Property Myths Busted

OMG I just made $50k from a development, let's do it again

edit goes hand in hand with
I'm doing it in my personal name so I don't have to pay GST/Income tax

 

Location, location, location is a mantra that real estate agents use to sell overpriced housing stock. "This property is overpriced but it's in a great location"

Pretty much, if you buy a fantastic property in a great location at the peak of the market, it will be a while before you get any decent capital growth. So timing is definitely important.

The other issue is presentation. You can buy a poorly presented property for less than an equivalent well presented property (think carpet, paint etc). Conversely when you sell, a well presented property will generally sell for more and will generally sell faster. So presentation is important.

So when it comes to real estate, it's all about: location, timing and presentation

 

Property outperforms shares

 

Because paying down debt improves borrowing capacity always, every time, except when...

The reality is that paying down debt improves borrowing capacity always, every time, except when it results in a significant loss of borrowing capacity. Just sayin'

 

Repaying non deductible debt gives you a marginal increase in deductable debt capacity. It's marginal because lenders now have higher servicing rates for investment debt and many no longer use negative gearing in their calculations. the difference is most marked for families with higher incomes/larger debts.

Changing from non deductible to deductible also means an extra rental income which does have an impact on capacity, but for pedantic old me that's a change to income rather than debt.

Repaying deductible debt doesn't have much of an effect on capacity as such. The calculator is the same. However there is now an extra potential rental income (when the debt is repaid but the rent is still coming in).
Repaying debt has the same effect as doubling the new purchases rental return as an example.

So if @Perthguy had paid his debt down instead of selling and losing the rental associated, his capacity would be better.

If he had bought nras and used the cash to pay down debt he would be in an even better position.

 

One of my favorites, good chance of achieving opposite

 

My pet hate, what's this got to do with investing

Acquisition phase and consolidation phase

 

How to make property double* in 7-10 years

* double in height not value

 

My way. It does 100% of the time. Your way...100% failure rate.

It comes down to this; your interpretation of debt reduction, and mine... vastly, vastly different. When I talk about debt reduction I mean paying off debt not by selling, and not by forfeiting either the property or its rental income, but by reinvesting surpluses from high yielding properties.NRAS, dual occ... whatever... just high yielders.

You have paid off debt by selling, and forfeiting a pre APRA credit facility and a rental income. By your own admission you damaged your borrowing capacity by doing so. - and exactly what I have warned against over and again.

If you'd taken the time to read any post I have ever written about debt reduction ever, you'd have seen this has always been the position advocated. Always. You'd have seen that I even specifically distinguished this strategy from one where you sell. I went to great lengths to warn against that. I posted lots of real world, lender servicing calculators in a further effort to help people avoid that sort of mistake. I talked about dividend reinvestment and the need for every investor still trying to grow, to reconsider their views on cash flow and debt management/deleveraging. There are threads covering this in detail, going back a long, long time.

I'm sorry you reduced your capacity to borrow by selling... but your experiences only serve to reinforce why the strategies I have long advocated are so powerful.


Rather than arguing semantics, lets just use your experience of an example of what not to do to improve borrowing capacity.

 

Lol

 

I think Euro's definition of two words differs from that of MTR:
"always"
"reduction"

 

Sorry - It may have been Perthguy.

 

Within the context of every post Ive ever written on the subject - totally consistent

 

This might be the case in Australia but in HK and I believe the US, this is actually true.

I received worse pricing for my first HK purchase for having no credit history when I was sent to Hong Kong as an expat.

 

Almost certainly. I am an amateur property investor with limited knowledge of finance. When I see 'debt reduction' as an amateur it means paying down loans and discharging them. How do you know that other amateur property investors don't think the same thing?

True but for me, not selling was not an option and selling wasn't actually the mistake. Retiring pre-APRA debt for no reason was the mistake.

I don't recall you ever posting a warning to people to consider carefully before retiring pre-APRA debt.

Well I have posted my experience to hopefully prevent someone making the same mistake I did.

The take away message here is if you have pre-APRA debt, think very, very carefully before retire that debt.

 

But Tony, there is a website that shows you the exact discount ? works for me

 

Yes, me. I am not a sophisticated investor with a deep knowledge of finance. I am a property investment amateur who barely understands the finance system. For a n00b like me, paying down a loan and discharging it is paying down debt. My naive understanding was that this would increase my borrowing capacity. Now I am kicking myself because I got it completely wrong.

 

Agree

 

I would say it's never a "bad thing" to reduce debt. In the absence of other alternatives debt reduction is always a good thing. It's just that it may not be be the optimum thing to do I a rising market. It's really about how much leverage guy want to take on. I started out myself as a young investor aiming to pay down debt as fast as possible. It's a good discipline to have to focus on repayments and cost of interest and principal reduction. But over time as you establish a base you may think a little differently. Also note that any reduction in principle you make now you can always use later on a redraw/refinance if you want to make another investment, so again not a bad thing. Plus you establish a pattern of repayment that may make you a more desirable to banks who are lenders.