The end game

[OKFFW]

I've been hearing a lot of "pay down your non-deductible debt" in my search for investing information. Seems like a good idea to me but after reading this thread I'm now thinking I need to investigate the numbers a bit more.

First question that came to mind though is how would having a debt on your PPOR effect your borrowing ability? Wouldn't the banks be less inclined to lend you more money if you still owe a bunch on your PPOR?

 

[geoffw]

There's a time to leverage and a time to service debt. Now is the time to service debt I feel. The market isnt going anywhere fast in the next 5 years at least so what's the hurry to go on a debt binge now?

I felt similarly- except that as house prices were not going to go any further, I went into business instead.

In 2004.

 

[sash]

Graemsay.....the real thing most people miss is cash on cash gain.

For example...I like have a 100% cash on cash gain within 2 year. This has happened in 85% of my properties.

By cash on cash...I mean what I put into the property (deposit, LMI, establishment costs, etc.) plus the neg gearing amount.

For example I bought a property for 263k in May 2010...it is now worth 350k and rents for $365pw. The costs (round numbers) were:
1.Deposit $13,500
2.Dep Rpt/Legals/Est costs $2000
3. LMI $5500
4. Reno $6,000
5. Neg gearing loss (post tax) $2,500x2 years = 5k
6. Stamp duty $8000

So the the total CF bleed is 40k

SO on a base rate of 303k (add in costs)...I have returned 47k on the 40k investment. This is approximately....117% return on capital.

Let me know if you can do this safely anywhere else?

I'm in agreement with China here (though not on the nubile blondes thing ).

If inflation is low and the economy is growing by 3% or 4% a year, then a decent return for an investment is probably on the order or 6% or 7%. This is about the same as the interest rate on a mortgage, but repayments aren't taxed so you'd need maybe a 10% return on an investment to come out ahead.

Anyone who can consistently get that should be sending their CV to City and Wall Street institutions. Most professional fund managers fail to generate these sorts of returns, particularly over a long period.

I know that people have done very well with investments, for example Kristine's Mission Brown Wonder, Hobo-Jo's pot of gold, and various mining shares. But did the entire portfolio show these levels of growth?

It's all very well focusing on the positive and inspirational, but knowing how to make something consistently repeatable is much more interesting.

 

[ok180]

I felt similarly- except that as house prices were not going to go any further, I went into business instead.

In 2004.

Ive read your replies in the business threads but do you think it was a better option than property investing in the pastv 8 years?

 

[joeExpat]

So the the total CF bleed is 40k

SO on a base rate of 303k (add in costs)...I have returned 47k on the 40k investment. This is approximately....117% return on capital.

Let me know if you can do this safely anywhere else?

A successful investment but hardly "safe", it was a highly leveraged and speculative bet. High risk, but that's what you have to take to get that sort of return. Only a 10% drop in prices would have wiped out your capital & left you with a debt.

It's a bit scary how many Australians might have taken these sort of bets (wearing a loss on a massively leveraged investment hoping for capital gain). When the worm turns it could get very ugly.

 

[HotRod]

A lot of these issues can be solved with CF+ IPs.

Rather get cash in hand (after expenses/interest/tax) each and every month than taking an almighty bet that the market will be up in 5/10/15 years.

 

[willair]

A lot of these issues can be solved with CF+ IPs.

Rather get cash in hand (after expenses/interest/tax) each and every month than taking an almighty bet that the market will be up in 5/10/15 years.

A lot of people invest for the future and some get it right while other end up you know where..
http://www.asx.com.au/asx/markets/optionPrices.do?by=underlyingCode&underlyingCode=CBA

 

[sashatheman]

Hi China

At what age do you assume the average aussie purchases a PPoR?

Let’s say at age 25 you take the plunge and purchase a PPoR via a P&I loan for $150k over 25 years, at 6.50 % this is obviously a basic example sans deposit, FHOG, yada yada, also for the example, assume this rate stays the same over this period

If you make the required minimum monthly payments and pay in nothing extra, when you make your last repayment, not only will you have paid back $150k of principal, but also about $153.5k of interest as well

You are now 50 years old

Your PPoR maybe worth about $800-900k now, but so are all of your neighbours

Whats the next step?

That's assuming you are paying the minimum. What if your intention is to pay it off as quickly as possible. I believe depending on the mortgage size you can do it under 10 years.
So the next step would be to sink all the extra free money into aggressively acquiring as many IP as possible.

I will say, us personally are taking a somewhere in between course. We are paying off the mortgage by slowly reducing it, but plan to purchase investment properties in between.

In other words we are NOT keeping the spare funds buffer at the miminum while sinking the rest into IPs, rather we are slowly increasing the funds in the offset account. I understand that we may upgrade the PPOR at some point increasing the loan size again, however the deposit would be large enough to keep repayments decent.

 

[Rixter]

Graemsay.....the real thing most people miss is cash on cash gain.

For example...I like have a 100% cash on cash gain within 2 year. This has happened in 85% of my properties.

By cash on cash...I mean what I put into the property (deposit, LMI, establishment costs, etc.) plus the neg gearing amount.

For example I bought a property for 263k in May 2010...it is now worth 350k and rents for $365pw. The costs (round numbers) were:
1.Deposit $13,500
2.Dep Rpt/Legals/Est costs $2000
3. LMI $5500
4. Reno $6,000
5. Neg gearing loss (post tax) $2,500x2 years = 5k
6. Stamp duty $8000

So the the total CF bleed is 40k

SO on a base rate of 303k (add in costs)...I have returned 47k on the 40k investment. This is approximately....117% return on capital.

Let me know if you can do this safely anywhere else?

The question needs to be asked though - was any of that 40k bleed leveraged funds or was all cash used?

 

[ok180]

A lot of these issues can be solved with CF+ IPs.

