Myths....don't believe them

[dredfern]

Great profit Buzz! Do you think your property really would have dropped 22% or could this have just been a motivated seller who recently sold?

I only ask because the majority of property in Melbourne would have dropped somewhere between 5-10% during that time, less than the 10% it would cost to sell and buy back in, even if timed perfectly, not to mention CGT.

Unless you have massive holding costs and/or saw terrible growth in melbourne for years and years to come, wouldn't refinancing during the peak, and getting access to 80% of your 100K profits (80K) to use elsewhere or at a better time be another good option? (i tried this but was 6 months too late)

 

[buzzlightyear]

Great profit Buzz! Do you think your property really would have dropped 22% or could this have just been a motivated seller who recently sold?

I only ask because the majority of property in Melbourne would have dropped somewhere between 5-10% during that time, less than the 10% it would cost to sell and buy back in, even if timed perfectly, not to mention CGT.

Unless you have massive holding costs and/or saw terrible growth in melbourne for years and years to come, wouldn't refinancing during the peak, and getting access to 80% of your 100K profits (80K) to use elsewhere or at a better time be another good option? (i tried this but was 6 months too late)

Was it a motivated seller? Hard to accurately make that assessment because how do you ever really know. A genuine seller, I believe yes. What was known was that they were/are a long term investor (owned property since 1998), whom i belive were looking to liquidate, to use the funds for something else. They painted the place, took off the old carpet, polished the timber floors underneath and took it to auction after a 4 week campaign, where there were 3 genuine bidders. Pretty standard marketing campaign in length and approach. The price was I believe was representative of the market today. The agent wasn't advertising a price, but was quoting in conversation with them around $350k and maybe a touch more.

If this was the opposite case, ie this property sold for $450 and I had sold for $350k 2 years ago, I would argue, yes, this is the new market price and they have skyrocketed in the past 2 years, so the reverse applies here.

Not to sound like a philistine, but I have a healthy scepticism about the reported median house price movements. The actual number is irrelevant to me, but the changes from reported period to period have always felt don't reflect what's happening in the market.

Nothing wrong with the refinance approach, but you are constantly increasing your absolute debt levels, and effectively keeping your LVR at 80%. There is an inherent risk in increasing debt levels in case of for example, unemployment, illness, major maintenance issue or long term vacancy. Given the likely net yields on resi property in Melbourne metro and even prevailing interest rates, this would typically mean that you are negatively gearing, even modestly. So the marginal impact of another refi and property purchase reduces your disposable income. Again, all fine if this is manageable, but at some point depending on your existing portfolio, this can't continue, which means if you want to keep on investing in property your strategy needs to change.

And this then starts the conversation piece about asset diversification, but for another thread

 

[lizzie]

Nevertheless, IMHO you need to be "aware" of the market (and to me therefore "time in the market" - whether you money is in there or not) to time specific buy/sell moves.

I totally agree ... we bought a good reno in the dooms of the GFC, reno'd and (incl interest, buy/sell costs) made net profit of $100k 18mths later when picked the post-GFC peak moment of 2010 ... I well remember arguing with hubby that we had to sell "now"! House hasn't increased in value since.

Also got caught with several early in my investing career at the other end - and had to dump them for some painful losses to free up cashflow ... but that was because I was to cocky after making some fabulous gains in 2003/4.

Fast forward to today and use two examples of pre-GFC frenzy versus real value - just exchanged on a property for $350k less than the vendor bought for in 2008 ... and he's spent around $200k+ on improvements ... a 25% drop on original value ... or over 30% on improved value ... our gain ... although the house has been let run down over the last 3 years.

Had a look at another property where the vendor was willing to take a $800k hit since 2008 ... a 30% loss but was still to expensive for our budget.

However - these are premium properties in a specialised area. My wee stock standard units in a sought after, inner area increased over the same period by 30% (2008-2012) and have held their value ... but then ... this area never overshot the market on prices in the first place.

It's a combination of when, where and knowing your stuff.

 

[MTR]

Was it a motivated seller? Hard to accurately make that assessment because how do you ever really know. A genuine seller, I believe yes. What was known was that they were/are a long term investor (owned property since 1998), whom i belive were looking to liquidate, to use the funds for something else. They painted the place, took off the old carpet, polished the timber floors underneath and took it to auction after a 4 week campaign, where there were 3 genuine bidders. Pretty standard marketing campaign in length and approach. The price was I believe was representative of the market today. The agent wasn't advertising a price, but was quoting in conversation with them around $350k and maybe a touch more.

If this was the opposite case, ie this property sold for $450 and I had sold for $350k 2 years ago, I would argue, yes, this is the new market price and they have skyrocketed in the past 2 years, so the reverse applies here.

Not to sound like a philistine, but I have a healthy scepticism about the reported median house price movements. The actual number is irrelevant to me, but the changes from reported period to period have always felt don't reflect what's happening in the market.

Nothing wrong with the refinance approach, but you are constantly increasing your absolute debt levels, and effectively keeping your LVR at 80%. There is an inherent risk in increasing debt levels in case of for example, unemployment, illness, major maintenance issue or long term vacancy. Given the likely net yields on resi property in Melbourne metro and even prevailing interest rates, this would typically mean that you are negatively gearing, even modestly. So the marginal impact of another refi and property purchase reduces your disposable income. Again, all fine if this is manageable, but at some point depending on your existing portfolio, this can't continue, which means if you want to keep on investing in property your strategy needs to change.

And this then starts the conversation piece about asset diversification, but for another thread

There is inherent risk in incresing debt levels

Absolutely, however if you can find those gems which are cashflow positive from day 1 with equity, buying below market then no need to sell.
I understand most will shoot this down, but it happens and they are there but one has to believe it.

Also, diversification, another thread, but once again this is huge, from experience one particular market is down, the other up, jump into the right market and can not help but achieve growth.

Congratulations on your win, great stuff.

Cheers, MTR

 

[MTR]

Oh no!......I have failed...committed the ultimate Faux Paux of buying a lot of ex state housing properties.....better round around flailing my arms like a mad man!

Yep, now just add rezoning to the mix, close to capital city, fortunately it scares most people for some damn reason.

Cheer, MTR

 

[nhg]

There is inherent risk in incresing debt levels

Absolutely, however if you can find those gems which are cashflow positive from day 1 with equity, buying below market then no need to sell.
I understand most will shoot this down, but it happens and they are there but one has to believe it.

Cheers, MTR

Agreed.

The problem I find with most people who can't find them, is they don't genuinly believe they exist and will buy something that doesn't meet the criteria.

 

[dredfern]

I agree medians are crap, but I'm also a little sceptical of a single sale representing the market price of all similar properties, as the sale price can fluctuate wildly from day to day.

I admit I don't keep my pulse on every market in Melb, but the few I do seem to be down only about 5% or so.

Regarding debt levels, I guess it's all about cashflow and buffers, if you have enough of both then you don't need to sell unless you want/or need to realise the gains without taking on more debt!

Eg, I have the need to sell one of mine at some point to buy a PPOR (kind of wishing I did in 2010 too now) but they pretty much pay for themselves after tax so keeping the others if I can seems like the best move.