Re-assessing Strategy

[austini]

Hi Steve,

I don't try to second guess interest rates any more but do manage the risk not by using fixed interest loans but allowing for sizable rate increases.

I have no intention of purchasing any more investment properties. Probably more a personality thing as for me I hate the hassles and baggage associated with owning property compared to shares.

We will just hang on to our existing property portfolio and take advantage of the equity when we need it. However in terms of new investments total focus will be on long term accumulation of quality dividend paying stocks and LICs in our SMSF and Trusts. I won't be aggressively throwing too much at the sharemarket at present but will just patiently buy when opportunities present themselves. But the LOCs are in place to aggressively buy if any obvious corrections happen. As to when nobody really knows I feel. Hence although I will avoid the crowds you can't by the same token sit on the sideline forever.

Have had a number of PPORs over the years but as time goes on we are becoming more inclined to rent. We are even thinking about doing so for quite some time when we retire. For example, we would love to live in a high rise apartment overlooking the ocean. But we have no desire to ever own any more highrise apartments. The BC and mgr levies can kill the returns. With the right investing skills I think it is cheaper to rent lifestyle rather then own it.

What is important to us is to have enough passive income from rent/dividends in conjunction with conservative but progressive use of our equity/capital to live the lifestyle we want.

Cheers - gordon

 

[LearningMan]

Steve, some good questions ... I am looking forward to attending your course in March and looking at some options afterwards.

Having recently come back from o/seas with HUGE plans and some savings we have had to stop and re-think strategy.

IP - Will continue to hold although rental returns are low + have to pay land tax now ! Not sure if there will be even 3% cap growth. In the long term however I keep thinking that they will do well.

PPOR - We will forget about this in Sydney for a while. Little to no value for money + all the expenses !!!

Business - Looked at MANY business' including MANY franchises. 18 - 20% Max return before Tax and Debt. Most are 7 days a week at the beginning. Not too much to get excited about. We will keep our jobs for now thanks !

I think the best way for us now is to look at renting something nice for a fraction of what PPOR repayments would be like. There is SO MUCH to choose from. One place better than the next.

Cash Savings - Looking to invest in Brisbane/ Melbourne when the right oppurtunity arises. Probably park funds in Navra fund until this times comes and also look to leverage via Margin Loan.

Property - Not sure if anyone has seen the few mortgagee sales in some areas. This is frightening considering there have been no increase in rates.
What lies ahead ???

Ultimate goal is to keep having fun, stay healthy and double our capital base every 5 years. Financial independance will follow ...

 

[simonjulie]

Hi agent 86
the last deal was exceptional and the one before that and the one before that and the one before that........and so on.
We are optomistic and it has paid off big time.
simon

 

[qaz]

Interest Rates: Steady for now. But will start to get a push on once inflation (from increasting wages) finally gets rolling and our overseas debt starts to get really high.

Property CG: I think once the low unemployment rate brings about wage increases there will be another this time shorter upswing in the property market. However it won't be a boom like the last one and there may be crash at the end of it.

Property Yields: I think they will increase a little as investors will tend to stick with the booming share market which should continue to boom for the next year or so.

Equity: Shares in my opinion will keep booming and booming until we get a pretty big bubble and then we will have a huge recession (possibly even a depression) afterwards due to the baby boomers.

RBA: I don't understand this so I can't comment.

Basically on the market side of things. I expect us to be very comfortable for the next few years with both a booming share market, increasing wages, increasing inflation, upswing in RE prices and all that typical boom stuff. I think the boom will go on for quite a few years and there will be a bubble as all the retiring baby boomers look to get in on the action before retirement. Very typical late 1980's situation. Then there will be on helluva crash and a very large recession (possibly depression) as negatively takes over. Im guessing this to be around 2010 or something. I know im forecasting well into the future, but it just seems to make sense and all fit in. As many of us here have relised, the business cycle over the last few years has been stretched out over a longer period of time due to proactive economic management in countries like the US and Australia.


Class of investor:

I'm just starting out. I have about a networth of $13k (hopefully boosting up to $16k as I get refunded for my uni course from a scholarship i'm hoping to get). I don't have any property but own about $10k worth of shares (the other $3k is in the bank).

Goals:

Well I have two financial ones.

1. Semi-retire on a passive income of about $100k net income (in todays terms) in 15 years or less.

2. Eventually have a investing equity (not networth as it includes PPOR and doodads) of $10 million (in todays dollars). Once I get that much, I may still invest, but i'll spend more time kicking back, enjoying myself and possibly doing something for charity.

