Best of all your friend can sleep well at night, even if the sky falls.
As he builds up his nest egg, he may get more confidence and look at other investments outside of houses. And then he can become what is a true "sophisticated investor".
The next 10 years: Prediction of the market
- Thread starter TMNT
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Best of all your friend can sleep well at night, even if the sky falls.
As he builds up his nest egg, he may get more confidence and look at other investments outside of houses. And then he can become what is a true "sophisticated investor".
$150k in todays dollars
A good debate going on here. I'm in a similar position as Trey, on the same project, same age and income (only have 100k in the bank atm) and also living at home but my PPOR is currently being built. I don't pay any board (Portuguese background) but I will be sure to help my parents out if they need it.
I think Trey is on the right track compared to others up here our age that have nothing to show for it. I honestly mean nothing not even a flash car, their pay gets **** against the wall on their 9 days off. Once this project and the others are over in 3 or so years time it's not looking good there's not much on the horizon so I'm here like Trey to digest as much as I can to make use of this great opportunity to really get set up.
I think Trey is on the right track compared to others up here our age that have nothing to show for it. I honestly mean nothing not even a flash car, their pay gets **** against the wall on their 9 days off. Once this project and the others are over in 3 or so years time it's not looking good there's not much on the horizon so I'm here like Trey to digest as much as I can to make use of this great opportunity to really get set up.
It suits the purpose; he is happy, allows hims to recuperate during his off time from the rig, and allows him to enjoy his favourite hobby (surf), and at the same time doesn't eat too much into his cash reserve.
Well done Trey for not being influenced and trying to keep up with the Jones.
Keep your eye on the goal. Stay Strong
Welcome to the forum Miggy. Stick around & learn. There's a lot of good stuff on here. Just don't listen to the trolls that come along every so often.
Only strategies for reaching top 1% of australians would suffice. Trey cant visit though as china has no furniture. Perhaps they can communicate via his CCTV?
Hi AJ14,
The point of that post was just to show the tax effectiveness of property investing relative to cash in the bank. I didn't even factor leverage into it whereby you could increase that return by borrowing money at 4.7%.
But, in respect to your question, I'll answer as below. Hope this helps...
I assumed 12 months in all cases, i.e. annual returns. You'll be lucky to get 3% for cash in the bank at the moment with banks lending it out for mid 4's.
I didn't include transaction costs as these are a one off and apportioned over the life of the investment, not just the initial 12 month purchase period. They amount to nothing in the long term.
Based on just matching inflation. Long term, capital growth has been shown to match wage growth which actually beats inflation. But I used a conservative long term assumption so it would be irrefutable. My properties did 15% last year in Sydney and were cash flow neutral. My leveraged IRR was actually over 300% on cash down for the year. [$100K cash in, $1.8M loans, capital growth $300K, net cash flow after depreciation $50K, equity $1.2M]
Gross yield. I'm actually only getting 4.2% on my properties after the capital growth last year, but 4.5% gross is readily achievable in most areas. Mine are top end so yield lower. I am comparing apples with apples as I calculated the Net yield after tax down to 3% and added that to the 3% capital growth to show 6% IRR for the $300K fully paid off IP model I outlined.
Ummmmm, yes? 300% better infact. And conservative at 6%. As I said, I achieved 350% last year on my $100K cash investment. But even so, I'd take 6% over 2% any day.
Hope that helps...
Cheers,
Michael
*not sophisticated, just old with scars from previous investments and the learnings that came with them* <- see my sig.
The point of that post was just to show the tax effectiveness of property investing relative to cash in the bank. I didn't even factor leverage into it whereby you could increase that return by borrowing money at 4.7%.
But, in respect to your question, I'll answer as below. Hope this helps...
I assumed 12 months in all cases, i.e. annual returns. You'll be lucky to get 3% for cash in the bank at the moment with banks lending it out for mid 4's.
I didn't include transaction costs as these are a one off and apportioned over the life of the investment, not just the initial 12 month purchase period. They amount to nothing in the long term.
Based on just matching inflation. Long term, capital growth has been shown to match wage growth which actually beats inflation. But I used a conservative long term assumption so it would be irrefutable. My properties did 15% last year in Sydney and were cash flow neutral. My leveraged IRR was actually over 300% on cash down for the year. [$100K cash in, $1.8M loans, capital growth $300K, net cash flow after depreciation $50K, equity $1.2M]
Gross yield. I'm actually only getting 4.2% on my properties after the capital growth last year, but 4.5% gross is readily achievable in most areas. Mine are top end so yield lower. I am comparing apples with apples as I calculated the Net yield after tax down to 3% and added that to the 3% capital growth to show 6% IRR for the $300K fully paid off IP model I outlined.
