Need a Reality Check - Is it time to break from investing?

[jacer4]

I have been a property investor for around ten years with a current portfolio of 4 IPs (Adelaide and Brisbane) and had reasonable success with capital growth.

Doing the numbers now though if a bought say a unit for 400K at a 4.5% yield its going to cost me 10K odd a year to hold (after rates, body corp, maint etc) after sinking 18K odd of purchase costs.

My crystal ball says that due to affordability and general debt levels that cap growth is going to be pretty much flat for the next few years except for some niche pockets driven by specific local drivers. The talk is that interest rates and going to go up increasing holding costs. First Home buyers have flushed through the system due to recent incentives.

So what is going to make it worthwhile investing for the forseeable future:

a) Will a new mining/energy boom push things higher (based on pressure currently building in WA)?

b) Will rents increase significantly to push returns to an acceptable level to investors?

c) Is it about searching for those magic cap growth areas?

Alternatively maybe its about staying out of the market for a while...

Interested in the wisdom of my property peers.

Cheers and Thanks...

 

[aussierogue]

These conditions that you have described havent changed too much for the last 10 years! Since the property market went into overdrive the numbers havent stacked up on paper yet the prices and rents keep rising.

 

[Propertunity]

Alternatively maybe its about staying out of the market for a while...

If we'd taken that view, the time to do that potentially was during the GFC, but then we'd have missed out on 20% CG in parts of Sydney that we were buying in.

You've only been doing it for 10 years. I suggest you zoom out and take a longer term view.

Here's a post I made just recently about my views of the market going forward (based on what has happened in the past):
http://www.somersoft.com/forums/showthread.php?p=713690#post713690

 

[Dazz]

Good question....


Banks / solicitors / Bank solicitors / Vendor solicitors / Council solicitors / Tenants solicitors / neighbours threatening to sick solicitors onto you / Tenancy advocate with solicitors acting on behalf of tenants for free.....

....after a couple of decades it just gives you the *****....well it does for me.

Unknown and unseen little backroom credit boys and girls who are too scared to meet you and when they do, lack the integrity to shake your hand properly. Folk who live in some ordinary house worth 500K with a 300K mortgage over it and no other investments, deciding whether you are good for a loan or not.

There is a hell of a lot not to like about buying property. It certainly gives me plenty of opportunity to stop and reflect.

 

[jacer4]

Thanks for your inputs. Its true Aussie that its pretty much cash negative game the whole way along but as there has been capital gain its manageable.

With the prospect of flat capital growth going forward I guess its a case of cash out and wait or hang in there by covering the negative cashflow with gains to date..

I reflect on this after review of my properties last week - a unit purchased for 400K on the gold coast 12 months ago has cost 30K in buy and hold costs and has had no growth at all. I realise a year is a small timeframe and its a least a 5yr-10yr window I plan for but the prospect of putting in 10K per year until things pick-up (in maybe 3-5 years) is making me think an option would be to take my losses and buy back in at a time and location that supports better capital growth.

Interested in views on this and the Gold Coast market which I an thinking is a victim of minimal discreational spending ( ie holiday/coastal market)

 

[chilliblue]

We took a break over the GFC to top up our share portfolio.

Essentially we took an educated guess and only purchased blue chip stock, but it was a good time to buy and we did well.

In hindsight, we perhaps should have brought another property then as two of the original areas we were looking at did quite well.

On the other hand, we do need to round off the portfolio.

 

[BayView]

Given your position of 4 IP's I'd say it may be time to start creating your own results for cap growth and/or cashflow.

By this I mean do a smaller project of subdivision in a decent area. A block that'll allow maybe 2, 3 or 4 units on it.

You build them all, then if there are 3 you sell 2 and use the funds to pay down as much as debt as possible and retain one for yourself which will have considerably less debt, and a very nice rent return. If there are 4 you sell 3 and so on.

Then repeat. Over 10 years you may end up with 2 or 3 more with great rent returns, and in a decent area there will always be some cap growth over time.

 

[Reality Cheque]

You called........

In my opinion buy and hold as a strategy isn't that attractive at the moment. The only property I'm interested in are ones that have the potential for significant value to be added , mainly through subdivision.

The free ride of capital gain will be harder to come by than it has been in a lot of areas so Im taking the opportunity to invest in other areas. Like cheap shares and precious metals.



RC

 

[travelbug]

Thanks for your inputs. Its true Aussie that its pretty much cash negative game the whole way along but as there has been capital gain its manageable.

With the prospect of flat capital growth going forward I guess its a case of cash out and wait or hang in there by covering the negative cashflow with gains to date..

