Stats: 74% of Property Investores Are Low-Med Income Earners

[hobo-jo]

How is that a troll?

I am not picking on property because I don't like property investors (which you seem to infer in every post about me). I am picking on the residential property asset class because I think there will be better buying opportunities in the years ahead.

I think a similar run up and eventual outflow of unsophisticated investors/late comers will cause a crash in the Gold and Silver markets once they've reached their bull market peak. Any bull market eventually becomes saturated with unsophisticated investors who will act like lemmings when the "risk free" asset starts to sour.

I would call 1 in 7 tax payers holding the same asset a saturated market. If you ever see Gold and Silver reach that level of take up then feel free to warn me of it's impending crash

"When it's obvious to the public, it's obviously wrong."

 

[oracle]

I think a similar run up and eventual outflow of unsophisticated investors/late comers will cause a crash in the Gold and Silver markets once they've reached their bull market peak. Any bull market eventually becomes saturated with unsophisticated investors who will act like lemmings when the "risk free" asset starts to sour.

I would call 1 in 7 tax payers holding the same asset a saturated market. If you ever see Gold and Silver reach that level of take up then feel free to warn me of it's impending crash

"When it's obvious to the public, it's obviously wrong."

You might be right Hobo...but the way I see it is if any or all of the above happens


1) QE3 and possibly more
2) Breakup of European Union
3) Prolonged ZIRP in US

Gold goes up ...not sure how much..but will go up.

If none of the above happens.

Gold stays flat and may be go down.

Finally,

1) If Fed decided to raise rates before 2014

Gold will have nowhere to go but down.

If I was holding any Gold assets I would be paying a very close attention to what US Fed does regarding their interest rates.

Cheers,
Oracle.

 

[hobo-jo]

Oracle, I would agree with that.

And to further add I think the events that surround Gold's rise may differ how the bull market ends.

For example:

1) QE3 and possibly more - I think further major QE from the US Fed and/or other central banks could result in the largest frenzy for precious metals and related stocks, creating a bubble not dislike that seen in the late 70s where Gold quintipled over the last 2 years of the bull market (and crashed following).

2) Breakup of European Union - Could see Gold rise substanitally with a huge demand for the physical metal as the related mining stocks get hammered with the rest of the market.

3) Prolonged ZIRP in US - May result in a more moderate end to the bull market with a slow climb in Gold to $2000-3000 over several years and price will see a slower melt following the peak as the US recovers and raises their rates following.


I think it's very unlikely the Fed will raise rates before 2014.

There are some statistics pointing to slight recovery in the US, but it's hard to separate the headlines from reality. For example last Friday the unemployment rate dropped, but this was predominantly due to a fall in the number of participants considered to be looking for work (rather than a substantial increase in the number of jobs created).

There is still a substantial overhang of unsold/underwater properties in the US, would hate to see the catastrophic result of interest rates being increased before those with mortgages and the federal government were ready to adjust to them.

US Debt stands at some $15.6 TRILLION. Every 1% increase in rates on that is an additional $156 BILLION that their government has to find in order to service the debt.

 

[HotRod]

With the amount of cash the US prints to keep their economy growing they keep on devaluing it. There has to be a point where the game will be up and they will default on their debt because they cant afford it or countries stop buying their bonds and dump the USD. This will lead to hyperinflation and no amount of interest rate rises will solved the problem, it will only make matters worse.

The US are in for a very rough ride that will bring to whole world along with it.

People just need to have their wealth in the right classes. Cash wont be king.

 

[oracle]

There has to be a point where the game will be up and they will default on their debt because they cant afford it

You cannot default on your debt when you have to repay debt in your own currency. Sure, you can devalue it (which will be good for the export industry, creating more jobs) but you cannot default!

Think about it...would you ever be worried about defaulting on your bank loans..if you had Australian dollar printing press in your garage??

Cheers,
Oracle.

 

[HotRod]

You can default on your debt when you don't payout on bonds. It's getting to that point.

 

[oracle]

You can default on your debt when you don't payout on bonds. It's getting to that point.

Even I know that...my point is what are the chances of that happening? Don't be fooled by all the political talks, debt ceiling etc etc.Bottom line is you cannot default when the currency in which you issued your debt and have to repay in, is the currency you have control to produce.

Cheers,
Oracle.

 

[BayView]

If I put $100 per week into an ING account, at the end of th year I still have $5200.

If my IP is costing me $100 per week, at the end of the year someone else has my $5200.

Who has the money?...The bank? I guess you could see it that way.

If you put $5200 only into the ING account, you are still paying your full quota of PAYE tax, plus tax on the interest on the ING savings, and erosion of the original capital due to inflation. Someone may like to work out the nett result on that.

Yes, you still have the capital, but same with the IP; you still have the IP after your $100 per week outlay.

