Reality check folks

Reply: 3.1.1.1.1.1.1.2.1
From: Eric Snow


Robert,

Backpacking around the world, a dream of mine also. The reason that I find these figures being bandied around difficult to believe is that the numbers just-don't-add-up.

Example: Let's say you have $100,000 saved up and ready to invest. Now numbers such as 300-8000% have been quoted. Let's be super-conservative and say a 100% ROI. Ignoring taxes and other costs,

After 1 year you have $200,000
After 2 years you have $400,000
After 5 years you have $3,200,000
After 10 years you have $102,400,000
After 25 years you become the proud owner of the Commonwealth of Australia
After 35 years you own the entire world.

Clearly ridiculous.
 
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Reply: 3.1.1.1.1.1.1.2.2
From: Robert Longmore


Ahhh yes, starting a new Company/business, always a nerve racking experience, i am at that great fork in the road, Buy a investment property or start another business? decisions decisions! i am particularly interested in the buying off the plan, paying nothing till completion and then re-selling before the completion date? how often does this work? is it easy? what are the chances of success in a deal like this?
 
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Reply: 3.1.1.1.1.1.1.2.1.1
From: Paul Zagoridis


That's one of the difficulties in REI (and also in other active investments).

You can't duplicate outstanding success every year, plus you have to deal with tenants or tradesmen or buyers. Plus there is the usual dealing with finance and tax returns.

My brag story is from September 1999. What happened in 2000? I got distracted with my contracting business and did precisely zero real estate purchases. This despite the fact that I made a great deal the year before. Instead I did six stock plays worth $18K all up. I'm about $2K ahead but about to take a bath on the latest purchase (approaching my stop loss).

Now if I'd bought at retail almost ANYTHING in Sydney in 2000 I'd have got a 8-12% return.

This calender year I've bought three interstate houses and looking for a good deal in Sydney. One of these will be my brag story next year.

The same thing happens for successful stock investors. They get distracted if it isn't their primary business. Warren Buffet's average return is so good because he focuses.

I aim for returns above 20% p.a. I like that and am on track. But I don't try to compound those returns every year. This is not a bank account. The transaction costs would cripple me.

Dreamspinner
Oz Film Biz is at
http://www.healey.com.au/~paulz
 
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Reply: 3.1.1.1.1.1.1.2.1.2
From: Robert Forward


Hi Eric, All I can say is that you've got to go backpacking it's the best thing I have ever done. 35 countries in 2 years was magnificent.


Now I understand the way you are looking at the figures. You are thinking of capital appreciation alone. Now if you think of this alone now wonder you think property isn't the way to go. You need to take into account other factors.

There is also a second type of ROI and that is from rental income. The figures I stated is from rental income. So it will be static until either/or you pay principle off the mortgage or you up the rent.

FYI: this property has also taken a 600% capital growth it too. Only because it was purchased at an extremely good price.

And all of this is ignoring tax, costs and other factors.

But let me point out to you that property can be worked out in 2 factors as well as shares. Firstly with shares you would work out the capital growth the same way you purchase property and secondly you then would work out your percentage return compared to dividends, is that not correct.

If you trade shares and you buy a share at $2 each and then sell them 1 month later for $4 each you have then received a 100% ROI, but that is a ROI for 1 month. so lets make that 1 year and your return would be 1200%pa. Which isn't unheard of it the stock market but very rare.

So, shares and property both have their little quirks and it's a matter of understanding these quirks fully plus how to come out with a final return figures.

With property how can you place a percentage return on a deal that you have not had to outlay any cash for. To purchase the property and then it's positively geared so you end up with cash in your pocket and the end of every week. What I am saying here is that I get $70pw from one property that cost me nothing of my own cash to buy (all amounts were borrowed from the bank) and that is after taking into account ALL expenses. Plus I also get Capital Gains on the property that I have never had to use my own cash on. So lets say I get 10%pa Cap Growth I have made $10k per year on a $100k property. Then plus my $70pw x 52 = $3640. My over all return on a property is $13640 without using any cash of my own.

Just a wee bit more for you to think about.

Cheers
Robert
 
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Reply: 3.1.1.1.1.1.1.2.2.1
From: Waverly Bay


Eric,

Some people have quoted interesting deals in which ROI was infinite or simply pretty damn high – all very reasonable and acceptable in the property game.

