Forum Replies Created
Duck, Elk,
Good to get some balanced feed back to the question.
A cross property could be neg or pos geared and a neg property could be crossed or on its on.
Terry,
Just a generalization on neg that's all.
Neg geared with exceptional CG is still a good deal.
There are a quite a few comments from members not able to find pos CF properties and some of them would be considering properties that they may need to cross or neg to obtain. This forum does tend to advise members not to cross or neg but sometimes it can't be helped especially if the deal is still good.
Elkam,
I know what each one is, how they work etc and have no particular situation in mind.
Was basically just wondering what people think of both and which one is the lesser of two evils.
After reading a few posts lately and seeing how some people had ended up using one or the other, the question was aimed more to provide information for others to see on the pros and cons as set out as in Ducksters post.
If the only way to secure a deal is one of the two options then which one could be considered the better option.
For me if the only way to seal the deal was to cross or neg then I would choose cross mainly because it is better to be taxed on a profit rather than be negative geared.
James,
The investment plan looks flawed from 2 aspects. 1) Your current situation; 2) Negative gearing of what appears to be multiple properties at the same time.
It appears that you over extended yourself just a little too much although your idea was good, the timing and application weren't the best. Breaking even is good and it is easy to understand your fears of values dropping but property when done on the buy and hold is a long term investment.
Do some research on how much property has decreased in the past and then how long it has taken to bounce back, recover those loses and then increase.
It is very hard to depict exactly what part of the property cycle we are currently in as some places are still showing increases whilst others are dropping slightly. I'm sure there are some out there that will only be too happy to say what part of the cycle we are in.
Rates do look as if they will still drop 1 or 2 % in the near future and if this is enough to help then you may want to reconsider selling.
JL,
You shouldn't need to wait for the tribunal in regards to entering the property on the grounds of abandonment and to secure the property. Just make sure you document when you and how you tried to contact the tenants, reason for entering and securing the property including time frame on the premises. Make your time on the premises quick but allow yourself time to document anything you need. 15-30 minutes could be considered reasonable time to secure a property disconnect power and gas etc, up to 1-2 hours if you need to fix a lock that was broken or sticky on a door or window. Perfect time to have a spare lock on hand to stop reentry. Remember a sticky lock could be considered a safety hazard and trap people inside so needs to be fixed. The law might cover tenants but it also covers property owners and land lords if applied the right way.
The seller should have but can't be held responsible for insurance prior to settlement and as mentioned not all people have insurance and this is why you should check and take out your own insurance for peace of mind.
Because your contract is unconditional that could have cause problems for you if the damage was more. The seller does have a legal duty of care to maintain and keep the property in the condition stipulate on contracts but this is a tight one to enforce.
When buying a property always check that the seller has insurance coverage.
JL,
If you have reasonable grounds that the property has been abandoned then you can enter to make the property secure and safe but do not do anything else. Take a video camera and film what you do and the condition of the place. The RE/PM can notify the tenancy tribunal of the situation and the reason for why you are entering the property. Your PM should know all this and have contingency plans in order for this situation. The PM also has to make a reasonable effort to contact the tenants before so.
Solution number 2 if the property has gas connected to gain immediate access. Get someone to ring the RE complaining of a smell of gas coming from the property. This can be used as a method to gain immediate access but only to check that gas mains are turned off etc.
wealth4life,
This being an investment forum most are assuming that properties are being bought for investing when in reality most are for ppor.
Although the developer may have done a fire sale and some lucky people picked up good bargains that doesn't mean the value of the others needs to affected. How often do we read here that someone bought a property for 20-30% under market value. What happens if those who bought the properties decide to sell and put the price at the full market price others have paid? Just because someone picks up a bargain it doesn't mean they will in turn sell it for a bargain price. I know I wouldn't.
The only real way the current owners would be affected is if they either tried to sell for less than they paid or if trying to get an equity loan the valuer lowers the price.
Depending on how many properties were in the project the developer may have already made his desired profit and now wants to move on to the next project. It would be wrong to assume that a fire sale is a sign of trouble.
Why doesn't the agent have a spare key?
DamienO,
Also the best deal doesn't mean lowest price.
