Jans new book

[JFEWSTER]

I thought that would get your attention.

Sorry, I just made that up!

But if she did, what would the title be called?

Me thinks - R.O.I. MATTERS! ( or why you shouldn't buy at the top of a boom without doing the maths!)

L Bernham, funny to see your recent posts generating such interest. As a long time lurker on this forum, I have generally been sympathetic to your views (whilst not always agreeing), and have been surprised by the "verbal bashing" you have sometimes been subjected to. After all, it's a forum. Everyone has an opinion as is entitled to it.

Bill L, are you, um, a land agent?

In my market, Adelaide Southern, I purchased a property 10 years ago with initial gross yield of 8.67%. If I was to purchase this same property today, initial yield would be 4.77%

Bearing in mind that this was my first investment property, and I had a lot to learn, having studied all the numbers very carefully over the last ten years, I am thankfull for the capital growth of the last three years, because otherwise it would have been a DOG!

I find it amusing to see people I work with (blue collar job) talking about buying an investment property shortly, when not only do they not read Jans books, nor frequent this forum, they can't even tell you the difference between gross yield and net yield.

Three years ago, when all the numbers were sound, investment advisers were still saying that property was dead.

Today, people are ignoring the investment advisers (when finally they might be right) and are wanting to purchase an investment property because they know someone else who has done well.

All the logical, well thought out arguments presented on this forum mean nothing to the general (blue collar?)market. Market sentiment means everything, and from where I stand, it's changing fast!

10 years of ownership have taught me that ROI is king. This means (for dill brains at least) timing counts! Current poor yields with the potential of zero future capital growth make me thankfull that I'm not buying the same property today (with the same level of knowledge as I had then). I suspect anyone doing so will be lining themselves up for ten years of very ordinary returns.

I should point out that I made the following mistakes with this property. - First tenant did a runner owing 15 weeks rent (self managed).
Latest tenant did a runner owing 8 weeks rent (professionally managed).
Property has been relatively high maintenance due to type of tenant (usually with pets or kids), highly reactive soil, most appliances were old and failed in the first few years, including most plumbing, H/W service, R/C air con, Stove and Gas heating.
Every year has seen a new tenant, therefore above average vacany rate. Property also had a lot of gum trees which caused sewerage problems and incurred high removal costs. Lots of things you don't generally worry about when buying your first I.P.

I wish I had bought it two years ago and was flogging it off now!
Much better R.O.I with a lot less hassle.

 

[Janfan]

Jfewster

scary stuff hey

any thoughts on what you would pick that would not have the problems you talk about

on Yield - lots of comments recentl about low yields and peak of market - if you were to wait for yields to pick up IMHO you could wait 5+ years

Or would you do asJan advocatesa and buy when you can afford
and setle for low( 5% growth) which should still be a bteer return
than anything else ie 5% growth 5% rent 5% tax relief =15%IRR


regards

Janfan

 

[JFEWSTER]

Janfan,

I would still buy property now because I have learned so much over the past 10 years, most of which came from Jans books and this forum.

I now understand that there are markets within markets and still many opportunities, you just have to be much smarter now than 3 years ago.

My point is that many people I know today who are thinking about buying a rental property don't have that experience or knowledge (just like I didn't 10 years ago) and it worries me what will happen in a few years time when they realise their numbers don't add up.

If your not getting a return that compensates for the effort and risk, then why bother.

There are of course many people on this forum who will do very well at any time of the cycle. Understanding I.R.R. is a very good step.

P.S. Can you believe that there was a woman on tv last night saying she is almost at breaking point thanks to the recent 0.25% rate rise!

 

[abcdiamond]

Originally posted by JFEWSTER
Can you believe that there was a woman on tv last night saying she is almost at breaking point thanks to the recent 0.25% rate rise!

I saw that, and I now wonder how many people live on such a tight budget. Surely someone must have mentioned to them the effects of the future interest rate rises, before they committed themselves?
Maybe the lenders should give them something in writing to say how much extra it would cost for each extra .25% interest rate rise.
I find it difficult to believe that people would think that rates could not rise.

 

[Simon H]

I think this was the story (taken from Today Tonight)

Home loan fears

REPORTER: David Richardson
BROADCAST DATE: November 5, 2003


The experts predict interest rates will continue to rise.
Rising interest rates could spell disaster for some battlers coping with huge mortgage repayments. Today's rise of one quarter per cent could have a major impact, even if it only means a few extra dollars.


Christine and Glenn McDonald are just hanging on.

An average Aussie family of battlers, they are angry at today's interest rates hike - an early Christmas present from the Reserve Bank of Australia.

