Investing in Real Estate on a Budget

[Sim]

Reply: 1.1.1.1.1.1.1.1.1.1
From: Sim' Hampel


Brilliant post thanks Dunc... that's exactly the kind of stuff I wanted people to hear.

I think you have a very good plan for dealing with the extreme cases, and have spent sufficient time in considering your position should these situations arise. Well done !

Note to everyone else... I consider Dunc to be fairly aggressive with his property buying. He owns quite a few properties and carries a fairly significant amount of debt. He is still moving forward confidently while not denying that rates would ever get to 17% again. He acknowledges that they could, and has a plan for dealing with the situation if they do.

The moral of the story: spend some time considering how bad things could get, being totally realistic (no sticking your head in the sand allowed) ! Then come up with some plans for dealing with these issues. Then move forward confidently, knowing that you have a better chance than most of surviving adversity.

It is very important that you don't let the fear of what could go wrong paralyse you into inaction. Identifying the fears and the potential risks you face is the first step in overcoming them. Give your fear a name, it is then much easier to deal with.

This is a process I have had to do myself recently, both for my own peace of mind, and to convince my wife that we really can manage such high levels of investment debt.

 

[Sim]

Reply: 1.1.1.1.1.1.2.2.1.1.1.1.1.1.1
From: Sim' Hampel


I'm with Dunc on this one Marina...

If you or anyone else are so confident that interest rates will NEVER get to 17% in my lifetime, are you prepared to offer a guarantee ?

If you are not 100% confident, then surely you should be planning for these kinds of scenarios ? You don't have to stop buying property. But you should have worked out some basic plans (see Dunc's earlier reponse to one of my posts) for dealing with things if they do.

Sure, there are limits to what is realistic. Planning for or trying to predict when World War III or the second coming of Christ will occur is not going to get you very far with your investing - so is not really worth considering from a fiscal point of view !.

But considering that it is so recently (within my own lifetime) that rates were that high, and that I still intend to be buying property in 20 years time, then I can conceive that they could go that high again.

I personally do not have confidence that a change of government (regardless of party) and some fiscal irresponsibility could not induce a similar set of circumstances that would lead to very high interest rates in the future.

The concept of looking at recent history to work out what is likely in the future is fraught with danger. Especially when events are totally independant. I'm sure some economists may disagree, but from what I can see, there are no real correlations between economic conditions 2 years ago when rates went up by a couple of percent rather quickly, and what the economic conditions will be in 2 years time.

Thus, the argument that rates have not gone up by more than 5% in the recent past and thus by interpolation, stating that they should not go up my more than 5% sometime over the next 5 years or so does not make much sense to me.

Considering that I have not had any major illnesses in the last 28 years, in fact I have not been in a hospital as a patient at all in the last 15 years... does this mean that income protection insurance is a waste of money for me ? Can I interpolate this historical information as an indication of future events and say that I will never have a major illness of suffer a disabling accident ?

So I am moving forward, planning for the worst, but expecting the best.

 

[WebBoard]

Reply: 1.1.1.1.1.1.2.2.1.1.1.1.2
From: The Wife


TW, It seems to me my paltry ability to reduce IP debt is next to worthless,
should I be concerned that I have no focus on reducing IP debt at all?

*** Nope, your plan seems to be working fine for you, looks like you have it all under control, i gave a view of what I think works for me***

How do you determine the 'selective properties'

*** the ones I like**

and is the opportunity cost
of letting equity lie fallow more than offset by the security you feel it
brings you?

** totally, it deals well with my security issues, see you knew the answers already :O)***

TW
Regards,

Duncan.

 

[WebBoard]

Here comes 17% interest rates

Reply: 1.1.1.1.1.1.2.2.1.1.2.1
From: The Wife


Hows that KJL, reckon it will get enough attention?

for people clicking on this, click on "entire topic", and you will see the great discussion taking place.

TW
~Life is a daring adventure, or nothing at all~

 

[duncan_m]

RE: Here comes 17% interest rates

Reply: 1.1.1.1.1.1.2.2.1.1.2.1.1
From: Duncan M


> reckon it will get enough attention?

