should i hold or sell with loss??

[Bill.L]

Hi all,

Acey,

You actually don't get it, do you???

In the example I gave, even though I only have $44,000 that is worth half as mush as it was 10 years earlier, I have $44,000 that I did not have previously.
If it was an IP, lets look a little more in depth.
Say we owned our own PPOR and bought the IP for $44,000.
rent return at $70 pw = $3640 pa
In our inflationary environment interest rates stay at 9.5% for the 10 years.
Borrow $44,000 interest = $4180 pa.
Now the rent return grows every year with inflation.
y2 = $3902
y3 = $4183
y4 = $4484
y5 = $4807
y6 = $5153
y7 = $5524
y8 = $5921
y9 = $6348
y10 = $6805
y11 = $7295
etc
Over the life of owning the property, inflation has turned a negative cashflow into a positive one.

But wait there's more!

When the property was purchased, it cost 3.142 times annual income of the purchaser.

Now after 10 years, it will only cost 1.571 times annual income of the purchaser to pay off the loan (if I wanted to).
No "real" (as in after ajusting for inflation) appreciation in the value of the property was necessary for this to become a good purchase. All it had to do was rise by the rate of inflation.

I'll even make the statement that most property, over the longer term has had most of it's appreciation due to inflation.
Yes there are areas and times when the the growth accelerates due to changes in economics/demographics/price of petrol/lifestyle aspirations/etc/etc.

Let's look at the situation of the same property with 0% inflation for the 10 years.
Income is still $14,000 pa
Rents are still $70 pw
House value is still $44,000

So Acey, do you see no difference in owing 100% of the value of the house and only owing 50% of the value of the house??

Do you see no difference in having $70 pw in income to pay off a $44,000 loan, and $140 pw in income to pay off a $44,000 loan (yes I know to expect higher interest rates with inflation)???

Do you no difference in having a personal income of $14,000 pa to service a $44,000 loan, and a personal income of $28,000 pa to service a $44,000 loan???

For the investor, there has been a real rate of return. There is now $44,000 that appeared from nothing, BECAUSE of inflation. Without inflation there was a zero rate of return.

Inflation is the friend of the leveraged property investor, and if an investor had locked in low interest rates, then they would be laughing.
Inflation erodes the value of savings, but the reverse of savings are borrowings, and it has the reverse effect on them.

Trying to bring this back to Georges thread, the relevance to an average property in an average suburb, without the factors that would lead to an increase in value above the rate of inflation, means it would be a drain on cash for a long time while inflation remains low.

bye

P.S.
Acey......
"Consider your scenario killed Bill! (Part 3)"
Is that really necessary??

 

[demoman]

Hi everyone,

I've just read the last three posts ( Bill & Acey ) and understand both arguments and can see both sides but find now that I'm a little confused in the aftermath.

Could some other experienced members submit there views on this topic, preferably without starting an all in brawl, to help alleviate the confusion I'm encountering. ( perhaps there's just too many numbers, after all Maths isn't my strong point )

Cheers

Jared

 

[TJamesX]

Maybe I’m wrong, but it seems as if Acey and Bill are getting some wires crossed;

Acey is simply stating that any asset returning an inflation rate of growth is actually going nowhere because your purchasing power decreases over time (and after tax you’re actually going backwards)

Bill is saying property does well in an inflationary environment because the price of the property and rent tend to increase with inflation.

If you take a no leverage situation of 100k property;

If it grows inline with inflation, then in terms of capital growth you are going nowhere. But if you include rent in the equation as well, then obviously your total return on the 100k is then greater than inflation (CG + income). Also the rent would tend to increase at the same rate of inflation – thus keeping a buffer for total return on your assets going forward. In this sense property protects your assets against inflation, as with the above assumptions you will always be returning greater than inflation on you funds. Ofcourse tax, leverage and interest rates complicate everything as to what is worthwhile doing. But in a general sense it demonstrates how property ‘can’ be a safe asset in inflationary times, as long as you’re assuming rent and CG keep up with inflation.