Try to find a place that charges a % that covers everything and not a place with add extras for postage and handling etc. Also check how many staff compared to renters roll. If not enough staff then the property managers are over worked and don't have enough time to check things thoroughly. You may also ask to see examples of their inspections reports and fees charged for reletting or renewal of leases. Some companies push 6 month leases telling you you can put the rent up at the end of each lease but what most really want to do is charge you a fee (can be 1 weeks rent) for getting the tenant to sign a new lease.
Normally the land lord is responsible for payments although depending on circumstances you can take out land lords insurance that may cover when you have no tenant. DHA is very different to the usual style of property management with guaranteed rental but this is also applicable to service apartments.
I read on another forum where the husband sold his 50% to his wife and she sold hers to him and changed a few other things. They had to spend some dollars on associated costs but ended up having the PPOR as an investment IP. Dont know if the money spent to do it ended up covering what could be claimed but a good accountant should be able to advise you further. As mentioned previously the ATO is always on the watch for these type of situations.
You can keep things legal by either telling the banks you are wanting to do renovations and would like to borrow extra to cover those cost or simply ask for 110% finance to help cover associated costs. Some may even suggest to borrow the first years interest as well but I'm not sure what is the actual benefit of that. There are a number of legal ways to get the extra funds without being dishonest. Far better to be up front and avoid any unnecessary problems later.
DamienO,
Before going down that path make sure you have a full understanding of your legal requirements. If self managed are you prepared and do you have time to attend tribunal hearings, court cases, apply for and serve eviction notices etc if you have a problem with a tenant? It might appear a good way to save money not having to pay a property manager but do you really want the extra hassles that comes with it? Are you the sort of person who can walk up to a single mother with 2 kids and serve an eviction notice? If not then be careful of self management or only rent to people you don't mind evicting.
ummester,
Anyone can say the word denial or even write it, but why would I need to say it?
I'm not denying oz is in hard times or that there could be problems for some but just pointing out that when people make references to Japans bubble and deflation they need to understand it was not brought on by economic policy or debt as we understand things to be.
Also a good idea to have ahead tenant who gets a room for slightly less than the others to help manage or to keep the place clean. Another option is to have a private cleaning service to go through once or twice a day in common areas.
Far better to charge a higher price that includes electricity and other charges rather than asking to split costs.
Be fair when charging a higher price and if what you get from the tenants is more than the actual utility costs then offer it back in tea or coffee or some other gesture that makes the place a little nicer.Kev,
Originally for me half the battle was knowing what I wanted, 25% was convincing those around me and 25% doing it.
Once you go down the property investing path there will be those who will say you are only chasing money, a dreamer or capitalist pig. Ignore them all and do what you think is best and right for your family. Try to follow a simple plan to start with and remember not to neglect your family in the pursuit of financial freedom. You will need to take risks but if those risks are based around good financial decisions and advise and not speculation then you need to take them to get ahead. If your plan is 10-15 years then that is slow enough to make better decisions with less risks. Some will say start small and then go big but you may find starting small and going slightly bigger may suit you better. I put a limit on how much I would spend on each investment and how much each investment should cost to purchase. Initially properties bought were under 100K with 5-10% deposit but now bought around the 350K range with no money down. The reason behind this is because I think it is always easier to move a property in the lower to middle price range than in the top range in a hurry. It does surprise me when I see people wanting to buy properties at around 500K as a first investment and to me this is not on. Far better to buy 2-3 properties for a total price of 500K. This way not all your eggs are in the one basket and if you do feel financial pressure you can relieve it by selling one and still have some properties left. My way might not be the quickest way to get rich but it does work over time and is a lot less stressful.
Good luck with your investing goals and don't rush into anything no matter how much of a bargain it may appear to be. This forum can be an excellent place to use as a sounding board for any investments you come cross. don't limit yourself to just Steve's books and here but also don't go overboard with trying to learn everything about property investing in a short time. You may just end up getting confused by all the different terminology and investing styles. Find a method of investing that suits you and when you have it under control and working then decide if you want to expand that method further or venture into other methods.
Foundation,
The difference is that in Oz prices did actually go up and you could sell and make a profit but in Japan prices went up but weren't sold. A simpler way to explain it is if you bought the same house in Japan and Australia for the same price, in OZ you could sell it for more but in Japan you would sell it for the price you paid but say it was worth more. This is where the fundamental differences apply. You buy a house for 100K for example in OZ and after 5 years it is valued at 150K. You then borrow 50K from the bank because you have 50K equity. Something goes wrong and you have to sell the house and pay back your debt of 150K. You then owe nothing but in Japan in the same situation you can only sell the house for 100K and you are left with a debt of 50K.
