How negative would you go!

[RichardC]

I've been having a look at a 400K property recently.

With costs on top it would be 425K.

I will never be in tune with you folks on SS.

400k is a big number and there is no way I would commit to it without a clear indication that it should work. A "maybe, if property keeps increasing" would not satisfy me.

$350/wk -ve c/f (ok, you eventually get some back) sucks.

Sorry! Don't like it.

ps Do a best case analysis (be fair, don't use recent Perth figures) on where you will be in 5yrs and I bet I can offer a safer alternative.

 

[oc1]

I will never be in tune with you folks on SS.

400k is a big number and there is no way I would commit to it without a clear indication that it should work. A "maybe, if property keeps increasing" would not satisfy me.

$350/wk -ve c/f (ok, you eventually get some back) sucks.

Sorry! Don't like it.

ps Do a best case analysis (be fair, don't use recent Perth figures) on where you will be in 5yrs and I bet I can offer a safer alternative.

I agree. With that weekly amount I could finance $150,000 worth of shares all capital protected with a greater probability of growth than a standard piece of realestate. In this current environment, unless you can force growth in your property, I ain't buying and certainly not one that would cost me $350 per week!

Cheers

Oscar

 

[Twitch]

I bought about a year ago on even more negative numbers. 90% land content and development potential though. I'm still deciding if it was a good idea or not....

 

[MJK]

I will never be in tune with you folks on SS.


$350/wk -ve c/f (ok, you eventually get some back) sucks.

Sorry! Don't like it.

Richard,

It would be approx $150 pw negative. Anyway I get your point.

So what alternatives would you consider a better option?

Thanks for reply Y-man & Richard, food for thought.

MJK

 

[sue78]

That's why we have an exception to the rule of never selling. I think it's ok to buy 3, sell one and so forth to manage holding costs/negative gearing.

 

[Bandita]

I have the same sort of decisions to make if I buy in CBD area. My rationalisation is, if it takes 10yrs to boom again and you lose $7665pa every year for the whole 10yrs, it totals $76,650. I'm factoring in maintenance and rises in rates etc so thats why a loss of the same amount every year.

When the boom comes, say in 10yrs (hopefully worst case scenario), the value will double to $800k or more. So you have spent $76,650 to make in excess of $400,000.

This seems a good idea but how about if you could afford two such buys?
You could sell one in 10yrs and completely own the other, thereby generating a positive cashflow forever.

Next question...can you stretch the finances without too much risk and get your hands on 3 houses, or 4, or 5? That's where Ian's PIA software really comes into its own.

I agree. One of the things that I have always questioned about negative gearing (and we are negatively geared - so only questioning ourselves here) - is whether we could have used the funds more wisely. For instance, we pay interest only, because we consider the principle component to be "savings" that we could invest more wisely.

I completely understand the idea of negativel gearing, however, the obvious necessity is that you're gaining more in capital growth than what you're losing. OK, so what if instead of buying a highly negatively geared property with expected 10-12% growth, you bought a property with slightly less CG (8%) that was almost neutrally geared and because of that were able to purchase another IP much sooner - without having to wait 5 years - and so you had 2 properties performing at 8% rather than 1 at 10% or 12% over 5 or 10 years? Which is better?

Our current properties actually only make us negatively geared from the depreciation - cashflow is covered from the rents. This makes it very easy to purchase the next one.....but we have the same question as you - how low should we go?

Cheers,
Jen

 

[Keen]

MJK,

You probably know this well.

In the end its what you can sleep on that really counts. If your gut, natural instinct is against this then you probably shouldn't.

If you are still keen to go ahead - you need to be very very confident that the capital growth will be worth it. You need to strengthen your opinion in this area, so if you do strongly feel the capital growth is there then you can sleep at night.

Regards

keen

 

[McBrain]

MJK,

I recently bought my first IP in inner Melbourne. Cost over 550k.

