Forum Replies Created
Hey….in the US…you can buy them for $0 US. Seriously they won't go that low in Australia as we don't have an oversupply of houses…yet. Once the financial crisis tsunami hits Australia you will see prices start to fall much more than they are doing at present as employment and migration drops (depends on China recovering). This is particularly going to be so in low demand for housing areas which you seem to be in. If you still have a mortgage on your home sell your investment and pay off anything you make off that loan or put it into the bank/good stock. If you own your own home then seeing you're so keen about keeping this investment house then keep it……the only condition is that you have to wait a number of years (perhaps 15) before it starts to make capital gains again and perhaps during the period become overly stressed. I doubt whether it will gain much even over that time period. The big question is can you continue to support this property and live with it in peace and calm? People have to realise that even before the credit crisis housing prices in Australia were overpriced….7.5 times your income to buy a place (it used to be 2.5 times) so on top of that we have the credit crisis which has yet to hit. Your problem is that your debt is far too high which personally I think you have to get rid of to prepare for what's ahead. Especially as you seem to have employment problems. Housing is not the only way to invest….the prices on the stock market for good stock is very low and to be sure this is the best place to invest if you're prepared to put what you can into it and just wait for 15 years and you'll be fine.
All of the above is on the assumption that you do have your own home (you keep failing to tell us) and the debt is paid off . If you still have a debt on it then forget the stock market and put everything into reducing the mortgage as nothing is better than seeing your home mortgage eliminated ……and there is no better investment.
CarpeWhilst there is an inverse relationship between intereste rates and inflation there is a difference when you're in or nearing a recession. Demand for goods (includes houses) falls so hardly the price of anthing will increase. People become wary in uncertain times so they'll put whatever excesses they have into important things like reducing debt. This bubble bursting we're starting to have should have started a long time ago (now 7.5 times your income to buy a property….used to be 2,5). Its a catch 22….if people put there money into retail it boost the economy (and fuels inflation) but in these times debt is people's biggest worry so they want to reduce it. The writing was on the wall for so long about rising debt and whilst we had a system better regulated in Australia than the US opportunities for people for borrowing beyond their means was being made more available as time passed. Strange to say this but borrowing will be made more difficult now which is a good thing….but it's a tragedy that it took a world financial crisis for people to understand what debt means.
CarpeHi Beth et al
Bear in mind that house prices in Australia are at an extreme in terms of income to cost ratios. It is (or at least was) up there with the US, Spain and Britain. Not so many years ago you could buy a house in Australia for 2.5 times the level of income and these days you pay more like 7.5 times income. In the earlier days you could not borrow from equity so I guess it kept the lid on prices. Once this changed then more investors entered the market which was good as it created jobs and boosted the economy. In my view things started to deteriorate when it became ok for investors to take on more and more debt relying on escalating prices to cover their debt and provide them with more oportunities to buy additional properties. On top of that it became fuelled by the opportunity to borrow even beyond the price of the property (includes money for new car). They were happy days (for some) but it left in its wake for the people behind who had to borrow more and more for the same property that someone a few years before bought for a song.
So the above path we were on was on the basis that house prices would still keep rising notwithstanding the high price/income ratio we had reached. The bubble had to burst and it will burst a lot more than it has today….although unlike the US it will more subtle (won't go to $0 price tags). In some ways the credit crunch in the US (excess house debt and oversupply of houses) has no doubt put the world into a financial spin and perhaps Australia will be spared less the drama of worse off countries but at least in terms of house prices it has brought us down to earth perhaps softer than it would've been had more years gone by when the burst would not have been so subtle). Regardless of the economic woes coming towards us to be sure there will always be a property market available to astute investors. Houses at the lower end of the market will always be in demand wherever there is employment and a shortage of housing. Likewise, in urban areas in good locations where demand exceeds supply and of course in pristine/elite areas and areas where land itself is short in supply for future developments. The capital growth of properties in general is going to be off the boil for a long time but for long term investors the bargains are still there and always will be. Good investors try to keep the level of debt to a sensible level ……for me (and I have done very well based on simply land and location) never let overall debt become higher than overall equity ie no less than 50% total equity in your property portfolio.
