Over geared? Problems with high LVRs?

[Propertunity]

you have to pay a premium to hire the use of it and then pay it back. Pretty basic I know but it is never explained that way.

Yes you have to pay a premium to use it - interest rate. BUT if your return on the investment you are making with OPM is greater than the interest rate you are paying - then waht is the issue. You are in front.

And NO - you don't have to pay it back. This is a common misconception. You can do IO forever and a day. The lenders do not want the money back - they want to earn the interest by lending it to you. The last thing they want is for you to repay the loan.

 

[Reality Cheque]

Steve,

Do you mind me asking how long you've been investing?

I'm not trying to judge your strategy, just interested.


RC

 

[battler]

And NO - you don't have to pay it back. This is a common misconception. You can do IO forever and a day. The lenders do not want the money back - they want to earn the interest by lending it to you. The last thing they want is for you to repay the loan.

I understand about interest only loans, but it means that either my kids have to continue paying interest on an inheritance, or they have to pay back the lender, no?

 

[Propertunity]

Yeah, yeah Propertunity!! I'll be looking forward to your predicted property boom.

I think you are trying to be inflamatory. I did not predict the next property boom. I'm pretty sure the words I used were "this is the beginning of the upswing". I suppose by definition we are (in SYD at least) 6 years closer to the next boom - the last one having peaked in 2003.

Propertunity is suggesting a hugh LVR because of the coming property boom.

I am NOT. I am saying that I personally have taken that position and I did not explain why. I did say that I was not recommending it to a novice. I can explain why. I am buying property with 7.5% yields. I can buy money at 5%. Overheads are 1.5 - 2%. At worst these properties are cash flow neutral before tax and cf+ after. Rents are still rising - I am the one raising them If I could buy at 100% gearing I am still in front and well positioned for any CG as and when it occurs. The properties I have are in FHB price ranges - they have already given me 5 - 10% CG in the last 8 months. It is a calculated risk. I have an exit strategy if it does not go to plan. I don't see the issue.

Bookmark the post, and come back in 12mths (July 2010), and we'll see who is right.

That will be the only decider.

 

[Propertunity]

I understand about interest only loans, but it means that either my kids have to continue paying interest on an inheritance, or they have to pay back the lender, no?

Scenario for you battler: IO loan and assume RE doubles every 10 years (conservatively, on average etc - all the usual caveats)
Year 1: Buy IP for $400K with 80% loan of $320K on IO so equity = $80K
Year 10: IP worth $800K, loan still $320K, equity now $480K
Year 20: IP worth $1.6M, loan still $320K, equity $1.3M
Year 30: IP worth $3.2M, loan still $320K, equity $2.9M
You die and kids inherit.
$2.9M property with a $400K debt - I don't see the issue, sorry.

There are so, so many options that do not include selling and repaying the $400K. Do you think the rent might service the $400K? That and the rest - the kids have a serious tax problem!

 

[battler]

Well it was a fair question was'nt it?

 

[steveadl]

Steve,

Do you mind me asking how long you've been investing?

I'm not trying to judge your strategy, just interested.


RC

About 8yrs or so from memory since my first property (I've mentioned it on the forum somewhere), been investing in shares on and off since 1997 to varying degrees of success and failure.

Constantly learning.

 

[steveadl]

That and the rest - the kids have a serious tax problem!

That can be managed as well (current law anyway) with properly set up Testementary Trusts.

 

[battler]

Year 30: IP worth $3.2M, loan still $320K, equity $2.9M

How much interest was paid over 30 years to produce $2.9M equity?

I have a testementry trust set up.

 

[Propertunity]

Well it was a fair question was'nt it?

Yes, it was a fair Q.

Did you like my answer?

 

[topcropper]

And surplus money comes from people who have been burned by the stock-market - remember 1987?.

Hmm, 87 was a bit different. I'd class the 87 share bubble in Oz right up there with Sydney property prices in 03. Crazy. Shares halved in value in the Oct 87 bust, but did dividends drop much, or did we go into recession? Nope, the recession started 3 years later. Share prices were crazy then. Average 3% dividend yields when property had 8% rental yields and term deposits were 12%. The 87 crash was different to the 07/08 one. Property was cheap and shares expensive in 87. Similar thing happened in 2000.

Plenty of shares today are paying no more yield now than 12 months ago, even though the share prices have crashed. An example would be Wesfarmers. Div yield at $35 of 5%, but now at $22 its still the same yield as the earnings and divs have dropped. Lots of companies the same.

I think supply of credit is also a factor and although credit is tight, it still seems readily available to people who can service the debt and have a good history of doing so.

Agreed. Someone wanting to buy a house, how much do you want? And a house doesn't really create any wealth. But a business owner who would like to expand and actually employ people and export stuff, you not only have to jump through hoops, but pay much more interest. Property developer..?? A property trust?, or big business?, some are having trouble getting credit no matter what.