At the bottom of the existing thread? Very little I'm afraid

Duncan.

 

[WebBoard]

RE: Here comes 17% interest rates

Reply: 1.1.1.1.1.1.2.2.1.1.2.1.1.1
From: The Wife


Dunc, if people "mark read" posts after they have used them, then these new posts come up like a whole new thread, you wouldnt know cause your an email junkie )

 

[Les]

Reply: 1.1.1.1.1.1.2.2.1.1.1.1.1.2
From: Les .


On 4/12/02 9:24:00 AM, Marina L wrote:
>Hi,
>
>My question is should we even
>be talking and concerning
>ourselves with 17% interest
>rates.
>
>Les and Mike have stated and
>explained why they will not
>go over 10%.

G'day Marina,

My comment was that I was looking 5 years out, and expect no more than 5% lift during that time (probably lower - my prediction was 4%).

But, note, that brings us to 2007. AFTER that, well 17% could become a reality - but probably not before 2012, IMHO.

My intention was to try to choose some reasonable limits (i.e. get away from people suggesting "we could be at 12% by the end of 2003 so we need to lower our LVR's..." etc.)


If we believe these things move in cycles, then it is at least HIGHLY UNLIKELY that Interest Rates will suddenly escalate above 10 - 11% within a short time-frame (1 to 3 years).

It is very useful to have the input from several of the "veterans" out there - can we agree, though, that any huge rises will take place OVER TIME. Following on, can we attempt to quantify the kind of time-frames involved that would see Interest Rates get up to 17%? Is TEN years a reasonable MINIMUM timeframe to consider, given that we are currently around 6%?

I suggest that preparing today for 17% Interest Rates over 4 - 5 years could be extremely counter-productive. But, preparing for a 5% lift (to 11%) over 4 - 5 years makes sense to me.....

Question to all - is the above valid? Could there be anything at all that might generate 17% rates by 2007 ???? A conflict around OPEC countries that lifts Oil to $40 a barrel? Or brings rationing? (It would certainly have some effect - but how do we quantify it??)

Good stuff, people - keep those thoughts flowing. and I agree we probably need a new topic with a suitable title to continue this. How do we capture all this good stuff and drop it in a new thread? Sim? Mike?

Regards,

Les


- "Eschew Obfuscation" - ;^)

 

[WebBoard]

Reply: 1.1.1.1.1.1.2.2.1.1.1.1.1.2.1
From: Kevin Forster



This is very good information.

The only concern that I have is in looking at 17% interest rates is that we've been looking at them in a vacuum and not taking a holistic view.

I think one thing that also should also be taken into account the types of properties that are held in your portfolio. Will they be rented out in a time of high interest rates?

The only reason I say this is that we haven't considered the effect of these sort of rates on businesses. Last time many businesses went to the wall, leading to higher unemployment. Could someone on unemployment benefits afford to live in your properties?

 

[Michael Croft]

RE: Here comes 17% interest rates

Reply: 1.1.1.1.1.1.2.2.1.1.2.1.1.1.1
From: Michael Croft


Firstly an apology as I don't have time to explain the logic an research that went into it but; I have done all recent figures on 9% for the next cycle (assuming we are one side or t'other of a peak). So I am betting on interest rates peaking at 8.5 - 9% in the next 3-7 years (bear in mind this changes as more economic data comes to hand).

So for a buffer I want to see an 10% rental return on purchase, AND before any whingers say "it's not possible to find 10% returns in this market in high growth areas" - I've seen two this week and I'm not looking!

Michael Croft

 

[Ross Sondergeld]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2
From: Ross Sondergeld


Hey Sim,


Sim said, "I don't think you can guarantee your maximum exposure without
something like a 25 year fixed loan. Good luck finding one of them !"


What is the longest fixed loan period in Australia ???

I.e. 10 years i/o at westpac (from memory)

Can you get a longer fixed interest rate Rolf ?




Ross Sondergeld

"No bird soars too high,
If he soars with his own wings."
- William Blake

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[Rolf Latham]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2.1
From: Rolf Latham


Hiya

In terms of fixed thats it guys 10 year with Westpac, NAB and I believe ANZ too now.

