Farmers Strategy to Build Wealth - oldie but goodie

@sash @Anthony Brew ah! Makes sense. Is this a type of loan feature you’d have to request at the start of the first IP?

 

If you have not yet got your first IP then you will not have been through the last decade of credit expansion where lending went a bit over the top allowing you to purchase the size of portfolio for this to be a problem during the credit contraction we are now going through, so I don't think it will be an issue for you.

The economy had been sluggish, so to try and get people spending money on goods and services, the RBA lowered interest rates as a way to reduce loan repayments to give them more money to spend and if it was spent on businesses, those businesses would pick up and hire more people and get the economy moving. That was the theory anyway. Unfortunately lots of people spent the extra money on more property which drove prices up further giving property owners even more money and with all of the extra 'on paper' money, the banks allowed more and more borrowing. This increased the country's debt (not the effect the RBA was looking for) and now the debt is high which is considered risky so to reduce it, APRA has introduced a range of new guidelines to make lending harder and to force people to pay down their debt.

As a result, those people such as you and me will not be able to build a portfolio of the magnitude possible then (at least for now and probably for quite a few years to come), but those that did, if they sell down some properties, due to the tighter lending restrictions now, it will be more difficult and sometimes impossible to buy back in for the same loan amounts they had previously.

Hence the use of that particular loan facility referred to - to avoid paying out the loan on existing properties and instead just transfer the loan to a property that can provide better profits.

In short - I don't think it will affect people with only a couple of properties or less.

 

Ok, got it. Yeah we’re just starting out educating ourselves as much as possible for jumping in. .

 

I would have thought this strategy is too costly with the high transactional costs of buying and selling property. Much more risky strategy to. The APRA rules will relax eventually. Maybe just renovating your exiting properties for the time being is another option.

 

Not really..if you can't borrow...then this will accelerate wealth growth.

As for APRA ...it may ease a little but...but fundamentally it will be in place for a at least 5 years.

 

And that's the problem being able to keep borrowing. You reckon 5 more years, did you hear that somewhere?

 

Well...that is when Sydney...Melbourne and Canberra cycles will pretty much be done.

So that would take a lot of pressure off in terms of borrowings and growth..Sydney and Melbourne account for at least 50-60% of the Australian housing market.

 

Hi Sash

Interesting concept to replace puling out equity.

Have you done any calculations as to the loss of capital due to the cost of the changeover. I am talking all cost RE commissions CGT buyers agents (if involved) stamp duty etc.

Personally I will keep holding as I have become quite accustomed to the rental income.

Cheers

Andreas

 

That is going to be pocket change if the market changes as expected.

In the Sydney morning bloke from Blacktown bought a place on bought a place in Cronulla he sold in Aug for 730k I believe...another one in similar block sold for 680k just recently....that is 50k pull back and more to come. I think he bought for 375k odd...a couple of years ago

So if you do the numbers ....when he sold he made a profit of net of costs of 330k.....after stamps, legals and sell costs but not CGT.

With CGT assuming 40% marginal rate and some other structuring (i.e interest in advance) he would pay about 160k about 60k in tax. So his net gain is 270k.

If he kept it and it went down to say 650k....he would have made net of stamps/legals about 290k...so it is pretty line ball ..in profit..and given there will be no CG for another 7 years. If he put it another market ...lets say he puts it into Brissie for 400k and lets say it rises to 700k...and assuming entry costs is 15k. and exit of 15k..he would still still be better off by 250k.

 

excellent post @sash, new lending environment, new strategy. The game has not changed, but strategies need to be evolved.

 

Thanks for sharing @sash. Very timely post given how profoundly the new lending environment affects buy and hold investors.

 

Wow. I never knew you could do this. Ta.

With all these apra changes looks like you are going to have to be inventive!

 

Isn't that what caused the GFC as the really big banks just got more inventive and started selling lots of garbage wrapped up to look like AAA.

 

Nope. Banks did get inventive. But Aussie banks have to report everything. Like everything even toilet visits (highly exaggerated). That plus the royal commission, it’s unlikely they will get too inventive.


And thanks @sash. Super useful post.

 

I thought selling interest only loans to owner occupiers was pretty inventive.