Un-leveraged Residential Property - A DUD Investment?
- Thread starter JIT
- Start date
Hubby is looking at retirement in about 3 years or so.
Current asset mix (approximate) is:
45% Property (around 64% LVR)
45% SMSF (invested in shares, MFs for o/seas exposure, and cash)
10% Direct shares/cash/other.
The SMSF is growing at a very healthy rate (due to salary sacrifice contributions), so we are looking at increasing both the property and direct shares portions over the next few years. The SMSF will more than adequately provide for our living expenses+ in retirement - the property and other assets are to provide the 'icing on the cake' (and I do like lots of icing on my cake!
)
Thanks, JIT and others who have gone to the trouble of responding. Your posts have certainly given me much to think about!
Current asset mix (approximate) is:
45% Property (around 64% LVR)
45% SMSF (invested in shares, MFs for o/seas exposure, and cash)
10% Direct shares/cash/other.
The SMSF is growing at a very healthy rate (due to salary sacrifice contributions), so we are looking at increasing both the property and direct shares portions over the next few years. The SMSF will more than adequately provide for our living expenses+ in retirement - the property and other assets are to provide the 'icing on the cake' (and I do like lots of icing on my cake!
)Thanks, JIT and others who have gone to the trouble of responding. Your posts have certainly given me much to think about!
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the property and other assets are to provide the 'icing on the cake' (and I do like lots of icing on my cake!
Exactly !!!
.....although.....looking at it from hubby's side.....as I often have a want to do....could he bring his retirement forward a year or two by swiping a layer or two of icing off your cake ??
Dazz
That would be just wonderful - trouble is, I'm going to have to drag him kicking and screaming into retirement!!! He hates all the politics and bullsh!t, but he has too much fun playing with his 'big boys toys' at work!!! But when your 'toy' is a Boeing 747-400, I guess you can hardly blame him .....
Cheers
LynnH
That would be just wonderful - trouble is, I'm going to have to drag him kicking and screaming into retirement!!! He hates all the politics and bullsh!t, but he has too much fun playing with his 'big boys toys' at work!!! But when your 'toy' is a Boeing 747-400, I guess you can hardly blame him .....
Cheers
LynnH
15 Steps to the Most Effective Strategic Use of Residential Property
If you're still following and interested, here are my general thoughts on the most effective strategic use of residential property as an investment vehicle/asset class for the residential property investor.
It's nothing particularly new, but just looking at it all from a slightly different perspective and sequence...
(1) To begin with, LVR on its own is not particularly relevant to residential property.
(2) The more important issue is an individual's serviceability.
(3) Reducing LVR by directly or indirectly paying down principal on investment property loans should not be a priority.
(4) Purchasing a property that is positively geared initially, whilst might be good, is very much secondary to the capital growth potential of the property itself.
(5) If a property is negatively geared initially, the main focus should be to make it approximately neutrally geared over time via increased rents, decreased loan interest rates, decreased property/maintenance expenses, or value-adding by renovation/development. Neutral gearing is based on the current rent of the property (- expenses) less the current interest on the original loan amount - and I use a before tax calculation.
(6) If a property is negatively geared initially, but becomes positively geared over time, whilst this might be good, it should not be the main focus of the investor holding residential property.
(7) So, the main objective should really be to get each individual property owned neutrally geared as described above...and prior to this of course, make sure you make an excellent selection that will ensure good prospects for future growh.
(8) Given the above then, the use of HDT's or DT's for holding residential property would be limited.
(9) You then have an investment, a residential property, that is leveraged to some degree (dependent on the present value of the property), continues to grow in value and create equity for you over time, and that is costing you effectively nothing to hold.
(10) This then acts as your source of funding (via the bank) at prevailing interest rates for other uses.
(11) If you are still requiring growth, then you use these funds to purchase more growth investments.
(12) If you will be requiring more income, then you use these funds to purchase more income producing investments, but you really should do this well before you actually need the income, and this requires a bit of planning and foresight...and IMHO, this is the biggest potential trap most residential property players will fall into.