If you put the $5200 into the IP, at the end of year 1 you may not see a lot of CG (you may also see a good amount), but it's a very small window of time for this caper. It's fair to say that property will double every 10 years approx (but let's say 5% per year on average so we don't exaggerate figures) In the meantime, you are getting some of the PAYE tax back each year. You wouldn't ordinarily get any of this back without the IP, so it is a real ROI.

My point in the earlier post relates to return on cash, or ROI only.

What's my investment (into the property)? $5200.

What did I get back for that investment? I would have paid $5200 in tax ordinarily, but I only had to pay $2600 due to my tax return. My $5200 investment has saved me $2600 - a 50% return. Let's call the tax return $1500 only; still a decent ROI.

Also the $100 per week goes into the wider picture of holding an asset - same as your $5200 in ING. It's still in the ING account or "asset", it's still in the property, so over the longer term you still win there too.

Your $100 per week is after all your holding costs including your P&I loan on the property, so as the property goes up in value, and your equity increases, you get that nice combo of CG, increased equity (nett worth) and the tax return; which if reinvested back into the property compounds the return.

 

[BayView]

Now, I'm all for looking at ways to reduce tax with non-cash costs, but to go out of our way and purposely lose money to reduce tax is just crazy talk.

I don't see it that way..

Say the accountant calls me and says "You are going to get a tax bill for $10k this year"...

Then, he says "But, if you buy an NG IP, you will only pay $5k in tax".

I don't do it....the $10k is gone forever.

If I do it, I save $5k (plus whatever else it saves each year after this). I also have an asset which will appreciate over time.

Another way to view it is as a forced savings plan like super, but with yer tax savings as an extra. All good.

To earn this amount nett, I would need to earn $7.5k gross (or maybe more) extra that year.

What's to decide?

You could argue the case for super and/or shares too, but we are on a property investing forum.

Now, let me say that I much prefer to have a pos cashflow anything, and pay my tax but try to minimise it, so I don't advocate going out to simply buy an IP to reduce your tax.

But, if that is all you have open to you to reducing tax (which is increasing your overall income/wealth) then it's better than a sharp stick put somewhere.

Some folk go out and buy a bigger car to reduce their tax...and the accountant tells them to. It seems great; nice car/lifestyle, but it's not better for your wealth creation than yer IP.

 

[hobo-jo]

Who has the money?...The bank? I guess you could see it that way.

If your property is negatively geared you are paying more for the interest on the loan than you are receiving in rent. So yes the bank has your $5200. There is no other way to see it.

If you put $5200 only into the ING account, you are still paying your full quota of PAYE tax, plus tax on the interest on the ING savings, and erosion of the original capital due to inflation. Someone may like to work out the nett result on that.

Assuming a 5% interest rate, 1/3 of that paid in tax and and the rest disappears to inflation then you've broken even in real terms. You have the same amount in real terms that you've saved (roughly).

If you put the $5200 into the IP, at the end of year 1 you may not see a lot of CG (you may also see a good amount)

You may also see it fall. But the scenario you originally proposed was one without capital gains/rent increases.

What's my investment (into the property)? $5200.
What did I get back for that investment? I would have paid $5200 in tax ordinarily, but I only had to pay $2600 due to my tax return. My $5200 investment has saved me $2600 - a 50% return.

The $2100 from your original post has suddenly turned into $2600?

Regardless your return is:

-$5200 (capital, paid to bank in interest)
+$2600 (tax return)
---------------
Net result: You lost $2600. A -50% return.

.

 

[Angel]

It still appears that some writers here think that EVERYONE who is negatively geared has done it for no other purpose other than to reduce their tax.

Sorry, but if someone is smart enough to find a property investors' mentoring forum such as this, then we are smart enough to know that it is always better to make money and pay the required tax on it than it is to deliberately lose money.

Sheesh, get over yourselves

 

[Fifth]

It still appears that some writers here think that EVERYONE who is negatively geared has done it for no other purpose other than to reduce their tax.

Sorry, but if someone is smart enough to find a property investors' mentoring forum such as this, then we are smart enough to know that it is always better to make money and pay the required tax on it than it is to deliberately lose money.

Sheesh, get over yourselves

Umm... I don't think anyone suggested that everyone who is negatively geared does it to avoid paying tax. Most do it for CG, that kind of goes without saying. I have, however, read several members on this forum claim that having too high a cashflow is bad because more tax is paid. Apparently not everyone is smart enough to know that making more money = good.

 

[hobo-jo]

+1 to Fifth's comment.

Sorry, but if someone is smart enough to find a property investors' mentoring forum such as this, then we are smart enough to know that it is always better to make money and pay the required tax on it than it is to deliberately lose money.