"I really would like them to actually come out and see these families and jump into the real world a bit and have a look at what this sort of thing does," Mrs McDonald said.

She says there's a very fine line between her family hanging on and falling off. Some weeks it's only a matter of a few dollars.

Can they cope with one quarter of a per cent rise?

"I don't know to be honest," Mrs McDonald said.


"This close to Christmas and we're barely getting by on what we get and what we've got to pay at the moment, I really don't know if we can do it."

The McDonalds have a massive mortgage of $350,000 on their home and an investment property they were talked into buying.

The first $210,000 is an interest only loan that already costs them $1,169 per month.


The second loan of $140,000 is principal and interest of 6.67 per cent and costs them $928 per month.

A quarter of one per cent is a lot to them.

"Roughly about $130 to $140 a month extra," Mrs McDonald said.

Mr McDonald is aware the result could be disaster.

"The last thing we want to lose is our family home," he said.

Dr Chris Caton from BT Finance has been expecting a rate increase and the fallout it will generate.

He says today's rise could be just the beginning.

"Well a quarter of a percent shouldn't be devastating," Dr Caton said.

"If anybody is so overleveraged that a quarter of a percent is going to hurt them a lot, then they've made a very foolish decision, but bear in mind that this is not the end of the story."

And that's the problem - some expect further interest rate rises as early as next month.

"What all investors need to think about is that this is the first of a series of rate increases and by the time it's all finished variable mortgage rates might be three quarters to one per cent higher than they are now," Dr Caton said.

It could also spell the death knell for the housing boom, or at least slow it down.

John Symonds from Aussie Home Loans has confirmed he will be passing on the interest rate rise to mortgage holders.

"The bubble hasn't burst and one of the reasons the Reserve Bank has increased these interest rates is to ensure that the bubble doesn't burst," he said.

However, he says the hike is a good thing in the long run.

"Less people will be out there looking to buy," Mr Symonds said.

"Which means prices will be more subdued and the housing climate will become more affordable for those looking to buy tomorrow than yesterday."

But John Edwards from real estate valuation group Residex doesn't think the one quarter per cent rise will have much effect at all.

"If they're easily able to get out of it and cut their losses without losing substantial amounts of money now, then probably it's time to do it," Mr Edwards said.

The rate hike is food for thought in the McDonald family. Did they extend themselves too far?

"Looking at it now possibly, but the advice we were given was that it was manageable and we agreed," Mrs McDonald said.

Glenn McDonald is already working night shift to raise a few extra dollars and Christine McDonald is looking for a job to make ends meet.

It's either that or lose the lot, and they're not alone.

John Symonds says the people most at risk are first home buyers who have bought in the last 12 months and borrowed the lot.

"They've got no insulation against rising interest rates," he said.

"They start a family, someone loses a job - that's the sector that will feel it faster than any other sector."

------------------------------------------------------------------------------------

I find it hard to believe that someone would take out a mortgage and not think about the likely event of interest rates going up at some stage and at least working out some figures before hand.

Very sad.

Simon H

 

[duncan_m]

Originally posted by JFEWSTER

In my market, Adelaide Southern, I purchased a property 10 years ago with initial gross yield of 8.67%.

How many have you bought since the first?

 

[asy]

Originally posted by abcdiamond
I saw that, and I now wonder how many people live on such a tight budget. Surely someone must have mentioned to them the effects of the future interest rate rises, before they committed themselves?
Maybe the lenders should give them something in writing to say how much extra it would cost for each extra .25% interest rate rise.
I find it difficult to believe that people would think that rates could not rise.

ABCD, you'd be surprised...

I have had ppl come into the office one week saying that they can afford a house of 200k and come in a couple of weeks later saying that they can now afford 220k.

When asked what changed, the reply is "well the interest rates went down and the bank now says we can borrow more..."

I have had this happen numerous times (differrent numbers!).

I usually asked the people what they'd do if rates went back up... I mean, if they are so close to the edge of their budget that it takes an interest rate reduction to have them able to afford the home then I'd like to know that they'd thought about a rise...

More often than not, the answer was either a confused 'what do you mean... RISE?' sort of thing, or else a simple, 'we'll worry about that when the time comes'.

With this kind of approach one wonders just how many people will not be able to cope with even the slightest rise...

asy

 

[Les]

G'day all,
MESSAGE TO EVERYBODY !!!!
Don't just accept the written word without question, will you.

A quarter of one per cent is a lot to them. "Roughly about $130 to $140 a month extra," Mrs McDonald said.

My calculator says "roughly HALF of that" !!!! What does yours say???

We are talking of total loans of $350k - and an increase of 0.25% - to me that sounds like $73 per month !!!!!

