Confused and don't know what to do next?

Hello There,

I've been a reader of this forum for may years, including the SS forums, and this is my first post.

My husband and I are a bit confused/ disillusioned with the market at the moment and don't know what step to take next?

Firstly, here is a bit of background, that may help you in providing some guidance:
- We are 46 &42YO and live in Melbourne
- 2 Children due to start high school in 2 years; private school with fees.
- I earn ~40k/yr, and Husband earns approx. 160K/yr.
- He works in automotive (Engineer) and will be made redundant in December. He believes he will land a similar paying job fairly easily within a month or two from finishing up... he already has some leads and potential offers

Our finance/property position is as follows:
- Own PPOR (All bad debt paid off, but have loans for the purpose of IP's/investments). House is valued at approx. $1.4 Million.
- 3 house investments in Brisbane (Middle Ring). Purchase Prices and year / Current Values/ Rental Per week are:
1) $545,000 in 2011, Current Valuation $650,000, Rent $565/wk
2) $465,000 in 2013, Current Valuation $660,000, Rent $560/wk (already released 120k equity)
3) $400,000 in 2015, Current Valuation $465,000, Rent $380/wk

- 1 Investment in Melbourne:
5) $499,000 in 2016, Current Valuation $525,000, Rent $450/wk

- We have 1 more Investment in Melbourne through our SMSF:
5) $381,000 in 2017, Current Valuation $385,000, Rent $400/wk

We also have invested 80K in shares, and that portfolio has a value of 104K atm, and half the shares are dividend producing (but reinvest into shares). money used for these was taken from offset account.

Our loan details are roughly this:
-Total loan amount across all properties is $2.4Million
- We have a total of approx. $300,000 in offsets
- One of the loan splits has $400,000 in funds that has not been drawn down yet.
- So effectively we are paying interest on a balance of $1.7 Million (note, none of this includes the SMSF Property)
- Interest rates range between 3.85-4.29%, with roughly half the loan value is fixed. All loans are IO and the closest one to finishing IO is approx. 2.5 years away.
- We are pre-approved for another $720,000 (ie 576,000 at 80% LVR, but can go higer based on our funds in offset, and the available 400K loan)

We have been actively looking at another Investment property, looking around the Melb North/North East approx. 15km out. Something that can become a development site in the future. Our plan was to buy something now, hold it for the next 6-7 years and allow CG to do its thing, and once we have finished paying the kids school fees, we may look at developing. Similar to whats happened over the last week with rezoning, this may(?) happen again in the future in our favour...

We have been to so many opens and auctions, and we're just shocked at what people are paying. When we do our fundamental calculations, yields are totally out and low based on the prices paid and they just don't make sense at those prices. We've been close to pulling the trigger but have been cautious as a lot of emotion has set in at each of these auction and prices have been super inflated. The other thing in the back of our mind is all the talk and seeing interest rates go up, with a possible correction occurring.

We are happy to diversify in shares, as we have done already, but don't know if this is the right thing either.

I hope I've given enough information to help create a positive discussion that may help us choose what to do?

The questions:
- Shouldbuy another property?
- Should we wait for a potential small correction and look at buying when there is less completion from crazy auction buyers?
- Should we look at purchase more share/ETF's etc?

Thank you.

 

Hmmm.. just off this information i'm just going to say it sounds like you have quite an excellent portfolio!
I'd go for more shares... get older, no headaches. No maintenance and plumbing issues. No tenant issues. No land tax. Much better liquidity in case of any urgent matter. etc etc etc...
Let you kids finish high school with happy parents.

 

Wow ! You guys have done exceptionally well so far.
I would say listen to yr intuition re prices going too high and yields too low !Maybe buy a commercial property to get the better yields as you have the cash for deposit.
Don't be anxious to do anything -Well Done !

 

Hi @Kocev. If you are shocked at what people are paying then you are right to question if this is the right time to buy. It might be a better time to investigate whether Exchange Traded Funds ( ETFs) or Listed Investment Companies (LICs) could help you achieve your investment goals.

 

I would caution against jumping into any further purchases with your children about to start private school and the potential for your husband to be out of work for a while. You have a large portfolio, is there any reason to purchase anything more?

As properties in Melbourne where you are looking are going to auction for unrealistic prices, it would be prudent to hang off. If you must buy another property, you might prefer to get something in a city that isn't going crazy at the moment. If I was in your situation I would be studying up on Perth suburbs for when he starts his next position next year.

 

You seem to be overweight in property and under in shares. I'd be buying more shares to rebalance your investments.

 

I agree with most of the other posters - except... I would encourage you to sit tight for a little while and evaluate opportunities as they arise. The other side to being an investor is knowing when to stop.

I think it's really important to wait until your husband actually signs on the dotted line with a new employer first. As you can never really be sure. At this stage, it would seem that you have a lot more to lose investing in another property than by not investing.

I'd be really interested to hear which suburbs you own property in, by the way. Please share if you feel comfortable

 

Sharing the sentiment with the other posters, wow - you guys have done really well for yourselves where you should be telling us what to do. However, some thoughts:

1. Risk Management
i. Surely with your husband's eminent job situation looming, this certainly would be the biggest concern, despite obtaining a redundancy and reasonable prospects of finding another job, it would be prudent to sit tight, store up savings and wait until he is in a solid job again, as often these things take a lot longer than planned.
ii. Possible increase in interest rates, it seems that your IP portfolio value (excluding super) is similar to your debt, and your achieved equity appears to be sitting in offset accounts or other fund positions. A quick calculation indicates that you are possibly cash-flow neutral at best, in fact the offset is helping in that cash flow position - a 1% change in interest rates would cost you another $17,000 per year, and hence cash-flow management would be a concern. Could mean the difference of sending one kid to a public school!