Ta

Rolf

 

[Sim]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2.1.1
From: Sim' Hampel


From http://www.yourmortgage.com.au/ :

So I guess this means that the big banks don't expect the rate to get above 8% on average over the next 10 years... which is kind of nice.

ANZ RI Fixed 10y
Initial rate: 7.90
Default rate: 6.07
Ongoing fee : 0
Startup cost: 600.00
MaxLVR noLMI: 80%
MaxLVR LMI : 95%

NAB RI Fixed 10y
Initial rate: 7.99
Default rate: 6.06
Ongoing fee : $8/m
Startup cost: 600.00
MaxLVR noLMI: 80%
MaxLVR LMI : 95%

Westpac RI Fixed 10y
Initial rate: 7.99
Default rate: 6.17
Ongoing fee : $8/m
Startup cost: 750.00
MaxLVR noLMI: 80%
MaxLVR LMI : 95%

 

[Marina]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2.1.1.1
From: Marina .


On 4/14/02 7:52:00 PM, Sim' Hampel wrote:
>From
>http://www.yourmortgage.com.au
>/ :
>
>So I guess this means that the
>big banks don't expect the
>rate to get above 8% on
>average over the next 10
>years... which is kind of
>nice.
>
>ANZ RI Fixed 10y
>Initial rate: 7.90
>Default rate: 6.07
>Ongoing fee : 0
>Startup cost: 600.00
>MaxLVR noLMI: 80%
>MaxLVR LMI : 95%
>
>NAB RI Fixed 10y
>Initial rate: 7.99
>Default rate: 6.06
>Ongoing fee : $8/m
>Startup cost: 600.00
>MaxLVR noLMI: 80%
>MaxLVR LMI : 95%
>
>Westpac RI Fixed 10y
>Initial rate: 7.99
>Default rate: 6.17
>Ongoing fee : $8/m
>Startup cost: 750.00
>MaxLVR noLMI: 80%
>MaxLVR LMI : 95%
>
>
Does that mean we can forget about 10%-17% interest rates coming along in the next 10 Years.???

 

[Sim]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.1
From: Sim' Hampel


On 4/14/02 11:01:00 PM, Marina L wrote:
>
>Does that mean we can forget about
>10%-17% interest rates coming along in
>the next 10 Years.???

Don't know about you, but I'm still taking the approach that unforseen events may have a disasterous impact on the financial system, and making sure that I have a plan for dealing with such events, even if the impact is relatively short lived.

If you consider those 10 year rates to be the banks thinking of the average over the next 10 years, you must remember that 10 years is a heck of a long time !

In those 10 years, we may have a period of extremely low interest rates (less than 6%) and maybe a period of extremely high interest rates (12%+), and even if rates shoot up for only a few months... if you can't afford to make the repayments on your debt, the bank WILL come knocking on your door.

So, ensuring that you have some form of buffer to handle these spikes is very important. All the hard work you put in to building up your empire will be worthless if you can't handle those spikes, no matter how brief they are.

Of course, you could always take out the 10 year fixed rate, which would mean that you can guarantee that your rates will not go above 7.99% (or whatever) over the next 10 years, but considering that rates are currently at aroung 6%... you will be paying 33% more interest NOW by fixing than you would be leaving it variable.

So it's all about balance. What is the cost of fixing now ? What is the potential cost of not fixing ? What is the opportunity cost of not using all of your available equity ? How much are you willing to lose ? How would going bankrupt affect your financial plans ? How would an extremely conservative strategy affect your financial plans ? How realistic are your economic predictions ? How much do you trust the economists to get it right ? How well does your cyrstal ball work ? How well do you sleep at night ? There is no one right answer !

 

[Les]

What's the longest loan period in Australia ???

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.2
From: Les .



Marina asked:-

>Westpac RI Fixed 10y
>Initial rate: 7.99
>Default rate: 6.17
>Ongoing fee : $8/m
>Startup cost: 750.00
>MaxLVR noLMI: 80%
>MaxLVR LMI : 95%
>
>
Does that mean we can forget about 10%-17% interest rates coming along in the next 10 Years.???