I wouldn't make such an assumption (that being able to signup on a forum instanlty results in understanding of math and tax), but that aside if everyone here understands the scenario proposed by BayView in his post on page 2 then why haven't there been more users posting to correct his inaccuracies?

Instead the forums resident anti-truth wordsmithing pitbull decided to turn the thread back on to me.

Angel, do you agree or disagree with the scenario that BV has proposed on page 2/above?

 

[Angel]

+1 to Fifth's comment.


Angel, do you agree or disagree with the scenario that BV has proposed on page 2/above?

Um, is this a trick question?

Basicly yes, I agree. But I come from a different demographic than many people here.

For those who are in the higher income levels, their idea of a savvy investment will be far removed from what Bayview's description of low-income earning "investors" are aspiring to.

I totally believe that dropping $100 a week into an IP for ten years has the potential to become far better than leaving it in the ING or adding it to the Stuper. OK, things can go wrong, that is the risk one takes. One has to weigh up whether they are prepared to take that gamble. And yes, it is a gamble that all will go to plan. For our family, the worst that could happen is that we would end up in the same state as if we had sqandered our spare cash and invested nothing.

Following that logic, have we thought what $300 a week for ten years can turn itself into? When our PPOR was paid off, there was the social or cultural expectation that we would sell it and buy a larger home. We could do that if we wanted to, but instead we chose to drop $300 a week into IPs.

 

[Angel]

+1 to Fifth's comment.

if everyone here understands the scenario proposed by BayView in his post on page 2 then why haven't there been more users posting to correct his inaccuracies?

What inaccuracies?

 

[agent007]

Other stats:
1 in 7 Australian taxpayers are a property investor.

I'll start by questioning the definition of "property investor". If it means (which I think it's the case here), that holding an investment property makes you a "property investor' then, I'm sorry but, I don't think that it is a right and fair definition and hence the problem/confusion. IMO, a property investor is different to a individual that holds a single residential rental property. Yes, I agree that such a property holder is a resi property investor for tax purposes but, nothing else
When you look closely to the numbers, you will find that only a minimum % have more than 5 investment properties. Again, IMO it is only after about 5 that the title of property investors starts to make sense.
So, what do you think?

 

[hobo-jo]

Um, is this a trick question?

Basicly yes, I agree. But I come from a different demographic than many people here.

I don't really understand what demographics have to do with the question...

What inaccuracies?

So just to confirm, you agree with BayView's conclusions in this scenario?

Even if someone owned a property for 3 years and saw no rent or cap growth increases in that time (this happened to us), their tax return alone would mean they have done better than if they simply stuck after-tax dollars in their ING account and did nothing, because the tax return is in addition to their loan repayments on the property.

As a rough example, say someone after all outgoings has to put $100 p/w of after tax income into their IP, and at the end of the year they get a tax return of $2100 (quite do-able), that is a return of 50% on that outlay. If they didn't have the IP, they'd be forking out the $5200 in tax anyway, with no relief (not including super contributions, salary sacrifice or salary insurance etc)

 

[HotRod]

Adding in stamp duty and agents fees you'd probably be about $30k worse off.

 

[BayView]

The $2100 from your original post has suddenly turned into $2600?

Type-o; was meant to be $2600 from the beginning (50% return on $5200)

Regardless your return is:

-$5200 (capital, paid to bank in interest)
+$2600 (tax return)

The $100p/w is what you personally invest into the acquisition of the asset (after all holding costs) - same as you would buying a weekly parcel of shares, or a super contribution, or a bank account, etc.

At the end of the day, $100 still comes out of your pocket to "buy" an asset.

The capital is still invested in the asset after the tax has been returned to you.

He hasn't lost the capital, unless the property goes down in value and he sells it for a loss.

Compare that to Joe Blog; renter earning $320k per year as low-skilled employee. Most Joe Blogs would spend all they earn, and put no money aside for anything. They get no tax deductions on anything, and fork out their whole component of tax.

But, Joe Blog no. 2 is a bit more motivated (has an IP) and receives back his $2600 in his tax return. His $100 is still going into the IP towards his continuing acquisition of it;

He is investing $100 each week into an asset - just like the Joe who buys his parcel of shares.

You may see it as a loss, because probably you mind still thinks in terms of the strategy of neg gearing being applied.

But the $100 is still invested, and the tax would have been $5200 instead of $2600, so the saved tax is money in Joe's pocket from his $100 per week investment.

He has, in effect; received $2600 because of his choice of investment vehicle and tax position from it.

It still boils down to 50% return on that $100 per week.

What is the return on that $100 if he re-invests that $2600 into the IP to reduce debt and save on interest?

 

[TomW]

It's fair to say that property will double every 10 years approx (but let's say 5% per year on average so we don't exaggerate figures)

What I thought I only had to wait seven years?