Ummmmm, yes? 300% better infact. And conservative at 6%. As I said, I achieved 350% last year on my $100K cash investment. But even so, I'd take 6% over 2% any day.
Hope that helps...
Cheers,
Michael
*not sophisticated, just old with scars from previous investments and the learnings that came with them* <- see my sig.
To calculate the yield correctly you must compare apples with apples.
1. Yeild on 5 year term deposit with Bankwest is 4.5% p.a
2. Property investment return must be net yeild to compare apples with apples a the term deposit would be 4.5% p.a net. To do this you must calculate the net entry/exit costs.[/QUOTE]
Hi AJ14,
Sorry, with all due respect, you're off the mark. Investing is a long term game and long term averages is what you should use unless you aim to be a flipper / market timer. Your talk about staglation etc is all moot. Long term, property is a hard asset and will track inflation. If it didn't it would in fact be falling in real prices. Sometimes it beats inflation, when investors favour property over other assets, and sometimes it lags inflation when the opposite occurs. But over the long term it is a hard asset and tracks inflation and has been shown using statistical mean reversion to more accurately track wage growth due to our disposable income allocation preferences. Again, unless you're a market timer / speculator then its moot. Investors invest through the cycle.
Even if you were to assume 4.5% return on cash, that's still only 3% after tax compared with the conservative average 6% after tax I showed for property. It may not be 300%, just 200% better, but that 6% is also conservative. You can add 1% to that net return from negative gearing / non-cash deductions such as depreciation as I've also modelled previously...
So you might be wondering how people can invest in property when mortgage interest rates are at 8% or above and still make a return? Well that's where cash in and leverage and IRR calculations come in. Assuming you put that $300K towards a $600K property and borrowed the other half, your total net return would still be 6% on the $600K, but you'd be paying interest at 8% on only $300K. That reduces your net return to 2% in my simple numbers but in truth your depreciation is double and your likely capital gain is higher if interest rates are that high. So adding leverage ads complexity I was trying to avoid to keep it simple. But if you're at 2% plus the 2% from negative gearing / depreciation gets you to 4%. And that 4% return is on a $600K asset so is actually 8% on your $300K cash in. Sorry, complexity I was trying to avoid...
All good mate,
Michael
Sorry, with all due respect, you're off the mark. Investing is a long term game and long term averages is what you should use unless you aim to be a flipper / market timer. Your talk about staglation etc is all moot. Long term, property is a hard asset and will track inflation. If it didn't it would in fact be falling in real prices. Sometimes it beats inflation, when investors favour property over other assets, and sometimes it lags inflation when the opposite occurs. But over the long term it is a hard asset and tracks inflation and has been shown using statistical mean reversion to more accurately track wage growth due to our disposable income allocation preferences. Again, unless you're a market timer / speculator then its moot. Investors invest through the cycle.
Even if you were to assume 4.5% return on cash, that's still only 3% after tax compared with the conservative average 6% after tax I showed for property. It may not be 300%, just 200% better, but that 6% is also conservative. You can add 1% to that net return from negative gearing / non-cash deductions such as depreciation as I've also modelled previously...
So you might be wondering how people can invest in property when mortgage interest rates are at 8% or above and still make a return? Well that's where cash in and leverage and IRR calculations come in. Assuming you put that $300K towards a $600K property and borrowed the other half, your total net return would still be 6% on the $600K, but you'd be paying interest at 8% on only $300K. That reduces your net return to 2% in my simple numbers but in truth your depreciation is double and your likely capital gain is higher if interest rates are that high. So adding leverage ads complexity I was trying to avoid to keep it simple. But if you're at 2% plus the 2% from negative gearing / depreciation gets you to 4%. And that 4% return is on a $600K asset so is actually 8% on your $300K cash in. Sorry, complexity I was trying to avoid...
All good mate,
Michael
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If I only had 300k I'd be pretty stressed
Some of the wisest words re general property investing I have read on this site Michael.
It is also worth remembering the costs of owning property, I was always advised to factor in 1.5% maintenance costs, then there are your rates and taxes, plus of course your "round trip costs", the cost of getting in and out, EA fees, lawyers etc.
Many people when totting up their presumed gains on selling a property never factor in the improvement costs, just paid 250K, sold 5 yrs later for 400k, forget the cost of the deck or new kitchen.
Just think for a moment how many millions if not billions are spent in Australia every year at Bunnings, or kitchen shops, or paid to electricians, painters and plumbers, or in garden centers! That is all borne by property owners, and hence part of the hidden cost that is often ignored.