2. Your goals
You haven't enlightened us on your goals such as wanting to retire say at 50, or happy to retire at legal retirement age of say 60. If you wanted to retire at 60 when you can access your super savings, then possibly one of your goals would be to ensure that your super fund has significant savings / investments / funds to provide for the retirement you are seeking. This would mean beefing up your SMSF which could mean contributing as much concessional and non-concessional funds as allowed to reach that goal (and could even mean selling IPs to release funds to contribute to the SMSF, transferring existing shares, and further cash contributions).

If on the other hand, you were looking to retire earlier and wishing to use rental incomes to fund such an earlier retirement, then there would be a strategy of buying and holding, achieving rental and property growth and adding properties to achieve that, or selling down and taking the cash. There would be no point in continuing to add properties if you are not getting the rental or price growth within your desired time frame.

3. Some options
i) Do nothing, continue to save your cash, wait until you see what happens with your husband's job and possibly take a nice holiday.

ii) Consider other property investment strategies:
- Doing property development is one way of accelerating property investment but it also has risk, and actually takes a lot of time, but one can manufacture equity and cash-flow orientation in such developments.

- There are also other income producing opportunities such as NRAS and dual-occ (refer @euro73 posts).

- And also buying below market value opportunities in states that are on the down-swing (e.g. Perth).

iii) Consider other investments in shares/ETFs/LICs etc.

Hope the above comments help, in closing, it would be great to be in your situation!

 

Everyone, Thanks for your feedback so far.

Yes, we may need to look into this. Our current share portfolio on has normal shares in it. I don't know much about LIC's and ETF's, and from what I've read so far, I don't know which would be a better option?

We've thought about this, but don't know much about Perth. Compared to Brisbane we have gone up many times, so we know most of the city well (ie the Brisbane stopover was always the addition to the yearly Gold Coast holiday ).
Would you mind giving some pointers on areas or parts of Perth to look at, or point me in the right direction?

Well, I suppose it comes down to the endgame. Our aim is to have 4 or 5 properties unencumbered by the time we retire/semi retire at hopefully 55, and the 5 yrs after that the super can kick in. So, trying to figure out how to pay off the remaining 1.7 million is part of the question. The aim of buying the development property/ies would be to hold for a period of time to allow for Capital growth to kick in, develop and sell off some to reduce the money owing. Not to sure how we'd be able to achieve it quicker with shares, or maybe even buying in Perth? Perhaps buying 2 in Perth and hoping for the capital growth, plus debt reduction in the others could then allow us to be in a position to sell a property (or 2) and pay off all the debt?
What other ways can you see us achieving the goal?

The 3 in Brisbane are in Wynnum. The one in Melbourne is in Ascot Vale.

Would be interested to find out more about this?


Thanks all again.

 

So it could be a case of the classic property investing formula, buy 10 properties, at some stage in the future, sell 5 to pay off the remaining debt and have 5 properties unencumbered (or it could be 8/4, or 6/3 depending on the situation!).

 

Great stuff!!

Go the LICs. .. specifically the ones that have been around a long time.
Look up Peter Thornhill and read @austing's posts, among others. We may need Peter Thornhill to do a seminar in Melbourne, me thinks...

 

Your based in Melb right?

Just curious, have you looked at Geelong, deve sites? Melb makes no sense at the moment.

Am thinking that perhaps Geelong has potential upside, ripple effect has already started and I do know a developer who could make the numbers work in Geelong?

Not advocating you should buy? but I would certainly be looking at this closely for potential upside, currently achieving good auction results. Just a matter of determining how long this market has been moving, I expect its behind Melb.
MTR

 

Thanks, looks like I've got a bit of reading to do.....but sounds very interesting.

 

I have only read the first post so may have missed if someone has asked already but

What is your goal?

What is the current cashflow after expenses?

How much do you need per year from property to live?

 

Yes, In Melbourne, just a suburb away from your dev site (I think in Thomo?)
We know Geelong reasonably well, but would really need to study to understand the potential of each area.

 

just a thought seeing are on the ground ?

Also Perth was mentioned, I am from Perth, there are certainly bargains to be had, but I don't think some realise Perth did boom in 2013-14 so we may be some time off another boom cycle, we have nothing to replace mining. There must be some trigger for markets to rise.

Also back to shares, many threads on this and seems investors getting excited, are just buying up with a view of long term hold.??
I cant bring myself to buy just yet, because I keep hearing we are close to peak. I am happy to sit back and wait for a correction and then buy up as I don't want to lose any capital

Perhaps I have the wrong approach, and cost averaging works better?? Who knows

Time to get cautious as the stock market hits a peak

 

1. Hopefully attempt to retire/semi retire by 55.
2. We are currently able to grow our bank balance/offset amount by approx. $8,000 per month.
3. With everything paid off, and kids finished school, I think we could comfortably live off $80,000 after tax from property.

 

?

 

you can find out what is happening as you are in Melb, much easier than if you were interstate like me

 

ahh, ok