I reflect on this after review of my properties last week - a unit purchased for 400K on the gold coast 12 months ago has cost 30K in buy and hold costs and has had no growth at all. I realise a year is a small timeframe and its a least a 5yr-10yr window I plan for but the prospect of putting in 10K per year until things pick-up (in maybe 3-5 years) is making me think an option would be to take my losses and buy back in at a time and location that supports better capital growth.

Interested in views on this and the Gold Coast market which I an thinking is a victim of minimal discreational spending ( ie holiday/coastal market)

Ok so I don't get it. Because you made a poor purchase choice you are stopping?

Because YOU haven't had any growth for 12 months it's not viable to buy property anywhere in Australia for the next few years?

I know LOTS of people that have made excellent CG over the last 2 years, me included. A property I bought inner Sydney 2 1/2 years ago has gone up 50% and is CF neutral. I haven't spent a cent on it. All my purchases in the last 2 years were under market and I'm slightly CF- overall.

The Gold Coast is not all of Australia. Look elsewhere.

And I'm just as beginner who doesn't know much. I just don't like paying full price for anything and pretty much don't want to be forking out $$$ every week so that's what I look for.

 

[Sunfish]

Travelbug. Sometime when you are in a quiet, reflective mood, click on the members menu above. You will find literally thousands of lapsed members.

We can only guess why they dropped off but I suspect that many would have been disappointed by their investment experience.

I have made 2,200% on some shares I own too. I accept that that is not typical or repeatable. Why do you believe your experience should be achievable in all markets? There is always a bull market somewhere but that is not the same as "always a bull market everywhere".

 

[zed_kid]

So where is the next bull market? I think equities. Looks to me like Australia is all about property/shares. When the share market dived during the GFC a lot of people pulled money out and put in to property. Now that the share market looks stable again (sort of), and IP having low yield, I think people will flock to it again. You got to invest your money somewhere right, and keeping it in a bank account is not an investment in my view.

 

[JamesGG]

We can only guess why they dropped off but I suspect that many would have been disappointed by their investment experience.

Many might've re-registered with a new username too, hey Thommo?

 

[Sunfish]

Many might've re-registered with a new username too, hey Thommo?

Touché

 

[willair]

I reflect on this after review of my properties last week - a unit purchased for 400K on the gold coast 12 months ago has cost 30K in buy and hold costs and has had no growth at all. I realise a year is a small timeframe and its a least a 5yr-10yr window I plan for but the prospect of putting in 10K per year until things pick-up (in maybe 3-5 years) is making me think an option would be to take my losses and buy back in at a time and location that supports better capital growth.

Interested in views on this and the Gold Coast market which I an thinking is a victim of minimal discreational spending ( ie holiday/coastal market)

One of my family has been in the Gold Coast Main Beach around Tedder Ave for the past 17 years buys one at a time high rise unit full six month reno,kitchen-bathrooms then resells and she has done very well over the years,she has been trying to sell for the past six months and just can't even get an offer,and it's only 100 metres to the beach as she said and she has seen this many times on the Gold Coast strip and she seems to think there is a 20% drop in prices over the past 9 months from here experience
and once you get over the one-three mill range the you are talking serious money..
..willair..

 

[MichaelW]

Good to do some reflection on your strategy from time to time. Here's some interesting reading from two commentators today which suggest which way the Australian economy, house prices and rents are likely to head over the next decade.

Michael Pascoe - Tick Tock...

“This is scary stuff and means only one thing for rents. Our forecast is for a Sydney-wide average rise of 5-7 per cent a year for at least the next two years. The west could record an even higher growth rate of 8 per cent-plus.”

*edit*

The whole process is delaying the increase in housing supply the nation needs to avoid affordability worsening and to gradually wean us off expectations of ever-rising residential real estate. Our spend on dwellings as a proportion of GDP has been more or less flat for the past six years – and an increasing share of the spend has been on extending existing houses, rather than building new ones.

With our population growth, that is not sustainable. The RBA has told us as much a number of times. And now the clock is ticking.

And...

Ross Gittins - Looming interest rate rises

What's worrying the Reserve is that, whereas business investment spending has been flat (though at a remarkably high level relative to gross domestic product), the survey of firms' capital expenditure plans suggests it could grow by as much as 24 per cent in nominal terms next financial year, with mining accounting for most of that.

Although sky-high commodity prices will be feeding incomes and flowing into consumption, it's such huge rates of increase in physical investment that will make the resources boom so big and so potentially inflationary - ''the largest minerals and energy boom since the late 19th century'', according to Stevens.

