For negative gearing Die Hards??

Discussion in 'Investment Strategy' started by MTR, 29th Sep, 2020.

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  1. spoon

    spoon Well-Known Member

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    Practising reframing as it was discussed. NG is really one is buying a property which the intrinsic value is higher than what a renter would appreciate. Therefore, the renter is only paying for his share of the value he gets out of the property, which is a roof over the head.

    The potential capital gain, the future to subdivide, does not concern the tenant. Therefore, as owner, you pay for the gap as an investment of future growth. Fair enough, as the future growth the tenant has no part of it. Hence, negative gearing.

    You are actually investing into a "future" so one day will reap the benefit. You reap the full benefit! Happier now?

    How about that?:D
     
  2. MTR

    MTR Well-Known Member

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    Just being devils advocate....Do you become a victim if this does not happen, waiting 7-10 years Zip growth??

    Just pointing out..... that servicing debt has risks if investors get drunk on debt. Market conditions, where and what you buy important. To grow a portfolio need to manage this. Maybe that is why so few retire on property.

    Not poo pooing property, as I LOR

    Also property which has development potential is great, but from my experience you need deep
    Pockets to hold
     
    Last edited: 20th Oct, 2020
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  3. The Y-man

    The Y-man Moderator Staff Member

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    Agree - this is why DD, risk management, and contingency plans are important. Easy to say when times are good, but overstretching is a real danger.

    The Y-man
     
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  4. kierank

    kierank Well-Known Member

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    The only percentage on my loan is the interest rate :p.
     
  5. Gen-Y

    Gen-Y Well-Known Member

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    It is pretty hard environment to be in negative gear.
     
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  6. MTR

    MTR Well-Known Member

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    I agree, but it does help if you have an excellent broker. Also structure, different entities, buying in Trust can help
     
  7. spoon

    spoon Well-Known Member

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    Yes, that would be quite sad and imagine the opportunity costs involved. I recall euro73 mentioned in some of his analyses that even if the dualocc approach without any CG, paying off equity and allowing such equity to improve serviceability is still a way to go. Not ideal, I must admit but I can see the merits.

    Which property investor doesn't want a six year double in value scenario. Not everyone is a good timing expert, some are better than others.

    Comparing to shares, one might even lose 50% or more in value. Every so often there are delistings happening. I remember in the 80-90s some building societies gone belly up. And imagine you put your lifesavings with Alan Bond or Christopher Skase, just to name a couple.

    Capital cities blue chip real estates, even during the pandemic of a century era, might lose 10-15%? 20% maybe? So, horses for courses. Whatever we choose should allow us to sleep comfortably at night and not wasting our mental and physical health over it.
     
    Last edited: 20th Oct, 2020
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  8. Jana

    Jana Well-Known Member

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    Just curious to know how you come up with min and max cash reserve threshold? Is it backup money to survive in recession time or backup for empty houses + emergency works, etc..until find new tenants?
     
  9. kierank

    kierank Well-Known Member

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    The min and max cash reserve thresholds is different for each person/household as it depends on their living expenses, their risk profile, their job security, their business security (if they own them), their investment portfolios, ...

    And for any one person, it can change over time as they age, their health status, etc

    Obviously, the absolute min is $0 and I would suggest the absolute max is $250,000 per person (as that is my understanding of what the government will guarantee; if one needs a higher threshold, it just won't be guaranteed).

    I know the above sentence is very broad and, so broad, that it is virtually useless. So, I will post my current situation (BTW I am very conservative by nature).

    We are retired and our lifestyle (living and travel) is funded by our mandatory pension from our SMSF which is mainly invested in shares (which can be rather volatile). So the cash component has a min of 2 x annual pension payment and a max of 3 x annual pension payment.

    We typically pay our annual pension as a lump sum in the first week of July. Say, in June, we had
    2 x annual pension payment in cash, then we pay the next FY's pension payment in the first week of July (so the cash balance is 1 x) and then something like COVID hits and our share portfolio crashes 33%.

    No problem. We have enough cash to fund the following year's pension payment and one would expect companies to pay some dividends (even if at a reduced rate) to top up the cash balance. In a worst case scenario, if zero dividends were paid, we could delay paying pension payment in the first week of July until June the following year (giving ourselves another 12 months breathing space).

    So, the funding of our lifestyle is very safe (but not guaranteed). Hence, we needed to set separate min and max threshold for expenses outside our lifestyle, mainly property. Our IP portfolio is basically cashflow neutral, so rent is hugely important.

