Surviving the soft depression
- Thread starter nonrecourse
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Yes, a will is missing for me.
And considering wife owns 85% of all our investments I should get it fixed as presently should she die, the first $100k goes to me and then 50/50 with daughter and me.
As a three year old she will not spend it now but as an eightenn year old with a slacker boyfriend
Get will, on the the do list.
Peter
And considering wife owns 85% of all our investments I should get it fixed as presently should she die, the first $100k goes to me and then 50/50 with daughter and me.
As a three year old she will not spend it now but as an eightenn year old with a slacker boyfriend
Get will, on the the do list.
Peter
Hi Sunfish
I don't disagree with much of what you say but shouldn't yields be included in returns on the borrowed funds whatever the funds are in.
"And you misquoted me. I did not say: anyone with less than 5% pa CG is losing money. What I said was : that you are losing money on any and all borrowed funds. I deliberately made that statement hoping someone would take up the challenge and prove me wrong."
Regards
Peter
I don't disagree with much of what you say but shouldn't yields be included in returns on the borrowed funds whatever the funds are in.
"And you misquoted me. I did not say: anyone with less than 5% pa CG is losing money. What I said was : that you are losing money on any and all borrowed funds. I deliberately made that statement hoping someone would take up the challenge and prove me wrong."
Regards
Peter
That's where I am not mainstream here. I think of yield on your equity and yield on the borrowed moneys. If yield is 3% net that will add to the 5% p/a capital appreciation and get you neutral on "normal" interest rates. This is not an exact science of course. I drift off when someone says they are getting 10-15% return on a property they bought some time ago. Those cap gains have already been booked, they are yours and they are already realisable (if they can't be realised, they are not real). If you are only getting 2% cap gains then you are giving back some of your profit. Note: I do not take the attitude that I'm there for the long haul. There is always a bull market somewhere and if it isn't in property, go find it.
If I'm going to borrow a couple of mil for RE speculation I want a profit on that money. Of course you can swallow a loss if there is cap gains in the short term but they are not assured in this climate.
Sunfish
Tomorrow I buy a $100,000 asset, loan 100% @ 8%,net yield 3% cg %5.
To me that is neutral, plus the yield has been realised.
Same asset same loan, 10% net yield, no cg.
Also neutral plus yield has been realised.
All I'm saying is net yields have to be included.
Note: I just look for a trend that can be traded up or down
Peter
I will try to reduce the tension with those who are decidedly bearish about IPs and just take the debate by referring to a third party quote.
Is any borrowing for IP at an operating loss if the CG is not 5% or more?
Based on last year full tax data for the same IP example I used in the previous email, my loss net after non cash expenses is 4.4% of total borrowings, ie all borrowings and zero own money (equity increase and refinance). Hence, disproving proposition that up to 5% CG is required to offset loss of 4.4% on borrowings in the IP investment.
I think we should keep in perspectives that the IP example I gave was based on 100 % loan (equity increase and refinance).
Hence, any CG is leveraged profit and this in a declining IR environment makes it very sweet and on top of it, median price in the suburb has increased 11.9% (API databank to August 2008, API Dec 2008), gross rental yield 4.6%. Median price $470k and median advertised rent $415 per week, compared with my new rent of $420 per week commencing next month.
So, profit from equity increase after break-even CG of 4.4% (= 11.9 - 4.4 = 7.5%. or $32.8k (imputed from $470k).
Going forward, IR will drop and low range IP values will be supported at least for a number of months. If I can lock in my loan repayments at sub 6% IR for 5-7 years, I think I can live with that! My IP will be maintained with a program of selective refurbishment to justify an ever increasing rental rate (if possible
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It's 4am and I assure I haven't been on the red, but reading Turk and Francesco's replies I can't see where you are saying anything different than I did.
Turk's
And Francesco says
I will admit I had trouble understanding your post. But I will only read any reply if you desist from such statements as this
Turk's
is exactly what I said but I'm not sure what is meant by the bit I bolded. The $8k interest has been paid every month so that has been realised. The $3k yield has gone back into your account so has also been realised. At the end of the year your $5k loss has been offset by a cap gain so you have a neutral investment. (Not quite, there is opportunity cost on your expenses, but that's OK). I have no interest in doing million dollar financial deals if I just hope to break even. Some have scoffed at the stories of a property crash by saying "What property crash? There was only a 1.5% fall last qtr". There is a mile of difference between a 5% pa gain and a 1.5% pqtr loss.
And Francesco says
If expenses are 4.4% (I did say it wasn't an exact science) and you book 11.9% appreciation, of course you make a profit. But that doesn't prove you can make a profit with just 4.4% appreciation.
