Passive Vs Active Investing - Hold at Steady Growth or Trade for Higher Growth?

Discussion in 'Investment Strategy' started by Jmillar, 14th Jul, 2018.

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  1. Jmillar

    Jmillar Well-Known Member

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    Hi All,

    I see a lot of people questioning the notion of selling assets. I hit the exact same mental barrier about a year ago, until a few of my mentors assured me that it's OK to sell, and that 'having to pay tax' should be low on the list of items considered when weighing up selling an asset.

    Anyway, I just spent some time putting together a spreadsheet actually comparing the figures. Table 1 looks at someone who holds an asset for 9 years which achieves a steady 5% growth pa. Starting investment is $500k, and they sell at the end of Y9.

    Table 2 looks at someone who starts with the same amount, but buys in a booming area. Each 3 years they sell the property and buy in the next booming area. This one is based on 10% growth pa.

    Assumptions
    When Buying -

    3.5% stamp duty paid (this was roughly the average for NSW/QLD for $500k property)
    $2,000 legals

    When Selling -
    22.5% of profit lost to CGT (ie 50% CGT discount, then highest tax bracket being 45%)
    2% sales fee on sales price

    Disclaimer:
    I flew back from Europe yesterday so my brain still isn't firing properly. Please correct me if I've missed anything major?

    [​IMG]
    [​IMG]

    Some other interesting facts:
    3% in Table 1 provided the same value at end Y9 to 5.25% in Table 2
    5% in Table 1 provided the same value at end Y9 to 7.4% in Table 2
    7% in Table 1 provided the same value at end Y9 to 9.55% in Table 2

    This makes me feel a lot more comfortable in trading - for example, to sell in Sydney now (outlook is probably a lot less than 5% pa for the next few years!) and reinvest somewhere due to have higher growth.

    Thoughts?
     
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  2. Foxdan

    Foxdan Well-Known Member

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    Your assumption that you can pick the next area that will boom at 10% growth for a few years is your biggest issue.

    Property investment is a long game. Your model of buying and selling just to be 100k ahead after 9 yrs seems risky to me - just get a job that pays 10k more a year and do nothing and you will be in the same position.
     
  3. jefn89

    jefn89 Well-Known Member

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    My thoughts on this are both can work and it'd come down to goals.
    Relying on capital growth though is more of a "hope" strategy rather than a plan.
    For eg with Sydney, if you were to hold for the next 10 years buying today, you'd be lucky to get a 4% p/a growth i.e. you may not see any growth for the next 5 years and bigger growth over the last 5 years. I'd depends on your strategy, risk tolerance and goals.
    Personally I'd rather be an active (reno's, subdivisions etc) although that's not in everyone's skillset, risk tolerance etc but given the current lending market continuing to buy and hold more than 4 / 5 properties is currently hard on ~$200K household income
     
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  4. Jmillar

    Jmillar Well-Known Member

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    Yes, obviously. It's merely an exercise to see how much higher return you'd need from a new property to see if it's worth trading. And I'm not saying that every 3 years there will be a new area booming at 10%, it's just an example.

    Also keep in mind this is based on $500k. If you base it off $3M which is roughly how much property I have, then the difference after 9 years is closer to $1M, and it increases exponentially so over 20 or 30 years the effect is even greater.
     
  5. Trainee

    Trainee Well-Known Member

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    The problem is that this looks fine with a 500k base. With a higher base, you might sell and not be able to reinvest due to lending limits.
     
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  6. MTR

    MTR Well-Known Member

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    This may interest you, oh yes, that old chestnut

    It's OK to SELL

    When I started investing in 2001 I was a buy and hold everything forever type of investor. I learnt the hard way that is not necessarily the best strategy, in particular when markets soften. What we are currently seeing in Australia today





    MTR:)
     
  7. MTR

    MTR Well-Known Member

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    or try 3%
    I think the average yield in Oz today is 4% and we are talking gross not net...... mind boggles really
     
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  8. jefn89

    jefn89 Well-Known Member

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    Preaching to the converted here! :)
    There's ways to get above that i.e. hi-res strategy although agreed selling and realising profits and then using the cash from the sale of an investment to reinvest in other investments or using "different" strategies in properties is likely going to be the "quicker" not easier way to financial freedom. At the same time different strokes for different folks, that's what keeps life interesting yeah?
     
