Schmuck Alert

[chilliaa]

I dont know how to put this post in a softly softly way so i will just come out direct.
At the end of the day i care about fellow members on this forum, so please dont take some of my postings as a better than thou approach. This is not my intention, whilst i see opportunities in this climate i cant over emphasise the need to do your own research, just because certain members highlight an opportunity doesnt mean other people will be able to blindly follow unless they posssess a similar skill set.

I saw a recent posting about some person looking at opportunities because they had a change in mood. Now maybe this particular person was looking at opportunities given their financial position or maybe it was just a case of someone having some perceived surplus capital and was on a fishing expedition as to how to invest it.

Anway my point is to highlight the risks of having surplus capital and then trying to invest it in areas in which you dont have a particular skill set but are seeing other people participating from a particular investment strategy.

Let me highlight this risk with something that has come to my recent attention. This being a public site, i am going to really gloss over the facts, to protect certain parties, but the underlying story is worthy of bringing to the attention of this board.

Anyway the story goes that a certain friend sold a certain small business last year for $500,000. The purchaser didnt have experience in that area, but had a property portfolio that had been slowly acquired and due to rises in property prices had minimal gearing. Now i dont know why this particular purchaser had an interest in this type of small business since the person had a full time secure job already, but maybe the person had attended some investment seminar or was trolling some investment website that said that the person could excellerate that persons investment returns by buying a small business (which generally sell on only 2-5 times pre tax earnings depending on the nature of the business) and leveraging the purchase price against a property portfolio.


So basically that person borrowed 100% against that person's low geared property portfolio to purchase the business.

Anway to cut a long story short, i have now found out that the business is bankrupt, the landlord has changed the locks. The purchaser is now $500,000 out of pocket (not including any losses incurred to date).

 

[csc]

whats the point of the axe grind here?

 

[evand]

Can you provide your definition of 'bankrupt' in the context of your story? Thanks.

I dont know how to put this post in a softly softly way so i will just come out direct.
At the end of the day i care about fellow members on this forum, so please dont take some of my postings as a better than thou approach. This is not my intention, whilst i see opportunities in this climate i cant over emphasise the need to do your own research, just because certain members highlight an opportunity doesnt mean other people will be able to blindly follow unless they posssess a similar skill set.

I saw a recent posting about some person looking at opportunities because they had a change in mood. Now maybe this particular person was looking at opportunities given their financial position or maybe it was just a case of someone having some perceived surplus capital and was on a fishing expedition as to how to invest it.

Anway my point is to highlight the risks of having surplus capital and then trying to invest it in areas in which you dont have a particular skill set but are seeing other people participating from a particular investment strategy.

Let me highlight this risk with something that has come to my recent attention. This being a public site, i am going to really gloss over the facts, to protect certain parties, but the underlying story is worthy of bringing to the attention of this board.

Anyway the story goes that a certain friend sold a certain small business last year for $500,000. The purchaser didnt have experience in that area, but had a property portfolio that had been slowly acquired and due to rises in property prices had minimal gearing. Now i dont know why this particular purchaser had an interest in this type of small business since the person had a full time secure job already, but maybe the person had attended some investment seminar or was trolling some investment website that said that the person could excellerate that persons investment returns by buying a small business (which generally sell on only 2-5 times pre tax earnings depending on the nature of the business) and leveraging the purchase price against a property portfolio.


So basically that person borrowed 100% against that person's low geared property portfolio to purchase the business.

Anway to cut a long story short, i have now found out that the business is bankrupt, the landlord has changed the locks. The purchaser is now $500,000 out of pocket (not including any losses incurred to date).

 

[chilliaa]

Can you provide your definition of 'bankrupt' in the context of your story? Thanks.

The underlying business went bankrupt, maybe the business started loosing money and the person fell behind on the rent, all i know is the landlord has taken possession of the business.

I am pretty sure the person is not bankrupt but now has a $500,000 bank debt against the residential properties, without the business to provide cash flow, a very expensive lesson learned.

 

[chilliaa]

whats the point of the axe grind here?