I will admit I had trouble understanding your post. But I will only read any reply if you desist from such statements as this
They are unhelpful, especially from someone who objects to being called a Pollyanna.
This can be a confusing term.
To me, an "operating loss" is when after all expenses have been included (including loans), the business (or property) has a negative cashflow. Some people look at that figure as a before tax figure, which I believe is not being realistic. I look at it as an after tax figure.
Operating loss - more money going out than going in.
The value of that business is what it is worth if it was sold, and is not part of the operating expenses/cashflows until it is sold. It's value is not listed on the profit/loss statement - it's listed on the balance sheet - assets and liabilities.
You can have a property that goes nowhere in terms of cap gain, but returns a pos income, or operating profit every week. Many companies on the stock exchange have very low value today, but they're operating at a profit.
If you are intending to gain an operating profit out of it from the sale of the asset as well as the weekly cashflows, then you would need to include its cap gain % into the figures.
For me, as a cashflow investor, the value of the asset is really only important from the point of view of LVR and ongoing acquisitions from it's equity, and how much cashflow it can return to me.
It's great to be able to say you are "worth" $X, but that's not much use if you are going broke on a weekly basis from an operating (cashflow) loss.
In my world, the term "operating loss" is only relevant to the cashflows and return on investment after tax.
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A good post Bay View. You may be closer to my way of thinking than I realised. Does that worry you?
This sounds fair enough to me. If you are doing the calcs to see if you will enter into a deal then your own tax situation must be taken into account. Trouble is, on the forum we all have different tax rates and for privacy reasons posters don't divulge any detail about this so I think for general discussions on the forum tax should be ignored and it is up to the individual to make the necessary adjustments. I, personally, have never made "tax advantageous" investments. I know of a couple here who rue having made them in the past.
Sunfish; [B said:
Sunfish
Whether you read or not read my post, or not reply, does not matter to me as long as you do not single me out to call me names. It's not polite. I have not singled you out to call you names.
If you feel compelled to defend the honour of all those whom I vaguely termed 'decidedly bearish' then you are welcome as long as it does not descend to calling individual names. I don't think it is in any way scurrilous for me to call the position of my unnamed logical proponents 'decidedly bearish' as that is the opposite logical position to what my analysis seems to support - 'somewhat bullish'.
In the past I along with many other forumites referred to a genre of postings as D&G, ie gloomy and pessimistic. It was never directed at a person by name as what you did by singling me and associating me with a term (Pollyanna) that is used to imply someone as naive, lacking in experience, unrealistic and generally young, or worse. I am neither young (a senior by age), nor inexperienced (2 careers and pensionable), nor unlearned (3 degrees including post-graduate), nor lacking in financial achievement as I have achieved retirement.
There is a big difference between my reference to a school of thought (or category) and your direct reference to me in an unfair term (put yourself in my shoes).
Having explained above, I mean no malice. It would be presumptuous and inflexible of me to think that I am right all the time as the paths of investments never run smoothly. Peace.
It is as you say, operating loss = net of expenses, negative assessable income. CG in my example that was shown to offset the operating loss was obviously estimated based on the available median data in the suburb. It was shown as a plausible outcome, not an actual outcome unless sold, but potentially accessible through refinance.
A good post Bay View. You may be closer to my way of thinking than I realised. Does that worry you?
This sounds fair enough to me. If you are doing the calcs to see if you will enter into a deal then your own tax situation must be taken into account. Trouble is, on the forum we all have different tax rates and for privacy reasons posters don't divulge any detail about this so I think for general discussions on the forum tax should be ignored and it is up to the individual to make the necessary adjustments. I, personally, have never made "tax advantageous" investments. I know of a couple here who rue having made them in the past.
SF,
I've always thought you and I were similar - at least in age!!
Maybe you are a tad more bear than me?We make all our investment decisions in this order;
1. Cashflow.
2. Cap gain.
3. Add value (see no.2)
4. Tax advantages (see no.1)
The investment must have all 4 though.
I do factor no.4 onto my cashflows, but as it is generally an unknown quantity when you begin, I try to always under-estimate the figure, and if the numbers still work after this, then we are a go, Huston.
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If it (the cap gain) becomes accessible through refinance, then for me, there would need to be new income attached to that refinance to offset the new operating liabilities/expense of the new loan (debt) to justify the inclusion of that cap gain in the operating cashflows.
In other words; if I access that cap gain through refinance, it would be to use it for another asset with a rent/dividend/sales return.