Strategy:

Basically at the moment it is to continue to save and buy shares. I'll keep going until I have enough for a deposit AND the real estate market is going start booming again (could take a while). But my strategy is far from set in stone at this stage. Your (Steve Navra) strategy appeals to me and its something I will base mine upon, but I will probably also look for opportunities in other areas (resources, options, contracts for difference, private share holdings, mezzanine finance, etc) should they present themselves.

 

[perky29]

Re-assessing Strategy



I am currently reviewing my own portfolio and it seems to me that the current investment environment is somewhat changed from what it has been in the past 7/8 years:



Considerations:

• Current low interest rates. (With impending increases?)
• Outlook for property CG. (Market tracking sideways / downwards?)
• Lower property yields. (As a result of high prices?)
• Equity market at / close to record highs?
• RBA looking to restrict soft lending criteria?

Also it seems that there are a few classes of investor (from reading the many posts on the forum)



Class of investor:

• Starting out. (Yet to acquire first property)
• Have PPOR (Yet to acquire first IP)
• Have IP (Yet to acquire PPOR)
• PPOR and IP/s (How many more?)
• PPOR + IP/s + Shares / other (What is the correct balance?)

I pose then the following questions for discussion:

• What are your views regarding the above considerations?
• Which class of investor are you?
• What is your ultimate goal?
• Can you set out your planned strategy?

I realize that this is a vast topic, but in essence the answers I am looking for should lead to a conclusion as to future direction . . . WHERE TO FROM HERE?



Regards,



Steve

Class of investor:
PPOR bad debt gone by end of year, have IP's and shares.

Ultimate goal :
Retire in 10 years, with between 3.5 and 5 mill in equity. Producing at least 200k net per annum , but still enjoy life in between this time
Strategy changes day by day - I must think about it too much.
There are too many variables there. What if my job goes to India in a couple of years?? What if interest rates rise? What if the "D" company can actaully do interest free loans
Current strategy has changed from one year ago - when I wanted to build my dream home at the new Greg Norman Schofields (Golf Course) development (which would have been highly neg geared for several years) to a safer option IMHO - park some extra funds into the Navra fund to make my current position cashflow positive - just in case the job situation changes.
Would like to buy another IP in Perth soon - but will need to pay off that remaining bad debt first and re-evaluate situation.
Interest rates possibly going up may well weaken investor sentiment in Perth like it did to Brissie at end of 2003 - so this is a worry.

 

[Jacque]

Great discussion so far

Steve, you are so right when you point out that the current investment environment is so different from 7-8 yrs ago. A major contributor to this has been, of course, all the legislation change with the FHOG, concessions on stamp duty, increases on land tax, new vendor exit tax introduction, changes to CG, introduction of GST etc. Some of these were almost single handedly responsible for inflating prices (especially in NSW) to artificial highs, well above real market values. With low yields here to stay for some time, no real incentives for investors to enter the Sydney market and the Carr govt sucking us dry by way of taxes the times are 'achanging. One can only afford to hold onto so many negatively geared properties after all. And, if interest rates escalate too much, there will be a lot more mortgagee sales out there than there already is.

The equity market is booming along quite nicely (along with your fund!) and that's where I intend putting more of my money atm. Also aim to hold onto some cash reserves (LOC's ready to go) just in case a wonderful opportunity wafts past my nose at some time. This could be property, but it'd have to represent a bloody good anticipated return!! (after ALL taxes!)

Being a realist and a sceptic by nature, I can't see CG improving on Sydney property for the next 2-3 yrs. Especially if interest rates rise and the vendor exit tax stays. I predict an increase in rents (have already implemented this when I received my latest land tax bills) a decrease in vacancy rates (caused by investors deserting the market) and a slow return to more sustainable yields of around 5% as the market plays catch up.

I am quite content keeping an eye on my current portfolio (well I watch the properties, Steve does the shares!) but not buying for now. As I'm also planning an extension on my own PPOR, a trip overseas this yr and some study to change careers I am quite happily busy.
My ultimate goal is to have the choice to be financially independent on a comfortable $100K p/a within 8 yrs. My plans change frequently as does my strategy, but I'm comfortable with the way life is just now.
But, if I could just ditch these ugly land tax bills that keep popping into my letterbox.........

 

[Alan H]

I guess you should always keep an eye on your Portfolio and evaluate your strategy, but I too feel this is an even more important thing to do at this time.