 

[Bargain Hunter]

Bill & Acey,

It's refreshing to see that the tax department doesn't believe in muddying up the waters with the future value analysis you are both employing. The historic value is the key for the tax department to collect CGT.

 

[handyandy]

Well I have a HECS debt as i only finished uni several years ago and this as well as the second highest tax bracket i find myself paying over 50% tax. Theo only positive of this property is that it is so negativly geared that it returned me 11k tax return. 5.5k of which went to hecs. Do you think it would be better to fill in the relevant tax forms and have witholding tax paid everyfortnight or just wait for the end of financial year???

Tim,

Im glad that your first investment was a dud and you now have 12 rental properties. I dont feel as bad now...

Thanks

Hi George

From the qoute of 11k tax return I assume that you received that and if so then you have also lost an additional 11k at 47% + medicare levy.

So from this we can say that you will loose 11k per year for each year you hold the property.

In my experience rents rise very, very, very slowly. Thus if you are to hold until the next boom which may be 7+ years off then you will have lost 77k on the property with very little capital gain and/or rental increases.

On this basis selling now and carrying a 15k loss is a small price to pay. You can save up the 77k and be in a position to buy prior to the next boom entering the market with a substatial cash stake. (if no distractions)

But in year 8 and 9, potentially, you will get massive capital gain doubling your values.

So is it worth being in the market, being in touch with the market to ensure that you have not taken your attention off the RE market and are ready to move when the ground swell of a boom is happening or are you going to be busy with other aspects of your live that will distract you from the RE market as you have no current interest (until everybody starts talking about it at which time it is too late)

In the end the decision is yours but if you decide to hold then please hold through the next boom don't be like most investors and rush to sell as soon as the market moves up 10%, as finally they can sell for the same money they paid.

Cheers

Andreas

 

[tigerGT]

Hi Andreas,

This is true, I am currently looking at changing agents as well. I have taken it off the market and am considering putting it back on for sale this spring. I will let everyone know how it goes. I will probably go exclusive with one agent and also bargain down the percentage for the sale costs. Never settle with the first offer as I have found they always reduce this. I have brought it down to 2.2% including GST in the past.

I was offered 2% by the real estate agent next door.

Fingers crossed. I know some people have advised to hold but im in a position in my life were I dont want to be held down. I would rather bail now re invest in a better cash flow property. There is no way I would buy a property with 3.1% yield as i have now....

Unfortunatly in this market, wanting to sell is very different from selling. Its been on the market for a year now. I settled on 365k however this fell through and i ended up with a small percentage of the 365k.

I then refused several 350k offers however I wish i hadnt....

We shall see what happens... There is a house across the road (high side) advertising for 395k and another house on the same side for sale for 349k. This house isnt fully renovated like mine though...

Lets hope spring is the turn around season for me....

I have some cash available for another purchase however I will be doing my homework beforehand this time........

thanks again people

 

[see_change]

Lets hope spring is the turn around season for me....

Spring can be over rated. While it brings new buyers it can also bring lots of new houses on the market as well.......

See Change

 

[see_change]

So is it worth being in the market, being in touch with the market to ensure that you have not taken your attention off the RE market and are ready to move when the ground swell of a boom is happening or are you going to be busy with other aspects of your live that will distract you from the RE market as you have no current interest (until everybody starts talking about it at which time it is too late)


Andreas

Andreas

I'm not convinced that it helps . I wonder whether seeing your property constantly going down just reinforces your opinion that you can't make money on property investing.

There are two experienced investors on the forum that I can think of who sold up in Logan and Ipswich just before the market took off in the current cycle. One because he had been sick of holding it for no gain for many years and could finally get his money back ( Gee , I wonder who that was...) and the other bought at the very bottom of the market at her traditionally bargain basement deals. She did very nicely and is probably very happy with what she got, but if she'd held for a couple more year she would have come close to quadroooupling her money....

From my experience in the last cycle, if you knew what to look for , it was easy to pick when the market was taking off.