Regardless of the prevailing world financial crisis, the bubble on house prices had to change re the points I made earlier on income/price ratio hikes. House prices are already spiralling downwards in the other countries like Britain and will probably get worse now that it is in recession and we know Australia house prices will be impacted further as we approach the door of recession regardless of our more secure economy (based on China).
Any investment has risks (our stock market!) but if the property is good and in a good location that at least provides a guaranteed rental yield then it could make for an excellent long term investment. Not a time now for the short term capital growth hunters in my view.
Cheers CarpeHi Beth
Thanks for responding and providing info that helps. Had not thought of forming a company but it seems like a great idea. I wouldn't start doing anything for another 3 years until the market improves so I have a fair amount of time to plan……I think in the ACT you have 2 years to start once it has been approved. I have been lucky to get where I have as I did buy land properties over 10 years ago before the housing craze started. They were days when nobody thought of buying old houses on large blocks of land and people did not have the option to borrow against equity. It was a requirement to put down a large deposit on anything you bought regardless of how much your assets were worth. As you know it went the other way so people could borrow against equity so much so they could borrow more than the cost of the property they were buying. It's scary to think of the time ahead if unemployment goes so bad that those kind of borrowers with huge debt having to sell their properties in a sliding down market. When I bought my properties over 10 years ago the cost of a property in Australia was only 2.5 times your income…….up to this credit crisis starting any property was a least 7.5 times the annual income. We were up there with Spain, US and Britain……and as you know prices are really tumbling particularly in the US and Britain. We haven't been really hit yet and let's hope we can head off the recession otherwise it will be bad for people in housing debt and the property market for a long time. Anyway on a lighter note I still think property long term is the best investment as long as people strive to never have less than net 50% equity in a property portfolio and at least a 5% cash flow on any property purchased regardless of employment income. All the best to you Beth and thanks for taking the time to post some good ideas.
Regards CarpeHi Matt007 and Bob Anderson
Thank you very much for the information provided…..all very useful to get me started. The block I'm planning to develop is unencumbered and worth about 1.5m so it seems like I have a good start. As I say I'm not going to start building tomorrow but I can prepare for it to take off in 3 or so years and the market by then should at least be known. By then I could sell another property to assist in the finance. I agree given my inexperience I'd be mad to take on the headaches myself so a project manager is a good suggestion. Thanks for your generosity in giving your time and leads which I'll explore. All the best to you both.
CarpeIndeed why struggle …..we only have one life and each day should be precious so make it as stress free as possible. This doesn't mean giving up on life's challenges and risks but I'd rather be happy in one home I own with family/friends than being burdened with seemingly unrelenting debt….especially given a definite mood prevailing of poor capital gains for a number of years. The good days of housing investment are no longer with us. You might struggle to pay the mortgage over the next 5 years but the high capital gains and respectable cash flows will not persist. We have to take risks in order to advance but there are good risks and bad risks. If you still have a mortgage on your house of abode then this might be a better place to put your money.
All the best James…….whatever you decide to do don't look back ever.
CarpeHow things can change. 3 years ago I had a serious illness so much so I had to discontinue my career. I was also a property invester with 5 properties but the debt on 2 was so high relative to my cash flow I was forced to sell 2 of them 2 years ago. They went for relatively bargain prices but I still made significant capital gains to reduce the debt on one other. I've done very well overall as my debt ratio to the properties I own is very low at around 15%. Taking such action was painful at the time (good properties that I liked a lot) but it immediately eliminated the stress of trying to service a debt through an illness and I'm so glad I did it. I know there is much information out there that the housing prices will stabalise soon but I don't agree. To be sure Australia does not have an oversupply of houses like the US (so much so that you can now buy houses there for $0) but Australia like the US, Spain and Britain has a very high house price to income ratio. House prices in Australia at the moment are 7 times the income that you earn . It is only a few years ago when the ratio was at 4 times the income you earned. Seriously it was less than 5 years ago I bought a house in the inner suburbs of Canberra for $280k and up to the credit crunch it had a value of $650k ( so 7 times the income of $90k). A postion paying 90k today was probably earning only 60k so you can see how the prices have escalated beyond buyers reach unless they are prepared to go into risky high debt and continue to speculate that prices will keep climbing. It will be some time before prices will take off again as notwithstanding the demand exceeding supply, unemployment rising and shrinking migration will impact. I still think there are gains to be made on property. However, you have to weigh up the plusses and minuses of your position:
1. Poor cash flow (unless you're prepared to take on extra jobs and diminish the joy of general living without overworking/stress)
2. Risk of employment income dropping (very stressful)
3. Very high debt ratio (seriously, if your total debt divided by the total value of your properties is higher than 50% you are in high risk mode)……it would be horrible to struggle for 5 years and not much gain made.