Nice if it were so - but this data doesn't put an 8% ceiling on expected rates. Yes, the Banks usually do "pretty good" out of fixed rates, but to be in front, if we have (say) 7 years of rates less than 8%, they can afford to give back a little in the last 3 years.

What it does seem to indicate to me (and, as you know I am not an economist, banker, - but may be a fortune teller ;^) is that the next 6 - 7 years are likely to be low, but AFTER 7 years ..... ??


Regards,


Les


- "Eschew Obfuscation" - ;^)

 

[Ross Sondergeld]

Long term interest rates... Good guide...

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.3
From: Ross Sondergeld


Hi Marina,

Subject: What's the longest loan period in Australia ???

>Westpac RI Fixed 10y
>Initial rate: 7.99
>Default rate: 6.17
>Ongoing fee : $8/m
>Startup cost: 750.00
>MaxLVR noLMI: 80%
>MaxLVR LMI : 95%


You said, "Does that mean we can forget about 10%-17% interest rates coming
along in the next 10 Years.???"


It's a good guide post. A friend of mine says to watch the 3yr rate.


(### Please note that i'm NOT an expert at interest rates!!!)





Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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...with a Buyer Agent on your side!!! "

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Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
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[Marina]

Long term interest rates... Good guide...

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.3.1
From: Marina .


Hi,

Thanks guys for all the feedback.

I guess the bottom line is always be prepared for the unforseen. Have a Buffer in place just in case.


I have another question- this will take us back in time.

I was not affected by high interest rates when they peaked- how high did they exactly peak to? and in how many months did it take for rates to peak from what they were to when they reached their highest point.?

I remember the saying THE RECESSION WE HAD TO HAVE, and I remember seeing all the sad stories of families losing their homes due to high interest rates on T.V.
A Greek Lady who I work with told me how she lost her whole property portfolio at that particular time.
Her family worked and slaved long hours for years running businesses and then came the recession we had to have and they lost the whole lot. To this day she is still bitter.

How is it that a lot of people did not have buffers or strategies in place?
Was it that the unforeseen and impossible happened overnight?

I recall reading a post by Paul.Z that he was affected by this.
Are you able to take us back in time for those that do not remember those days.
What would you have done differently to have survived back then?

I was living at home at the time(in my younger days) and was pretty insulated from the whole experience.

When I got married in 93,and we bought our house interest rates were 10%.
How long did it take for rates to go down from the highs to 10%?
Why did they go up so high that if affected many many lives?


Also can anyone find out what the 3yr and 10year fixed rates were in those preceding years before interest rates peaked.?

Had someone watched the 3 yr rate maybe that would have offered some clues as to the rates going up.
This is what Ross. S. is suggesting we do .
Is that correct?





Thanks
Marina.

 

[paulzag]

Long term interest rates... Good guide...

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.3.1.1
From: Paul Zagoridis


Hi Marina

On 4/15/02 3:39:00 PM, Marina L wrote:
>A Greek Lady who I work with
>told me how she lost her whole
>property portfolio at that
>particular time.
>Her family worked and slaved
>long hours for years running
>businesses and then came the
>recession we had to have and
>they lost the whole lot. To
>this day she is still bitter.

I know many people who are bitter over the losses they incurred during the recession we had to have. Sadly many have not got on with their lives. Either because they can't (due to age or circumstances) or won't (attitude adjustment required).

>How is it that a lot of people
>did not have buffers or
>strategies in place?

Because all booms are the exception. It can't stop yet for this special unique magic reason. But all booms end. See below for my delusions.

>Was it that the unforeseen and
>impossible happened overnight?

The unforeseen in never the unforeseeable. Economists are great at explaining why once it's happened.

>I recall reading a post by
>Paul.Z that he was affected by
>this.
>Are you able to take us back
>in time for those that do not
>remember those days.

No! no! nooooooo! the pain the paaaaaiiiinnnn!