See Change

 

[demoman]

Maybe I’m wrong, but it seems as if Acey and Bill are getting some wires crossed;

Acey is simply stating that any asset returning an inflation rate of growth is actually going nowhere because your purchasing power decreases over time (and after tax you’re actually going backwards)

Bill is saying property does well in an inflationary environment because the price of the property and rent tend to increase with inflation.

If you take a no leverage situation of 100k property;

If it grows inline with inflation, then in terms of capital growth you are going nowhere. But if you include rent in the equation as well, then obviously your total return on the 100k is then greater than inflation (CG + income). Also the rent would tend to increase at the same rate of inflation – thus keeping a buffer for total return on your assets going forward. In this sense property protects your assets against inflation, as with the above assumptions you will always be returning greater than inflation on you funds. Ofcourse tax, leverage and interest rates complicate everything as to what is worthwhile doing. But in a general sense it demonstrates how property ‘can’ be a safe asset in inflationary times, as long as you’re assuming rent and CG keep up with inflation.

Thanks TJamesX,

The fog has lifted.

Cheers

Jared

 

[topcropper]

This has been a great thread and learning experience.

I especially like handyandys comments.

See ya's.

 

[Bill.L]

Hi all,

TjamesX, I don't think the wires are crossed.

The value of inflation to the investor lies exclusively in the borrowings.

If you buy the property with cash in year 1, then whether inflation is 0 or 10% will make no difference to how well off you are.

The difference (by using borrowings) is because you can pay back the loan (that has stayed static in either scenario) by using deflated dollars.(dollars that are worth less than they were 10 years earlier).

I hope I have not muddied the waters for you.

bye

 

[handyandy]

Hi See change

I am suggesting being in the market angle as a possibility now that George has a property but he also has to understand what it means to then hold it for all that time.

As far as loosing money on property when did that happen? I am a long term holder of property I do not look at the valuation on a day to day basis. As you are aware if you buy at the right price, the market will move up and even if it doesn't then the positive cash flow means it doesn't matter because your making money anyway.

The example you touch on is exactly what I meant by peolpe holding for a long time and then selling prematurely. I feel that the main reason in both cases would have been the long time that they held in an area that was depressed and at the same tie saw other areas close to home gaining massively. Because of the depressed nature of the area they did not feel that the area would boom in the same way and sold to take oppurtunities elsewhere. In the second case I would have drawn down the equity rather than sold but then I am just a long term holder and that fits my strategy.

Cheers

Andreas

 

[asy]

BOys...

Play nicely please...

I don't have time to have a full read now, but will do so when I get home.

If you can't play nicely, I"ll come through with scissors and the lock.

asy

 

[keithj]

This is where I mention the classic line about not arguing with idiots

Asy & the other mods, I apologise in advance for this post.

AC, some of us gave up arguing with you a long time ago

KJ

 

[Bill.L]

Hi all,

Acey thanks for the flame.

Now, could you please explain your position of how inflation is not any good for the purchaser of property with borrowed funds.

If my assumption that you can pay off a loan that has stayed the same size, with deflated dollars is incorrect, please explain where, using an example.

bye

 

[duncan_m]

The value of inflation to the investor lies exclusively in the borrowings.

I completely agree Bill.. Inflation is a good friend when you've borrowed funds to purchase real assets.

 

[RichardC]

I completely agree Bill.. Inflation is a good friend when you've borrowed funds to purchase real assets.(my emphasis)

Dunc has hit the nail on the head. Inflation is great for the borrower and it stinks for those who are self funded. And it really doesn't matter why you borrow as long as you invest wisely. RE (especially PPOR) is just the most obvious investment vehicle.

Nor does it matter if your PPOR increases above inflation rate if a rising tide is floating all boats, as has just happened. You still own "just a house".

Hardly earth-shattering stuff and I can't imagine what you're argueing about.

 

[thefirstbruce]

Man what a thread. Trying to judge the relative merits of CG and inflation is too difficult to do without providing modelling, especially in George's case, who happens to be badly negatively geared.

