Forum Replies Created
C2
The loss of $7k p/a is after negative gearing. Approx. figures are;
Rent +$16k
Loan Interest -$25k
Ppty Exps -$3k
= $12k real loss p/a
Tax rebate -$5k
= $7k net loss p/aThis situation would improve with increase in rent & decrease in interest rates.
All our 3 investment properties were negatively geared each purchased @approx $340k – $350k with 100% finance + costs.
All were built to maximize depreciation (& negative gearing) claims.Total investment ppty value $1,050,000
Debt: $1,070,000
20% equity was from our PPOR ($300k with no H/L debt)
At the time my income was approx. $75k with tax $20k claimed on 221D to help servicing.
Our contribution (after negative geating was approx. $300 p/w)
Interest rates were approx. 6.8% with 2/3 fixed. Interest only repaysThe plan was to hold 7-15 years with the ppty value doubling to $2.0mill. Net equity >$1.0mill + PPOR.
Flaws were;
– Ppty values have not increased. Only approx. 10% in the Berwick area over 5yrs (all ppties in this area)
– Job changes (forced) reduced income & tax paid (we sold one ppty in 2007 to release equity to buy a business. Only broke even on this property. The second property was sold this year due to pressure on cash flow. The current economic conditions especilly in the used car market have suppressed s/emp incomes. We also broke even on the sale of this ppty)
– heavy reliance on both capital gain + negative gearing
– We purchased all inv ppties in 2004/5 just at the top of the ppty cycle.
– All ppties were purchased as H&L packages at a 'fair' market price in an area with many similar homes being built with lots of land available.As the majority of our debt was fixed interest rate changes up to now were not affecting our cashflow. However our second sale was partly due to coming off 6.4% fixed in Nov2008 to 8.5%. Increase of $7k p/a which we could not cover. Rates have since fallen so maybe we could have held the ppty…
Why do you think our investment plans were flawed?
We are still not sure whether to sell or not. I cannot see alot of benefit in holding apart from the ppty becoming closer to a neutral cashflow. Growth will be minimal over the next 5yrs or so + any gains will be subject to CGT.
If we hold it will be for the long term 10yrs+. Logic suggests some growth will occur in 10-15yrs????The stock market & superannuation appear to better investments over the next 5yrs or so.
My only concern is a 15%+ drop in values over the next 2-3 years if we cannot service the debt. This is the worst case senario but I dont think it would come to that as we would find a way to make up the shortfall. (We still have approx. $50k of other debt to service as well)
To sell we lose $8k in agents fees & to buy $17k in s/duty + costs = $25k turnaround (7% loss).
Seems time is running out … hopefully we can make some correct investment decisions over the next few years!
carpe_diem wrote: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.Do you really think that property prices in the outer suburbs will stay flat for the next 15 years?
I have been monitoring selling prices around Berwick & they are still relatively stable, even showing a slight increase over last month or so. Probably due to the new FHOG.Increasing unemployment combined with high debt levels this seems to be the biggest risk at present.
http://www.livenews.com.au/Articles/2008/11/14/Australian_Housing_Safe_As
We own our own home (val. $330k) but still have a small debt of $50k owing.
Although I dont believe house prices in the outer suburbs will fall more than 10-15% (falls in the inner suburbs may be more) I can see no substantial growth (if any) over the next 5 years at least.Sounds like I better sell up now before its too late!
Thanks for your comments C2.
We decided to invest in property in 2003 to try and create some $$$ for our retirement in the next 15 to 20yrs (we are currently in our mid-late 40's).
The plan was a long term one.
The mistake we made was to put our faith in a property investment company which sells H&L packages in the Berwick area. Although we felt the properties were good value at the time in hindsight they were not a good 'investment'. We could have bought better with more research and better timing (2003-4 was the peak of the property boom).
Changes to my employment situation have (unintentionally) put a little more strain on our cash flow than planned which resulted in the sale of 2 of our 3 investment properties over the last 15 months.
We want to hold onto the last investment property for our future retirement & I think we can unless the economy goes into free fall in the next couple of years.