I was getting involved in a risky deal. The finance had onerous penalties. I'd make lots at 15%, a little at 16%, lose a little at 17% and go broke at 18%.

I bet the farm that a federal Labor government would not allow first mortgage interest rates to hit 18%. I was sure there would be revolution in streets if they let it happen.

First mortgage rates hit 18% (highest in the OECD). My bridging finance (with escalations and penalties hit 33%).

Hey! I just realised that we'd have had low inflation now even if Keating had not pushed rates that high. Bugger!

>What would you have done
>differently to have survived
>back then?

Not waited 3 months for the Bank of Melbourne to refinance once it became obvious they'd miss their promised date.

Sell when I wanted to. I got talked into holding on to a property that didn't fit our strategy -- I got greedy.

The biggest lesson is to deal with what is and not with what should be.

>When I got married in 93,and
>we bought our house interest
>rates were 10%.
>How long did it take for rates
>to go down from the highs to
>10%?

I went broke in May 1992. So about 12 months. I've blocked most of the timing details out. I try to remember the lesson, not the pain.

>Why did they go up so high
>that if affected many many
>lives?

The recession we had to have?

I now consider my exit strategy very closely. But I don't get paralyzed worrying about 17%. All my deals would turn negative if that happened. But I'd deal with it.

Risk of doing business.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/

 

[Sim]

Long term interest rates... Good guide...

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.3.1.1.1
From: Sim' Hampel


Thanks for sharing your experiences Paul, now I'm going to ask you to share some more ;-)

On 4/15/02 8:18:00 PM, Paul Zagoridis wrote:
>
>The biggest lesson is to deal with what
>is and not with what should be.

Do you care to give us all an example of what you mean here PZ ? I already have my own policy on this matter, but I think a lot of people would benefit from a little bit more explanation from someone like you ?

>I now consider my exit strategy very
>closely. But I don't get paralyzed
>worrying about 17%. All my deals would
>turn negative if that happened. But I'd
>deal with it.

Again, care to share some examples of how you intend to "deal with it" ? Like Dunc's great post earlier, do you have some specific tools or techniques in place to be able to manage an unexpected peak in interest rates ? I think some real examples are very useful for people who are a little unsure about how to plan ahead.

Anyone else care to contribute their own strategies for dealing with the unknown and unexpected (particularly in regard to interest rate risks) ?

 

[Tibor]

Long term interest rates... Good guide...

Reply: 1.1.1.1.1.1.2.2.2.1.1.1.3.1.1.1.1
From: Tibor Bode


Hi Sim and every else on this thread.

I've gone through the last cycle (lost job 200K loan, paid 19% interest P&I) and also survived a couple of year later (being over extended) when the very "helpful" bank started to push to reduce the debt. The lessons I've learned? Still going currently for high LVR, IMMEDIATELY reducing it by doing a reno from own cash. First 5 properties are IO (the portfolio is cashflow positive without depreciation) and the subsequent ones will be taken out as a mix of P&I and the same strategy as before. This will ensure that if harder times will come (I do not know what will happen, but I do not expect to see 19% again in the next 10 years due to several reasons), I can vary the portfolio by using various options (selling down worst performing / highest LVR etc and cash up for 2 to 3 years) and strengthen the remaining ones by making them even more cash flow positive. The immediate reno also ensures low ongoing maintenance and rentability even in a really bad market.
When times really bad then I will go into base portfolio "survival" mode. Cycles are coming and going. I am not sure how long was the worst ever cycle, but as everything else it will also go away and interest rates will come down to a more sensible level after a some time (2 to 3 years?). My view is that Governments in the majority of the western world will have huge financial problems with the ageing population and the lack of sufficient savings for the boomers. They can not afford to keep interest rates high for a prolonged time as they need a strong economy just to allow them to look after people and without taxing the living daylight out of the remaining workforce. 9x% of the people will retire on a small super and when this runs out the s*** will hit the fan big time.
RK and some other also warning about it, but as usual the vast majority lives for today for the instant gratification.
I'd like to hear someone else opinion about this matter as I see, it will effect almost all western societies in a serious manner.

Tibor