Who was Mrs McDonald listening to? Did she work it out herself? Or did someone else tell her the figure and she said "Oh yeah - that sounds pretty awful! You must be right !!!"

Now, I could be wrong (eeeek! ) but even with a P&I loan, the ONLY thing to change is the Interest - so, according to my calculator, $73 per month is what the McDonalds are facing (this time).

Of course, it could go up again next month, then they REALLY WILL be paying $140 per month extra. But that has yet to be seen. Meantime, don't accept everything at face value!!!

Question what you see, draw your own conclusions !!!!

Regards,

 

[Jamie]

What really annoyed me about the story was the portrayal of the couple by Today Tonight as "Aussie Battlers"...

The McDonalds have a massive mortgage of $350,000 on their home and an investment property they were talked into buying

Talk about sensational journalism (the bad type - not sensationally written ). Sure, 350k seems big when you throw it into a sentence, but there was no mention of the value of the property owned by the couple, nor the LVR. 350k sounds like a huge loan if the value of the properties is 350k.. not such a huge loan if they are valued at 600k plus.

I particularly liked how they were "talked into" buying an investment property.. there seems to be an inclination here to blame others for their financial situation. If they have owned even one of the properties for at least 2 years, then in pretty much any suburb in Australia it would have risen markedly in value. If things are so dire, why not sell the investment property? Why not sell the PPOR (from what I saw on the program it was a large house, on a large block in a housing estate) and downgrade to something more manageable?

Because it appears this particular couple wants it both ways. They want to take the plunge into home ownership and property investment for the potential financial rewards they bring, but then moan when something happens which can potentailly derail those plans.

Nobody forced these people to buy property . Its that simple.

I still cant fathom how people could think interest rates could stay this low forever. I personally believe if you cant handle a 2-3% rise in rates, you should think twice about investing in property, especially in the current market...

The fact that a .25% rise can push people to the brink astounds me. Might be an indication that these people are living well beyond their means well before an interest rate rise is taken into account, and that, if they want to place the blame with someone, they might not have to look far.

Jamie.

 

[abcdiamond]

Les
I agree your calculations, I didnt even bother looking at it first, just accepted it as being right !
Now I am wondering how they worked it out at that figure.

Asy
People are a bit of a worry then arent they!
Its difficult to accept that some peole dont consider the implication of rate rises.
Maybe they dont have others to discuss these things with?

 

[Kristine..]

G'day All

Well, I reckon the worst thing about a rise in interest rates is being inundated with all this piffle in the papers and on the so-called current affair programs.

The article as quoted by you, Simon, is so full of hearsay and waffle it really doesn't bear comment.

As a mortgage broker, all 'service calculators' are factored to 1.5% to 2% above the Standard Variable Rate when checking to see if a borrower can afford the payments.

So, if they are borrowing at 5.97%, their serviceability has been checked at eg 7.97%.

Once they get the loan, however, that safety margin is easily forgotten. Most people spend to the limit of their incomes and beyond (credit card debt remains high).

It is an insult to the real Little Aussie Battler to put that tag on a couple who own / control more than half a million dollars in real estate.

And does 'so close to Christmas' mean the intention to spend even more on 'gifts and holidays' may be a cause for concern?

We all have a bit of a whinge when any price increases, let alone the price of money.

I already pay 8.25% on my development loans. So what? Money is a raw material, a commodity, like anything else. We wouldn't be borrowing it if we didn't think we would benefit from doing so.

As I have previously mentioned, my ANZ Better Business Loan in 1989 went from 24.00% at the interview to 24.25% at drawdown.
It would have been easy not to buy, not to borrow, not to do anything. But the action of borrowing that money and buying that business (I had saved $1,800 from my part-time job, hoping to buy a couch for the lounge room) eventually laid the foundation for buying the freehold, later selling that and the business, then buying my first investment property and starting another business, then buying the bank and building an exec house for rent. Not a bad result from an initial $1,800 investment at a time of astronomical interest rates.

What's that old saying?

When The Going Gets Tough, The Tough Ones Get Going.

And no thanks, I don't want to hear any comments about how tough and leathery I'm getting in my old age ...

Alak, poor Yorick, I knew him, Horatio ...

Cheers

Kristine

 

[Les]

G'day Kristine,

An excellent point:-

So, if they are borrowing at 5.97%, their serviceability has been checked at eg 7.97%

So, how has it suddenly become such a major problem to them to "hold on"? Or was their finance application a bit of a concoction????????

And, even if they took out these loans 18 months+ ago (when WAS it that the Cash Rate was at 4.25%?) they STILL should have some in reserve...... This is our 3rd Interest Rate rise since the LOW !!!! (going by memory here - can't find the spreadsheet with the numbers).