My main concern at present is will property prices continue to rise (in the outer S/E suburbs) over the next 5 years at a rate greater than the holding cost of the property ($5k – $6k p/a) ? If not we are paying out these $$$ each year for nothing!
What do other investors think?
carpe_diem wrote: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.
Cheers CarpeAlthough the current economic conditions are not great I am optomistic we can contiune to make the loan repayments in the short to medium term unless the ecomomy takes a dive.
I am still asking myself why I should be trying to make the payments.
Over the past 4 years we would have been better off if we had put our loan payments in the bank (negative gearing contributions).
Looking ahead through the gloom & doom I struggle to see how (outer suburbs) property prices will increase more than say 2-3% p/a over the next 5-10 years especially with high debt/servicing ratios we currently have.We will only be ahead holding on to the property if a capital gain of 3%p/a (on average) is maintained.
Also it is more likely property prices will drop before they start to rise again.
Why continue to struggle?
harb wrote:James62 wrote:The debt on the property is currently $360k (we borrowed extra for other inv purposes). @$2000- p/mth I/O.
Once rent has been increased to $360p/w I estimate the holding cost of the property is $120-p/w ($6k p/a) after tax rebates, costs etc.
So with another 1.75% rate cut you'd be in front ?
We locked in a 5yr fixed rate of 6.85% in 2004 so rate changes have not been a concern.
The worry is income dropping to a point where loan payments cannont be made combined with a 10% or more drop in property prices.
JamesThanks duckster,
Yes we are claiming a building writedown since the property was established however this is reducing each year.
Because our income has reduced by $25k p/a (going from PAYG to S/emp) + we are now income splitting the tax rebates have greatly reduced as well.All our surplus income is going to hold the property now so we dont seem to be getting ahead.
With all the negative press about property prices now & in the foreseeable future it appears the downside is much much worse than the upside.We did sell our 2nd investment property approx. 2 months ago purely due to cash flow worries. The property was built in 2004 as well cost $345k. Sale price was $360k less selling costs $10k we just managed to break even after 4 years….very disappointing.
It appears inner city suburbs are currently incurring significant losses in some areas & outer suburbs are holding values… Will these price drops eventually flow into the outer suburbs?
If so how long will they take to recover & start to post 10% capital gains again?Thanks suavemechanic,
We have just increased the rents by $10 p/week on each inv ppty increasing our annual income by $1000.
We could have asked for another $10-$20 but I did not want to lose the tenants as this could have caused more cash flow problems.
Apart from trying to stabalize our new business business income at a breakeven point (now just starting to get there) in Nov08 the interest rate on one of our inv loans ($360k) will increase from 6.44% to approx. 8.75%+. This will cost us an additional $8200 p/a ($160 p/week) in interest which we currently dont have. Further increasing the rent by $20 (x2) will only generate $2000 p/a.
In Oct09 our second inv loan ($360k) will come off its fixed rate of 6.85% to ?……………what then?
I dont see much light at the end of the tunnel. Looks like we will have to sell one ppty to keep our heads above water & hope we dont incur a capital loss!
Over the last 5 years I feel we have put everything into buying & holding investment properties (using negative gearing) but are getting nowhere fast as we are not financially better off. It is very disheartening.
I am still amazed by stories of investors who manage to grow a portfolio of more than a few quality inv properties using negative gearing methods due to inevitable cash flow shortfalls.
James
Hi All,
It is now 1.5yrs since my original post.
Since 2006 we have had a number of significant changes to our financial position;
> We sold one of our 3 investment properties 8 months ago for $355k which just covered the H&L purchase price + expenses.
> We used the equity / surplus of $50k to purchase a start up franchise business (commenced Sept 07)
> I resigned from my PAYE full time job (which was our primary source of income) to work in this new business.Our current asset / liability position is;
1. PPOR $320k – Debt $40k
2. INV 1 $370k – Debt $360k loan fixed @6.44% to 11/2008 (H&L purchased 2003 $330k + costs $30k)
3. INV2 $370k – Debt $360k loan fixed @6.84% to 10/2009 (H&L purcahsed 2003 $330k + costs $30k)Total ppty $1.06mill v Debt $760k
Gross rent: $ 33k p/yr
Our wage income is approx. $25k less than 2yrs ago because of commencing & building up the new business so our negative gearing addbacks are significantly less.