This where the Japanese 'latent profit', 'book value accounting' and 'asset value' gave a distorted view of Japans economy and why the situation is very different here. When prices or values rise in OZ that is what you can normally get if you sell but in Japan it was totally the opposite. Banks in Japan allowed companies to borrow against latent profits something that you would not usually see here in OZ. Japans economy was totally false and so were the values applied.
Other ways the values of companies were over valued was by one company A offering shares/stocks to another company B at an inflated price. Company B then sells these shares to Company C at an even higher price who then sell back to company A ath another inflated price. This then allowed company A to say they are worth so much money. No money ever changes hands in all these deals. Do not think for one moment that these are isolated incidents but common practice amongst Japanese companies. Japanese companies form groups called 'Keiretsu' and these may comprise of hundred of small companies or businesses who continually lend money to each other or buy each others stock to keep their values up. If one owes money to a member of the same group it is often written off and forgotten about in the books as not to devalue the strength of the group.
You can look for similarities in what happened in Japan and why and what may happen in OZ but in reality you shouldn't.
Trying to do so is like trying to compare apples to oranges and finding similarities because they grow on trees or are round.An example in the news tonight the prime minister of Japan has said that people should not sell the stocks in the post office (which the previous Japanese prime minister tried to privatize) at the current low price and wait for the shares to go up so the post office doesn't lose value. It would be a very brave Japanese person to go against what the prime minister has just said although some opposition groups are saying his comments are totally irresponsible. Then again what can you expect from a prime minister whose home city is notorious for being controlled by the Japanese mafia and nothing gets done without their approval.
Another way the govt contributed to Japans economic down fall is by bailing out companies and spending money on projects that get no returns. Japans govt debt stands at an estimated 250% of GDP. The USA has an estimated 64% debt of GNP. Australia has a surplus. An example of how govt departments do things in Japan. The Housing Public Agency's subsidiary Japan Unified Housing Life (JUH) developed an office tower in Tokyo and then claimed the building was 95% leased. The tenants were either JUH or related companies which occupied the building at 4 times market rents.
Deflation in Japan is controlled by MOF in their policies of creating interest rates as close to zero as possible, 0.25%. Imagine someone who retires on about 200 thousand dollars and uses half to pay their home loan off and has the rest in the bank earning 0.25%. The equivalent of $250 a year. Is it worth to keep the money in the bank?
Although there may have been no mention of the aging population or low birth rate in Japan this definitely has also played a big part in deflation. Japan has become or is about to become the worlds oldest country with a birth rate that is now below 1.0% with approximately 20% over 65 years of age. This creates enormous strain on health care, pension plans and working population. Japan has gone from having 11 workers supporting 1 retired person to 3:1 and possibly 2:1 by 2025. This aging population attributed to 85% of 1,800 health insurance companies being in arrears and forcing them to stop payments to elderly policyholders. Ministry of Health has raised contributions from 10% to 20% & 30% and lowered benefits.
All this is further complicated by steep inheritance tax amongst the highest in the world. People are forced to buy life insurance which accounts for 20% of household savings. Doesn't sound too bad but MOF requires insurance companies to buy low interest govt bonds and invest in the stock market whenever the exchange begins to drop. This created years of investing with no yields or gains and zero or negative returns. This coupled with trillions of yen in bad loans shows that there isn't any money. Japanese pensions plans return a declining rate of around minus 3% compared to the United States positive 15%.
Probably the biggest problem contributed by the aging population is brought on by 2 situations: many companies and govt departments force workers to retire at 55 but the pension doesn't start until 65 leaving a10 year gap of no income and savings in banks getting interest of 0.25%. where do they get money to live on?
Overall nearly 70% of companies do not have the money to pay their pension obligations and it is estimated that Japans pension liabilities are in excess of 100% of the GNP. Major companies like Mitsubishi Electric, Honda Motors, Toyota Motors and Sony owe 238.5 Trillion yen in pension payments to workers.
If Japan tried to repay the govt debt through taxes it would need the equivalent of 2 years wages from every worker or 20% of wages for 60 years just to cover today's debt.