Just media hype - again.... But, I guess it all helps to "cool" the market as average Mums and Dads read the papers, and watch TV, and go "Tsssk, tsssk! We'd better not get into IP's then..."

Regards,

 

[Peter 14.7]

THE LESSON FOR ME FROM THE THREAD

Dear All

I agree with most comments and was also disgusted at the ACA report. It was also interesting to note the flaws as pointed out (hadn't thought to check calculations, perhaps someone should tip off MEDIA WATCH) and the social comments. I can add:

1. Despite the failure in IP logic the report may stop the ill-informed from rushing out and buying an IP in the present market which despite Jans comments of just do it, most would agree is not the best time for an inexperienced person to take the plunge. Hopefully this will offset the ACA articles of a year back screaming to all and sundry "but now and buy big" so perhaps it is a good thing? THE LESSON: Media influences mases and masses influence markets. Watch the masses.

2. On the sample couple, I too was appalled at ACA comment "talked into buying" A cop out no doubt from ACA to gloss over the fact they decided to do so. A valid balanced article would have engaged an honest financial adviser to assess the optins and put them forward (i.e. sell down PPOR, sell IP, lock rates). Probably would have found many options but that would not be good TV.

The LESSON: LOCK YOUR RATES why not? Good on you for getting an IP and trying something but if you are that desperate... fix your rates. In july I locked my IP exposure at 6.15% for 5 years with CBA as Jan tells us.

Having stated the above, what we as informed investors need to learn from the article and understand, with sympathy, that the couple probablys sees no future other than taking a risk due to our high tax rates and lack of incentive to earn and save.

This month I have taken over my sisters (recently widowed) financial affairs, I now understand how soul destroying it can be for the average battler to sort the sharks from the angels.

I have had to spend only minimal time getting my sister into a better $ positon by simply persisting to ask the right questions with the bank, centrelink, debtors... but it has taken persistance. I guess I saying ....hate ACA but not the couple. We need better responsiblity being laid at the banks and advisers and sellers to stop what clearly looks to be disaster about to happen re IP advice. The LESSON : what is easy for informed investors is : very : hard for the naive or beginners. Solution : seek advice often and varied

However... you can lead a horse to water, blah , blah blah.......I run a small company in commercial property consulting and management and I am constantly amazed and stunned at how little $100k CEOs know of property investment. Where I can, I pass on my advice re personal IP but often it is not heeded until too late. I guess Jan has the same experience with seminars, some many talk about going, less do and even less buy a book or try to learn and only a few buy an IP.

As case in point, I remember in 1999 telling colleagues to buy an IP and they all laughed and bought Tech shares. I recently sold and IP bought that year grossing 250k profit. Now they all tell me with excitment how they just bought a unit off the plan in Sydney!! I shake my head. THE LESSON: logic goes out the window when greed comes thorugh the door.

 

[Robyne]

Just a small point here, it isn't just blue collar workers who are jumping on the IP bandwagon just before it slows down. Lots of people are just waking up to the possibilities. Lets face it, who wouldn't look into property for retirement when managed funds have done so badly over the last couple of years.

 

[Bill.L]

Hi all,

JFEWSTER, a land agent!!!

I have been called many things in my time, but never that before.

Do you not like the facts I present or my opinions??

Please feel free to show me the error of my ways.

bye

 

[qaz]

Its probably been used allready, but another good name for a new Jan Somer's book would be "Subdivide and Conquer"

 

[JFEWSTER]

Bill L

My question was serious. Not criticism. Yes or No?

Upon reflection of my original post, it does seem that I have paid you the ultimate insult. That was not my intention as I respect your input just like I respect L Bernam's.

If I was a Land Agent I would have a natural bias to talk up the market at all times. Then people would buy my houses and I would get my cut.

If I was a financial adviser or accountant, I would have a natural bias to say that property is dead! Then people would buy my managed funds and I would get my cut.

From my perspective, when it comes to property discussions on this forum, you are close to the ultimate "bull" and L Bernam is close to the ultimate "bear".

I think somewhere between the two opinions is the truth.

I just find it amusing that the bears (or chicken littles) are more likely to come under attack on this forum, especially given this time of the cycle.

My view of the market is based on my experiences in the area I invest in.

I've seen so many people, including close family and co-workers re-finance every second year as interest rates fell, thereby consolidating their debts and making themselves feel better off, even if the only thing they achieved was to turn 3 year loans into 30 year loans, only to use the freed up cash flow to go and get into trouble again.