Until rates go up and your + cash flow is history. Sometimes debt has to be serviced.

 

[HotRod]

Until rates go up and your + cash flow is history. Sometimes debt has to be serviced.

I'd rather take my "chances" knowing full well what I'm getting from the get-go than trying to service the debt from day one hoping for a future payday.

 

[jacbmw]

A successful investment but hardly "safe", it was a highly leveraged and speculative bet. High risk, but that's what you have to take to get that sort of return. Only a 10% drop in prices would have wiped out your capital & left you with a debt.

It's a bit scary how many Australians might have taken these sort of bets (wearing a loss on a massively leveraged investment hoping for capital gain). When the worm turns it could get very ugly.

Knowing Sash, and deals of that type I would have to disagree. This is far from speculative and very easily repeatable.

Speculative implies what >50% changes of been in the Red. I would say with Sash's knowledge, understanding, DD, and negotiation skills there would be a <10% chance he would be in the red after 2 year period.

He would make alot of that return very soon after purchase through buying and selecting below market, negotiating hard and then cosmetic renovation to reduce risk.

Sash/Nathan - can I ask how many of these type deals have you done in last few years (though mass media classified doom times), and how many have been in the red after 2 years?

 

[china]

China,

If you wish to join the elite please read the book, "How to achieve Wealth for Life...through Property Investing!" by Tony Melvin & Ed Chan. I know I must be repeating myself here, I had mentioned this before but it is warranted.
There is a dedicated Chapter 7, "Myth 6ay off Your Home Loan as Soon as You Can" dedicated to what you are suggesting.
It really is an eye opener and a great lesson to learn. I realize it may be a generalized example but so simple to understand.

Not paying off any debt. So there's an example where:
1. They pay off the home AND after 30 years:
Result: $3.2 million in equity
2. They pay interest only on the home AND after 30 years:
Result: $2.9 million equity

Now most people would say to pay off the home but they go further because the next step is to use the amount saved on paying off the principal to help fund the shortfall on an investment property:

3. They pay interest only on home and IP and after 30 years:
Result: $6.4 million equity
The example shows that paying off your home loan can cost you millions in lost opportunity.

Their phrase is "The player focuses on increasing their asset base, not on reducing their debt".

This is just a simple long term strategy I think especially useful for our kids (people that have time to invest long term).

I strongly recommend for any novice investor to understand that principle. However, it's not for everyone, first one must understand, second one must feel comfortable with it and third one must act on it (not many people will, right?) I hope this helps!

The 6.4 mil achieved in example 3 is based on: 1. increasing capital value every year without fail over 30 years of both PPOR and IP

2. that we have a 30 year investment time frame
3. no crises in 30 years that requires us to pay less on repayments or possibly sell

A bird in hand is worth two in the bush.Pay off the PPOR quickly and then focus on IP.

 

[WillG]

A bird in hand is worth two in the bush.Pay off the PPOR quickly and then focus on IP.

China,
I reckon your advice is good for the average Aussie but limiting for somebody wishing to achieve financial independence in their 30's or 40's.

 

[sash]

Well borrowed via revalued properties which the bank valued about 15% under market.

In otherwards I borrowed off properties I bought in 2006-2008 which had grown about 80%-100%.

Whilst this strategy requires some skill...it is in the moderate risk category.

This is how I have built my portfolio and continue to do so.....yet to hit the serviceability wall at almost 18 properties (one under construction).

The other one was convincing a bank to accept 10% and no LMI. Long story that one....

The question needs to be asked though - was any of that 40k bleed leveraged funds or was all cash used?

 

[china]

China,
I reckon your advice is good for the average Aussie but limiting for somebody wishing to achieve financial independence in their 30's or 40's.

Absolutely correct but the "average" aussie refers to the majority be definition. Achieving fiancial independence in their 30s and 40s is not done by the "average" Aussie. This would mean taking great risk with investments or winning the lottery.

 

[sash]

jacbmw

In the last 2 years.....I have only done 4 (2010 thru 2012). All them have had at least 90% cash on cash. The best one was probably about 200%.

2009 was not as successful as the 2 Qld ones have returned 50% and 25% cash on cash up till now. Still better than the bank I guess. One also in 2009 in Albury which has about 50% also.

None are in red ...touch wood.

Knowing Sash, and deals of that type I would have to disagree. This is far from speculative and very easily repeatable.

Speculative implies what >50% changes of been in the Red. I would say with Sash's knowledge, understanding, DD, and negotiation skills there would be a <10% chance he would be in the red after 2 year period.

He would make alot of that return very soon after purchase through buying and selecting below market, negotiating hard and then cosmetic renovation to reduce risk.

Sash/Nathan - can I ask how many of these type deals have you done in last few years (though mass media classified doom times), and how many have been in the red after 2 years?

 

[china]

Well borrowed via revalued properties which the bank valued about 15% under market.

In otherwards I borrowed off properties I bought in 2006-2008 which had grown about 80%-100%.

Whilst this strategy requires some skill...it is in the moderate risk category.

This is how I have built my portfolio and continue to do so.....yet to hit the serviceability wall at almost 18 properties (one under construction).

The other one was convincing a bank to accept 10% and no LMI. Long story that one....

Many people would have lost money on properties bought in 2008. The average joe would hit serviceability issues after one or two purchases.

 

[sash]

I am an average joe.....as a matter fact a very lazy one at that.

...must admit...I like haggling with banks and playing games with them.

Many people would have lost money on properties bought in 2008. The average joe would hit serviceability issues after one or two purchases.

 

[Rixter]

So its not cash on cash gain then because you didn't inject any of your own money in..it was OPM. (borrowed funds) injected. So it becomes your IRR.

Well borrowed via revalued properties which the bank valued about 15% under market.