But lets say Robert uses the 100K cash as a deposit to buy investment properties for $500K (ie using a conservative 80% gearing). And lets assume that Robert “stuffs up” and he can only achieve a ROI of 10% p.a.

If Robert purchases 1 property every year for $500K using the increase equity from his previous purchases, his increase in net equity after 10 years will be $3 million. He outlayed 100K in year 1 and ends up with net increase in equity of $3 million after 10 years.

His increase in net equity would be more if would be more if we took into account the net income earned from the property.

Not a bad stuff up if you ask me.


Cheers




Waverly
 
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Reply: 3.1.1.1.1.1.1.2.2.1.1
From: Anonymous


I'm an avid IP investor. However I know from the empirical studies both in Australia and the UK, NZ and US that residential property on average increases by 2%-3% pa above the level of inflation.

If the inflation target is 3% pa then house prices on average increase by approximately 5% pa.

In other words, the real rate of return after inflation is 2%. That's it. It's not great but it's steady and relatively risk free.

However, obviously, other factors such as renovations and scarcity value will increase the IP by a faster rate.
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2
From: Gary Smith


Robert said:

>> But this is the difference with shares, you can only live off the money
if you sell your shares and as such you lose your equity (Note: I know there
are always dividends but most dividend payouts are only a small percentage
and you'd need to own millions of dollars of shares to retire on dividend
payouts <<

Well, a member of my family has lived solely off dividends since the early
80's. She spends her time playing with the kids, doing the gardening,
swimming, walking the dog, etc. You can buy shares mainly for their
dividend. Buy correctly and you will have an ever increasing (and may I say
increasing faster than rents do) income. Lets take an 'average' divident of
4% and an average rent of 8%. But you don't get twice as much much actual
money. Out of that 8% come the rates, insurance, maintenance, management
fees, etc. Then you get to pay tax on what is left over, minus whatever
depreciation allowances you have. The dividend however already has 30% tax
paid on it. The after tax money in your pocket is not much different. Of
course, you can buy property with higher yield/lower capital growth (or vice
versa) but you can do the same with shares. Just depends on what is more
important to you. I also write options against some of my shares which gives
me about another 10-15% of cash a year. The common picture that living off
shares involves continually buying and selling shares is a myth. Sure some
people do it, just as some people flip properties.


Paul said:

>> Imagine now having $1M in the market on 80% margin. Most people wouldn't
sleep and wouldn't be taking care of their day jobs either. <<

So we should aim to be 'most people' :) What was RKs line about being an
average investor?

>> The only time I've been wiped out was over-gearing when 1st mortgage
rates hit 18% in 1991. <<
>> This level of gearing is conservative to normal. << (presumably talking
about 80% LVR real estate, but I'm not sure)

Don't you see a contradiction here? You were wiped out because you were over
geared, but like property because you can have a large LVR. Now I will admit
to being a conservative borrower and don't like going much over 50% on
anything, but I would be happier with a larger LVR on shares that property.
Why? Because I know I can get out the shares quickly and cheaply if needed.
But heh, everyone's different.


David said:

<< a certain stock's value can plummet overnight by for reasons beyond
anyone's control, leaving shareholders gasping for breath. <<

That's true. However, shares can also go up overnight as well. One of my
stocks - Hardmans - went from 38c to about 88c in one day recently after a
oil discovery. Now I know I had nothing to do with it, and had no influence
on it, but so what? I took the money and ran. Many people seem too worried
about losing money to actually make money. That's not restricted to shares
of course, also applies to property and business. But if all you think about
are all the things that can go wrong then you you will never do anything.
Then again, doing nothing might be better than not thinking at all and going
into things you don't understand.

