with a trader in the US but I can't seem to get much more than 40% on my money. This just isn't enough at this stage of my life and I think real estate is so much easier.

I think tapes and seminars are great. Seminars can be quite expensive but I have never felt that I wasted my money on them (but make sure of the content first some of them are just plain dodgy).

As you can see I'm a big fan of education, from people who have done it. You can not put a price on it. My wife did the other day though, I asked her what she would pay for some info that would make her $100K this year ( I like this question as the answer tells you so much about the person). She said she would give me $90K, I was stunned and asked why. Her rational was that she will still make $10K this year and then next year she will still have the info and can make her $100K for nothing.

Hope this helps, Andrew
 
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Gee Cee

Reply: 1.2.1.1
From: Mike .


Re: Books
From: Gee Cee
Date: 4/16/00
Time: 8:35:17 PM

Andrew

I have taken a while to reply. Computer & phone line problems along with demanding 8 month old twin boys.

Thanks for the list of reading material.

I have read quite a few of these but not all!

In short any time that I have dumped a DOG of a property some other better property has come up.

I had two houses in Kingston (Logan Shire) in the mid 80's.

After noting the amount of houses and units being built in the area I dumped them both and came out with a slight overall loss.

This freed up a amount of cash and in 1989 when interest rates were rising and property had done it's dash I picked up a waterfront home at a auction for $135k.I rented it out and gradually did it up. It is now my own home.

Today it is worth around $300k.

The cash freed up also allowed me to purchase a mortgagee auctioned home @ $88k about 3 years ago.

I have just sold this @ $ 121.5k. Not a great profit but the cash from this sale allowed me to purchase a block of land and build a project home @ $180k total price. Just sold @ $234.9K.

Profit from this has allowed me to purchase another block and I am setting up another build/sell again.

If I cannot sell it at a reasonable profit then it will be rented and added to my investment portfolio.


Overall I am much better off than if I had just sat & waited for Logan to get it's act together. !!!!


Regards, Gee Cee
 
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PeterT

Reply: 2
From: Mike .


Re: Strategic advice on a worrying situation
From: PeterT
Date: 3/14/00
Time: 8:33:22 PM

Hi Michael, Same thing happened to me with my first property, bought in Caboolture $103,000 for a Town House, revalued 12 months later when borrowing for my second property and it was now valued at $80,000(ouch!).

Mate you've just got to grin and bear it, over the long term I'm hoping it will equal out and that property is rented now for $120 pw, so while I'm dirty on the MEN IN SUITS, with laser pens who sell these properties to suckers like me....it did prompt me to learn a lot more about the wonderful world of Investment Properties and I'm glad to say after 3 more properties I'm still learning..and still buying.

As for a good strategy, Hold & never Sell, you may feel that you've bought a Pig in A Poke but if it's paying it's own way hang on to it
 
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Michael S

Reply: 2.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Michael S
Date: 3/15/00
Time: 12:45:29 PM

Thanks for your response and advice Peter. Your advice confirms my gut feeling about this. Despite everything, I have always felt good about this investment. I will hold on and see how things shape up in the coming years.

Michael S
 
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Andrew G

Reply: 2.1.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Andrew G
Date: 3/16/00
Time: 2:05:27 PM

Michael,

Look at my response to Les below Re:- theory to discuss. Perhaps you could do some "value adding" in addition to getting your rent up to market value.

If this property is sucking money out of you at $154 pw then something must be done. (Sure it is about $70pw after tax, but who cares you still had to earn the money in the first place so you have lost it to the bank not the taxman. Personally I'd rather you give it to the taxman that way we MIGHT get something useful from the money.)

Do you realise that at $70pw that is $36,400 over ten years. This property had better double in the next ten years because you will have flushed $70,000 down the can ($34K you lost + $36K in cashflow) ouch. I don't know how you can still feel good about this investment. So far you have lost more than the national average wage, I want you to feel pissed off (I am for you I hate wasted money). Pissed off enough to turn this situation around and get it under control. And not just this investment but every new one you do over the next few years.

Not to be the victim of events and accept the view of "see how things shape up in the coming years". If it doesn't shape up OK then it is too late you want to retire in 4 years. Now you can't plan this as you don't know what is going to happen over this time. You may need to work for another 10. (I bet that sounds attractive) Don't just leave it to chance.

