My mistakes!!!

[marg4000]

You have not done much wrong, maybe just expecting values to lift more quickly than they have.

We bought an IP in the early 1990s and for the first 4-5 years it went absolutely nowhere. Fortunately back then rents were proportionally higher so it did not cost us much to hold.

So long as you are meeting your repayment obligations fairly comfortably then all you have to do is wait it out a few more years till things get going again. Your wife is investing in her education which will lead to a much higher paying job, which is possibly the best investment you can make at the moment.
Marg

 

[MichaelW]

Hi Sanjay,

About the only thing you did wrong from my viewpoint is that you took on too much leverage too quickly. There are always two elements to weigh off against each other in an investment property strategy, the first is exposure to capital growth through a highly leveraged position and the second is the impact on cash flow from taking on that degree of leverage.

Unfortunately, a lot of people "borrow to their limits" by considering LVR only and not servicability. They use LMI and FHOG to max their borrowings without considering the ongoing cost to service these large debts. You're now caught in a highly leveraged cash flow poor situation. In the longer term you should do well from your leverage, but it will cost you a lot of servicing pain over that period unless you can act on some of the suggestions above to improve your servicability.

In future, only purchase when you can comfortably afford to service the new loans allowing for significant increases in the variable interest rate. Most seasoned investors limit their LVR to 60% odd but it sounds like yours is more like 95% odd, or even more if some of your properties are underwater.

A lower LVR gives you SANF (Sleep At Night Factor). You may not be as geared up as possible and exposed to all that awesome capital gain potential, but at least your wife won't have to work two jobs and you'll be able to get a good nights sleep without fear of going bankrupt and losing it all.

That's the only mistake I can see. Too much leverage too quickly. Its a good learning and you'll grow from here if you can hold your portfolio intact.

Cheers,
Michael

 

[weg]

I too think things aren't bad.

Keep paying more into the PPOR which allows a cost free withdraw or a 'holliday' if ever you need it.

Once your wife finishes her degree her income has the ability to double as well.

Rents go up.

Give it time - you should find in a couple of years or so things appear much better.

 

[sanjayag]

holding the fort

Thanks again for the support and guidance.
I'm not only holding the fort tightly but probably going to make my 5th mistake.
As the PPoR is quite small, we are going to do a small extension there.
Wife is doing extra hours to partly fund that, some money coming from her family (inheritance) and rest coming from advance paid on PPor loan.

I know it looks silly when you are struggling and yet planning for the renovation/extension, but it is going to be good learning for me as lot of things will be done by myself and tradie friends (for beers). Apart from that this extension will not be dent on the cashflow from existing situation.

 

[MichaelW]

Thanks again for the support and guidance.
I'm not only holding the fort tightly but probably going to make my 5th mistake.
As the PPoR is quite small, we are going to do a small extension there.
Wife is doing extra hours to partly fund that, some money coming from her family (inheritance) and rest coming from advance paid on PPor loan.

Didn't you read my post?

Ah well, it sounds like your cash flow isn't as bad as I presumed if you're willing to take on even more debt for some lifestyle improvements. If it all works out then you'll look back fondly at these years. If it goes to poo, you know where to point the finger.

Good luck with the extension!

Cheers,
Michael

 

[sanjayag]

Didn't you read my post?

Ah well, it sounds like your cash flow isn't as bad as I presumed if you're willing to take on even more debt for some lifestyle improvements. If it all works out then you'll look back fondly at these years. If it goes to poo, you know where to point the finger.

Good luck with the extension!

Cheers,
Michael

Michael,
I saw your post and others' too. As I said, this extension is not going to affect the present situation. The majority of the money for the extension is coming only for this purpose otherwise they are not going to contribute.
I'm not behind in any bills (so far) and my present cashflow is sufficient to hold where I'm at the moment. The only problem is that I need to make a lot of balance between the dates of my fortnightly pays and due dates of the bills to pay. However, if IRs are increased further, or I lose my job, or something else..........

 

[Token Funder]

Not to be flippant, but it seems to me Sanjay's actions would be in accordance with much of the "advice" floating around here during that period.

Just sayin'

 

[Deltaberry]

I have a vested interest. How could you trust what I say?

 

[Gools]

AdelaideNow article tonight regarding Olympic Dam and Whyalla

The scale of this project will allow the company to continue to invest heavily in South Australian businesses and services, especially in the Upper Spencer Gulf region of Whyalla and Port Augusta," said Mr Dalla Valle

Mistakes solvered as they say..........

Gools

 

[The_Bludger]

from what I've heard, there's nothing good to come out of Whyalla.

Best snapper fishery in Australia mate!

 

[Fifth]

As the PPoR is quite small, we are going to do a small extension there.

Seriously?