>> and within 48 hours the company was worth 35% less because the market
lost confidence in this CEO to positively run this organisation. If due
diligence and market research is done, this would never happen with
residential property. There are too many constants that are unchangeable,
ensuring it remains a secure investment. <<

Some people think that you can't lose money in property. Bet they weren't
around 10 years ago. (Sort of like those share traders who thought they
couldn't lose up until about a year ago). Also funny how others in the forum
boast about getting 10%, 20%, 30% off 'market' value. What is this if it
isn't a sudden drop in value? The reasons why property drops in value may be
different, but to pretend it doesn't happen is fooling yourself. The main
difference for the members of this forum is that if a property is available
for 30% off it's market value they are in there trying to buy it; but when
talking about shares they look on it as though there were already the owner
of the shares and therefore losing money, rather than a potential buyer
looking to make money. Again, worrying more about losing than winning.


Robert said:

>> My $1m of cash can buy $10m of property. And my cash return on this would
want to be $200-400k pa so that's a 20-40% ROI. It's a matter of leveraging
from my point of view. <<

Your return is from gearing, not the investment. And you can gear shares
just as you can property, unless you want to gear above 80% which I
personally would not go anywhere near. From my viewpoint, using that sort of
LVR is introducing an unacceptable amount of risk into a reasonably safe
investment. At a LVR of 90%, all it takes is for the interest % rate to be
about 1% more than the after-expenses yield and you won't have the cashflow
to pay the interest. And if you only own property what are you going to do?
Lose a lot of money when you have to sell in a hurry to lower the LVR. A
trip back to the late 80's shows how that happens. Now, if we could get 30
year fixed IO loans then that would make it a totally different proposition.


And a lot of other people talked about ROI on borrowed money. I've got to
say that implying a return of infinity because you borrowed all the money is
bogus. But even so, that has nothing to do with property. Last time I
checked my margin loan, I had a unused borrowing capacity of about 400k. So
if I wanted too, tomorrow I can buy 400k worth of shares using 'none of my
money'. Does this mean that if the company suddenly goes bankrupt - ala HIH
or One-Tel - I didn't lose anything because I didn't put any money in?
That's a crazy concept. Once you have enough net worth to borrow as much
money as you want to, the concept of differentiating between your own money
and the banks is nonsense. I prefer the concept of measuring the return
against the amount of money you could potentially lose if it all went wrong.
But I think that's another conversation.

I think that investing in shares and property are actually quite similar,
and in the long run it doesn't actually matter which one you choose - a
passive share investor will get about the same as a passive property
investor, and an active property investor will get about the same as an
active share investor. I'm quite happy to do both, though for me there is a
lot more 'unenjoyable work' in property. The real question is which one is
easier to accumulate enough net worth to 'retire' on. For most people, it
seems that would be property, particually if you don't have much to start
with. When you don't have much cash/equity, high LVRs sure are attractive.

Gary
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2.1
From: Paul Zagoridis


On 5/30/01 10:32:35 PM, Gary Smith wrote:
>>> This level of gearing is conservative to normal.
>presumably talking
>about 80% LVR real estate, but
>I'm not sure)

Yes

>
>Don't you see a contradiction
>here? You were wiped out
>because you were over
>geared, but like property
>because you can have a large
>LVR.

Yes and no. Overgeared was 120% of realisable value as I had some bridging finance for a risky play. I bet the farm that a Labor government wouldn't allow first mortgage interest rates to hit or exceed 17%. I bet wrong. Lesseon learned? don't deal in what might or might not happen, deal with what is actually happening.

>And a lot of other people
>talked about ROI on borrowed
>money. I've got to
>say that implying a return of
>infinity because you borrowed
>all the money is
>bogus. But even so, that has

I kind of agree with you there. I prefer to examine the Cash On Cash return and structure things so I get my capital back quickly. I like to play with profits or reasonably borrowed money.

ROI is Return On Investment. A place that costs me $64K means $64K invested. If it is all borrowed my CoC is huge. That said when measuring returns it is appropriate to allow CoC=ROI. Otherwise you can't masure the impact of leverage.

Regards

Dreamspinner
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2.1.1
From: Eric Snow


Gary,

Good to have some back-up here! Good explanation of the whole buying below market value nonsense. When I hear things like "I just bought a property worth $200,000 for $160,000! (Note exclamation point) I reply, "No you just bought a $160,000 property for $160,000. It sold for $160,000, therefore the market value is $160,000" I also usually slap them across the face to hammer the point home.