Historically low interest rates, a good economy, huge CG gains(but low Rental Yields), Stockmarket at record highs, easy borrowing...........is it all too good to last? I guess history would tell us that it IS too good to last and it will just be a matter of how serious the landing will be.

I was talking to someone just last night who just can't envisage property prices falling or even stagnating. Their serious investment experience has been the last 5 years and they can't see anything in TODAYS paper that would destroy the good times? In their minds, whatever a property is priced at in Sydney, it will always be that or more.

I too just had a read of Olly Newlands book. Not that I necessarily prescribe to the doom and gloom merchants but I think it's often good to get some historical balance to the 'never ending sunshine' that we have been exposed to from all quarters in recent times.

While I may have lived through some downturns, unless you were directly affected by the ramifications, you probably didn't learn too many lessons from the experience. There are probably many on this Forum who haven't been directly exposed to large investment corrections and/or cycles. To those that have, I think your experience and input at this time would be priceless.

More than ever, I would be wanting to ensure my financing and exposure is manageable and that a very clear exit(and entry) stategy is in place to both protect against problems as well as take advantage of opportunity.

I think my feelings could be summarised as "Be careful out there now folks. Anyone could have made money the last few years but now might be a time to become a shrewder investor, check your structure and check your direction"

 

[simonjulie]

Like the rest of you, I too am interested to see what Steve has got up his sleeve.
We have benefitted from his strategies in the past, both directly and indirectly.
So Steve, whats new?
Kind regards
Simon

 

[TomL]

Considerations: = I subscribe to the "dont bother trying to predict the future" camp. I base my financial decisions on hard facts and obvious existing trends. I subsrcibe to a hybrid of methods largely composed of Somers, Spann, McKnight, Navra, DeRoos, Zheng.

Class of investor: = Have IP (Yet to acquire PPOR) + Have Shares - well will never realy have a PPOR, happy to lease for ever.

Ultimate Goal = you wouldnt belive it anyway.

Strategy:

Property = CG not cashflow. Continue to accumulate prime IP's, ensuring with each purchase there is a way of getting as much of the initial capital (or more if possible) back out asap. Redevelop, reno etc. Rinse and repeat. Keep the gearing at or around 70-80%

Shares = Cashflow not CG. Continue to hold shares, with a an overall capital preservation rule in place, and leaning towards income strategy. Take out LOC on IPs and pump into shares as applicable - This is used to fund any cash shortfall in IP. Max gearing at 40-50%

Cash = Continue to maintain sensible buffer at all times. Current = 13 mths cover if all hell breaks loose and not one of my insurances pays up.


I call this the loaded spring strategy. Even if property goes down/stagnates, i continue to pour money into it. Each deal needs to be structured to extract the capital back out asap and move onto the next one. Share and J.O.B income will continue to nicely fund any cashflow deficiency. This way, I will be in prime position for the next upswing in property.

Some people call this the loaded gun strategy but hey - I got lots of safeguards and rules in place to ensure my capital is working for me and not walkin out the door.

Even if the next real boom is in 10/15 years I will already be in an excellent position for it, not having to constantly worry about when the swing is, and definitely not scrambling to get on board with the sheep.

 

[shazza]

Our current position is PPOR and 1 IP - equity is maxed out but positive geared IP. Our plan is to hunker down and pay off our non-deductible ASAP and get our hot little hands on equity.
I am dabbling in a handful of shares to get a feel for the sharemarket (portfolio at 15% gain) and learn the strategy that I'm comfortable with but all extra money will now go into PPOR. Have decided that I'd like a combination of mostly value shares with a few growth (good if you can get both - bought some COH at $19.40). If I ever decide to trade will definately get a broker because things happen so quickly and you often dont hear about them until after it happened!
I have also just finished 'when the bubble bursts' and I thought it was a worthwhile read and as someone pointed out - good to hear from a property bear.
So far now I'm just lurking and reading and watching and waiting for yields to come back up!

Looking forward to listening to Steve tomorrow.

cheers Sharyn

 

[Sleeper]

Great Thread

We currently have a PPOR/IP's/SHARES/BUSINESS

Someone I know and think is fairly smart in the investment world doesn't believe in being predictive So I've taken that on board and apply it to our strategy. There are too many unknowns and variables to think about and besides that I haven't got the time to worry about it.

Someone else taught me that Preservation of Capital is what it's all about. Another one is ignore the noise in the market, and there's certainly no shortage of that at the moment.