We are now currently paying $300 per week ($15k p/annum) to just maintain this position which is all our surplus funds.In Nov 2008 one of our loans will come off its fixed rate & increase by at least 2% adding a further $140 per week to our loan repayments ($22k p/annum). We are uncertain if our income will increase in the next 6 months to meet this commitment.
In Oct 2009 our second fixed rate loan expires.
Our main delema is whether to sell another inv ppty now before we may or may not incur cash flow problems in early 2009.
Is it worth holding ppty in the current economic climate?????Our existing 2 investment properties have only increased by approx. 12% over the past 4-5 yrs ($8k per year on average)……so much for doubling in 7-10 years!!!
On top of this there was an article in todays Melb Herald-Sun suggesting a possible 30% drop in property prices;
http://www.news.com.au/heraldsun/story/0,21985,23566323-2862,00.htmlWe are very disappointed with our investment returns over the past 5 years & are still confused on what we should do now.
I would appreciate any comments or recommendations which may assist us in making a decision.
James
Thanks for your comments Kum Yin,
I realize that I am very highly geared & very reliant on future capital growth.
If all variables remain constant I can still afford to hold these 3 IP’s but will not be in a position to save or reduce the loan balances.The question is should I continue to spend $15k per year to hold on to $1 mill of IP (with $1 mill of debt)?
I would be interested in the opinions of any other investors if they were in my position.
James
Thanks Kum Yin,
Just to clarify;
I am in the 31.5% tax bracket & the $15k p/a I am outlaying is after tax rebates & all expenses.
I expect this outlay to increase in approx. 2 years when my fixed rate loans @6.50% expire & depreciation claims drop. Hopefully rent increases may partly offset this.We are by no means doing it easy…we are living a very ‘simple’ lifestyle to afford these properties…just breaking even at present.
I am uncertain what the vacancy rate is exactly; I suspect < 1.5% as finding tenants in this area is not a problem.
My main concern is whether losing $15k p/a will be offset by capital growth over the next 10-15 years. If it doesn’t I will be very disappointed!
James
Thank You all,
I appreciate all the positive comments which reaffirm the reasons I started this journey in the first place.
Yet I still feel that no one has addressed my question on current (& future) affordability issues as reflected by devo76…
I wonder the same thing.If housing is so unaffordable for middle australia. What chance do we have of a housing recovery. Recovery to me means increase in house values but this will make housing less affordable and therefore less people will by so to me that would drop prices. My head hurtsMy loans are interest only & I am relying on high depreciation claims over the first 5 years (all 3 properties were newly built) so I do not expect to be in a position to pay much off the principal in the short term.
I am therefore heavily reliant on capital growth to get ahead.
Are there any factual reasons why property WILL double in value in 7-10 year periods?
Surely there must be a saturation point where property becomes too expensive? A property worth $300k today increasing to $1.2mill in 20 years would require a combined income of approx. $250k+ to qualify for finance (with a deposit of $300k = 20% + costs).
Have any of our more ‘experienced’ investors gone through any periods of low affordability in the past? If so how did the ‘property cycle’ over come these issues?
Maybe there is no answer….maybe historical returns ARE a indication of future returns (unlike most financial planners are prepared to say!)…never the less I still get the feeling we all are investing in HOPE to some degree…bit like winning Tatts!
James
Thanks Wylie,
The properties are single storey 26sq 4 bedroom homes on 620-650sqm lots located in Victoria’s South Eastern Suburbs;
2 in Berwick
1 in Narre Warren SouthJames
Please explain….
The average wage in Australia in 2006 is approx. $56k p/a.
(http://144.53.252.30/AUSSTATS/[email protected]/Lookup/6302.0Main+Features1Feb%202006?OpenDocument )To purchase a home @$350k with a loan $275k (LVR@80%) Deposit ($70k) + costs ($17k) paid by purchaser from savings, the income required to qualify for the loan is approx. $60k p/a.