(13) If you are approaching retirement or need cash for some other reason, all this borrowing may not sit well with you, and if so, you should consider selling one or more of these properties to realise gains, but do so in the most tax-effective manner possible.
(14) If you are appproaching retirement and you are happy to continue using borrowed funds you might even consider using these funds to pay for your living/lifestyle expenses.
(15) So, residential property is primarily a growth vehicle that generates equity for the investor which can be used in a number of different ways depending on an investor's present objectives...and the best strategic use of this investment vehicle should always keep this in mind.
...It's also quite possible that I'm delirious now and none of the above is particularly insightful or makes any sense!
Not sure yet, but I might put this on a new thread...
If you're still following and interested, here are my general thoughts on the most effective strategic use of residential property as an investment vehicle/asset class for the residential property investor.
It's nothing particularly new, but just looking at it all from a slightly different perspective and sequence...
(1) To begin with, LVR on its own is not particularly relevant to residential property.
(2) The more important issue is an individual's serviceability.
(3) Reducing LVR by directly or indirectly paying down principal on investment property loans should not be a priority.
(4) Purchasing a property that is positively geared initially, whilst might be good, is very much secondary to the capital growth potential of the property itself.
(5) If a property is negatively geared initially, the main focus should be to make it approximately neutrally geared over time via increased rents, decreased loan interest rates, decreased property/maintenance expenses, or value-adding by renovation/development. Neutral gearing is based on the current rent of the property (- expenses) less the current interest on the original loan amount - and I use a before tax calculation.
(6) If a property is negatively geared initially, but becomes positively geared over time, whilst this might be good, it should not be the main focus of the investor holding residential property.
(7) So, the main objective should really be to get each individual property owned neutrally geared as described above...and prior to this of course, make sure you make an excellent selection that will ensure good prospects for future growh.
(8) Given the above then, the use of HDT's or DT's for holding residential property would be limited.
(9) You then have an investment, a residential property, that is leveraged to some degree (dependent on the present value of the property), continues to grow in value and create equity for you over time, and that is costing you effectively nothing to hold.
(10) This then acts as your source of funding (via the bank) at prevailing interest rates for other uses.
(11) If you are still requiring growth, then you use these funds to purchase more growth investments.
(12) If you will be requiring more income, then you use these funds to purchase more income producing investments, but you really should do this well before you actually need the income, and this requires a bit of planning and foresight...and IMHO, this is the biggest potential trap most residential property players will fall into.
(13) If you are approaching retirement or need cash for some other reason, all this borrowing may not sit well with you, and if so, you should consider selling one or more of these properties to realise gains, but do so in the most tax-effective manner possible.
(14) If you are appproaching retirement and you are happy to continue using borrowed funds you might even consider using these funds to pay for your living/lifestyle expenses.
(15) So, residential property is primarily a growth vehicle that generates equity for the investor which can be used in a number of different ways depending on an investor's present objectives...and the best strategic use of this investment vehicle should always keep this in mind.
...It's also quite possible that I'm delirious now and none of the above is particularly insightful or makes any sense
!Not sure yet, but I might put this on a new thread...
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LOL. Yes, you'd need to be a movie star or similar to be able to have your own one of those to play with. Maybe he could get friendly with John Travolta?
My mix at the moment is pretty basic. I've only been in the game a couple of years or so, and have mostly been learning about shares & derivatives. I'm also moving into retirement, currently working part-time and looking to retire completely next year.
PPoR 29% (no mortgage)
Super 8%
Cash 62%
Shares 1%
The super percentage will grow a bit now, as I'm currently salary sacrificing all remaining salary to super. I'm stuck with the $50K limit this year, but turn 50 during the next financial year so can go up to $100K then. I also wanted to sal-sac all my long service leave (18 years worth) but have been told I can't do that.
My main focus for the near future is still shares, and probably some managed funds for exposure to overseas markets, but I'm almost right out of shares at this moment until I see where the markets are heading (6-12 months ago my shares percentage would have been much higher). Real estate is still a possibility, but I need more time to study the markets and devise a strategy that won't reduce my income too much.