I guess you could include it in a LOE situation, but you need to mindful that there is no "real" income supporting the LOE other than the projected cap gain, or the existing equity.
It's like a company financial controller saying "we have projected income of $x next year, because the projected cap gain in the company will be x% next year".
Hi BV
You can consider alternatively along the line of a rent/dividend in a LOC situation where there is 'real' income resulting from using the LOC that will result in positive taxable cashflow. This is not rhetorical given the declining IR environment, there is a real opportunity opening that will yield a margin of 2% passive income on my LOC, more depending on IR % drops.
My example of optimistic gain has not included the potential gains from this fortuitous environment of IR drop and LOC usage. (O Lord, please let me bag this opportunity!
)The thud sound you hear is the soft depression landing
It seems the word depression is now out of the bag see post below
http://money.ninemsn.com.au/article.aspx?id=684101
Time to reactivate the discussion on how you manage your properties in the soft depression
It seems the word depression is now out of the bag see post below
http://money.ninemsn.com.au/article.aspx?id=684101
Time to reactivate the discussion on how you manage your properties in the soft depression
A point well made BV and the difference between an investor and a speculator. It is the latter category who (quite understandably) have to cling to notions that this particular asset class is somehow immune to all and any challenges.
It is those punters that my many comments over the last year or so have been aimed at giving a reality check. I don't wish financial diificulties upon them, I just get sick and tired of taking properties into possession from borrowers who clearly drank the "property is different" cool-aid and could have avoided serious grief had they had a more realistic view of investing.
As an observation, they are also the delinquent borrowers most likely to blame someone else for their problems
I like property. Property remains my primary asset class by $ (all in the PPOR these days but owned freehold courtesy of disposing of others) but I don't "worry" about movement in perceived value because my long term financial future is not absolutely dependent on it increasing at an unsustainable rate over time.
Insurance companies in a depression
There is another thread in the property Market Economics that mentions funding issues with some of the insurance lenders. We are currently reviewing all our insurance policies and questioning the small print clauses. It has come to our attention that AMP is culling some of their brokers and with at least three of our building insurance policies they are now dealing with us directly.
I suspect as the financial melt down progresses we will see insurance companies doing what insurance companies do best...take your money and run. 12 years ago we had a fire at our business premises and then had two years of knock down drag out war with (not AMP) the assessors and then getting a pay out.
The statistics are that 80% of businesses that have a fire never reopen and we experienced why that was so. We discovered a cute little clause in our building insurance policy after the fire that stated if the business went under the insurer did not have to pay up the entire amount. In our case they left us hanging for two years. It was only the action of the ombudsman that brought the issue to a resolution.
I know times are tough but you must start to provision for the worst but putting aside some reserve funds preferrably in cash.
There is another thread in the property Market Economics that mentions funding issues with some of the insurance lenders. We are currently reviewing all our insurance policies and questioning the small print clauses. It has come to our attention that AMP is culling some of their brokers and with at least three of our building insurance policies they are now dealing with us directly.
I suspect as the financial melt down progresses we will see insurance companies doing what insurance companies do best...take your money and run. 12 years ago we had a fire at our business premises and then had two years of knock down drag out war with (not AMP) the assessors and then getting a pay out.
The statistics are that 80% of businesses that have a fire never reopen and we experienced why that was so. We discovered a cute little clause in our building insurance policy after the fire that stated if the business went under the insurer did not have to pay up the entire amount. In our case they left us hanging for two years. It was only the action of the ombudsman that brought the issue to a resolution.
I know times are tough but you must start to provision for the worst but putting aside some reserve funds preferrably in cash.
Why because some guy has said so. Mate you are sounding increasingly desperate to prove your point. Sorry buddy but i am so far quite happy with the opportunities that 2008 has thrown my way.
Some people regard a storm as a reason to hunker down and take cover, i prefer to lean how to dance in the rain.
Mmmm quite the opposite situation to my own personal situation when claiming on business insurance policies.
I had business interruption insurance when the Gas crisis happened in Victoria about 10yrs ago and received received a nice pay out.
I had business interruption insurance on another business when the global economic forum (whatever its official name) was in Melbourne, and when all the protestors resulted in police barackading off certain areas of the CBD. Again i got a nice pay out.
But then again i use a large professional insurance broker.
i plan to buy more properties.
as many as i can get my grubby, specufesting little hands on.
and i plan to ignore all fundamentals to the contrary.
blinkers on.
tally-ho! chaps.
as many as i can get my grubby, specufesting little hands on.
and i plan to ignore all fundamentals to the contrary.
blinkers on.
tally-ho! chaps.