Assuming property doubles in 7-10 years;
Same property is worth $700k
Income required to qualify for a loan of 80%LVR = $120k p/a
Savings required for 20% deposit + costs = $175kWill the average wage also double in 7-10 years? If not what will be the effect on the property market?
If there are less buyers in the market wouldn’t this lead to less demand > keep prices down?
In 20 years will the same house be worth $1.4mill???? What sort of income will be required to service a loan of $1.1mill????
There is no way property can continue to double every 10 years!
Does anyone support or oppose this view????
[confused2]
James
Nats12, I wish it was as easy as that!
My current job is the highest paid position I have had in my 27 year working history! With limited qualifications & very high competition within the (finance) industry I am in my prospects of getting a similar or higher paid job are difficult (but not impossible).
An alternative I would like to consider would be to become self-employed & try to build up my own business…however I can not afford to do this as I am trapped by the negative gearing!I have also recently spoken to my Managing Real Estate agents & they estimate my investment property values to be $10k – $20k each below my current expectations.
Easy way to loose $60k overnight!!!!…… (on paper anyway) must be something to do with that negative gearing again!!!! [grrr]
I will try to look at the positive side………time will tell!
Cheers [exhappy]
James
Thanks Coopranos,
I just needed an injection of reality!
Because of being new to property investing I was having doubts about a number of issues;
– Will there be any capital growth in the next 5 – 10 years? Many “experts” predict the market will go backwards before going forward. If i had put my $15k p/a (negative gearing shortfall) into the bank or shares over the past 3 years i probably would have $50k+ that i dont have now.
– Whether my property “Advisors” are looking after my best interests or theirs. To be honest i accepted their recommendations without doing alot of due dilligence. I am reasonably happy with the end result though. I cannot see how property can double every 10yrs from now due to affordability issues. Buyer beware!
– Cash flow; I did take the precaution to fix interest on 70% of my total debt so I am not overly concerned about rate rises…yet. My main corncern is that I rely heavily on the tax rebates & therefore maintaining a minimum level of income (& paying tax) to make it work. If I want or need to change jobs I must maintain my current level of income. This is why I feel trapped by negative gearing.
– Inability to buy additional property; due to income & negative gearing limitations I cannot see how i can move forward (with investing) in the foreseeable future, although at the moment i have enough to worry about!
Overall I agree I am in a good position overall & can’t complain..we all have choices to make and have to live with the consequences of these decisions.
I agree with Dr.X about positive cash flow & rural properties they are not my cup of tea.
I will continue to hold as long as I can & hopefully expand my portfolio…maybe in 10 years I will be a millionaire!!!
Thanks for your contributions & GOOD LUCK to you all.
Keep [exhappy]
James
Thanks Dr.X
Just to clarify…
Are you recommending this course of action only on the basis we cannot maintain existing cashflows or would you do it anyway to ‘create’ additional cashflow?
Because of the mechanics of negative gearing I have reached a point I cannot afford to buy any more property for a very long time..would this help & are there any significant risks?
I am not familiar with vendor finance or wrapps. Does this mean we would be ‘selling’ the property???
The key appears to hold (& hope) for future capital growth.
Can anyone give an opinion/idea on what the capital growth forecasts are for outer metropolitian suburbs of Melb over the next 5yrs? And particularly the South East (ie.Berwick-Pakenham-Cranbourne) regions.
I hope they are more than 1.2%p.a.!!!!!!!!
James
Thanks Dazzling for your comments.
My gut feeling was to hold, hold, hold…if cash flow permits.
The recent posts on doom & gloom in the property market were giving me second thoughts if this strategy was sound considering how high we are geared.It’s always easy in hindsight…..
What affect do you think increasing affordability will have on future capital growth? Will less buyers mean less capital growth?
There are also a number of doom & gloom articles on the Jenman web site in this regard.
[smiling]James
Quote:Originally posted by TurboB:I contacted ASIC directly to get info, here is their response, hope it helps.
I got the same stock standard reply last week…
The silence is deafening….James
The first ‘batch’ of loans were due to settle this week…..does anyone know what is happening with these?
Any update on the ASIC investigation?
A Hopeful Punter!
JRN