When I modelled his numbers, I used IRR at 30 years to compare various mixes of inflation and capital gain. I come to these conclusions:

Inflation:
- diminishes inflation adjusted equity more as inflation rate rises, leaving eroded "real" capital gains.

- improves cash flows due to erosion of the value of interest repayments relative to rental income, thus improving IRR.


At the end of the day, a high rate of negative gearing in a time of low cg and low inflation is a bad investment. You don't have the benefit of inflation to erode interest repayments, nor cg to improve inflation adjusted equity.

My modelling showed the highest IRR occurs when inflation and cg are both high. However, remember that is for George's badly geared property. Results are attached. I would be interested to see models from others, especially if you have PIA or something similiar.

As for the scenario when you are not leveraged, well, let's leave that for another thread. That really requires modelling of opportunity costs as unused equity is Steve Navra's 'lazy dollars'.

P.S. these figures are the best I can do currently. Obviously, factoring in interest rate correlation with cpi would be sound. Though one can always lock in rates.

Secondly, I haven't confirmed calculations have accomodated inflation correctly..... i.e. equity in IRR calcs.

Anyway, I think it better we evolve modelling this stuff objectively with real figures rather than waste time with misunderstandings...

 

[Les]

Man,
This thread is going stratosheric!!!

Inflation:
- diminishes inflation adjusted equity over time, leaving poor "real" capital gains.

But what if the gains (in de-valued dollars) allow re-investing in more assets? And, again, the mortgage on the new IP remains fixed, while inflation increases.... leading to IP #3, then #4, then ..... For an input of "someone elses dollars", plus a bit of interest, and a chunk of time, you could end up with 10 IP's that are only worth what 10 IP's were worth in 1960 (in real terms) - BUT you have TEN IP's !!!!! (What did you start out with????)

To me, it's all a bit like that snowball that, when you finally get it rolling, just keeps rolling, getting bigger....

Yeah, I know, I'm a bit of a conservative old b.... You can possibly do much better in 100 other different ways - but, in the end, YOU gotta do what YOU think is right for YOUR situation.

All the various thoughts here are great - hopefully, one of them (or more) will appeal to YOU!!!

Love the thread - thanks to all for the varying input,

Regards,

 

[thefirstbruce]

Man,
This thread is going stratosheric!!!

But what if the gains (in de-valued dollars) allow re-investing in more assets? And, again, the mortgage on the new IP remains fixed, while inflation increases.... leading to IP #3, then #4, then ..... For an input of "someone elses dollars", plus a bit of interest, and a chunk of time, you could end up with 10 IP's that are only worth what 10 IP's were worth in 1960 (in real terms) - BUT you have TEN IP's !!!!! (What did you start out with????)

To me, it's all a bit like that snowball that, when you finally get it rolling, just keeps rolling, getting bigger....

Yeah, I know, I'm a bit of a conservative old b.... You can possibly do much better in 100 other different ways - but, in the end, YOU gotta do what YOU think is right for YOUR situation.

All the various thoughts here are great - hopefully, one of them (or more) will appeal to YOU!!!

Love the thread - thanks to all for the varying input,

Regards,

Hi Les

How about some modelling when you get a chance. You must have a copy of PIA!!!!
It would be a really good thing to come to terms with. I think we are all a little fuzzy on how inflation and capital gains and interest rates and negative gearing relate, with different gross rents, and before and after tax.

WOuld be good to start building a resource page in association with the site (a PI faqs) to address these complicated issues. Would be an excellent educational resource. There are enough brains on the forum to do something definitive, and it would be better to build something objective than argue. At the end of the day, I can see Bill's and AD's side. But I think it takes modelling to work out in which case either would be strongest.

Re your comment about cash flows and/or equity being used to buy more, I agree. I haven't allowed in my statements for what one does with extra cash flow. I used a IO loan. Nor did I factor in that unrealized capital gains aren't taxed (unlike positive cash flows). Working these things out is always more complicated than at first they seem. But it is possible. And worth doing. At this point, I am trying to look very fundamentally at things so they don't get confused in my own head . I am finding it helps to consider cash flows and equity serparately when understanding primary effects of inflation.