Mortgage Prisoners with Negative Equity | 60 Minutes Australia

Discussion in 'Property Market Economics' started by GentleChief, 9th Feb, 2019.

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  1. skater

    skater Capitalist -- www.skatepro.com.au Premium Member

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    So I was right. The culprit was depreciation.

    I'm not trying to have a go at you......but surely you realised this when you quit your job? That's a planning issue, I think.

    Also, the income from your US portfolio isn't a lot. Paying yourself a salary from this still won't really address the situation properly, and what happens if there's problems overseas. You're really only getting around $500 per annum from each property.......$10pw. There's a lot of risk there.

    If it was me, I'd be looking at selling some of that US property.....you did say the values were growing.....and pay down some of the Aussie debt. I'm all for taking a bit of risk, but sheesh, I couldn't sleep at night with that going on.
     
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  2. Kickstart

    Kickstart Member

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    I think it’s monthly rental income??so $500 per month from each property
     
  3. Noobieboy

    Noobieboy Well-Known Member

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    56 properties generating only $506 per property per annum? That is insanely low. Is it really worth the headache and the pain?

    Doesn't seem to me like a sustainable or even worthy strategy, unless there is a significantly high probability of capital growth. With US economy going through 9th year of expansion I can see that probability evaporating pretty quickly. Ceteris paribus it is likely what didn't boom already, after 9 years of economic expansion, might not see a sustainable growth. Caveat emptor.
     
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  4. hieund85

    hieund85 Well-Known Member

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    I think his numbers are per month so more like $500 per month per property which is $6000 per annum per property. A not so cheap maintanance or tenant issue will wipe out the annual CF+. And not sure if those US properties were bought outright or with a mortgage at ??LVR. Accounting/legal fees, FX rate fluctuation, fund transfer, etc are all need to be considered. That's too much imo. But if CG is really good then it is a different story.
     
  5. euro73

    euro73 Well-Known Member Business Member

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    I think he is using MONTHLY figures... so the total income appears to be @ $30,597 + per month based on

    Australia (13 properties) - Minus 11,019
    Atlanta - (16 properties) - Positive 13,240
    Detroit (56 properties) - Positive 28,376

    Annual income of $367,164. But that will be pre tax. he may be accounting for US state and federal taxes but Australian Commonwealth taxes ( minus whatever offsets he gets for US taxes already paid) will then need to be taken from that when repatriated to Australia to create an income here.

    The numbers still don't really make a lot of sense to me.... @GentleChief has stated he went from + $50-100 per week per property while drawing an income here, which is @ 2.6K to 5.2K CF+ per annum per property per annum, which is $33,800 - 67,600 CF+ per annum in total across 13 properties, to negative $11,019 per month across the portfolio of 13 properties, which is negative $132,228 per annum in total. That is a turn around of between $166,028 and $199,828 per annum. If we divided that equally between 13 properties it would mean that each property had had an annual cash flow deterioration of between $12,771 and $15,371 - and that's the after tax effect , as the properties had previously been offset against Australian income. Surely these properties arent running that amount of depreciation, each? Not if they were purchased starting in 2007.

    The pre tax loss would need to be much more significant. In simple terms, to get from - negative 132K per annum ( the current claimed situation with no Australian income to offset losses /deductions against) to a positive result of 33.8K per annum after tax in Australia there would need to have been @ 369K of depreciation losses/deductions. Assuming a 45% MTR, that loss generate @ 166,050 in neg gearing refunds. Applied against the current stated loss of $132,228 per annum , that would return the cash flow to @ 33.8K CF+ To get from a loss of $132,228 per annum to 67.6K CF+ per annum there would have to be @ 444K of deductions/losses - again assuming a 45% MTR. This would provide for a refund of $199.800 which would transform a pre tax loss of negative $132,228 to an after tax surplus of @ 67,600

    What I'm suggesting is that it's unlikely 13 properties are generating losses of between 369 K and 444K from depreciation alone... especially properties purchased from 2007 . I would suggest that depreciation on 13 dwellings of that age would struggle to account for even 130K of the 369 - 444K or deductions/losses.
     
    Last edited: 10th Feb, 2019
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  6. Beano

    Beano Well-Known Member

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    Buy something like this ..your problems will disappear
    Mate paid $1.3m for this a couple of weeks ago
    All fund from equity at 4%
    He has a waiting list of tenants that are wanting to move in at a higher rental (already on 10.5% net yield! ..)
     