4. If you have a home mortgage this is the one we shouldn't have. Always a joy to see it eliminated.
5. high uncertainty about capital gain on this high debt investment property.If it was me I would be focusing on reducing your debt but this is not advice to you on what you should do. It is your decision and I wish you well on what you decide.
Cheers Carpe
Hi Pamela
I agree with the others that you just ask your questions. So you know what questions to ask you could send me an email if you want an assessment of your financial situation ……..others on the forum might be able to then answer the questions you ask. I won't be asking you private stuff just numbers to go into a spreadsheet to get a clear picture of where you are at present.
CarpeThanks Guys. The truth is I have done nothing yet and given the way the stock market has behaved probably it was a good thing. I have been to a financial adviser and it came down to my selling a property rather than my desire to borrow to invest. The interest rate has been going up so perhaps he was right……..I suppose I have always been a bit conservative that's why I have stuck with property investing for the bricks and mortar. For me I think I have two options. 1. Borrow to redevelop the block and convert home into apartments…..or 2. Borrow to buy either a property or shares that pay for the interest and boost my income. Not sure whether the latter is realistic given the predicted rise in interest rates. Perhaps I should get a part time job which seems a bit silly given the equity I have been lucky to accrue……though of course I have not fully recovered from my illness (had a brain aneurysm so why am I worrying about this stuff as I could've been dead!) Still, 29k is not an ideal income with so much equity. Another option is to just keep going until my cash runs out in about 2 years….at least my sons have finished Uni now so my cash is no longer so much under threat). I've restated my financial situation below to make it clearer. Cheers Carpe
Financial Situation – carpe_diem as at 4 Dec 2007
$’000 $’000 $’000
1. Equity Val Debt Equity
Cash 55 0 55
Inv Com’ial Prop 300 0 300
Home 1200 0 1200 ***
Inv Prop 1 500 95 405 ***
Inv Prop 2 590 375 215
Total Equity 2175
2. Cash Flow Inc. Exp Net
Net Comm Prop 1 17 0 17
Inv Prop 1 16.9 8 8.9
Inv Prop 2 33.2 30.1 3.1
Totals 67.1 38.1 29 (net income)
*** Core 3 and 2 storey redevelopment sites
Hi
I assume you want this house despite the variation in value to the sale price. 15k is a very small variation however as I don't know your financial situation your problem might be that you want to borrow 100% and don't have the variation amount to cover the sale price ie the 15k. Depending on your overall equity some lenders will loan above 100% (and you just have to say because you want to spend 15k to improve it even though of course you don't do it) but you need to go outside the square and go online to find a broker to find a lender to suit your needs.
CarpeHi KP
You're doing well and good on you. Just because minerals are in the ground it doesn't mean they continually will be mined. Mining booms come and go (at least they used to unless things have changed!) as does the unwise who don't spread their investments wider than mining shares…..and excessive property investment in risky mining areas. It's a double whammy risk and hence one does need to be particularly cautious in case the bubble bursts…as is to be expected one day (my view). An investor might have the interest payments covered by secured rental for some extra years but as soon as any crash occurs property prices are at risk of entering a downward spiral if employment in those areas tumbles in sync with mineral demand falls. I'm not trying to block people on taking risks as I have done plenty of that myself and have done very well overall including some losses but rather suggesting that newer property investment people should consider carefully their investments as one big sour investment can be disasterous…..as history also tells us.
Carpe
Hi
I think your debt ratio is extremely high at close to 75% and you might be wise to wait for awhile until you have more equity.