    For a minimum, I looked at and picked the highest, consecutive, three months of cash expenses (ignored non-cash expenses such as depreciation).

    For a maximum, I looked at and picked the highest, consecutive, six months of cash expenses.

    So, we can survive and not change our lifestyle if we get zero rent for 3+ months of our highest cash expenses.

    So, when COVID hit in March, we had not reason to panic from a financial perspective (obviously, we were concerned from a health perspective).

    In the early 2000's when the bird/swine flu was hitting the world, I owned a business. I knew my staff were getting concerned about their their job security, the business future, etc. So, I invited all of them into one of our conference/training room and told them that, should things go really pear-shape (and none of us could work - no revenue for the business), the company had sufficient cash reserves to pay all of its expenses such as their wages, the office rent, ... for up to 6 months.

    I could see the relief in their eyes, it was that visible.
     
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  10. Jana

    Jana Well-Known Member

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    Good note Kierank. It will be useful to other readers too.
     
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  11. kierank

    kierank Well-Known Member

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    Thanks. My apologies for the long post but I felt it deserved a detailed explanation.
     
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  12. MTR

    MTR Well-Known Member

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    yes it is ... saving grace low interest rate
     
    Last edited: 22nd Oct, 2020
  13. MTR

    MTR Well-Known Member

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    I have seen a few investors lose their shirt when markets changed. Too much debt
     
  14. Hari Yellina

    Hari Yellina Well-Known Member

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    Add value.

    1) renovate
    2) get Development approval.
    3) Build and hold.
     
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  15. MTR

    MTR Well-Known Member

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    Yes, this is one of my strategies

    Interesting, now I am seeing Perth market in recovery mode, so developing is attractive.

    Can also sell a couple, keep a couple dependent if you are chasing cash flow.
     
  16. MarkJ

    MarkJ Member

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    All these options require more valuable cash to be sunk into an asset that is not going anywhere soon. Far better to sell or be patient for at least 10-20 years.
     
  17. MTR

    MTR Well-Known Member

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    Buy, hold, sell, access equity, add value. You can do what suits. If asset appreciates then you have capital
     
    Last edited: 1st Nov, 2020
  18. Hari Yellina

    Hari Yellina Well-Known Member

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    are your properties around Melbourne(5 - 20 km from CBD) and Sydney (5 - 20 km from CBD)

    or in the countryside or in a different country.

    If they are located in good suburbs in Melbourne and Sydney in few years you will see a good capital growth.
     
  19. Luca

    Luca Well-Known Member

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    I think the B&H strategy will always work. Cons is time, I think you need to account for at least 20/30 years however if you start at 20 that means 50 yo potentially financially free. By the way, you still need to buy the right assets, with lemons you`re not going to make.

    Active investors will get there quicker however it brings more risks with it. Cosmetic renos, full renos, split and sell land, knockdown and develop, H&L, grannies, and so on.

    In regards to the finance side of things it is all up to the single person and how they manage the business, as having a portfolio is like having a business. Neg gearing can make sense to someone but not to others.

    @kierank thanks for your contribution, we need people who already got there to enlighten our journey. Couple of questions:

    1) did you sell many properties along the way?
    2) did you buy across Australia or focus on one area in particular?
    3) did you engage Buyer Agents?
    4) did you have a MB or you preferred to deal with the banks directly?
    5) When pulling our equity, did you establish a new loan or you went LOCs?
     
  20. The Y-man

    The Y-man Moderator Staff Member

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    I'm happy to go through actual numbers to see if this actually worked. This was one of our purchases early in the journey, and sold in the GFC.

    Property: Thornbury 2BR/1BTH/1PK apartment, 70's build, block of 7.
    Purchase year: 2000
    Purchase price: $148k
    Deposit: 20%
    Rented for: ~150 to 175pw
    Prevailing loan: 7% (?)
    OCBC: $2k pa
    Sold year: 2008
    Sold price: $272k

    Assuming a loss of 2%pa (of purchase value) and $2k pa OC/BC I get 40k loss across the 8 years (I could go thru our tax spreadsheets for 2000-2008 but it's a lot of digging!! - the figures sound about right).

    Assuming NO tax deductions, and 5% selling costs, 7% sunk purchase costs, I figure an annualised compounding return of 12% pa.

    The Y-man
     
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