 

[sanjayag]

Best snapper fishery in Australia mate!

Actually, Whyalla has improved significantly in the last 3 yrs. There is no more iron ore red dust from steel plant coming to the town as they had changed the technology 3 yrs back and now steel company is trying to clean the old red dust from the most affected houses. Council has developed the beach area with great landscaping etc.
I bought here when there were so much big project around here were in pipeline and still are, but it takes long time between start talking about and commencing those projects.
One more thing, the house/unit prices had a big jump in the last 10 yrs. But now they are down from the 2008 level.

Regards
Sanjay

 

[Gools]

Sanjay, is the town pretty excited about the $350m explosives factory plans that came out last night?

Gools

 

[sanjayag]

Sanjay, is the town pretty excited about the $350m explosives factory plans that came out last night?

Gools

I think the reaction of people will be more clear in coming days.
It is funny, lot of people are living on pension and government handouts, but always start screaming when any project comes nearby Whyalla. I would say let the environment feasibility to be completed by the experts and then start opposing or supporting.

 

[MichaelW]

Not to be flippant, but it seems to me Sanjay's actions would be in accordance with much of the "advice" floating around here during that period.

Just sayin'

Tend to agree with you which is precisely why I offered my opinion as to the potential hazard with over-leveraging. Others don't see it as a "mistake" but I'd suggest most long-term investors have a good handle on the criticality of servicability models and contingency plans in said models. Controlling a large portfolio is all and good, but at the end of the day the banks own it and if you stuff up your servicability then you can find this out really quickly. Better to control a smaller portfolio and be able to hold onto it through the entire cycle.

Cheers,
Michael

 

[sanjayag]

Tend to agree with you which is precisely why I offered my opinion as to the potential hazard with over-leveraging. Others don't see it as a "mistake" but I'd suggest most long-term investors have a good handle on the criticality of servicability models and contingency plans in said models. Controlling a large portfolio is all and good, but at the end of the day the banks own it and if you stuff up your servicability then you can find this out really quickly. Better to control a smaller portfolio and be able to hold onto it through the entire cycle.

Cheers,
Michael

That is why I'm naming it 'my mistakes'. So....our target is:
1. Build $20K for emergency
2. Bring down current LVR to atleast 80% by CG/reno/payoff.
3. Save enough cash to buy next property at 80% LVR + buying costs.
I think action#3 will take 2-3 yrs of time unless existing properties increase exceptionally in value.

 

[MichaelW]

That is why I'm naming it 'my mistakes'. So....our target is:
1. Build $20K for emergency
2. Bring down current LVR to atleast 80% by CG/reno/payoff.
3. Save enough cash to buy next property at 80% LVR + buying costs.
I think action#3 will take 2-3 yrs of time unless existing properties increase exceptionally in value.

Sanjay,

Now THAT's a plan I would support wholeheartedly.

Well done,
Michael

 

[Gentle_Chief]

Sanjay,

Your Chain is only as strong as the weakest Link.
Hence things could come down like a pack of cards if you do not have sufficient Cash reserves.

Mate,

Not to scare you but your "what if" scenario model should be based on multiple scenarios. Not just one or the other like an Interest Rate hike.

My model of minimum cash reserve ratio is to survive 3 months of vacancy with 4 months of no-pay (due to job loss for e.g.) and 2% over the current variable rate. All at the same time.

In banking we call this "Monte Carlo" Simulation analysis.

I would NOT do an extension on my house, whatever the source of funds are.
I would instead maintain more cash.

Your situation is precarious.

But I pat you on your back for taking the right steps. Maybe just one bite too big.

 

[BV]

Sanjayag hang in there mate.

Sanjayag

Have you filled out an income tax withholding variation (ITWV) application so you pay less income tax as you go?

Interest rates will eventually go higher so add 1% to your monthly interest and see how that would affect your cash flow. Will you be able to manage then?

Your pain will increase as interest rates go up and you won't be alone so you might not be able to sell for a good price. If you can't find ways to improve your cashflow situation I suggest you cut your losses and offload 1 or more properties and to do it now that properties are still affordable.

 

[sanjayag]

Reserve for emergencies

Thanks Gentle Chief and BV.

1. I have small cash in India kept with my parents, so my two properties in India can survive with their installments for atleast 8 months.

2. I don't do the IT variation, because I like to get a big amount (approx 6K) after my tax return in August which will be spent on Air tickets to India. This is already budgeted in my expenditures.

Sometimes I wonder why my after tax salary of around 70K seems very less to me........13K goes towards Indian properties every year, 10K goes to holidays (India and within Australia), around 8K goes to both IPs in Australia,
two cars, PPoR loan, groceries, phones, internet, water , power, gas, insurance, school and swimming club fees, charity etc etc........I'm fed up now.