Tempting to sell....but

[steveadl]

Spot on Tracey. I'm always weary when people listen too intently too general sweeping statements of entire macro markets and base micro decisions on that. It's important to be aware of the bigger picture and circumstances, absolutely, but that doesn't mean we need to sit on our hands or sell out.

If a good deal presents itself and the figures work out well for you, why pass it up because of a predicted wider economic bump in the road? On the hope you may possibly get it cheaper if you wait 2yrs? Sorry that's not for me, but hey - each to their own.

 

[s_t]

Yes Steve, but one can get a bit cocky and take it too far. The longer one continues with a massive rate of growth, the more likely it is for something negative and unforeseen to happen and bring it all crashing down. It is easy to see in hindsight, when one went 'too far'. And easy to say what you said, before it happens

I'm not saying that is likely to happen in Daz's case, but it is something to keep in mind. He has indicated that he is now going to stop and digest what he currently has.

In this current situation it is more about whether to take advantage of an unusual 'open chequebook', and in doing so reduce the risk that he's gone 'too far'. I certainly can't determine that risk, not knowing him or his investments particularly well (and probably not even if I did)!

hmmmm if Daz had listened to that advice in 2006 he wouldn't have bought this deal that could yield him millions in profit in less than a year. There's always plenty of general advice out there on the wider markets that doesn't apply to individual deals, food for thought....

 

[s_t]

Yes, I agree, but I think there is more to it than just that. I think that a very high rate of growth of a portfolio continued over an extended period time would have to increase the risks - regardless of how good the individual items in the portfolio are. The higher the rate of growth, and the longer the time over which this growth occurs, the higher the risk.

Yes, and this is one aspect where we "small fry" actually have an advantage over the Buffetts and Packers. We only buy individual properties, and the performance of "the market" isn't as relevant to us; the only thing that's relevant is how our investment performs. If you hold a very diverse, large portfolio, you're going to perform pretty much the same as "the market", whereas we small fry have the opportunity to out-perform it. Of course we can also perform worse

Of course I'm not saying that the market is irrelevant, I'm saying that it's only relevant to the extent that it has implications for your particular investment(s). It seems to me that a lot of investors - particularly beginners and economists - spend too much time and energy trying to optimally appreciate and forecast "the big picture", and not enough time and energy applying the critical thinking to ask "what are the implications for my investment plans?"

This can easily lead to analysis paralysis - waiting for "ideal market conditions", instead of just grabbing good investments when they present themselves.

 

[steveadl]

Yes Steve, but one can get a bit cocky and take it too far. The longer one continues with a massive rate of growth, the more likely it is for something negative and unforeseen to happen and bring it all crashing down. It is easy to see in hindsight, when one went 'too far'. And easy to say what you said, before it happens

I'm not saying that is likely to happen in Daz's case, but it is something to keep in mind. He has indicated that he is now going to stop and digest what he currently has.

In this current situation it is more about whether to take advantage of an unusual 'open chequebook', and in doing so reduce the risk that he's gone 'too far'. I certainly can't determine that risk, not knowing him or his investments particularly well (and probably not even if I did)!

Absolutely ST, which is why I always say it depends on the figures of the individual deals. If it's heavily negatively geared for example you need to be sure of what you're doing and why.

I'm currently in the same boat as Daz, just pulling off my biggest purchase to date and don't plan on doing anything for a while now while I let it digest (obviously my meal was nowhere neat the size of Daz's ) - but I didn't let impending market collapses etc stop me from buying a property that will help me achieve my goals. But agreed, we are getting off topic, this thread is about the open chequebook issue.

 

[Ausprop]

there's been 5 pages of debate but I think it is simple... if you can sell somehting for way above market value then grab it and go buy something else. there is plenty of other property for sale.

 

[Dazz]

I think it is simple...

I disagree John.

It's not as simple as that, for you may be dumping a stellar future performer for a short term gain, the proceeds of which, you may be pouring into a future dud.

We have had quite a few offers on our properties over the years, some well above market.....but in 20/20 hindsight, it was definitely the right decision not to sell. Churning the portfolio over and over may involve alot of activity and give the appearance that you are making headway, but it does not necessarily follow that it is better than "sitting doing nothing".

Yes - there is a hell of a lot of property out there, but the absolutely exhaustive process that is needed to sort the wheat from the chaff is not something that I take on lightly.

There is a lot of property out there - that I grant you, but most of it is complete dross. Finding the crackers is the key....and doesn't rely on any macro events or circumstances.

 

[Ausprop]

Churning the portfolio over and over may involve alot of activity and give the appearance that you are making headway, but it does not necessarily follow that it is better than "sitting doing nothing".

i am guilty as charged there! mind you with resi dogs you are dammed if you, dammed if you dont

 

[GoAnna!]

I think that Keith makes a very important point.

Given that Keith is one of the very few on this forum to live off their investments with a sustainable plan I have a lot of time for what he has to say. My thoughts are not so much directed at Dazz as he knows more about his own situation than I ever could but rather the phases of investing as they effect us all.

I think on the way to our goal we are rewarded with the current behaviours:

Risk taking + high leveraging of finance + focus on property selection + focus on tenant selection + value adding + lowering personal expenses to maximise cashflow + hands on involvement. The focus is on accumulating and holding as much as possible. We have less to risk as our LVR is high and / or equity relatively low.

Once we reach our goals some of those behaviours need to change or we place our achivements at risk or cannot enjoy what we have accomplished.

We are rewarded for focusing on short to medium term cashflow + finance strategies + risk management + standing back and looking at the larger picture. We have much much more at risk. Our LVR is lower and our equity much higher. Savings would have minimal efect on our portfolio growth. We are finally able to enjoy the fruits of our labour.