The bubble and deflation that occurred in Japan was brought on by govt mismanagement and debt by companies not personal debt which is the main difference between Australia and Japan. Debt in OZ is mainly personal. Corporate debt in Japan is around 4:1 compared to 1.5:1 in the US. There is personal debt in Japan but this is mainly due to Japanese mafia who charge rates of between 40-100% and are sanctioned in a strange way by MOF. MOF support these rates for personal debtors because they believe it dampens consumer borrowings. Personal debt in Japan is small compared to the govt and corporate debt.
Hope this clears up a few things and gives abetter understanding of Japans economic woes and reasons for it.
Scamp,
Why do you think negative gearing wont exist?
Are you under the impression the govt will stop it?
Although negative gearing is not considered a good way to build financial independence it is strongly supported by the govt. If you look at the last time a govt stopped negative gearing it quickly learned it wasn't a good idea and reinstated it to help stimulate the housing industry.Foundation,
I will only focus on the Japanese part of the discussion.
The Japanese mindset is totally different to how we look at investments, borrowing and paying back debt and why our situation is different.
Below is an example of how and to whom Japanese banks lend money and how they decide to buy and sell stocks. The worst part of it all is that it is well documented and true but try finding it in official research papers on the collapse of the Japanese economy.
One woman who is know as Madame Nui was a financially advisor to International Bank Japan, Japans J.P. Morgan, Yamaguchi Securities and approximately 30 other Japanese Banks and financial Institutions. At one stage she had loans totalling 22 Billion USD making her the worlds largest individual bank borrower. She was considered the single most important player in the Japanese stock market. Banks and financial institutions would send their deptartment chiefs to get her advice and what to buy and sell. Now for the ridicoulous but true part of this little story. She owned a magic ceramic toad that these chief would part on the head after saying some prayers. Madame Nui would then join them and go into a trance. After the trance she would then tell them which stocks to buy and sell. The end results of borrowing like this to Japanese borrowers saw Japanese banks in debt to 120 trillion yen or the equivilent of 23% of GNP.
Part 2 how the govt helped cause the collapse.
MOF or Ministry of Finance control and set the levels for stocks, bond and interests rates in Japan that everyone must follow. They controlled interest rates so that companies could borrow at rates of 0.5% where other countries were charging anywhere between 5-20%. Investors in other countries expect returns and dividends but in Japan this is not expected. Companies didn't pay dividends but miracously stocks kept climbing through the 70' & 80's and thus the myth that stocks in Japan always rose. To understand the consequences of this further you need to look at how stock is valued through the P/E or price to earnings ratio. This tells you what you can expect the company to make in earnings from your investment. Japan had P/E ratios of over 100 whereas companies on the Dow Jones were lucky to have 30 at the height of the 2000 era. This situation was compounded further by the fact that little stock was available to the public but companies got around this by buying each others stock, and this stock was never sold. This enabled the MOF to control mergers or takeovers and most of all the TSE Tokyo Stock Exchange. After driving stocks upwards year after year the MOF created a thinking called 'magic of assets' through 'book value accounting' which is where owners of property, stock, or bonds do not need to assess their holdings at market value but at the priced purchased. Items that may have been bought at 50 which now have a value of 100 still appear as 50 creating what is called latent profit, the difference between purchase value and current value and this means latent loss doesn't exist. Investors have ignored dividends and looked at 'asset value' and 'latent profits'.
The 'magic of assets' gave a distorted view of Japans strength and economy. At one stage Japan had the top ten banks in the world by assets with 29 banks in the top 100 but only 5 of these had assets in excess of debts.
The MOF overall created the share prices must go up thinking by (1) stocks that yielded no dividends, (2) debts that companies never needed to repay, (3) balance sheets that hid losses and liabilities. In this market Japanese companies could never lose or go wrong. Japan economy continued to grow at 4-6% and couldnt be maintained and eventually went down to 1%. Japanese people believed that no bank could ever go bankrupt and investors always won on the stock market.
