Tempting to sell....but

An open question to anyone...if selling and reducing debt meant huge positive cashflows for you, BUT, having to pay the highest marginal tax rate on that income...would you still sell?
 
JIT, i think most of us here invest to provide financial independence, if i can sell and obtain a desired positive cashflow and still have moderate (i.e more than inflation) CG then why not? Tax is an offset of earning income, which at the end of the day is the goal.
 
An open question to anyone...if selling and reducing debt meant huge positive cashflows for you, BUT, having to pay the highest marginal tax rate on that income...would you still sell?

Based on that info only - yes. Would rather be paying tax than claiming losses.
 
An open question to anyone...if selling and reducing debt meant huge positive cashflows for you, BUT, having to pay the highest marginal tax rate on that income...would you still sell?

Very hard to imagine someone paying that much above market to make it worth while swapping out and back in again... but going with the hypothetical nature of the question - there is a price that would make it worthwhile! :cool:
 
Hi, Dazz.

I think Kerry Packer famously replied, in response to your sig question about how much is enough, "Just a little bit more".

If it were me, I'd politely inform the tenant that I don't want to sell thank you very much.

If they are really interested, they will come back more seriously another day.

Regards,
 
I think we'll keep feeding it via the job for a wee bit longer, then switch to feeding it via excessive rents from other props later on, allowing me to ditch the job. Current breakeven capital appreciation rate is 0.9%, so if we get 1% p.a. growths or higher we're in front.

I just did some calculations on the nett rents expected in future years....the Lease is pegged at 3% p.a. increases until the end of 2011.....not good. We'll still be chipping in significant sums for most folks even then.

They have a 3 year option available to them thereafter, but we get to impose a market review on them....where we hope to double the rent at the time. That will be our "back the truck up" moment.

In the immortal words of that turgid TV show - "No deal".
 
I think we'll keep feeding it via the job for a wee bit longer, then switch to feeding it via excessive rents from other props later on, allowing me to ditch the job............. We'll still be chipping in significant sums for most folks even then.

But you are not "most folks" and with "excessive rents from other properties", it sounds like you will be able to hold it.

Tell 'em to go whistle.
 
In the immortal words of that turgid TV show - "No deal".
So when will you sell ?

If you say 'NEVER' or 'NOT YET'.... then you continue to run the risk of the house of cards falling over if a couple of tenants go broke and you fail to relet quickly. The economic cycle has turned - major businesses are falling over - eg ASX listed General Property Trust has just plummetted to below 20 year lows. Commercial property is likely to be a high risk business to be in for the next 5 years - unlisted commercial property yields may rise by 100% within a couple of years (because values MAY fall by 50%). Much ASX listed property already has. Have a look at a chart of LPTs over the last 5 or 20 yrs. LPTs are often a leading indicator of unlisted commercial property. At this time in the cycle cash is king.

You've said previously that -
  • the bank OKed your borrowings recently - what would it take for them NOT to OK them at next years review ?
  • they won't lend you any more - do you think you'd be able to pick up bargains if you had a big wodge of cash this time next year.... and do you think you'd be frustrated if you came across bargains but couldn't act because no-one would lend ?

What would make you say 'Yes' ? The CFO offering you double what it's worth ? The CFO offering enough to put into cash @ 8% & have a 100% guaranteed income for life (remembering you have other assets to give you more CG & income than many would ever dream of) ? How much more perfect does the current perfect scenario have to be ?

The unimaginable has already happened the listed property trusts - falls of almost 50% across the board back to pre 2000 levels, and in GPTs case back to 1980's value. GPT was a $10B+ cpy at the end of 2007.

One worst case scenario....
A couple of blocks away some dodgy tenant goes broke, the landlord (who has held for 20 yrs) is strapped for cash so sells at a profit on his purchase price (so he's happy), but 50% below it's most recent valuation. The value of the whole block gets dragged down. Next year your bank reviews your borrowings - sees falling valuations in your postcode - perceives negative equity.... wants a top up of the loan :eek:. Sure you've got great tenant, solid lease, neutral c/f, but it's things out of your control that the banks valuer is infuenced by.


