How much do you have "at risk" if a bubble bursts tommorrow?

Just wondering?

We have 2 ips. I'd say we have about $200K "at risk" money if

Our Yarraville warehouse was purchased in 2006 - only cost us $600K at the time and I don't think there is any real risk as I don't think commercial property has had any real bubbles. Id say if we sold today, we'd probably get $800K.

2nd ip was in Chaddy mid last year, prices have appreciated since, but not much. Purchased $800K, if things went South tomorrow real quick, I'd say we would lose between $200-$250K.

Having said that I have relatives and friends who are well in debt and if it crashed tomorrow, would lose in the vicinity of $1mil-$1.5mil. Honestly do not know how they sleep at night with that much debt!
 
2nd ip was in Chaddy mid last year, prices have appreciated since, but not much. Purchased $800K, if things went South tomorrow real quick, I'd say we would lose between $200-$250K.
Why would you lose that much? The market does not go down 25-30% overnight. :confused: If it goes down, it is generally 5-10% max and that is over the course of 12+ months, and even then, only of you absolutely have to sell. Banks are reasonably OK with you having a negative equity position (within reason) if you are able to service the debt and make your monthly payments.

Having said that I have relatives and friends who are well in debt and if it crashed tomorrow, would lose in the vicinity of $1mil-$1.5mil. Honestly do not know how they sleep at night with that much debt!
Personally I'd love to be debt by more than that, say $10M in debt. I could sleep really comfortably in that situation if I had only $11M of property, as I'd still be a millionaire.
 
Just wondering?

We have 2 ips. I'd say we have about $200K "at risk" money if

Our Yarraville warehouse was purchased in 2006 - only cost us $600K at the time and I don't think there is any real risk as I don't think commercial property has had any real bubbles. Id say if we sold today, we'd probably get $800K.

IMHO , I think you don't have a real appreciation of risk , in particular .....

You have everything at risk , if you are in a position where you are unable to meet your repayments or are unable to sell properties if you need to .

In the recent GFC , an acquaintance with a multi-million dollar portfolio of commercial properties was told by the bank ( despite having never missed a repayment, that with the decrease in property values , his LVR's were too high and can we please have $XXXX amount of money with in XXX days . some time later he was declared bankrupt .

How sell able are your properties in time of a crisis , in particular how sell able is your commercial property ?

In the time of a financial crisis , commercial properties can sit vacant for months or even years despite how " GOOD " they are and well located . In the aftermath of the GFC we bought two units in Mosman which we did quick reno's and rented within a week .We drive down military rd on a regular basis and there were a hell of a lot of vacant shops along that high profile strip . I didn't track which ones were vacant for how long , but I think some were vacant for maybe two years.

A commercial property is valued on yield . no yield , you may not have people fighting to buy it in a down turn.

The financial pages often tell the stories of commercial properties selling for considerably less than people have paid for them.

Your risk is no tenant , a mortgage you can't afford and a bank who want THEIR money .

So how much buffer do you have ? What income do you have ? what type of insurances do you have in terms of income , accident and Disability ? That is critical in determining your risk .

How old are you ? If things go pear shape , do you want a start again ?

There are several forumites I know who have been prepared to take " risks " in the last years because they are younger than I am and if things went pear shaped they could start again , but they have mitigated that risk by being very financially educated , watching their markets very closely and buying at times when the markets are moving . DaveM and Richard Feynman , Michael X spring to mind.

While non IP people would consider what they have done to be risky and that they are " lucky " , my opinion is that what they have done is considerably less risky that what the majority of the community do , who are only 1-2 pay checks ahead of missing payments .

For me , I believe that my only risk is a financial crisis bigger that the great depression or a WW3 which totally changes the fabric of our economy and society

I have a bullet proof Job . If I want to , I can do more hours and make more money .In the recession we had to have I worked with a Dr who was working 7 days a week , long hours to keep the wolves from his door .Not something I'd want to do , but it's an option . I have disability and income insurance . I have a buffer of several hundred thousand dollars . this is over different institutions . Worse case scenario I have parents who would be happy to help out in some unforeseen crisis . We have family we could move in with , as another last resort

We have a PPOR which we could rent out and we could more into one of our cheaper IP's if necessary to increase our income . We also have a weekend which I would also be more than happy to move into full time

We have multiple properties with considerable equity .I would expect to be able to sell some of those but there are multiple layers of safety nets to go through before .

Our current LVR is just over 50% .

My biggest risk management safety net is I watch the market and the forum closely and have a track record of buying and selling at the right time and while some people might consider this lucky , I don't .

I also have a track record of not making mistakes . There have several schemes / investment opportunities and structures promoted on the forum over the last 14 years which have resulted in forumites loosing money . We've done our due diligence on these and decided not to be involved . Being a football fan , I know a successful team is built around a solid defense , and that involves being careful . If that means missing out on opportunities so be it .

We've also sold down properties to pay for a development when I thougth the market was high . We could have got top up loans to borrow more but I felt that would have increased our risk at the time

One thing I've learnt on the forum is that there are always opportunities , but sometimes it's better to sit on the side lines and wait for better one's to come along.

So what is your real risk ?

Cliff
 
I would feel pretty comfortable with any amount of debt on the right asset. A very low risk asset would be residential property located near the CBD. The benefits being:
- increasing demand (Aus. population increasing by ~400k per year, most of the pop. migrating towards the capital cities)
- fixed supply (inner city suburbs are fully built out - literally cannot build up [council restrictions restrict height] or out [no space]
- no possibility of a margin call

You can mitigate most risks and increase the "sleep at night factor" by adjusting your time horizons and expectations. Over 20 years with the population boom that will occur in Australia resi. property represents pretty low risk for me.
 
Good post Cliff.

You make a very valid point on the risk/age topic, too.

I'm consciously operating under the framework of progressively lowering my "risk" into the future and making the most of my youth and lack of dependents in the mean time (I'm just shy of 30 and intentionally single).

That said, I feel I'm at far lower financial risk than almost every person in my circle of friends and acquaintances.

Education, action and mitigation are the keys.
 
In the time of a financial crisis , commercial properties can sit vacant for months or even years despite how " GOOD " they are and well located . In the aftermath of the GFC we bought two units in Mosman which we did quick reno's and rented within a week .We drive down military rd on a regular basis and there were a hell of a lot of vacant shops along that high profile strip . I didn't track which ones were vacant for how long , but I think some were vacant for maybe two years.
There are currently 2 x Comm properties down our way (larger ones) vacant -

One has been vacant for almost 2 years, and one has been re-leased after well over 1 year, but only in part - approx 3/4 still vacanct...for almost a second year as well.
 
see_change why would banks effectively make a margin call (is there a different word for this in RE?) for commercial property but not residential? What's so fundamentally different about it? Is it because if things get tough, you're much more likely to find a residential tenant that'll sign for 3 months compared to a commercial tenant that are generally expected to sign for a period many times longer?
 
see_change why would banks effectively make a margin call (is there a different word for this in RE?) for commercial property but not residential? What's so fundamentally different about it? Is it because if things get tough, you're much more likely to find a residential tenant that'll sign for 3 months compared to a commercial tenant that are generally expected to sign for a period many times longer?

I'm not the one to ask .

I decided a while ago not to buy commercial .I have no interest / knowledge or affinity for it , where as I like looking at houses and looking for opportunities .

For me there is more risk in commercial , but obviously some people do very well out of it .

Cliff
 
I had a small commercial property at one time, you need to budget for vacancies. But the potential yield north of 18% gross made it manageable.
 
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