To highlight the risk of branching out into investments you dont have much experience with.

An investment might sound good on paper, but one needs to be familiar with the underlying risks.

 

[csc]

To highlight the risk of branching out into investments you dont have much experience with.

An investment might sound good on paper, but one needs to be familiar with the underlying risks.

... with respect you dont have a friggin clue about me.......theres gotta be a "real" underlying reason why you posted that rather than the throw off line of sounds good on paper etc.............that saying is for teenagers, honestly !

the initial post is just rambling for the sake of it...no real background.....sounds awfully like you have just taken sides and thats it!

im sure if this story happened it would be nice to hear the true facts from both sides rather than mere gossip.

enjoy your day.

 

[jaycee]

wow csc you goetting offended for all of us or for me, the person who posted another post saying I'm feelig in a bad mood today & feel like basically chucking it all on red on the roulette wheel, and it will be borrowed money to boot

Man, chillia was more or less talking directly about me and I didnt even read it as patronising or offensive....and I WISH i was still a teenager, but the grey hairs which pop up to say hello from time to time remind me I'm not

should we all be scared to post things now ? care to give guidelines to help us avoid mistakes ?

 

[chilliaa]

... with respect you dont have a friggin clue about me.......theres gotta be a "real" underlying reason why you posted that rather than the throw off line of sounds good on paper etc.............that saying is for teenagers, honestly !

the initial post is just rambling for the sake of it...no real background.....sounds awfully like you have just taken sides and thats it!

im sure if this story happened it would be nice to hear the true facts from both sides rather than mere gossip.

enjoy your day.

mate this post was never directed at you specifically. You asked me the point of the article and my point was to highlight the risks using surplus capital in a low geared property portfolio to branch off into other investment vehicles with the goal of turbo charging the investment performance.


And there are no sides to it, the purchaser of the business thought that buying a small business financed 100% by borrowings against that persons property portfolio was an easy way to increase returns. The person had no experince in that type of small business, the business is now bankrupt and that person now has a $500,000 debt against that persons property portfolio.

 

[sparky23]

At the end of the day it is up to every individual to make their own decisions in life. When we put stuff up on these forums and people respond we can choose how we react to the advice, suggestions, recommendations etc. I find it useful to take a little bit from each post and weigh it all up, take in the useful bits and toss out the crappy bits or the bits I just don't like and then go off and do what I like anyway which is a womans perogative!

Hey its just a forum not the bible, just a bunch of individual people, mainly smart people with their own ideas and takes on life. None of us know any better than anyone else no matter how much we might think we do!

 

[jaycee]

newbies for example can be swayed, just like some seminars etc which people warn about for example. Guess Chillia was trying to put some perspective for people like that. Might sound so obvious that it is demeaning to people like csc, but perhaps.... that is not whom it was directed to (?) just a thought.....even what Chillia wrote is simply an opinion for people to pick & choose what they want to listen to and act upon

 

[Token Funder]

Warnings are useful.

I had a file cross my desk last week (one of many in this category over the last 6 months unfortunately) which has all the hallmarks of one to many seminars:

• 5ish years ago PPOR only with less than 50% LVR
• gears to 80%, buys IP.
• waits for CG
• refinances (lo doc) everything to 80%, buys again.
• waits for CG
• gears again, buys development site (lo doc..clearly factoring future CG as income)
• looks to gear again - no can do - low doc market stuffed
• then it gets odd - into arrears but has cash in other account sufficient to clear but holds on - why? - because sees future buying opportunities and doesn't want to give up potential deposit given extracting CG not possible
• arrears get worse
• properties taken into possession
• big shortfall on the cards.

Fewer seminars touting upside, more teaching risk-management might have helped.

 

[Rolf Latham]

Hiya TF

xcept for the PPOR bit ...............The first few points sound like most listed property trusts

ta
rolf

 

[evand]

I still don't know what you mean by 'bankrupt'. Is the business still trading? If so is its cash flow not enough to meet expenses? Does it have an overdraft facility? Maybe bankrupt isn't the correct term in this case.

Did the person buying it do any DD before buying?

