Hi from The Y-man

Hi All,

Well about time I introduced myself

My original story up to 2006 is found on Somersoft
The Y-man Interview

Here are some of the details the original interview skips over:

In 1997 both my wife and I were working full time jobs on pretty much average pay. I was pretty much broke (spent all on cars) but the better half had saved up $30k over a period of 6 years before we married.

When we discovered the $30k had been stolen by the sham operator (as described in the Somersoft interview) but that we still had a binding contract for $300k to settle, we decided we would need to work very hard and scrimp on everything. So both of us got a second job (wife in a call centre after she knocked off from normal work, and I took up lecturing while taking annual leave). One of the key things was that no bank could tell us how much they would lend us (joys of OTP). We figured 70% LVR would be reasonably safe (we were green) so we set about saving $90k before the building was to be completed.

The Lord arranged it that the building was delayed a year and we saved up the $90k by April 2000. Also at that point, an out of court settlement was reached by all the people who had been scammed, and the developers, who kindly decided to forego the 10% deposit - in other words, we could get the apartment for $270k balance. About this time, we also found out we could probably borrow about 90% of the price ($270k) anyway, so we felt comfortable enough to actually buy a place of our own (because the OTP was not going to be ready until 2001).

The first property that settled in our name (and just before FHB grant came in - doh!!) was what was going to be our home - a lovely 3BR 2bath unit in a block of 4 in the south east. As detailed in the previous interview, we ended up renting it out.


We settled our OTP apartment (2 bed 2 bath in a building with 200+ apartments)

Between 2001 and 2006 we went on to buy several 1 and 2 bedroom apartments within a 10km radius of the CBD, and a unit in the south east, before finally buying a 4BR house (as an IP) – and we hit the serviceability wall.

We bought apartments because they were affordable and the holding costs were not as great as for houses. We also figured that in bad times, people won’t be able to afford buy or rent houses, but could still afford to buy or rent a small apartment (liquidity). Also, if we needed to sell, we could sell in small “chunks” (hard to sell half a house when you need the cash). However, we could also see the cap growth that houses were getting.

We stretched one last time and bought a PPOR. It was one of those houses where we went to inspect as a sort of wishful thinking. It was advertised as POA, which to us meant “you can’t afford it”. When we talked to the agent, we found out it had actually been sold at auction, but the buyer’s finance fell through. The house had been off market while they tried to settle for several months, and had come back onto the market 6 months after the original auction. We ummmed and ahhed and realised we could just afford it – and got it.

 

So what happened after 2006?

Realising we had come to the end of borrowing serviceability of property, I went looking for more sources of loans. I found them in 2 places:

1. Margin loans for shares

2. 100% loans for structured financial products

The share market at the time was rocketing – any toddler could have made money. Typical returns we 30% pa. I got into the act big time.

Using money drawn down from the equity of the properties, I used that as collateral (deposit) for margin loans (loan upon a loan). This mean I could buy shares that were 100% geared.

For a while we made heaps of money.

I then discovered structured products, which meant we could borrow a huge amount at 10% interest. I figured I could fund the interest bill with the money we were making from the share market (remember we were already at serviceability limit for home loans!).

Then the great GFC crash came. In a matter of weeks, instead of making money on the share market, I lost heaps. The shares I had were worth less than the money owed on them. I had reinvested everything I had made back into the market and lost the lot.


The structured products were a problem too. The GFC meant that we were left with products what were not going to make any money (they were locked in cash due to the way the trusts were structured), but we were locked into paying a huge interest bill for the following 7 years.

We were certainly not unique in our predicament. Thousands of people were affected. Many went bankrupt.


What saved us was our properties (and some gold that had been bought prior as a risk hedge). Here was where this thing people talk about a lagging market became crucial. The share market crashed, but it didn’t mean house markets crashed straight away – there was a lag (granted people affected by the GFC began to sell their houses, but that wasn’t every property investor!) We put our properties on the market immediately in the winter of 2008, and managed to sell off quite a few of them.

The proceeds of the sales was used to pay off all the loans, close off the structured products, as well as pay off all the debt on the remaining properties (we became very debt paranoid). A lot of money had been lost, but we had a couple of IPs and our PPOR paid off.

We then reconsolidated until the end of 2013 – when we once again realised how we were paying outrageous amounts of tax (considering we were getting our pay as well as the rents, with no interest payments). The fact our GFC losses were trapped in a trust didn’t help.

In December 2013 we felt comfortable enough to get back into investing. We bought units in the outer north which were almost cashflow neutral on an 80% loan – which didn’t really help the tax issue. Looking for more CG than CF, we sold off the last of our apartments (except one due to poor prices in the area) and bought houses in the inner city and one in the southeast.

As I write this, our latest purchase has just settled. This will probably be the last for a while, as again serviceability will be an issue. We are investing into AREITs instead of paying down our loans as they are returning about 1% more than the prevailing interest rates. More importantly, they are providing “tax prepaid” income, as they slowly work off the losses from the GFC.