The factors above are main contributors to why the Japanese economy eventually collapsed as it couldn't be sustained. The result of all this plus a few other reasons is why Japan has had 10 years of deflation and is a totally different scenario to the current world situation let alone here in OZ. Even all through the 90's Japanese banks continued to lend money for assets that would return either none or little return not only in Japan but to other countries like Korea, Malaysia, Indonesia and 50% of foreign money lent to Thailand. When these countries suffered in the 1997 crash Japans banks had losses 4 times that of US banks and had to write off tens of billions of dollars. Japans crash didn't occur overnight like people think but was about 7 years in the making. Japanese deflation has been controlled by MOF and some sources even think created and orchestrated by MOF as away to control the economy.
In regards to the realestate market and stock markets. Japanese banks have continued to lend money to realestate companies that own land now at a 5th or 10th of the price paid a decade or two ago and when theses companies go under the banks put on the books the value at the original purchase price so it appears as if the money lent is less than the value of the property. The problem is that no one will buy the properties at the price the banks are asking so little gets actually sold or bought creating a paralysis. The same situation 'paralysis' occured on the stock market. 89 saw approximately 5.8 trillion yen raised by new stock offerrings but this had dropped to 4 billion or only 0.07% by 92 and only up to 284 billion in 98. New companies being listed on the stock exchange during the 90's was non existent compared to NYSE which went up 45%. The TSE controlls the stock market whichs purpose is to allow companies to sell equity to the public but this was virtually shut down for 10 years and can be seen when you compare the differences raised between NYSE $92 billion in the first 3 months of 2000 compared to less than 50 billion for 10 years by Tokyo and Osaka Exchanges.
The Japanese should have worked out that their practices of borrowing and lending where totally out the window but the last 10 years shows they still haven't learnt and continue to make the same mistakes today.
When you buy a property in OZ you expect over time the value will go up but in Japan the mindset now is that as properties get older the value decreases although the land stays about the same. The Japanese have convinced themselves that anything old is worthless and if you have something old then you must be poor. No one wants to appear poor so they buy the latest of anything that comes out and second hand items are ridiculously cheap. This particularly applies to cars and houses. House reforms/renovations are a big market in Japan. Houses will be completely reformed after 10, 20 or 30 years or totally destroyed and a new house built. Home owners do not expect to make money on their properties when they sell and banks if they get a house through defaulted loan will value the house and try to sell it at the original purchase price and not the current value. This is why some houses sit for sale for 10 or more years. The same thinking applies to rental places and it is very common to see residential or commercial properties vacant for 10 years or more. The reason is that properties are leased at a certain price per m2 and this price would most likely have been determined when the place was first built or before the bubble and is the price still expected today. When it comes to real estate, Japan defies all logic and reasoning and thus a big reason for why so many foreign investors lose money in Japan and why Japan has deflation and can't be used as an example of what could happen in OZ.
Unemployment figures in Japan are falsely exaggerated and included jobs that aren't jobs and workers that are paid to do nothing and also include age demographics not taken into account in other countries. Wages go from ridiculously cheap to extravagant. A girl working in a club can easily make in excess of 10K a month for just pouring drinks and smiling. All paid for by business expenditure accounts and tax deductible.
Japan does have pension plans but superannuation is virtually not heard of. The pension fund is continually used to pop up banks and govt departments and has probably been all used.
James,
Do you have a good accountant?
Are you able to offset the 7K a year as negative geared deduction against your taxable income?
Although not in favor of negative gearing sometimes it does suit a purpose.There are a lot of conflicting reports about what property and interests rates will do over the next few months let alone years. One thing that has occurred over time is property prices do eventually rise and rents also rise. If property stagnates for the next 5 years I think you will find that rents will still rise. You wont get $150 / month more in rent in a short time but you will get some extra over the next year or two. Also if rates keep dropping as they currently are you should be able to refinance for less than your current repayments by probably early next year or about the time when your current loan changes.
You mentioned a 5 year outlook but you also need to take into consideration your long term 15-20 year goal towards retirement. Does anyone really think that property prices will be less in 15 years than they are now? If looking at historical studies or values you will see that over time property has risen.
I think that and I don't mean to be critical but there seems to have been a major flaw in your investment plans. Can you explain more about why you had to sell 2 other IP's? Were all your properties negative geared and thus the current interest rises and decreased income attributed to your down fall? If the answer is yes then this is where your investment plans have been flawed. Do you have a financial adviser or someone who can look over your investment plans or current finances and look for alternative solutions?
Selling now may get rid of your debt but how long would it take before you can put yourself in a position to buy again or have a property that would reap the same rewards 15 years from now?