Property is generally a good hedge against inflation, and forces one to save where you might not normally.
If you're looking at gross rental yields of 4.5% against borrowing costs of around 5%, then that suggests to me that it's fully priced.
Knock off management costs (Trey is off surfing and working, so that would be a necessity), maintenance, and voids between tenants, and the net yield might be 2.5%.
OK, you've got tax benefits, but with the government making noises about reforming negative gearing they might be curtailed. And I suspect that interest rates might rise sooner rather than later, which will put downward pressure on the property market.
If Trey is interested in capital preservation, and retaining liquidity for the right opportunity, then cash isn't a bad place to be. But I'd split it up across a couple of institutions, due to the $250K limit on the deposit guarantee scheme.
Knock off management costs (Trey is off surfing and working, so that would be a necessity), maintenance, and voids between tenants, and the net yield might be 2.5%.
OK, you've got tax benefits, but with the government making noises about reforming negative gearing they might be curtailed. And I suspect that interest rates might rise sooner rather than later, which will put downward pressure on the property market.
If Trey is interested in capital preservation, and retaining liquidity for the right opportunity, then cash isn't a bad place to be. But I'd split it up across a couple of institutions, due to the $250K limit on the deposit guarantee scheme.
Firstly, you're in the UK, so what would you know about the Aussie Market? Secondly, Micheal has a high end property in a nice area, near the city. Not all properties are the same & while a 4.5% yield might be good for the property in question, 4.5% is not indicative of the whole of the country, so there is no way to make any real comparisons until a specific property is analysed.
Hi Guys,
Humbly, thank you Mr Crumbpacker...
The message I was trying to convey was quite simple really. I buy the trend line, not the curve. And the combination of leverage and tax effectiveness makes property a superior investment option over other asset classes including cash.
A lot of new investors only look out 2-3 years and all they see is the grey clouds on the horizon and the cliff ahead. If there's a strong case of potential mean reversion then maybe "timing" your entry warrants that consideration, otherwise now is as good as any time. Unfortunately, there is so much noise in the real estate asset class that its hard to sort the wheat from the chaff. Every commentator out there will have their own chart to justify their predictions. Picking the right one is a difficult prospect, particularly for new investors.
I personally like property prices over disposable income per household. Note that was "disposable income" not "total income" as this is determined not only by wage growth or household makeup but by the cost of other fixed expenses. We have more disposable income than we've ever had and this is what is driving property price appreciation. As a consumer group we allocate any disposable income we have to improving our life through purchasing that better house. Unfortunately, we do this on mass and only manage to bid up the price of properties.
Ross Gittins did this great article on it years ago if anyone is interested in understanding real estate as an investment asset and what drives property price appreciation.
So, unless property pricing to average disposable income per household has blown off the charts, timing is not your problem. Confidence likely is...
Cheers,
Michael
Humbly, thank you Mr Crumbpacker...
The message I was trying to convey was quite simple really. I buy the trend line, not the curve. And the combination of leverage and tax effectiveness makes property a superior investment option over other asset classes including cash.
A lot of new investors only look out 2-3 years and all they see is the grey clouds on the horizon and the cliff ahead. If there's a strong case of potential mean reversion then maybe "timing" your entry warrants that consideration, otherwise now is as good as any time. Unfortunately, there is so much noise in the real estate asset class that its hard to sort the wheat from the chaff. Every commentator out there will have their own chart to justify their predictions. Picking the right one is a difficult prospect, particularly for new investors.
I personally like property prices over disposable income per household. Note that was "disposable income" not "total income" as this is determined not only by wage growth or household makeup but by the cost of other fixed expenses. We have more disposable income than we've ever had and this is what is driving property price appreciation. As a consumer group we allocate any disposable income we have to improving our life through purchasing that better house. Unfortunately, we do this on mass and only manage to bid up the price of properties.
Ross Gittins did this great article on it years ago if anyone is interested in understanding real estate as an investment asset and what drives property price appreciation.
Ross Gittins said:
So, unless property pricing to average disposable income per household has blown off the charts, timing is not your problem. Confidence likely is...
Cheers,
Michael
cheers for all the posts and advice fellas its all being noted. All i know is theres a SW groundswell 6-8ft hitting Uluwatu for the next week. And im flying out of sydney to bali at 9am in the morning. talk to ya s in week!!!!
i was at the temple for the high swell - the waves were HUUUGE - massive LH barrels and really fast, short rights.
waves are pumping!! surfed padang padang really good yesterday and the sarvo is on again aswell!!