When do you intend to start derisking your portfolio ? The gambler says - just one more throw of the dice..... and eventually they get unlucky.....

What IS your exit strategy ? 'Just a little bit more' is a losers answer.
Remember that your mentors suffer from survivor bias - find someone who held on for one rental review to many because they wanted 'Just a little bit more' and ask them what they wished they had done with hindsight.

Obviously you know your assets, structure, lenders and risks intimately - I don't. Have a look at the big picture & imagine the worst that could happen & how you'd feel if you failed to look a gift horse in the mouth...... :) . I'm sure in the long term everything will be fine - however surviving the short term is the issue some will be having over the next couple of years.
 
So when will you sell ?

When he's old enough to make it more ''tax-effective'' and can't swallow the risk anymore?

When he's answered that silly but tough question on his sig.? :p

When do you intend to start derisking your portfolio ? The gambler says - just one more throw of the dice..... and eventually they get unlucky.....

The gambler stops when they've well and truly had enough...ie. when they're broke! :eek:
 
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Thanks Keith,

For me, it’s fairly easy to reply, cos I get notes like this all the time from my Bankers and other property professionals. All of ‘em have way more knowledge than me on macro-markets, lastest comings and goings, latest trends on rates and fluctations, what’s happening on the wider scene and who’s failing and who’s going OK.

I let most of it just wash on through, as although these guys have an enormous amount of insider knowledge, they are all still bashing away at the Bank on ± 150K p.a. and will be long after I am retired. They are all 10 to 15 years older than both the wife and I and so by their age alone they demand a certain amount of respect.

All I can say Keith is that I know my little patch(es) of dirt fairly well, and feel confident with the tenant’s selected, along with the bond structures in place, it gives us a little bit more breathing space to handle a crisis than otherwise we might. Having the land component of most of our properties being well above what the loan amount is also helps…..the value of the property is always going to be worth something, even as a vacant block….and if that figure is higher than the bank’s loan amount, we’d be fairly confident – no guarantees offered – that we’ll get along just fine.

Everything seems to be dictated by cashflows and how they compare with the immediate loan payments and outgoings burden. That’s what you are judged on at the time. If you make the payments, the heat is off for another month. I suppose our aim is to have the ability to survive in a downturn just that little bit longer than our competition.

Do we wish to de-risk the portfolio – no way, by design I have chosen an investing path that is very risky indeed…and then obsessively managed those risks to the best of my abilities whilst maintaining exposure to that high risk environment for the commensurate high returns that have been and continue to flow through to us. I have no wish to stop that process at this stage.

In terms of the “house of cards”….in a serious analysis I wouldn’t describe it to being even close to a house of cards. Powerhouse tin boxes flinging off heaps of free cashflow and growing in capital value, each holding their own and contributing to consolidated revenues is not something that I’d describe as a house of cards. We’ve never missed a mortgage payment in 15 years of investing, with many mortgages paid up at least 12 months in advance. Despite the high risk nature of what we invest in – we sleep remarkably well at night.

We have no intention of “picking up any more bargains” in the foreseeable future. We have happily plateaued just now, and intend on letting the portfolio go on auto-pilot next year. Cash may be king, but we’ve never needed a lot of it, I’m quite content to just plod along like a giant turtle. The little rabbits can scurry about chasing the ups and downs of the market, but I’ll be around long after they are all dead and buried.

I’m not a gambler – never have been and never will be. If you ask some of my industrial tenants if I gamble on things, they’d probably say I’m one of the more conservative types in this fish pond.

I’m happy to look at the big picture and imagine the very worst that can happen….I need to do this every year to entertain the whims of the fly by night Bankers who see risk and downside in everything I do. Unfortunately, sensible planning and investing decisions rarely come from this exercise. You might shelter yourself from some big downturn, but you might also preclude yourself from a magnificent upside that will propel yourself to the next level. If that type of strategy was employed over the years, the wife and I would probably only have 2 or 3 houses, fully paid off and waiting for disaster to strike. No thank you. That doesn’t interest us.