GP
I really must do a portfolio update. Is it really 2 years already since I did one?
Time flies when you are having fun.
I really cannot see any value at all in not having property leveraged, after all it is one of the least risky of investments and thats the one the lenders prefer.
That in itself is what makes property a good (not a dud) investment, the low element of risk. Sure, the return may be poor, and growth might have slowed for a while but it is still the best asset you can have to use for leverage.
Other investments might carry greater growth atm, and even higher return but at what risk level, and could you use those for leverage to gain a bigger loan than with property? In most cases, probably not.
It is not just a question of property, but a balance of a portfolio overall. All you can do is believe in what you are doing and give it your best shot.
Time flies when you are having fun.
I really cannot see any value at all in not having property leveraged, after all it is one of the least risky of investments and thats the one the lenders prefer.
That in itself is what makes property a good (not a dud) investment, the low element of risk. Sure, the return may be poor, and growth might have slowed for a while but it is still the best asset you can have to use for leverage.
Other investments might carry greater growth atm, and even higher return but at what risk level, and could you use those for leverage to gain a bigger loan than with property? In most cases, probably not.
It is not just a question of property, but a balance of a portfolio overall. All you can do is believe in what you are doing and give it your best shot.
Great, an update would be very interesting to read!
Yep, someone clearly agrees with me at last - take the leverage out of residential property (eg. by reducing all loans against these properties to zero or a minimal amount/LVR)...and you're left with a DUD!
Yes I agree, although, I don't mind Dazzling's approach (with OR without leverage), which is overweight in commercial property, as you get good income AND reasonable capital growth too using this asset class.
That's a lot of cash GP. As I recall you recently cashed out your shares. Now I don't know whether you had held a long term or trading portfolio or how much cap gain you banked so I have no inclination to comment on the wisdom, or otherwise, of this but I haven't taken this route.
Like you, I understand that there are troubled times ahead in the US (in particular) and that it is unlikely to be contained within their shores. But you seem to be holding your breath waiting, while I'm not. It does not look so immediate to me.
So I'm still holding all my long term shares, it's just the traders that I've lightened up on. Getting them out of my margin account and into my broker account and then paying the CGT on sale, seems too much trouble. Even if there is a 25% draw-down that might be what I'd lose assuredly to tax. Let's see...... On my main holdings with market value $343k I would realise $242k gains, disc to $121k and about 40% tax is almost $50k tax due, or 15% of the gross. (Not the guesstimate of 25%.)
I doubt we will have that sort of draw-down on BHP, a silver miner, a gold miner and a drilling services company with a patent process during '08.
I would not want to hold cash during times of inflation anyway and would need to find somewhere to stash the cash and gold is where it would go, but I have gold and silver miners anyway, so this becomes a circular argument.
This is just IMHO only.
Applicable to my situation only.ps. This has been an interesting exercise for me, thanks. Bill.
Yeah, I know. One of the main problems has been not having enough time to work on things for a while, due to work, recent surgery, planning a holiday, and a few other things. I sold down most stuff back around the August correction, and haven't really had time to work on it much again. I have dabbled a bit with my trading account since then, but only relatively small quanitites of a few stocks and the odd warrant.
Well now that I'm almost out, I'm not keen to get back in too much right now, for any long-term positions, until I see a more definite direction to the market. I've still got my eye on some stocks for shorter-term trades, and trade index warrants occasionally (in fact, picked up a few hundred bucks from that yesterday), but am trying to get a few other areas of my life organised right now, so keeping up with shares is temporarily on the backburner. At this stage the plan is to start into it again after our holiday in March.