I'm negatively geared $350/wk. yield is 3.9%

My reasons for doing this?

- I think that this type of property is best, for me, for long term capital gain.

- I'm paying too much tax so this is a good way to reduce it.

I think you need to be careful comparing yield with managed funds. Sure, you could gear into managed funds for a higher yield, but the RISK is higher (I'm talking equities here, don't know about LTPs).

IMO there aren't many properties within a 15k radius going for less than 400k which I would be interested in.

 

[MJK]

MJK,

I recently bought my first IP in inner Melbourne. Cost over 550k.

I'm negatively geared $350/wk. yield is 3.9%

My reasons for doing this?

- I think that this type of property is best, for me, for long term capital gain.

- I'm paying too much tax so this is a good way to reduce it.

I think you need to be careful comparing yield with managed funds. Sure, you could gear into managed funds for a higher yield, but the RISK is higher (I'm talking equities here, don't know about LTPs).

IMO there aren't many properties within a 15k radius going for less than 400k which I would be interested in.

One of he LPT's I'm in at the moment is doing over 20% pa for the last 5 years.
I agree that the stockmarket funds are a bit more risky but I'm quite comfortable with LPTs.

Say I bought the house, its costing me about 8% pa with an income of about 4%pa thats a net loss of 4% pa. Say it grows in value at 7% pa then I'm ahead only 3% (granted its OPM so this is good)

But

If I invested the same dollars into the LPT at 20% pa.......

OK lets be conservative...even if the LPT did only 10%pa ...

MJK

 

[RichardC]

Richard,

It would be approx $150 pw negative. Anyway I get your point.

MJK

With costs on top it would be 425K.

Factoring in the next interest rate rise interest cost, at 7.5% interest would be $31,875

Rent is 350pw / 18200 pa

On raw figures loss would be $13675 pa

Include rates, management and insurance @ 3,100pa and loss would be $16,775pa.


I simply multiplied this by 2 and shifted the decimal and rounded up. Good enough when using such rough figures but the calculator says $322.60. I don't mind. I used this number because you will be out of pocket that much during the year. The difference will be refunded much later. I doubt you could get your PAYE taxes reduced to reflect this loss.

So if you can't live on $350/wk less than your current take home pay, you shouldn't do it. I wouldn't consider it, (I could afford it) but I'm conservative. Also, being on the PAYG scheme, my q'ly BAS would be reduced after the first year.

Hey! This is just how I feel.

 

[McBrain]

Say I bought the house, its costing me about 8% pa with an income of about 4%pa thats a net loss of 4% pa. Say it grows in value at 7% pa then I'm ahead only 3% (granted its OPM so this is good)

But the 4%pa is compounding, the 8% isn't.

If LPTs were so good, why would any of us buy actual property?

What is the MER on your LPT? 1.5% - 2%?

Cheers

 

[RichardC]

So what alternatives would you consider a better option?

Lets assume you are putting no cash up front but the $25k costs.

That will allow me to buy $200k CFDs on BHP with an uncomfortably small buffer. I could do that with under$100 costs, methinks. (We're $24.9k ahead already. LOL) With average luck we will not have to pay out another $ while we hold these CFDs.

BHP has a PE (price/earnings) of 9.1 ie 11% return (not divs) which is much more assured than the 10% cap gain on city property. So if BHP does nothing new for 7ys (makes no mistakes either) it will double in value. This increase in value will show in it's steadily increasing share price and this in turn will counter the interest accruing on the CFDs.

If bhp only does this well our CFDs might only be worth $50k after the 7yrs. Slim pickings indeed but we haven't lost either. But: If BHP outperforms and quadruples in price (my bet) then we've made a cool qtr mil. Not a bad return on the up-front costs that would have incurred on the property deal. And remember that during the 7yrs we have incurred zero out of pocket expenses with almost zero management time.

Risks? The CFD provider will sell us up before we go into the red so all we stand to lose is the initial $25k which were costs anyway (on the RE purchase), so we have lost nothing.