Yes, I'm sure there are plenty of vendors out there just dying to sell their properties at a huge discount to market value. Arrrgh! Get away from the keyboard, Peter Spann!
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2.1.1.1
From: Dave :)


Eric,

I'll retract my comment about you being able to hold up a decent debate....after that post, its obvious you're definitely a sandwich short of a picnic.

You said you were looking forward to hearing more from me. Well, since my reply, I've heard nothing from you in return.

Everyone has a right to their opinion, but please offer some substantial evidence of anything you've done before you knock what others in here have done. Members of this forum post real life examples so that other investors can benefit from...please respect that.

If, as you claim, you have zero debt, you're most probably not even a real investor. And, if you're not a real investor, what are you doing here? Just feel like a good chat, is that it?..use this forum as a place to show the world how knowledgeable you are..how well spoken you are??

Loneliness can make you do the strangest things....yes Eric, even at 'your' age.

Cheers,

Dave
:)
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2.1.1.1.1
From: The Wife


*snicker giggle snicker*

TW
~Life is a daring adventure, or nothing at all~
 
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Reply: 3.1.1.1.1.1.1.2.2.1.2.1.1.1.1.1
From: Kevin Forster


Just a couple of things: - Firstly thanks Eric for starting a lively debate and probably the longest thread in the new forum.

Shares generally outstrip property for capital growth. If shares do not provide as much cashflow than property then they must provide higher capital gain. People buy property with 2-3% yields for higher capital gain. Also you can buy undervalued shares. An undervalued share has been sold down too far and the fundamentals show it to be stronger(not much different to property really).

You can also gear with shares using options and warrants which some people on this forum do and create very good gains.

I do own IPs and also I own shares (using an index fund for international exposure and hold shares directly).

I like shares for the tax credits they give me and the capital growth. I like property for the cashflow. Cashflow from the properties is like an unfranked dividend and the excess tax credits from franked share dividends that I get can then be used to reduce the tax I have to pay on the property cashflow.

I think shares and property fit together very well.

Anybody on this forum that thinks they can defend property as the best investment should jump onto a share forum like hotcopper and add a new thread called Reality Check folks and tell those share buffs there that property is where it's at. Then start debating

Just a thought

Kevin
 
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Reply: 4
From: Charles Homme


I also posted this message under "No Topic" cos I wanted to make sure Eric the investment bigot read it. I make no apologies for the description, he should be elsewhere other than this forum as he provides nothing of value to those in here.

I must be getting old and intolerant in my old age. I have been reading the totally uniformed postings from Eric, and admire all of you who have bothered to enter into the "debate".

Eric obviously knows absolutely nothing about how to profit through property investment. As usual, when ignorant, people tend to generalise.

The facts are simple. If you know how, you can be investing in property tomorrow for as little as $100. The last deal I did involved a total cash outlay of $ 100. My return from this $100 was $ 30,000. I achieved this (cash/profit in hand) in 90 days. By my reckonings, this equates to a return on my investment (the only way you should ever look at any investment) in the thousands of %. No borrowings. No finance. No nothing. I bought well. I had it sold before I bought it. What could be easier or more risk free?

As I said, I must be becoming intolerant. I am no longer going to waste my time reading posts from ill-informed, biased, close minded investment bigots who only want to ridicule and not offer anything constructive.

I feel much better now having said that. Time for a beer.

Charles
 
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Reply: 4.1
From: Eric Snow


Dave,

Apologies for not replying sooner, but this thread has been darting about in all directions.

What you said came awfully close to an ad hominem attack, and besides, I like sandwiches.

True, I have zero debt, but since when did debt become a prerequisite for investor status? If I want something I buy it with cash. If I don't have the cash right then I save up then buy it. What could be easier than that? Borrowing only makes sense if the asset you are purchasing appreciates at a faster rate than the interest rate you borrow at. Plus income from said asset minus expenses of course. With interest rates so low I could throw a dart at the property section of any newspaper and hit something that satisfies that criteria. When interest rates rise though, I can see a different story emerging.

Bottom line: I am looking more than 12 months ahead.

Eric
 
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Reply: 4.2
From: Eric Snow


Charles,

Thanks for the insult. It proves I am doing something right.

Tell us more about this great deal of yours, turning $100 into $30,000. Sold before you bought? Fascinating. Perhaps you would let me lend your time machine for a bit? I could get next weeks lotto numbers.