The underlying business went bankrupt, maybe the business started loosing money and the person fell behind on the rent, all i know is the landlord has taken possession of the business.

I am pretty sure the person is not bankrupt but now has a $500,000 bank debt against the residential properties, without the business to provide cash flow, a very expensive lesson learned.

 

[Sunfish]

Hiya TF

xcept for the PPOR bit ...............The first few points sound like most listed property trusts

ta
rolf

Funny that you mention property trusts Rolf. Over the years here I have been frustrated with property investors who wanted to diversify (or maybe just didn't have a deposit) into "the share market". They could not go past REITs or the banks. That is absolutely not diversification.

 

[BayView]

who, me?

This thread is possibly about me; we have done exactly this and about to do it again (see this thread: http://www.somersoft.com/forums/showthread.php?t=47824

Now, I am no finance genius, and have made my fair share of mistakes - fortunately none of them big.

The point is; to change to an industry you don't know anything about is only as dangerous as your Due Diligence allows it to be. It can be done successfully, and is done successfully by many people.

I don't know the circumstances behind the person described in Chilliaa's first thread, and it is sad that they have gone under, but my guess is there was not enough research done first, or they may not have had good staff in place to make the business run correctly, may have paid too much for it, or all of the above and so on.

 

[Sunfish]

Bay View. You are an entrepreneur at heart and have had experience. I could (now, it has taken time) pick a viable small business without "accountant's figures" and I am sure you could do the same. What you need is a reasonable assumption of costs and how much can be achieved in a month. Beginners can easily underestimate one and overestimate the other.

But: The single most important thing for someone buying a business (and I endorse the concept wholeheartedly) to know is "Know thyself!" I was 24 when I first went into business and I shudder when I think how I thought of myself as "10ft tall and bullet-proof". Let the record show that I wasn't. After a few years I sold out with the minimum deposit on a "standard" house.

 

[JIT]

just because certain members highlight an opportunity doesnt mean other people will be able to blindly follow unless they posssess a similar skill set.

I agree, it really is a critical point and I think very few people get it right...even on SS.

With direct share investing for example...I wonder how many of the people here who invest based on ''fundamentals'' actually read even a single company annual report cover to cover, let alone historical ones...? And how many can actually make sense and gain useful information from analysing a large company's financial statements, with all it's annotations, adjustments etc...??

I can't (nor do I have the time), so I (later this year) will dollar cost average into index funds .

 

[Dazz]

None of us know any better than anyone else no matter how much we might think we do!

I don't agree with that sparky23. I'd contend that quite a few forum members on here are above average, some here are around average, and quite a few are below average.


It's a very Aussie way of thinking that we are somehow all equal, but I don't believe it for a second.

 

[chilliaa]

This thread is possibly about me; we have done exactly this and about to do it again (see this thread: http://www.somersoft.com/forums/showthread.php?t=47824

Now, I am no finance genius, and have made my fair share of mistakes - fortunately none of them big.

The point is; to change to an industry you don't know anything about is only as dangerous as your Due Diligence allows it to be. It can be done successfully, and is done successfully by many people.

I don't know the circumstances behind the person described in Chilliaa's first thread, and it is sad that they have gone under, but my guess is there was not enough research done first, or they may not have had good staff in place to make the business run correctly, may have paid too much for it, or all of the above and so on.

Bayview it wasnt directed at you or any member of this board that buys small businesses. I used it merely as an example of what can happen when people start investing in an asset class they dont fully understand (especially when that investment if financed through debt leveraged against their property portfolio).

And i fully agree with Token Funder, looking for profit opportunities is great, but so is an emphasis on risk analysis.

Just look at those poor souls caught up in storm, maybe if there had been a bit less dazzle and a bit more research these people wouldnt have got caught to the degree they did.

 

[BoatBoy]

Just look at those poor souls caught up in storm, maybe if there had been a bit less dazzle and a bit more research these people wouldnt have got caught to the degree they did.

Others would argue that these poor schmucks innitialy did the right thing.

They sought out and paid for proffesional financial advisors for advice and to do the "smart" thing for them.

Dave