There's also some indecision at the moment in relation to our PPoR. My wife and I have talked about a few options from small-to-medium renos to buying somewhere else, the latter case with either selling or continuing to hold our current place. If we go with buying somewhere else and continuing to hold this place, that will require some significant cash as well. As far as significant renos go, we seem to have a dilemma that this house is too good to knock down and rebuild, but not good enough to spend much money on (primarily due to cracking - it's full brick on clay). Also, my wife is keen on a double-storey place (which this place is not), and every new house built in this area recently that I've seen has been double-storey, but personally, given our age and that we'll soon be empty-nesters, I don't see the point. So there's also some disagreement in that indecision.
Maybe not, but that would only take it back to around $30, where it was back in May (and nearly dipped to back in August). You may have thought the same thing after the run up through 2005 and early 2006, but it nearly reached that draw-down in May & early June 2006, and in fact slightly exceeded 25% by Jan 2007. Of course, as a longer term hold, it more than recovered, thanks to the on-going bull.
While it's anybody's guess what will happen, I don't have much problem seeing it drop back to around $30 if things go @rse-up shortly. Of course, it could also be $100 by next Christmas. And it is one of the stocks I'm keeping an eye on, but I think it's still in a corrective phase at this moment.
Nor would I, but I wouldn't want to be holding too many assets either if we run into a problem similar to what Japan had, or this sort of scenario.
Mind you, I watched the second part of The Super Comet on TV last night, a docu-drama about the effects of the Earth being hit by another asteroid similar to the one that allegedly wiped out the dinosaurs. In that post-apocalyptic society, if one survived, where to put your hard-earned wouldn't mean squat. And the most valuable skills would be survival skills, so perhaps I'd better get in some practice with a bow and a spear.
Cheers,
GP
Hi all,
This is an interesting thread with lots of good info, but nobody has done the simple mathematics of the original question.
Is this because peoples opinions matter so much more than cold hard calculations??
$1,000,000 at 6% in bank earns $60,000 per year. If this was the only income, tax would be about $13,400 per year (current rates), leaving $46,600 pa.
$1,000,000 property yielding 6% would be $60,000 income. Then take away expenses of 25% equals $45,000 income. Because of non cash tax deductions of say $8,000, the overall taxable income would be around $37,000. Tax payable of $6,000. Net income of $39,000.
By year 10, with 3% per annum growth in rent, the figures look like this.
y10, $80,500 income minus 25% for expenses leaves $60,350. After non cash deductions of $8000 leaves a taxable income of $52,350. Tax payable of $11,000. Net income is now $49,350.
Having $49,350 is better than having $46,600.
But wait there is more!!!!
If the gross yield is $80,500, then to be a yield of 6% then the value of the property must now be $1,341,666. If we sold off $341,666 worth of property to return us to the $1,000,000, and paid CGT on the proceeds we would have the following.
$254,000 growing at 3% pa gives about $341,500. Given growth of $80,000 over 10 years (after REA expenses etc) then the tax payable would be ~$20,000.
This then leaves us with $321,000 plus $1,000,000 worth of property yielding 6% pa.
Basically, in answer to the original question, owning $1,000,000 of property now that yields 6%, with growth in rents of 3% pa, beats having money in the bank earning 6% over a 10 year period, by a proverbial mile.
bye
This is an interesting thread with lots of good info, but nobody has done the simple mathematics of the original question.
Is this because peoples opinions matter so much more than cold hard calculations??
$1,000,000 at 6% in bank earns $60,000 per year. If this was the only income, tax would be about $13,400 per year (current rates), leaving $46,600 pa.
$1,000,000 property yielding 6% would be $60,000 income. Then take away expenses of 25% equals $45,000 income. Because of non cash tax deductions of say $8,000, the overall taxable income would be around $37,000. Tax payable of $6,000. Net income of $39,000.
By year 10, with 3% per annum growth in rent, the figures look like this.
y10, $80,500 income minus 25% for expenses leaves $60,350. After non cash deductions of $8000 leaves a taxable income of $52,350. Tax payable of $11,000. Net income is now $49,350.
Having $49,350 is better than having $46,600.
But wait there is more!!!!
If the gross yield is $80,500, then to be a yield of 6% then the value of the property must now be $1,341,666. If we sold off $341,666 worth of property to return us to the $1,000,000, and paid CGT on the proceeds we would have the following.