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  9. MTR

    MTR Well-Known Member

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    Cash flow is King/Queen.

    I think the negative gearing strategy is really a dead duck in current environment, credit squeeze, market softening, low yields... Be lucky if investors can keep up with inflation, which in reality means you are going backwards.

    I always have a giggle when I hear the comment, buy and hold is less risk :oops:\
    It is a fallacy you are holding when market conditions change, property values can and do drop, as we are seeing this today, rents do not always rise and interest rates can change and impact on cash flow.

    If the end game is financial freedom from resi property, unless you become an active investor I think it will be very difficult for investors to achieve this in current climate.

    I think its good to keep an open mind and investigate various strategies that improve chances of growing wealth and increasing cash flow. Why just stick to one strategy?

    MTR:)
     
    Last edited: 15th Jul, 2018
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  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Ya cant go broke taking a profit

    ta
    rolf
     
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  11. Sackie

    Sackie Well-Known Member

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    Agree with this. I've always been a strong advocate for buying assets that you can add value to in some way. I think its perhaps more important now than ever before.
     
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  12. Karina

    Karina Well-Known Member

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    Ditto when I started investing I was buy hold and never sell. I remember years ago in the somersoft days when we played cashflow 101 board game day at glebe Yuchun said to me why don't you sell.. and I was like no I never sell anything. I learnt!!! thanks Yuchun. Wow that was a long time ago, must have been maybe 2003. I don't like to sell positive cashflow properties though. Like to keep the cashcows.
     
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  13. Sackie

    Sackie Well-Known Member

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    If I can keep super quality assets and still move forward with my investing then I'm extremely hesitant to sell those assets. Recently decided for my latest reno I'll keep instead of sell. Just too good to offload. May go down 100k or so over next year but over next 15 its likely to continue to kick ass.
     
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  14. jefn89

    jefn89 Well-Known Member

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    Good post here! More people should read what you've written here
    Being a broker along with recently starting the Steve McKnight apprenticeship course I can say that I'm all about getting on board with the creative strategies and making sure keeping the end game and questioning the assumptions underlying my own investment decisions!

    There's plenty of opportunity to do things a bit differently out there and you're hitting the nail on the head there with an active strategy rather than buy n hold, which for me involves too much hope
     
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  15. jefn89

    jefn89 Well-Known Member

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    Amen Rolf!
     
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  16. MTR

    MTR Well-Known Member

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    bump.... timely thread....

    How many investors here will be kicking themselves for not taking some money off the table....selling out of Melb or Syd markets prior to peak???

    You can use the old cliché...... that property is a long term investment, but seriously how logical is this?????
     
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  17. Serveman

    Serveman Well-Known Member

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    Interestingly Rich Harvey has just shared an interview on FB he did will Phil Tarrant ( Smart Property Investor podcast) about this same topic being discussed here.
    He is on the side of long term investments therefore favours investing in the two largest cities due to multiple employment drivers. He also likes the gentrification suburbs and adding value approach. From memory he was predicting that in 30 years the median in Sydney will be 8 million ( that's if we are still all alive by then) which by comparison was $250k in 2000 and currently sitting just above 1 mil
    Personally I've got nothing compared to most of you here on this forum, but emjoying reading all the posts.
     
  18. Willy

    Willy Well-Known Member

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    More logical than saying what you should have done in hindsight.
     
  19. ellejay

    ellejay Well-Known Member

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    I'm very happy to have sold in Melbourne this year. Using the profits to fund a subdivision. I'll probably sell another low yield one this f/year now the growth is done for a while
     
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  20. Beano

    Beano Well-Known Member

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    Just try to find something you would believe you would hold for ever and ever and hold it for ever and ever .
    Hence avoiding the clipping of the ticket by
    CG tax
    Stamp Duty
    Legal
    Real estate commission
     
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