CarpeHi Woodyvale
The important thing in life is to follow your dreams and take some risks to achieve them. We can always block ourselves by finding things to put us off. So go for it if this is what you both sincerely want to do and are both committed to sharing the blame if things don't quite work out. Your debt is around 40% and grows to 50% if you borrow 100k which might be the limit given your situation. If things get difficult down the track then you could always then sell the IP. All the best…
CarpeThanks Peter…..something definitely to consider. Joint venture was not something I had even thought about. The developer just wants my property but is a meanie even though the $1m offer sounds good……he owns the two next door and really needs my corner block facing North/East and opposite the best apartment complex in Canberra.
Thanks Linda. I also put this question in the Help forum and got some good responses including a spreadsheet to put my figures into with excellent results…..that turns the property from a 1m sale to the developer to a potential 2m value if it is developed myself (as well as architect and builder I would probably have a project manager also). I can't imagine not being able to sell the properties off the plan as this land is in a hot demand area although based on the figures there is not going to be a problem for me to borrow the whole lot if necessary. Though like you I think I'd rather sell some off the plan so it is something that I will also be exploring. Thanks very much Linda for the tip on Ron Forlee also and I'll be pursuing this today.
Thanks again…..and all the best to both of you on your property journeys.
Regards CarpeHi
I think you've answered your own question respective to your particular financial case. You have laid out the two extremes of property investing……so your target must be for something in between and certainly not one that jeopardises a reasonable standard of living for yourself and family etc. As a successful property investor I prefer to have a few good growth properties than a mass of properties that might one day pay the interests on the loans but you still have the debt unless 'real' growth is a definite. For me the same rule applies to the stock market.
CarpeHi
You have to pay it if you sell. Your capital gain is halved and it is added to your taxable income. Hence if your gain is say $100k then 50k is the additional taxable income. So if your current income is 50k then your taxable income becomes 100k. So the aim would be to lower your taxable income as much as possible in the year you sell. The only way to reduce your taxable income is to take time off with no pay, reduce your income by paying more into superannuation for a period of time (salary sacrifice) or sell another property in the same year that it is sold at a loss. You of course can buy another investment property in the same year and all those expenses including stamp duty (valid some States), repair work readying for it's rental, loss differential between interest rate against borrowing and rental income, rates etc also reduce your taxable income.
CarpeIf it is seriously going into the legal network for sorting out then you have to make the decision on whether you can accept the pain for possible gain though with probable delay or bailing out and don't look back as you move forward.
CarpeHi Pat
It depends on your financial situation. Generally I am against selling an investment property. Negative gearing is ok if it is reducing the tax you're paying in a significant way. Even if it was paying off the loan ie posively geared (as a lot of people seemingly go for albeit very dubious to achieve these days) it is only a good investment if it does have the potential to grow in capital value. All the pain and labour of having an investment that after 20 years has not risen much in value even though it's kept the bills paid seems to me to be a waste of effort and needless worry. There is only one way to invest in property and that is to buy for capital growth not the positve gearing by itself. If you seriously believe through your research and advice from others that is has a low chance of motoring ahead in value then yes take the plunge and get rid of it and go for something that might be negative geared that you can manage but make sure that you go for location, location, location or something that can be improved for future growth value. I have been investing in property for years and have done very well but like you I made a mistake. I bought a townhouse in Coffs Harbour which was an easy walk between the Plaza and the beach (seemed cheap but I was blinded by southern City prices) and the value did decrease in 4 years so I sold it at a loss and went on to something else that is better in terms of capital growth.
All the best
CarpeHi Jon
Thanks for your generosity in sharing the spreadsheet with me and thanks also to the contributions from others. I love this site as people give without expecting anything in return. It's like we're in a good family!
All the best to everyone.
CarpeThanks Jon…I did send you a pm but have not heard back from you.
Thanks Richard…very handy figures to work off. When I have been through all the research etc with Planning body, architect and builder I will be in contact with you to discuss further. Besides this development property that I own (1.0m) that is in a prime redevelopment City area I do have additional equity of $900k in other properties. I have no doubt that the completed properties in such an area will sell easily off the plan. I'm also thinking of using a project manager for a job like this rather than me. So based on your figures I can borrow say $800k on the property up for development plus $1.72m (80%) against the development cost (9 x240k x80%). The end valuation is likely to be 9 x 470k = 4.2m…….and the borrowing percentage against that is (.8 + 1.72)/4.2 is about 60% so I should be right on the finance side given I've probably also overstated the expected costs….if I've done the calculations correctly.
Regards
Carpe