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  7. TMNT

    TMNT Well-Known Member

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    thats almost 100 properties, I thought I was the ultimate slumlord at 26

    If the strategy was for cashflow only, then id be worried to , or reliance on the cash flow to prop up other business or ventures,

    if long term CG with cashflow ist he goal, then unless there is a recession I think he is fine,

    my aim was neutral to slight positive cashflow for a few years with eventual CG to kick in, but after a few years of horrible cashflow neg through maintenance/tenants/bad luck etc. I decided to shed the problem ones,

    Gentle chief, maybe its different in the US, but dont you have periods where you have multiple vacancies, maintenance, dud tenants that will kill off any cashflow?
     
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  8. kierank

    kierank Well-Known Member

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    So, I was right :D.
     
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  9. berten

    berten Well-Known Member

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    Nice. Beano, any tips on sourcing good commercial ops?
     
  10. Beano

    Beano Well-Known Member

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    All my mates just look and look and look ..then they find.
    I just look ...takes me longer to find!
    I am looking at one now that i believe that could yield over 10pc on review and another one that could also yield something similar but may need to source a tenant.
    Would you be interested. ..both about $12m ?
    (Pm me and I will email to you and we can chat about it)
    Another one of mates brought a couple one at $18m the other one i think at $15m...they look like 12pc on review....

    No secret here just buy something large and messy ...tidy it up, get new tenants on higher rentals

    (ps it is not all good ..another mate had to sell his $80m properth for $50m during the GFC its just been re-valued at $100m! )
     
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  11. berten

    berten Well-Known Member

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    Haha, 12m is a bit out of my league but your first example of 1.3m at 10.5%, I’d probably be on in heartbeat. I haven’t followed commercial market for years but my basic understanding atm was that prime is around 6-8% and shrinking?

    Have commercial asset prices come down at all during the downturn? I’m surprised anyone would let go of an asset that reliably returns 10% tbh
     
    Last edited: 10th Feb, 2019
  12. Beano

    Beano Well-Known Member

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    Yes in the GFC....that example i mentioned is one
    I am not in his league but pre GFC i had a offer pre GFC of $8m post GFC a valuation had shown the value had dropped to $4m ...the yield on the $4m was 10pc (ps the value is back to $8m now yield is still 10pc but now on $8m)
     
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  13. berten

    berten Well-Known Member

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    Good god man, 800k a year?

    Re asset prices, I meant the current downturn in Sydney and Melbourne and credit tightening has generally lopped a lot off the 1m+ bracket in resi re, any effect on commercial?
     
  14. Beano

    Beano Well-Known Member

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    Depends if there is a hard ratchet clause ...if there is (and the tenant has invested heavily in the building) then no effect ...us landlords are safe as house ..as they say :)
    Ps my mate brought the above property from a person who paid a net price of $800k in 1993 (i think) and now it generates the same income.
     
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  15. Kangabanga

    Kangabanga Well-Known Member

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    Fairwater estate in Sydney’s Point Piper sold for 100million last year.

    Exclusive: Atlassian chief buys Lady Mary Fairfax's Fairwater estate for close to $100m
     
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  16. Beano

    Beano Well-Known Member

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  17. Beano

    Beano Well-Known Member

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    Error in these detail's
    Paid $1.2m not $1.3m (being NZ no stamp duty or land tax)
    With the pending decrease in the rating valuation net yield could be 12pc so 2/3 of rental is clear profit
     

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  18. Redwing

    Redwing Well-Known Member

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  19. Perthguy

    Perthguy Well-Known Member

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    What's the TL;DR @Redwing? My internet can't handle video right now.

    Also, I have an interesting situation. I have gone in 50/50 with a house build. Current value ~600k with a loan of 150k. The thing is that it took longer to complete than anticipated so if I add up land, build, holding, selling fees and taxes then it would sell for less than the total costs to produce. At a $460 per week rental it's nicely cashflow positive but I still consider it negative equity. I'm not a mortgage prisoner though.
     
  20. Beano

    Beano Well-Known Member

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    Filled vacant space pre-settlement . .net yield now 18.5%.
    Filling up the rest of vacant area will bring the net yield to over 21%.