Negative Gearing Can Be Like Treading Water

But during this period there have been 2 boom cycles in Melb/Vic, so they purchased in 2009, good timing, boom time.

2008 BOOM (only State in Australia that boomed during GFC)
2013 BOOM

Boom cycles last at least 2 years maybe 3, Melb is having a good run, maybe 4 now

 

I agree and I disagree, property does lose value if you don't sell, because you cant access equity if the value does not stack up and you cant sell if you paid more than its worth today, in real terms that is a loss. Investors sometimes do not get a choice and have to sell, this is why we sometimes jump on bargains, life happens, and some people bite more than they can chew, happens all the time.

You are also stuck because you can not sell or access equity you may lose time, which you don't get back, can not continue to grow your capital.

I agree that if it cash flow positive you can ride the wave, hence, negative gearing can be like treading water. My point is great to jump in for gains, but need to manage cash flow/debt.

 

Doubling your money in 6 years, brilliant. Brisbane? However this would not be the case for all who invested in this State during this period, it will be dependent on what and where they purchased. .

What I meant by slow and steady, hold forever.... many investors have a perception that this is far less risker than being an active investor and I would disagree with this because you are holding during corrections etc, if you have the cash flow to do so then I guess its not an issue... otherwise its like treading water.

 

Is it yearly for 40yrs or nearly 40yrs?

 

So the people who own properties in mining towns like Port Hedland and Moranbah, who haven't sold because there are no buyers, haven't lost value? The only uncertain part is just how much they have lost.
Marg

 

That is not really a good example
I think i know what Paul means
If the value of the investment falls but income stays the same and you don't sell ...then nothing is lost.
If the property value falls the banks may ask you to top up equity however.
When you buy a property that is super rented (all things remaining equal) then the property value will fall. (But equity is maintained IF the super rent is applied to debt)

 

Value is underpinned by guaranteed income

 

Have had my head in the NG trough for many years. Last foray was a 105% purchase of an investment property (x coll) in 2009. Can't really be locked down on the figures but I think it was initially about $20,000 negative cash flow with about $6,000 pa in non cash deductions.

A few years of significantly paying down the loan, slight rent increases and interest rate reductions it is in the sweet-spot of cash flow positive but slightly negatively geared for tax purposes due to depreciation write-offs. Moving now quickly towards paying annual tax on this one.

Of course, the CGs over the last 8 years in Sydney have been pleasing. At this point the strategy has been solid.

I am lot more financially rock-solid (on paper) than I was in 2009 and could probably do the same thing again and use the IP to fund any new purchase.

Would I do it again? Not on your Nelly!~!!!!!!

That period (in hindsight) was an absolute sweet spot but the game has changed significantly. The decision made in 2009 was pure luck and the coincidence of a few things coming together for me at that time.

The game has changed significantly since then and I am not so sure pure NG is the way to go for the future. The dogs are barking but I don't think we have to fear too much if we are prudent and have a plan B.....&......C.

For me now (on the property front) it is about increasing liquidity slowly and reducing leverage, also slowly.

The beauty about this investing ' gig ' is that there is no one perfect approach, it is a matter of respecting clear investing cornerstone principles and using them in your own unique circumstances. NG can be part of that strategy but the dosage differs from person to person and the specific individual circumstances.

Best to all

 

If they dont sell they only lose value in terms of borrowing capacity and poor credit servicing etc. Regrettably the past 5 years have seen a vast explosion in property owners who count their property value when its unrealised. Thats fine to keep watch on it but you dont have that equity until its sold and banked. Its uncertain and shouldnt be counted until its sold. A buyer of property in Karratha may hold a property decimated by recent collapse in values but if they bought it in 1969 and it cost 140 dollars the answer is different to someone who paid $1m three years back.

The inverse often happens with shares. I see many older people with portfolios with VERY high yields. On things like CBA. They bought them for $2.60 and they pay a massive yield. Now worth $82.80. They dont see the value as $82.80 as they seek the income not its capital value. They dont concern themselves substantially with present value as they hold for the income they produce. Like a person who earns the Karratha property.

 

Investors got cut at the knees with income dropping by 50% including values of the properties. Lots of blood on the street in Mining Towns today

 

Call me silly .. but Paul I really do not get your logic whatsoever, maybe you don't concern yourself with values of your assets and how they perform but I do.... why???.....so I can improve my results, If you have 40 years go for it

I also want to manage debt, offload properties that are perhaps not performing, costing too much to hold due to maintenance etc., review market conditions, and also look at ways of diversifying and making more money from a superior investment choices.

BTW not saying my strategy is the way to go for everyone

 

+1

 

@wylie

Well, it is both really....nearly, truly....

 

Truly ,madly, deeply?

 

From my graph which is a Melbourne suburb - I wouldn't call those years booms, I would call it 'normal' especially If you compare to the 16-17 year (so far) as it is currently over 45%.

From the graph I posted the % growth each year was
08-09 - 7.5%
09-10 - 17%
10-11 - 0.009%
11-12 - -6%
12-13 - 11%
13-14 - 6.5%
14-15 - 10.7%
15-16 - 12%
16-17 - 49%

It might look rather large the 16-17 year but they did purchase the house for pretty much the median house price back in 2009 and I calculated the sale price against 2016 year as I would have to assume their 'house' which was previously pretty much median is still median if anything it would be worse than median as they haven't done any improvements where as new stock would of come online.

I live in the suburb and there hasn't been a 'boom' until end of last year around Sept/Oct where I started seeing prices go above what I would expect but it wasn't until March/April where the boom felt in full swing especially when I went to an auction that I thought mid to high 700s and it ended up getting 880k - even the crowd was gasping at each bid in dismay... Kind of tells you a boom is on then.

 

I never ever rely on graphs they will never give you a true indication what is happening on the ground

I can tell you from personal experience that Melb was booming during 2008-2009, started with inner city, and then ripple effect out. Inner city units were also star performers, you wont find this in any chart. I purchased 5 ips over 12 month period

@Jingo may be happy to give account he is from Melb and also playing in this market at this timeline

 

A quick question
Do you take into account taxation ,"principal " payments and "capX" into cashflow?
I agree with about not doing cf-
(Incl the above items)
My last year (at $30k pm slightly more cf- than your $20k) has been a bit of a killer too

 

Hi Beano

I probably should have used the term 'negatively geared ', the sum of 20k was the approximate cash loss for the period, ie, rental income - allowable deductions.

I incurred that range of loss for a year or so before I hacked into the principal

No principal or capital expenditure in $20k figure.

Haven't done the figures recently but I imagine the property is positively geared by 5k or a bit more before non cash items.

The real meat came in the capital growth (on paper) over the last 7 or so years.

Of course, in relation to untapped equity - the market gives and the market can take away

All the best