Is now the time to buy?

Det,
At no point in my post was I suggesting to go and buy 10 properties outright. I was merely pointing out how much equity you have and how you are not using it to your advantage. I am saying this with great trepidation, but at the moment seems to me you are making everybody else richer than yourself (taxman etc.,).
As far as living off debt goes, it is a strategy based on the assumption of capital growth ( from what little I understand so far). I think there might be a few people doing this on this forum.
If the idea of investing in property is a long term hold strategy, then why should it matter what the cycles are doing – as long as you buy well. don’t you make money when you buy?
Also Foundation, “to sell now will require vendors in most areas to accept lower offers than they could have expected a year or two ago” – Wouldn’t that mean NOW is the time to buy?

I guess each to their own in this game. It all boils down to what level are you comfortable with. As Oshen was saying if we listen to every piece of advice coming our way, we will never be able to make up our minds.

I was only trying to point out – given your situation – you are wasting your time and money by even indulging in this discussion. You have equity and serviceability even if it were negatively geared for a little period of time. What are you waiting for?
If I were you, I would be actively looking at using that equity in buying quality property in quality location being close enough to either +CF or neutral, reduce my tax liability, increase my portfolio so that I can retire in the next 5 to 8 years time.
But then that is me and I am reckless.
Bye
Padma

“Why buy when prices have started falling? Would it not be better to buy when they have finished falling?”

When would that be?
Padma

I’m with foundation on this one.

[sarcasm] Despite popular belief, the real estate market really is cyclical! [/sarcasm] [biggrin]

People who say that if you can afford to hold for the long term then why not buy now are not allowing for the current value of money impact. Inflation will erode any negligible medium term returns leaving you effectively worse off in buying power. Sure, you can buy and hold and still have those houses in 5 years time, but there’s a good chance you’ll be worse off in NPV real terms. You’d be better off putting the cash in to a fixed interest deposit with a big bank or some other investment option (so long as the after tax return exceeds the inflation rate).

Cash flow is only really of concern when you’re looking at servicability. You won’t make your millions out of five bucks a week on $20K down. Its the CG where you make your bucks, and the WHOLE market is headed for a prolonged period of stagnation.

If you can pick the eyes out of it and turn solid returns immediately out of informed buying then that’s a nice approach, but I’d advise flipping it or such then so you don’t get stuck holding it whilst it underperforms for the foreseeable future.

All a bit doom and gloom, but in every cycle there is a downturn! If you’re patient then this will be a good thing in a few years time!!

Ciao,
Michael.

Thanks Michael. I guess that proves that ‘value’ depends on your perspective![biggrin]

If you take the 12 month fixed term option, they now offer 9%. Its revised every quarter, so that it could stay the same, increase or decrease. but right now its 9%. It still means they are offering 9% now for 12 month fixed. So what would you call it then Foundation?

By the way I am not advocating city pacific, merely pointing out that its an option which is there to be explored, that’s all.

Foundation, I have found you to be quite negative to a lot of forumites on a regular basis. We all have differing opinions so lets all be happy about it and move on. Good you have an opinion and share it but we all would like to do the same without a few slices being requoted and belittled as you dont agree.

I feel that Det shoud have a go and not listen to chicken little shouting the sky is falling again and again.

goto LJhooker logan central, Logan central first national and look at the percentage of sold properties there NOW. I dont requote people but you really do get caustic after a while.

The market for townhouses is in a bit of a surge there and a lot of people are catching this wave now. Cap gains an issue, I dont think so. Projections on the townhouse and unit market has them averaging $157k by december and the cheapest is $120k now so with this figure being a struggling $100k 2 months ago it seems you may not have looked as closely as you should have before doing your one line misquote then hassle of all and sundry.

Det, do what you want but do something. Minimogul is right(again) about not being shy and getting into it. I wont be waiting and bought another townhouse which settled 2 weeks ago.

I reno it when the lease expires in July. Have a go.

DD

PS146 Certified Financial Planner and Buyers Agent
Don’t sweat the small stuff,and it’s all small stuff!!

Jeff, My point is that a 2% net yield on money employed will not cover your cost of capital. That isn’t even keeping up with inflation, so in real terms you’re going backwards.

That was my point about servicability. Your cash flow calculations are important, and do need to allow for any potential vacancies/interest rate increases etc. But at the end of the day that’s all just so you can “keep” your asset. You make real money out of it through its untaxed “capital gain”. (I get an LOC against any equity built up as deposit on the next IP, so “spend” my CG without being taxed on it). I believe cash flow is important, but only in servicibility calculations.

My personal gearing preference is for neutral or even slightly negative. This allows me to buy the quality properties near the city centres in postcodes with prices just above the city median. These perform well over the mid to long term in CG relative other market segments. But, as others have pointed out, everyone has their own strategy and should execute it accordingly. This is my strategy and I post it just as an insight to others considering getting into IP. IMHO, too much emphasis is placed on cash flow insted of potential CG.

Cheers,
Michael.

Jeff,

Good worked example, and I admit I didn’t factor that it was an IRR return on your money, but considered your money employed, but I think money employed is important as the leverage increases your potential gain/loss.

My concern with the example given is that you’re making only $3.4K on your $100K employed. One of the real benefits of real estate as an investment vehicle is leverage. ie you can borrow big money from the banks at 80% LVR which you can put to good use to make you more money. As you put it using OPM!

I’d say 3.4% is not such a great use of this leverage. Sure you’re making 17% IRR on your 20% down, but there’s a lot of risk involved. If the interest rates go up by 2% then your neutral (virtually). If you get some prolonged vacancy then this hurts too. And, if the property drops in value to say $80K then you’re net return is -$16,600 for the year! In that case your IRR is -83% and not +17%.

Leverage works both ways, and I think the CG/CL is not given the amount of weight in the calculations that it should. I think this is because the cash flow is easier to predict and doesn’t rely on some estimated projection of value.

I agree that if you can lock a $3,400 return on $20,000 down then this is nice, but it ties up $100K of your borrowing power and is quite risky without due consideration of future CG/CL etc.

IMHO,
Michael.

Jeff,

I agree that you can make money out of cash flow alone, but my point is that regardless of which strategy you adopt, CG/CL is far more important than marginal cashflow considerations. Cash flow might make 1-2% difference on equity employed depending on the selected property, but CG/CL can make 10-20% or more difference on your ultimate IRR.

I agree that cash flow is important when considering whether you can service the loan, but my “primary purchasing criteria” is always the potential medium to long term capital gain/loss. If I can select a portfolio of quality properties which can return 10% pa on capital employed then I consider this far more beneficial than 3.4% positive cash flow with no capital gain. This is even more exacerbated when you consider the after tax returns of each approach whereby your 3.4% becomes 1.7% and the CG remains 10% untaxed.

As always, its horses for courses, but to overlook the impact of capital gain/loss in your IRR calculations is to ignore the most significant potential lever of personal wealth creation in my opinion.

Cheers,
Michael