I think buying to hold forever is bullshit. Have you ever lived in a 30 year old home that has seen at least 10 tenants go through it. It becomes a huge drain on your cash, houses fall apart. Houses are a depreciating commodity and that should be remembered.

I like to get a tenant hooked on the property, then sell it to them. Do some value adding to get long term tenants then bump up the rent and offer them $10pw credit towards buying the house. That's only $5200 over ten years, which is nothing when you consider that you now have no vacancy and no agents commissions to pay (why do you need them anymore?). They start to feel like they own it so they really look after it and don't consider moving.

Do you have a long term tenant? Do you want one? Offer $20pw credit for a 5 year lease with annual rental reviews. They pay for all minor repairs and credit is lost if they make late payments. This is a forced saving for them so really you are helping them out, they may never save a deposit on their own. Now you are their friend not the "bloody tight assed landlord" or worse still the faceless person behind the "wanker agent". You can tack most of this credit money onto the price anyway.

As I said in the mentioned post, structuring is the most important part. The house is just a tool for collecting cash nothing more. Renters are consumers, do you have the best product on the market? Everyone hates moving so make it easy for them to stay.

If you want to live in denial and believe Logan is a good investment then I wish you good luck. If you can admit it was a shocker then you can start to learn from it. If you don't you will keep making the same mistake over and over. The school of experience is a wonderful teacher but the tuition is inhibitive.

Andrew.
 
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Les

Reply: 2.1.1.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Les
Date: 3/17/00
Time: 12:24:40 AM

G'day Andrew,

Run the numbers and I think you'll find the largest part of the problem is in the makeup of the loan (see my reply to Michael on another leg of this discussion).

His property (even as is) SHOULD be cashflow POSITIVE - I know Logan, the prices, the rents - so a re-structure should turn this baby around.

The ONLY caveat I have on the whole scenario is the ACTUAL area - there are SOME areas of Logan that might reflect Adam's "proportional difference" story. Some areas of Logan won't come right in the next 10 years (in my opinion) but they are small in number. But meantime, the cashflow SHOULD be positive, even with a $120k purchase price.

So let's give Michael a chance to rethink the whole scene, maybe restructure the loan, add some value, raise the rent, and feel positive about the place again - if it's possible.

I KNOW what you (and others) are saying re "cutting the losses" and "opportunity cost" - and all are worthy of note. But I prefer your earlier comment where you "were stoked that he had a go". I would like to see him again "have a go" to see if this one can be turned around. Let's see if he can do a Kiyosaki on this and turn a losing deal into a winning one.

And even though the purchase price sounds high, some parts of Logan are potentially VERY GOOD areas. If his purchase is in one of those, he could end up selling out (with associated costs) JUST IN TIME to see the whole area jump in value.

Several articles I've read are talking of Brisbane being the growth city over the next 6 years - and a rising tide lifts all boats. So maybe this "dog" can still have his day.

And to you, Michael - is it salvageable? I agree with Andrew that you SHOULD do something - get cashflow positive (minimum), add some value, maybe look at Andrew's idea of selling it to a tenant (after increasing the cashflow for a couple of years first with "value adds") - or the flip side (cut your losses, and go for a better opportunity). It's your call, and good luck with it.

Les
 
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Crystal

Reply: 2.1.1.1.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Crystal
Date: 3/17/00
Time: 4:07:30 AM

I would like to find out more about "value adding" and offering credit to the tenants each week towards buying the property. Any suggestions as to relevant reading would be greatly appreciated. Thanks, Crystal
 
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Michael S

Reply: 2.1.1.1.1.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Michael S
Date: 3/17/00
Time: 8:59:02 AM

G'day Andrew. Thank you very much for your stirring comments. I am beginning to see now how things really are and I am getting pissed off. I intend to examine your advice together with Les' advice and quickly do something to turn this situation around. Once again, thank you.

Kind regards, Michael
 
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Andrew G

Reply: 2.1.1.1.1.1.1
From: Mike .


Re: Strategic advice on a worrying situation
From: Andrew G
Date: 3/22/00
Time: 10:18:39 AM

I agree with Les. If you can get it cash positive that will be fantastic news and I will be really happy for you. Don't sell it if you don't have to. If you can go cash positive why sell it?

Hang on in there I'm sure from Les' comments it will turn around OK./

Andrew.
 
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