Finally – what’s my exit strategy ?? This is always a cracker and one that the Bankers always hit me up with. It’s very new age and very hip to enunciate what your exit strategy is….and if you don’t have one, apparently that makes you an amateur, someone who hasn’t fully thought through all the options. I never play ball with stuff like that. It frustrates the bejesus out of them. I guess, hanging around elderly folk and gleaning little golden nuggets off them regarding what they did in the past, I am heartened by stories like ol’ Jack who bought the family farm for 120 quid back in 1924. He also didn’t have an exit strategy, but it’s worth 1.2M now so it doesn’t really matter. Or maybe Sir Frank Packer who bought the family residence in Sydney for 7,500 quid back in 1937. It’s now worth probably upwards of 50M and the family still owns it. I wonder what his exit strategy was ?? Does it matter now ??

No, I plan on controlling my portfolio for the next 70 years of my life, and then after I pop my clogs, will continue to control it via the Testamentary trust we have set up. She’s not a zip in, zip out, zip in type of operation.
 
Finally – what’s my exit strategy ??
And "planning to end up filthy rich, but failing that I'll be going down in a blaze of glory" doesn't cut the mustard as a response? :D ;) If not, I'd better work on coming up with a better answer...
 
Finally – what’s my exit strategy ?? This is always a cracker and one that the Bankers always hit me up with. It’s very new age and very hip to enunciate what your exit strategy is….and if you don’t have one, apparently that makes you an amateur, someone who hasn’t fully thought through all the options. I never play ball with stuff like that.
.....
No, I plan on controlling my portfolio for the next 70 years of my life, and then after I pop my clogs, will continue to control it via the Testamentary trust we have set up.

Agreed, Dazz!!! We, too, are going to let the trustees worry about it 80 years after we've popped off our perches and the TT needs to vest! In the meantime, they'll have a very long list of instructions .....

Exit strategy? What exit strategy??? Or, more to the point, WHY an exit strategy?

Cheers
LynnH
 
WHY an exit strategy?
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 :).
 
No worries keith, because (as per another thread) Dazz has FINALLY seen the light and is offloading his commercial stuff and buying a couple of nice townhouses which he is planning to rent to down on their luck recovering druggies, single mothers and bikies :p:D .
 
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Exit strategy? What exit strategy??? Or, more to the point, WHY an exit strategy?

keithj

The last line of my post was meant to be a bit tongue-in-cheek - along the lines of an ad on TV up here for RACQ Insurance where a boat owner has run into another boat and his wife is taking the mickey out of him, running around the back yard with a towel over her head and her arms outstretched yelling, "Boat? Boat? What boat?" Oh where is a 'tongue-in-cheek' icon when one needs one the most??? :confused:

Apologies, keith, for my warped sense of humour - irredeemable, unfortunately, as I'm 'too old' to be re-programmed! :D

Cheers,
LynnH
 
The problem is that little of it is controllable.

It's all relative isn't it?

Looking at other direct CIP investments, eg. via unlisted public trusts or private syndicates...there's even less control here isn't there?

Or in any listed investment for that matter, eg. LPT's?

How much 'control' do you have as a retail sharemarket investor?

I appreciate you do have the upside of more immediate liquidity with listed investments though...not that you can control the price of course.

I guess in this instance, Dazz is being offered 'immediate liquidity' on a platter, in a comparatively illiquid investment, and at a (?) opportune time...?
 
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Couldn't be bothered reading the whole thread.
In a word 'SELL' cash up and look for other opportunities or not.
I was advised late in 2006 that the smart money was cashing out of both equity and property markets and going into cash and just waiting on the sidelines for this current ill wind that is blowing across the globe.
It seems you have the same opportunity to do the same.
Cash out and wait for for those opportunities to materialise.
You have enough other comm property to carry you through.
A good cash position would be a good hedge.

SELL, cash up, be patient for the inevitable opportunities that will come along, and soon I reckon.

kp
 
Couldn't be bothered reading the whole thread.
In a word 'SELL' cash up and look for other opportunities or not.
I was advised late in 2006 that the smart money was cashing out of both equity and property markets and going into cash and just waiting on the sidelines for this current ill wind that is blowing across the globe.

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....
 
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....
Yes, and this is one aspect where we "small fry" actually have an advantage over the Buffetts and Packers. :cool: 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 :eek:

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.
 
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