So, with these thoughts in mind our current strategy is to ensure we're not over committed but continue to look for opportunities and stick to our investment rules.

Interest Rates - As above. The longer they stay down the better for our business but if they go up they may benefit our property portfolio and we might be able to find some builders to do extensions to our PPOR

Property - Last purchase 2 years ago but still looking. Currently hold a mix of positive and negative cashflow. Have never sold a residential property yet only land. But never say never.

Shares - Keep going with the same fundamental rules as always however in the current market be sure to keep moving the trailing stop losses up. I won't sell at the top of the market but I won't miss the rises if they keep coming. Shares are still increasing as a percentage of total portfolio. Two lessons I've learn't with shares are don't get attached to them, if they have to go then out they go and don't worry about the tax implications of selling. It's great to get them through that first twelve months though

Business - Keep working a&#e off to make it really produce the goods then start off-loading some of the work and have some time to spend on family, properties and looking for more opportunities. A full time manager, - pure luxury.

Moving forward? - The cycle goes on, maybe we're coming to the part where the chaff gets seperated from the straw? I don't see any reason to run and hide. I'd like our business to provide a better return and be able to get to a point where we could employ a manager or be able to sell for a nice profit and that's where most of our efforts are centred at the moment but it's early days yet. I don't know of any mind bogling new investment stategies at the moment so we'll just stick to our knitting.

Cheers
Sleeper

 

[ren-A]

G'day Steve - good questions.

What are your views regarding the above considerations?

For me, not relevant. I'm a 100% shares guy, and invest in strong businesses that provide strong returns on equity throughout the economic cycle. In my 20+ years of amateur economic forecasting, there always seem to be reasons for putting off or delaying investing. I now concentrate on bottom-up and am finding that works a lot better for me.

Which class of investor are you?

I'd say I'm a risk-taker. Have PPOR leveraged to buy shares, and super (also in shares). This has done very well for me. The IP market is outside my experience and expertise, so I stick to what I know and do best.

What is your ultimate goal?

To have passive income exceed expenses by >10%.

Can you set out your planned strategy?

"By my 50th birthday (2011) my dividend income will exceed $40,000 pa. I will achieve this by investing in businesses that my analysis indicates a per-annum growth in earnings of >15%, and holding onto them indefinately."

A little different to the majority of posters, but thought it might stimulate some debate.

Cheers

 

[Merovingian]

What are my views regarding the above considerations?

Well, as for low interest rates, we all know that they're going to rise this year, and by how much, is anyone's guess. Though I think that we have to ignore the media on this one — they love to turn it into a "doom and gloom" topic. I personally think that interest rates will rise will rise less than two percentage points this year — again, this is only a guess.

As for property CG, I think it will be pretty flat in most capital cities, except for say, Sydney, where there may be a decline overall, (and to a much lesser extent, Melbourne and Brisbane). CG will have to be added through renovations and rejuvenation, as the market won't give it to us...

As for rental yields, these will be quite low for the next couple of years, but rising slowly, as rents increase due to economic factors, and higher interest rates pushing mortgages up, making renting a better option for a lot of people — i.e. more rental demand. My guesstimate is that yields will become more satisfactory for investors at around 2008, give or take...

Equity market. No idea.

RBA restricting soft-lending criteria. Again, no idea.

What class of investor are you?

OK, I fit into the starting out category, and I'd say I will be there for at least the majority 2005...

What is my ultimate goal?

My ultimate goal is to have about $4 million in property, in today's dollars, fully paid off, giving me my passive income to live off. The 'rule of 20' estimates that this will be around $200,000 per year. I would be happy with about $150,000 per year. My goal is to have this before I'm 40, (which gives me 20 years). As for a more specific date, within 10 years would be nice, but we'll see...

Since positive cashflow property is so hard to find, and the growth rates on these are relatively low, I would probably adopt a Peter Spann type of strategy...

Can you set out your planned strategy?

I hope so...

 

[quoll]

More than ever, I would be wanting to ensure my financing and exposure is manageable and that a very clear exit(and entry) stategy is in place to both protect against problems as well as take advantage of opportunity.

I think my feelings could be summarised as "Be careful out there now folks. Anyone could have made money the last few years but now might be a time to become a shrewder investor, check your structure and check your direction"

I agree Alan, having only been investing for 5 years, I haven't seen enough so I'm looking forward to the next phase of the cycle simply because it is something new and unknown. Hopefully we have structured our investments so we can come out the other end stronger and in a better position.