$254,000 growing at 3% pa gives about $341,500. Given growth of $80,000 over 10 years (after REA expenses etc) then the tax payable would be ~$20,000.
This then leaves us with $321,000 plus $1,000,000 worth of property yielding 6% pa.
Basically, in answer to the original question, owning $1,000,000 of property now that yields 6%, with growth in rents of 3% pa, beats having money in the bank earning 6% over a 10 year period, by a proverbial mile.
bye
You're wrong there Bill, I did some calculations at the very beginning and asked for others to comment, but didn't get much response...(I even asked a couple of bears on GHPC to comment!)
Perhaps you missed it, if you re-read the thread you'll find that I got a similar sort of result. And this is the reason I pursued this line of questioning/thinking.
So you're saying at year 10, you sell about 1 property and take the cash...OK.
Huh?
So the 254k is the proceeds from the sale of about 1 IP at the 10 year mark, and you do what with this?? Perhaps someone else can make sense of what you just posted??
Yes, I know, because of the capital growth, but until you sell the property and realise this gain (or leverage off it) there is no huge benefit for you (ie. just $2750 pa difference in income at the end of 10 years by your own calculations)...which was the point from the very beginning.
Feel free to entertain us with your asset allocations
.Thanks for joining in.
And also note, as the thread evolved, the original question became focussed more on un-leveraged residential property as a retirement income stream...
And also refer to this thread below:
http://www.somersoft.com/forums/showthread.php?t=38286
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Currently 7.7% is possible with term deposits of 12 months or more.
With a family trust and two no-income beneficiaries, this would drop to $8,100 (based on $60K still).
While I'm sure this is possible in some places, around my neighbourhood 3%-4% is more typical.
I think there are too many unknown variables to project incomes forward another 10 years. By then, interest rates and rental yields could be anywhere from zero to 20% pa, inflation could be almost nothing or 100% a day, and property prices could have skyrocketed or plummeted.
Consequently, I base my decisions on the current state of play and my perception of what the future might hold during the next few years and the consequent risk to any form of investment. For my own personal situation now, my aim is to provide sufficient income to live off, which I already have, plus enough growth (or compounding) to at least keep up with inflation. Of course, while that's cash it's subject to the vaguaries of interest rate movements, but at least it's easy to move capital to other classes of investment when I deem them more attractive.
Cheers,
GP
Hi all,
JIT and Great Pig,
Are you prepared to bet that inflation will stay low for the next 10 years??
If inflation does stay low, are you sure you can still get high rates of interest on your money in 10 years time??
These are the types of questions that are relevant in this type of discussion as they are just as unanswerable as how much cap gain may or may not occur.
The example I gave before has a cap growth equal to inflation (assuming inflation was 3%), and that was only to keep the yield at 6%.
bye
PS Great Pig We have both bought and sold property in the last 12 months.
JIT and Great Pig,
Are you prepared to bet that inflation will stay low for the next 10 years??
If inflation does stay low, are you sure you can still get high rates of interest on your money in 10 years time??
These are the types of questions that are relevant in this type of discussion as they are just as unanswerable as how much cap gain may or may not occur.
The example I gave before has a cap growth equal to inflation (assuming inflation was 3%), and that was only to keep the yield at 6%.
bye
PS Great Pig We have both bought and sold property in the last 12 months.
I just used the cash alternative as a comparison, but my preference would be to use shares or commercial property (at least partly) for a retirement income stream due to this inflation issue (not residential property, or if you do use residential property, it should be a smaller % of your total portfolio).
So I certainly wouldn't suggest someone actually hold cash for 10 years to provide an income for themselves, and I suspect GreatPig doesn't intend to either, but is waiting for better opportunties and is just holding cash short-term..
So I certainly wouldn't suggest someone actually hold cash for 10 years to provide an income for themselves, and I suspect GreatPig doesn't intend to either, but is waiting for better opportunties and is just holding cash short-term..
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