Excuse me, I have to go check my share portfolio, those things are mighty volatile, you know...

Eric
 
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Reply: 5
From: Annie Morison


Hi there,

I've only just logged onto this forum today and have spent hours enjoying all the comments and information being presented. Thanks to all of you for the knowledge.

Given that I am new to this investing game, I was hoping I could get some advice as to whether to buy my first home or get some shares that might assist in saving a bigger deposit for a first home.

Whilst the government grant is good, it doesn't add up to much if you haven't got a lot to contribute. Borrowing 95% comes at a big cost and high LMI. I've been spending high amounts on rent living where I want to live (in Melbourne)and can't afford. There's no problem with paying off a loan, it's the deposit that lets me down.

My question is
(1) do I jump in and buy a property that I can afford a deposit on and hope that it will return enough to get me into the area I want to live within a few years, or
(2) do I save for a bit longer and buy in a good area? If option 2 is the go,
(a) how best to make the money work for me rather than keep it in the bank.
(b) Should I gamble this minimal savings I have and try and make it grow by playing the stocks?

There are so many more questions....finding a house is not easy either as I've found out!!

I don't expect to find the answers straight away. Learning takes time.

I'm enjoying the learning experience and am so pleased to have found this site where there are so many of you dedicated and experienced investors who I'm sure have been where I am today and know exactly how I feel as an amateur.

I'll look forward to the day where I'm handing out some tips!!

Stay tuned.
Cheers
Annie
 
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Reply: 4.2.1
From: GoAnna !


Eric

Sounds like you or some-one close to you has been burned with real estate. If you have a lesson tell us about it. This forum is the discussion of real estate - the good and the bad.

I doubt anyone on this forum would disagree that there are some shocking property deals out there, and heaps of ordinary ones. However we are all learning from each other so that we can find the great deals and the truly wonderful deals. To do this we need to be lateral, creative and sometimes band together - just ask Dave:).

I am happy to learn from your experiences but also hope that you are open minded enough to learn from successes as well as failures.


GoAnna !
(aka Anna before she got real)
 
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Reply: 4.1.1
From: Dave :)


Eric,

No need for an apology. See me in 10 years time and we'll compare
notes.

I'm 28. And, I do know quite a few wealthy people...even though I'm not
yet wealthy myself - far from it. But then again, you sound like you've
surrounded yourself, and take advice from, ill-informed, narrow minded
and simple people, who have closed themselves off from exploring
property investment strategies that work...so I'd probably make it into
your 'rich' list already.

For now, my time is valuable. And, given the amount of time I've spent
in replying to you, I'll now need to make up for what's been an
extremely negative return on my investment. I shy away from
self-inflicted mediocrity, so please accept my sincerest of
good-byes....

Cheers,

Dave
:)
 
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Reply: 5.1
From: PT Bear


Hi Anne,

This might not be the sort of info you're after, but you might find it useful:

My wife and I bought our first IP six months ago in Brunswick after living in a rat-hole to save for the deposit. We're still renting, but did move in for a period of time to renovate and get the FHOG.

At this point our IP is paying for itself, with some $ left over to contribute to our rent in a suburb which is better for our situation anyway.

We tried to make some money on the stock market for a while (my brother is a stockbroker), but found it difficult in the current climate - even with a professional we trust helping us. Most of our money was saved from our salaries and stored in a proven mutual fund.

The stock market can be a good way to make money, but we simply don't know a lot about it. I'll probably go back to it some day, but that'll be when I can give it a lot more time and attention.

We also found that worrying about paying a few thousand for mortgage insurance isn't a problem - it can allow you access to a deal you couldn't otherwise afford and we've made that money back several times over in the past six months in equity.

The final thing is that it took us a year to save the deposit we had. It was frustrating, but it gave us time to understand the market develop a strategy and become comfortable with it.

We also figure that we'll be buying a second IP within a year of the first. At this point, finding the good deal is the hard part, not the deposit and judging by the people we now associate with and the stories on this forum, that only gets easier with experience.

Best of luck, with determination you will get there.

PeterT.
 
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Reply: 5.2
From: Mike .


Hi Annie,

You'll have to open the attached file to read my reply.

Mike
 
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