*edit*

The ratio of household debt to disposable income has been steady for the past few years and it would be nice to see it falling over coming years. But how long it will take for the boom to overwhelm households' present restraint is anyone's guess. Mine is: not long.

So, to paraphrase both articles:

The economy is booming and we are on the verge of the biggest boom since the late 19th century. Interest rates will rise. At the same time, we've still got high inflation and way too little investment in the production of new dwellings. Rents are rising and will continue to rise. Yields are improving and the rent vs buy equation is moving closer to favouring buying. In time, the wage inflation driven by the commodities boom will see household fiscal restraint waver and more people pour money into bidding up the prices of residential property.

Did I get it close?

I can't see too much downside risk to house prices or rental yields in the near term. In the mid-term I see very strong house price and rental increases and an RBA fighting inflation strongly with higher interest rates. I initiated fixing about $1M of my loans today at 7% odd. In 2 years time I anticipate the standard variable rate after discount will be closer to 9% odd. I also anticipate about 20% price increases in Sydney (and probably other markets I don't want to speculate on) over that same two year period.

All my personal take on the current situation, but it pays to have a view on what you think the future holds to inform your strategy and adjust accordingly. My adjustment is to fix a little under half my loans and dive into my development to position my portfolio for the boom to come in the coming decade. All good. Looking forward to the ride.

Cheers,
Michael

 

[DJBarnstar]

Good to do some reflection on your strategy from time to time. Here's some interesting reading from two commentators today which suggest which way the Australian economy, house prices and rents are likely to head over the next decade.

Michael Pascoe - Tick Tock...



And...

Ross Gittins - Looming interest rate rises



So, to paraphrase both articles:

The economy is booming and we are on the verge of the biggest boom since the late 19th century. Interest rates will rise. At the same time, we've still got high inflation and way too little investment in the production of new dwellings. Rents are rising and will continue to rise. Yields are improving and the rent vs buy equation is moving closer to favouring buying. In time, the wage inflation driven by the commodities boom will see household fiscal restraint waver and more people pour money into bidding up the prices of residential property.

Did I get it close?

I can't see too much downside risk to house prices or rental yields in the near term. In the mid-term I see very strong house price and rental increases and an RBA fighting inflation strongly with higher interest rates. I initiated fixing about $1M of my loans today at 7% odd. In 2 years time I anticipate the standard variable rate after discount will be closer to 9% odd. I also anticipate about 20% price increases in Sydney (and probably other markets I don't want to speculate on) over that same two year period.

All my personal take on the current situation, but it pays to have a view on what you think the future holds to inform your strategy and adjust accordingly. My adjustment is to fix a little under half my loans and dive into my development to position my portfolio for the boom to come in the coming decade. All good. Looking forward to the ride.

Cheers,
Michael

I Hope So!! (But not the interest rate bit )

 

[MichaelW]

I Hope So!! (But not the interest rate bit )

Unfortunately we can't have it both ways...

I've mentioned before how I'll take a strong economy with strong capital appreciation and a good job market with high interest rates over a stagnant economy, falling asset prices and a weak job market any day.

Bring on the boom times. Lock those rates now if not already...

Cheers,
Michael

 

[WinstonWolfe]

Jacer,

Rule 1.
never buy passive IP outside of mid inner ring cap city burbs, except when rates are low and the press are boom boom. Your Gold Coast passive buy broke rule 1.
I don't care what locals think, the Gold and Sunshine Coasts are still playgrounds. Local commerce does not prop up property prices. Cap city residents and miners do.

Rule 2.
Bayview is a wise man. Passive investors need to grow up into informed active investors.

Rule 3.
Understand what controls credit expansion and contraction, then you will understand passive PI success. Most PI'ers don't understand what drives credit expansion/contraction in Australia.

 

[jacer4]

Thanks heaps forumites.

Have had a few 'ah-huh' moments about passive vs active investing and getting into a different geographical market (our first 3 IPs are within 10ks of Bne/Adl as per WW's rule 1 and have performed acceptably well, as opposed to the last at the GC).

I don't understand your point 3, Winston regarding the credit stuff..appreciate expansion on this

 

[WinstonWolfe]

I don't understand your point 3, Winston regarding the credit stuff..appreciate expansion on this

Hi Jacer.....just sent a long reply that seems to have disappeared, that I am disinclined to repeat.

Read up on the growth of 'credit money' in Australia over the last 12 years, and ask how it could have been higher than the growth of the economy....and whether that is a sustainable trend.