 

Hi Gockie,

Thanks. There's some technicality around this too that I can't go into too much detail regarding franking credits. I am also of the camp that sees the industrials and financials
1. at a steep long term high (bitten twice nows - .com bust and gfc
2. having massive economic reliance of world on PRC which is yet to fully stabilise
3. EU needs to sort its game out

I'll watch these play out and forego a bit of gain. Also if going back into "the fray" I'll most likely be going via the ETO route again for leverage and income generation.

Further, at our stage of life (looking at at least partial retirement), cash flow is critical to feed the pack of -ve CF properties we have. So we have tied our CG hopes into the resi props, and income to the AREITs. I do want the industrials and financials to do well by the way - they are my tenants in the commercial and industrial properties


The Y-man

 

Yeah - we are one of those unadventurous people that will only buy resi in a market we understand - and the best way to do that is to walk it, live it. Bris will be the only other city we have and will consider at present as we have family up there.

The Y-man

 

Haha - no - it goes back a loooong way, but has to do with a nickname at my office (second half of my first name starts with Y)

The Y-man

 

Not old enough to get to access to super in the near future yet

Although that is where my main exposure to the sharemarket is - my super is split between cash and a vanguard index fund. I tilt the split based on market conditions (more into cash when market high, more into the index when market low)

The Y-man

 

I just realised I did not mention ETOs anywhere prior to this coment.

I should clarify: prior to the GFC (ye goode olde days) we were also quite heavily involved in options trading (exchange traded options) predominantly in spreads (not covered calls). We were also trading the market on the short side - you would think I would have made money in the crash right? Every time I thought the market had topped, it would shoot up even higher... ugh...

Also as an update to our AREIT strategy for those interested, our returns since 2013 (when I started the current strategy) has been about 12% to 15% pa. The worst patch actually was between July to January this year.

The Y-man

 

Let's do a situation update

A few (apparently big) things have happened since my last post on this thread.

I guess the first thing is the talk about this big property crash that is happening/will happen. People might note I have little to say about this - and it is not that I agree or disagree as such. I do see prices have eased in certain pockets around the Eastern half of Melb - no doubt.

However, I am not actively searching for anything, and as a result a bit oblivious to the news as we maxed our borrowing limits in Feb 2017 as per the earlier post.

Nevertheless with the advent of the APRA thingy and RC and all that, we needed a change of strategy to meet the so called IO/PI challenge

Will this be a widespread, disaster causing issue - I don't know - but I can see some highly leveraged early stage developers going through some tough times. As for the PPOR buyer - probably a good a time as any.

As for ourselves, the following strategic changes have been made over the past year.

1. Diverting all surplus income from work and REIT/Shares to paying down home loans (no further investments into the REIT/Share market)
2. Strategic "extinguishing" of loans that are due to come out of IO soon to manage cash flow

As others have debated elsewhere, maintaining cash flow for our seriously CG oriented IP portfolio is seen to become an issue in the near future, with several of our IPs coming out of IO next year with little prospect of refinance at this present time.

With the 2 changes made, we have now got to a stage where we can effectively "extinguish" (we will retain the loan with 0 balance) most of the upcoming IO/PI conversions. The impact of this is twofold. The first is that more cash is going in to consolidate our debt position (not a bad thing), and less going towards more aggressive income generation such as REITs. The second is that the tax benefits (yes folks we do take advantage of tax benefits to the max) will evaporate (again not necessarily a bad thing) and we will be contributing a significant share to supporting the nation.

The other issue that the whole RC/APRA saga has apparently resulted in is a falling out of bank shares out of most investor's favorites. Whatever it is, as I write this, the bank share portfolio has taken a belting. However in my (limited) view of the world, I still don't see them going out of business - in fact with the changes made, they should be more financially secure than ever before, with (hopefully) far less risky loans on the book. Granted the spectacular dividends may not stay - but my view still remains that as long as I am receiving more in dividends than I am paying the same bank in interest - I might as well hold the shares (probably also explains why I don't get into the "banks are evil" debates ~ I get a lot of money from the good fee paying customers ).

The Y-man

 

Who knows what might have been. ... but then what if we had pulled it off? In some ways we do not know until we give it a shot (well maybe not in such a big way mind you)

The other thing I repeatedly state is that you may lose the cash, but you certainly do not lose the experience (good and bad!) nor the knowledge. The stuff we are doing now - such as strictly keeping a limit on the amount in the market and NOT reinvesting the income is one such learning.

I am not sure if I have written above or elsewhere, that despite all the dramatisation above, that 10 years after the GFC, our net worth is now 3 times greater than it was at the peak prior to the big crash. Sure there's been a lot of work years in between, and we get a decent salary between the two of us - but it's not astronomical by any stretch of the imagination.

Much of that growth in the past 10 years has been due to our forced property "trade-ups" - selling off the apartments and units that let us get into some good deals for houses in price ranges we would not have been able to afford without the consolidation (each of those houses needed two or more apartments ~ kind of like monopoly).

The Y-man