DISCLAIMER: I haven't done this even though I have the funds and knowledge. CFD's can be dangerous to your wealth if mis-handled.

 

[RichardC]

But the 4%pa is compounding, the 8% isn't.

Only true because you are meeting these costs monthly. There is a compounding return foregone. ie Oportunity cost.

If LPTs were so good, why would any of us buy actual property?

Good question

What is the MER on your LPT? 1.5% - 2%?

Cheers

What are your insurance and PM fees on privately held property?

 

[McBrain]

DISCLAIMER: I haven't done this even though I have the funds and knowledge. CFD's can be dangerous to your wealth if mis-handled.

Exactly. And where's your SANF?

I trade shares, have done for years, although I don't trade CFDs.

Shares are a great way to get rich quick, I love them. But property is a great way to get rich slow. - That's why I'm interested in property.

 

[oc1]

Shares are a great way to get rich quick, I love them. But property is a great way to get rich slow. - That's why I'm interested in property.

Gee can you irritate me even more???

I cant for the life of me see 1 logical point to your post there?

Please elaborate further.

Cheers

Oscar

 

[WillG]

I will never be in tune with you folks on SS.

400k is a big number and there is no way I would commit to it without a clear indication that it should work. A "maybe, if property keeps increasing" would not satisfy me.

$350/wk -ve c/f (ok, you eventually get some back) sucks.

Sorry! Don't like it.

ps Do a best case analysis (be fair, don't use recent Perth figures) on where you will be in 5yrs and I bet I can offer a safer alternative.

Hi Richard,

I understand your comments. This is however how a 'buy & hold' strategy works. It takes time. No instant gratification. 'Time in the market' ... not 'timing the market'. I am sure you have seen this before.

Perhaps it is worth while comparing leveraging $400k (IP) against $150k (managed funds)

 

[RichardC]

Exactly. And where's your SANF?

Where's the loss of SANF? I just demonstrated a no cost, no risk investment and you think it would keep you awake nights.

It ain't perfect but it ain't bad neither.

 

[RichardC]

Perhaps it is worth while comparing leveraging $400k (IP) against $150k (managed funds)

An invalid comparison for me.

Firstly: I'm not in the 40% bracket so my holding costs would be higher than in the example.

Secondly: I do not invest in MFs.

Thirdly: I can get 70-75% leverage on a large number of shares and funds via my margin lender and 90% via my CFD provider.

Finally: My trading results are better than "satisfactory" and if I had the income to be in the 40% tax bracket I could be even bolder with CFDs, maybe even buy the swag of BHP mentioned above. (I'm warming to the idea and may yet do it.)

Oh! One more thing. I'm retiring shortly but that isn't relevant to the general thread, as most here are much younger.

 

[McBrain]

Where's the loss of SANF? I just demonstrated a no cost, no risk investment and you think it would keep you awake nights

With CFDs you can loose more than your original stake, i.e more that 100%. You may say that that your CFD provider will sell you out first, but if you're getting whipsawed out the market all the time you're going to make losses.

I would imagine that if you're retiring soon then your risk approach would be low.

Go and trade CFDs for a year, come back and show me your equity curve and then I'll be convinced.

 

[RichardC]

McBrain. I hope you accept that I'm only having a discussion, not an argument, and am pointing out there are many ways to invest and that different folks have different preferences and needs.

You're right about being whipsawed out of CFDs if you don't have adequate buffer. That was the reasoning behind the "wealth hazard" remark. I have <1% of my share capital in my CFD account which is being used for discovery more than profit. And I don't know how a 9 to 5er could use them aggressively. But there are ways to buy NYSE stocks with CFDs and write covered calls. With proper money management this can be safe and requires just an hour a month to implement.

I use margin and (possibly) CFDs because I'm a late starter at wealth creation and just don't have the time for the conventional wisdom of "time in the market" to work. I stress for me.