Resi property certainly is different in Australia to anywhere else. I'm learning that now. It was always the undisputed safest asset. But if banks and the government throw everything at it at the expense of wealth generating business, then of course it will come out the other end looking good. Lets see how long this can go on for?


See ya's.

 

[steveadl]

How much interest was paid over 30 years to produce $2.9M equity?

I have a testementry trust set up.

Conversely, how much income was produced over that 30yrs? I'd say chances are over the entire term the income would total more (lower to start, then gradually rising to overtake interest even with fluctuating IR's). How one chooses to use the income produced is up to the individual.

 

[investor888]

I think you are trying to be inflamatory. I did not predict the next property boom.

You pretty much did. "IO loan and assume RE doubles every 10 years (conservatively)"

So from the Sydney median of about $450K in 2003, I'm looking forward to the median of $900K in 2013, from about $570K now. Somehow I don't think so.

But I how talking up the property market helps (www.propertunity.com.au)

 

[Propertunity]

I have a testementry trust set up.

Excellent work - me & the missus too

How much interest was paid over 30 years to produce $2.9M equity?

If the rents cover the interest, do we care?

Remember if you go into this thing with only CG in mind and you are not seeking cash flow from rent, just debt servicing - then............remember rents tend to double every 9 - 10 years and mortgage repayments tend to stay the same. You (not your kids yet) are going to have a tax problem! (this is a good thing)

 

[topcropper]

Steve,

Do you mind me asking how long you've been investing?

I'm not trying to judge your strategy, just interested.

RC

You can read all about Steves strategy on his interview. Very impressive too.

http://www.somersoft.com/forums/showthread.php?t=43276


See ya's.

 

[topcropper]

TC I'm still waiting for RIO to get back to $36 but it stubbornly sits at $50+ mocking me I think I missed the bottom - correction I know I missed the bottom.

OK. But it's not like if I miss the start of the next property boom I'll go away and sulk under a rock and not come out for ten years. I will just continue on my farming path that I was headed down anyway. Any resi properties I bought would have just been a stepping stone for me into more farming dirt. That's where I see the most capital growth as agricultural productivity platues out.

See ya's.

 

[battler]

If the rents cover the interest, do we care?

If the rents equate with interest, the only thing you can look forward to is the capital gain, which is of no value without further borrowings or selling, at which time you have lost your income producing asset, that you have to pay CGT on,...no?

Yes, The best problem you can have in life is a tax problem.

 

[Propertunity]

So from the Sydney median of about $450K in 2003, I'm looking forward to the median of $900K in 2013, from about $570K now. Somehow I don't think so.

Like I said earlier - the market does not care what you think. I think the market and I are starting to agree after your rather tedious posts.

I'm told that a man with an experience will beat a man with an argument every time. Here's a real life experience:

In 1987 I was selling a very ordinary 3 bed red brick veneer house in Gosford for $63K
In 1997 that same house was $125K
In 2007 that same house was $250K, in 2009 it is more like $270-280K

I dunno if SYD medians will get to $900K in 2013. They will be $900K at some point in the future.

But I how talking up the property market helps (www.propertunity.com.au)

If I were on this forum to drum up business I think it would be a poor use of my time. Clients hire BAs for all sorts of reasons. Is there any point to being on a property forum to talk the property market down? I don't get it
Thanks though, for the opportunity to post my website one more time

 

[steveadl]

If the rents equate with interest, the only thing you can look forward to is the capital gain, which is of no value without further borrowings or selling, at which time you have lost your income producing asset, that you have to pay CGT on,...no?

Yes, The best problem you can have in life is a tax problem.

If you do the actual figures, then I believe generally the rent will take over the interest payments within a decent time frame and you'll end up ahead in the income/expense equation - especially over 30yrs. My last negatively geared IP has already gone positively geared and that's only 2yrs into owning it. Granted the drop in rates help, but the rents certainly risen as well.

Which leads to your next point - the tax problem!

 

[Propertunity]

If the rents equate with interest, the only thing you can look forward to is the capital gain, which is of no value without further borrowings or selling, at which time you have lost your income producing asset, that you have to pay CGT on,...no?

Look I am a growth investor - to me the rents are inconsequential - but I like it when they pay for my holding costs.

Lets say cost of money is 5% for the 30 years and the rental yield is 5% for the 30 years too. (It won't be that way but go with me for now)
After 10 years the property has doubled (as has the rent) The rent will now service more debt - exactly double the debt as it happens............and by a happy co-incidence the equity to do just that is sitting there waiting for you to draw it down. This is a silly kind of example of LOE on one property - but the principle is what I'm trying to get you to see.