Problem is, this time interest rates won't drop to save their ass. They may even rise a lot. And wages are not rising very quickly at all.

To me, the ultimate goal with investing is to maximise your investment potential.

Why buy an older, high maintenance, low growth, low yeild, high vacancy rate I.P at the top of the boom when (with a lot of knowledge and experience and maybe some luck) you could also buy a super blue chip "growth" property, minimal maintenance and good depreciation schedules due to age, low vacancy rates due to desirability and strong yeild due to sub division and value adding renovations / improvements, with the property purchased at the bottom of the cycle when the buyer has the most leverage?

I personally recently sold an I.P. purchased 3 years ago in Adelaide for 80k for 190k. It was not sold for financial reasons, (unfortunately life throws up unexpected situations that cant be planned for). However I had very little maintenance expenses and good yeild over that time. It taught me a lot about growth/yeild and market timing.

The property I mentioned at the beginning of this post would most likely sell to an investor and probably at the first open if I was to put it on the market tomorrow (which I don't intend to do). And I pity any "newbie" who thinks they could make money out of it given the future prospect of interest rates.

To give you a clue, after ten years it still has an after tax loss of 2k each year. Not too foul if your getting some capital gain to compensate for the effort! But will there be capital gain in the future given potential of rates rising? There does not need to be a "bust", nor a recession to make this a lousy investment. In fact a booming economy could make it an even worse investment due to rates rising.

People will still buy it but my advice to newbies is that if you are serious and smart about property investment, then timing IS a serious consideration. Whilst the boom could plateau rather than bust, and existing smart investors won't lose if they don't panic and sell should there be a bust, I think some of the "bulls" on this forum owe the "newbies" better advice than to tell them that "now" is always a good time to buy.

They can do better, with knowledge and timing!

Perhaps paying off existing P.P.O.R debt is safer and more practical at the moment.

 

[Aceyducey]

Originally posted by JFEWSTER
I just find it amusing that the bears (or chicken littles) are more likely to come under attack on this forum, especially given this time of the cycle.

JFEWSTER,

If this is what you think then you aren't yet paying attention

The most bullish investors on the forum are saying that the property market is slowing & opportunities are becoming more limited. They anticipate falls in some areas - such as certain metro apartment markets & slow CG growth in most markets with some lagging markets still experiencing stronger growth - basically what is actually happening.

If, just as L Bernham has claimed the market would drop by 40% over the next 2-3 years, the 'bulls' were claiming that the market would rise by 40% in the same period then their judgement would be called into question just as much.

But frankly, the real reason L Bernham comes under fire so much is that he cannot provide any rationale for his positions & has a limited theoretical and practically no practical experience in property (except for his sole inner metro apartment IP which he's sold). He falls into the ordinary or average investor category.

Bill & other more 'bullish' (or more realistic depending on your standpoint) investors are significantly more experienced and have spent a number of years actively involved in the property market, so have a greater market understanding.They can support their positions and continue to achieved much higher returns than the below-average returns L Bernham touts as good deals.

Cheers,

Aceyducey

 

[Jacque]

Jamie and Peter,

I'm with you here. I really get tired of these "battler" stories where others are always blamed for their financial situations. How can someone "make" you buy an IP?
How can you be so naive as to not allow for at least 1% interest rate rise? And, even so, if you're really afraid, then FIX! It's really that simple.

The more dribble these programmes come out with, the sicker I feel. The fact that they label their shows as "current affairs" doesn't say too much about the IQ level they are pitching at. Geez............. maybe we should all just turn off the TV set.

 

[The Fence]

G,day Jacque & all,

I have not watched ACA or Today Tonight for years on years as I find it an insult to be subjected to their twisted sensationalism in pursuit of advertising dollars.
Also, I don't feel as though I have missed much either (by not watching).
As others have mentioned, the information given on these shows is clouded and inaccurate, so how can one get a balanced view of the subject. It's for entertainment value only.

Serious investors have their own pain/gain thresholds which are derived from proper analytical assesment of the investment and it's current standing, given an action plan is drawn up to provide strategies for ever changing conditions.
It's up to the individual to decide if they are Serious !
Only then should they be taken seriously on advice /discussion of the said investment as it's reasonable to say they are Informed!
There will always be bulls & bears but status quo is also possible.... Hmmm !

I'm a Jan Somers fan because she has proven ability! However, my investing is not strictly along Jans' lines either, it's a mix and customised to suit me only.

I'm mostly a lurker here but quickly fly through the posts that start to become personal and not focussed on the issues at hand.

Anyway, the "Jan's new book"... got me going too......... I have no doubt it will come sooner than later and it will be a good read.

Happy days.....!
Thorpey