Hanging on for the long ride.
cheers
quoll

 

[Steve Navra]

Like the rest of you, I too am interested to see what Steve has got up his sleeve.
We have benefitted from his strategies in the past, both directly and indirectly.
So Steve, whats new?

Hi Simon,

The investment environment is new!!
(Well at least for these who didn't live through the peaks of 1987/88 and the subsequent crunch in the early 1990's.)

The replies have so far been more than interesting.

I decided to start this thread for the following reasons:

• Make forum members (especially the newer investors) AWARE of some of the pitfalls associated with a changing investment climate. (Heaven knows how badly I was personally caught unawares by previous HIGH interest rates.)

• To strongly emphasise the necessity of CASH FLOW in difficult times.

• To suggest that a doom and gloom psychology is NOT NECESSARY even in ‘difficult’ times and that in fact this is often where good opportunity exists.

• To point out that one stays active in working the portfolio, irrespective of investment conditions.

I intend to cover all the investor classes in my answer . . . so hopefully there will be something for everyone by doing it this way.

Mostly though, I am currently re-assessing my own personal strategy; so all I will really be doing is sharing some of my thoughts as regards all of the above.

(It might be a quite long response )

Regards,

Steve

PS: I invite both Bill.L and likewow to contribute their thoughts on this subject.
Firstly I think they both can add good value to the discussion and secondly as they are usually astute in their comments, it will bring out the best in my response.

 

[simonjulie]

Hi Steve
Part of my current strategy is to free up titles and compress loans onto existing securities and then use these titles as a safety net or for further borrowing as the deals present themselves.
Do you think it would be better to hold these free titles or cash them in as LOC's just incase the lending environtment changes in the future?
If I where to cash them in as LOC's this will raise my LVR. So in more difficult times I would have Cash but not as much equity.
Which is better Cash or equity, for more difficult times?
Obviously BOTH is the answer.
But is there a new balance of these to be considered?
Kind regards
Simon

 

[Steve Navra]

Do you think it would be better to hold these free titles or cash them in as LOC's just incase the lending environtment changes in the future?

Hi Simon,

I think you just answered your own question

My preference at this time is to "lock in" your LOC's:

Reasons:
1) The ultimate cash buffer against interest rate increases.
2) Decreasing valuations. (Valuers become more conservative especially with the threat of interest rate increases.)
3) LVR is inconsequential , as as soon as you access the equity it will reflect back to the LOC LVR.
4) Maybe, just maybe you could invest the funds at a rate better than the LOC interest (And the return will boost your serviceability!!)

BUT . . . knowing you, I am sure this question was purely rhetorical and you just wanted me to answer it for the benefit of other Forumites (Good onya!)

Regards,

Steve

 

[demoman]

hi Steve

Definately starting out and a little on the late side.

We bought our first block of land in 1989 and sold this in 1993 for a small profit which was our deposit on first PPOR. Renovated this & sold in late 2004 for a very large profit. Currently renting with proceeds from house sale in bank earning 5.25%. Have just signed on 2nd PPOR in a new area but will have reasonably small mortgage. Finding work will be a challenge and money may be tight for a little while. Short term plan to pay off as much as we can from mortgage then start investing before next upswing.

Looking forward very much to seeing Steve in March & then may have a better idea about investing overall. Have read Jan Somers & Steve McKnight but keen to learn more.

We watch the stockmarket with interest but have not taken the plunge just yet. Have no real idea about the interest rates although suspect they will have to go up eventually.

Cheers

Jared

 

[AndyB]

"Be careful out there now folks. Anyone could have made money the last few years ...check your direction"

This is a thought that is constantly in the back of my mind. Current situation is PPOR (sold 1 IP to help finance), 2 IP's (cashflow neutral). Shares in Navra. I have seen great capital growth in all 3 properties, has this been due to good management or simply due to property cycle?

I too believe now is the time to focus on structure and pay down some PPOR debt.

For more experienced investors who have seen both good and bad times (possibly several times over), have they laid low with financial structure in place ready to go prior to boom times or is it more a case of buying whenever the right deal comes along?

Regards
Andrew

 

[simonjulie]

Hi Steve
Thanks for your feedback
My strategy wheels are starting to turn again. I can't afford to become complacent.
The last thing anyone wants is to be left behind wondering why things are not the way they were yesterday.
Looking forward to your report.
Kind regards
Simon