Selling on the way up makes little sense unless it allows you to move forward and hold even more. At the top selling may put you in a far far stronger position and as Keith suggests may make the difference between maintaining your success or losing your success.

We are reaching / at that point and I can see that behaviours that have rewarded me thus far may now be my greatest weakness now. This shift is not easy though and at times I am unsure whether I am losing courage or gaining in wisdom

Because the only way to gain equity is to takes risks (often high risks as Dazz acknowledges). If you continue to take high risks then eventually it is LIKELY that the house of cards will crumble. The Packer example is one of those that didn't crumble - there are likely 99 nameless others whose pack did crumble. In the long term IP & Commercial IP are low risk investments, however in the medium term they can be high risk (enduring the flat/down part of the cycle). Dazz has riden the up bit of the cycle and has gained great equity. His bankers (who are older & have experienced more than one cycle, but don't have his risk tolerance or income) are suggesting that the down cycle exists and that things that are out of his control may possibly affect his asset valuations & cash flow. Sure lots of risks are managed - big bonds, rent reviews, lots of onerous exit/break clauses, fixed rates. But the macro risks are v. hard to mitigage against.

The exit strategy approach
Imagine you have 5 comm props worth $5M each with neutral c/f.
One CFO offers you $10M for one of them (and also pays your CGT) giving you $5M to invest @ 8% guaranteed, resulting in $400K income pa.
You keep the other 4 CIPs, if they grow - great, if c/f increases - great.
However, if a few things that are completely out of your control happen. EG one tenant goes broke, economy falters, unable to relet wbefore bond runs out, bank forecloses, resulting in forced sale in down market, the other 3 x-colled CIPs go down with it.

The absolute worst case scenario is $400K pa income & no other assets.
The absolute best case is $400K pa income & 4 CIPs growing with c/f.

The non-exit strategy approach
Keep the 5 CIPs - if the above worst case chain of events does occur ...

The absolute worst case scenario is this imaginary investor ends up with $0 & has to wait 10 years for the next upcycle.... this is infinitly worse than the first worst case scenario.
The best case scenario is 5 CIPs (instead of 4) growing with c/f. This is only 20% better than the first scenario.




That's why (IMO) an investor needs an exit strategy. The potential downside is a lot bigger than the potentially lost upside.


What's the risk of the 1st scenario - if it's only 5% then it's to much for me. The problem is that little of it is controllable. Sure, the leases can be tight, lots of lovely clauses forcing the tenant to do hard stuff, but if the tenant is busted, then it's impossible to force them to do anything. IMO that's gambling on things that are not within your control when there IS an opportunity to mitigate the risk. Risk mitigation is an important part of investing, in the early growth phase it takes back seat, at some stage it's should become more important. Dazz presumably hasn't reached that SANF level yet .

 

[NigelW]

Dazz

I won't presume to give you advice, but can I ask one question and make one suggestion?

• Has the CFO actually written down said number? (apologies if I've missed that in the thread). As I'm sure you don't need reminding, talk is cheap. Ask him for at least a written offer (details to be developed) so you know whether the conversation is worth continuing at all...no need to fret on a hypothethical.
• Why don't you sell at said ridiculous number on condition they give you a 5 year option to buy it back again at an agreed (hopefully modest) uplift from the sale price. (subject to the vagaries of WA stamp duty you may need to think about how this is structured...) That way you can eat your cake now but be able to get it back again too...Failing that, at least a right of first refusal...

Cheers
N.

 

[hobo-jo]

So, what did you do?

 

[Dazz]

I wrote to the CFO two weeks ago, stating my position.

I gave him a deadline 'til the end of August to either put up or shut up.

The "put up" part is to convert the quirky written down 2 liner in an email into a formal written unconditional offer to purchase.

The "shut up" part is a warning to stop bleating when I enforce my rights as a Landlord under the onerous Lease conditions.

He got the message.

I suppose new Tenant representatives just need a bit of training and a few harsh words to remind them where they reside on the pecking order. When they get promoted to a position of authority within their own organisation, sometimes they get a distorted view of their remit.

 

[landlubber]

I'm still betting this CFO is full of his "new pay cheque". I actually hope he makes Dazz a huge offer that is very, very tempting just to watch the blood pressure meter. But I'm betting a whole bottle of Dan Murphy's clean skin Shiraz Cabernet ( that's a whole $5.95 folks) that no offer is forthcoming.
...ever the big spender..
LL

 

[Twitch]

Dazz, my dumb question is that if the property is x-coll'ed with others, can you be sure the bank will allow you to get your hands on any of the purchase money?

 

[Dazz]

I'm betting that no offer is forthcoming.

Indeed - that was confirmed less than 3 days ago.

The board utterly rejected my most generous T&C's

....so, it's situation as normal. They remain as tenants and I sit in the background as some boring ol' passive rent collector.

Complete waste of time all round really.

 

[landlubber]

Take a cup of hot cocoa, go to bed early ...and re-read repeatedly your rent review clause. You'll feel better in the morning !
LL

 

[Piston Broke]

My bet is that they will take any chance to "put the boot in" if & when the occasion presents itself.
Nobody likes bullyboy tactics, and they have much less to lose...

 

[Dazz]

Very emotive PNB, but your comments bear no resemblence to fact.

Legally and contractually, I don't know what "put the boot in" or "bullyboy" actually means.

There are only rights and obligations. Enforcing LL rights and ensuring Tenants abide and carry out their obligations is what I do, and am authorised to do, and they've already agreed to it all....so i fail to see what you are hinting at.

Perhaps we are coming at it from different perspectives and see the same situation in a different light.