Virtual Penny for your Thoughts?

Discussion in 'Investment Strategy' started by Newtothisgame, 4th Mar, 2017.

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  1. Newtothisgame

    Newtothisgame Member

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    I wondered if I could ask for your thoughts and inputs on my situation.

    • Despite talk of being at the top of the market, I went ahead and purchased a 2/2/1 with harbour and city views in Elizabeth Bay/Kings Cross / Potts Point area at the beginning of 2015 as a PPOR
    • Recent market sales seem like the market value for my place has appreciated ~25%
    • LVR at present ~50%
    • Structure interest only at present and pumping as much as I can into the offset
    • Would likely be able to ride out a bursting bubble and interest rate rises through the cycle (hopefully), things would get tight though
    • The place will likely last us around ~ 4 years before we grow out of it, would then have to sell or turn to investment property
    • I purchased in the area with a strong believe (which I still have) that the area is on an upward trend, the X is changing and will gentrify more and more in coming years, location to the city and transport is great and close to water
    I'm concerned though that 100% of my savings is tied up in the property and the market seems far to hot for reason at the moment. If the bubble bursts and its a big burst, then I would be tied to the place for the long term.

    I'm tempted by the two sides;

    1) continue to ride the next months of crazy price inflation for as long as I have the nerve and try to gain more - while my capital is leveraged
    2) exit while there is limited supply on the market and prices are hot. Move into rented accommodation and wait it out to see if there is a downturn, if so buying in, if not looking into IP in other areas and other investment options

    Letting out the property doesn't appeal to me given the low yield and risk of devaluation

    Would love to get your thoughts, really appreciate any insight you can provide,
     
    Perthguy likes this.
  2. hammer

    hammer Well-Known Member

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    Do you have any other property or is this it?
     
  3. Newtothisgame

    Newtothisgame Member

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    No this is my only property

    95% of savings either in the property or the offset account, so 0 risk diversification at present, hence the nervousness of a down turn
     
  4. Propertunity

    Propertunity Well-Known Member

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    I'd hold. I don't believe there's any bubble. If the market stalls / pauses for a few years it is unlikely your Eastern suburbs PPOR would be much affected.

    Your risk mitigation is fine - money in the offset and low LVR. Congratulations on purchasing in the face of people falsely claiming a peak back a few years ago.
     
  5. Gockie

    Gockie Life is good ☺️ Premium Member

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    I'd keep it. Its Blue chip, there will always be a demand for that property. But I'd also pull out equity to say 80% and use the released equity in a shares or property investment that has a better than interest rate yield, which also has growth too. Let time do its thing....

    Btw. I think you're in a good position. ;)
     
    Last edited: 5th Mar, 2017
    Chris Au likes this.
  6. Newtothisgame

    Newtothisgame Member

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    Thanks for your input, it's a tough one.

    Timing the market before a decent drop is very tempting, but maybe it's just fantasy.

    If I decide to hold the property would people fix the rates? I'm currently on 4.1% interest only....
     
  7. The Y-man

    The Y-man Moderator Staff Member

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    @Newtothisgame

    Could you explain what exactly is the risk if there is a "price crash"?
    What do you fear? Is it just the loss of opportunity to make money?

    The Y-man
     
  8. Gockie

    Gockie Life is good ☺️ Premium Member

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    Ps. Sounds like that property would be a great short term or executive rental too if there are no objections from neighbours!
    So if you can do that, it's a very high yielding property. ;)
     
  9. Newtothisgame

    Newtothisgame Member

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    I guess being stuck paying a high mortgage (with higher rates) for a property worth less than I paid for it, when there's a lot of talk it's coming
     
  10. Newtothisgame

    Newtothisgame Member

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    Unfortunately short term are not allowed by the strata, they are pretty tight on it too, would have been nice.

    I'm thinking though of letting out my car space in order to bring in some revenue to contribute to offset account
     
  11. Newtothisgame

    Newtothisgame Member

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    Thanks for taking the time to respond and provide your input.

    I'll definitely look into releasing some of the capital, even if I just hold it in the offset account until I find the right next investment.

    My thinking is that to out perform my offset benefit I need 4.1% (current mortgage rate) + the marginal tax rate 37% of that so my huddle rate for alternative investments is min ~ 5.6%. Is this how you would see it?
     
  12. highlighter

    highlighter Well-Known Member

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    With a PPOR your decisions will be different to those of an investor. However I do note you're looking at the relatively short-term, of 4 years.

    There is a bubble: this is not a point for debate. Even the secretary of Treasury, John Fraser, has called it unequivocal. There is a bubble by every possible economic measure of bubbles - these measures typically look at whether and how far fundamentals (representative of demand as a home) and prices (often influenced by demand as an investment) have de-coupled. Some of these include price-to-income ratios, debt-to-income ratios, rent-to-own ratios, occupier-to-investor ratios, as well as measures of other fundamentals like population growth, income growth, rental demand, actual physical housing supply and so on.

    Now, the thing about bubbles is they last a long time - often decades (if you include the 'normal' boom period which is generally the case). They are characterised by a sharp continuation of speculative investment even after fundamentals drop off. People buy because prices are rising, and inexperienced investors do so in very unusually high numbers. Bubbles tend to be self-bursting because eventually fundamentals (especially when oversupply emerges, as it always does thanks to over-development) assert themselves. People can no longer afford to buy in, banks tighten lending, incomes stall - many of these factors can spark a rise in negative sentiment, which can snowball just as positive sentiment did to grow the bubble. (i.e. you go from 'people buy because prices are rising' to 'people sell because prices are falling'. Inexperienced investors rarely hold when gains dry up).

    So - the bubble exists and eventually it will burst. The only way you can really tell it's about to is by looking at fundamentals. These are your clues (and why Steve Keen was so, so wrong years ago - when we had population growth, wage growth, rental growth all at near record highs). If you can't look at a market and justify, with market fundamentals, where continued momentum is going to come from - you may well be either at or past the peak. It's not an exact science, no one has a crystal ball, but I think a lot of people are feeling Sydney has grown as much as it can reasonably grow. The median buyer can no longer afford the median house. Oversupply is starting to emerge. Banks are tightening, restricting lending, hiking rates out of cycle. These are canaries in the coal mine.

    You personally have a good LVR and are comfortable on IO. One thing to ask yourself is would you comfortably service your loan if rates rise? When paying P&I down the track? If someone loses their job?

    Suppose the absolute worst-case scenario did happen (I'm Irish so am always wary of this - I watched it unfold). Suppose the bubble bursts (the bigger a bubble is, the more likely a hard correction becomes). For a PPOR you don't necessarily need to panic. You're probably better off holding if you aren't prepared to sell and risk a "loss" of some future gains. If prices fall, as long as you can service your loan, it's fine. You can ride it out. A 4 year time frame, though, is short. In a bubble the peak alone tends to last a year or two. The crash half a decade. If you do dip into negative equity you might be looking at twice that long for prices to bounce back to a place where you're comfortable selling.

    I think you need to look at fundamentals. Consider the asset you have. Look at what is for sale right now, in your area, and what has sold in four weeks. If say you have an apartment with thousands of identical offerings available, well, ask yourself what the likely demand for those assets will be. What sorts of assets are you competing with? If you own a detached house in a tightly held suburb the situation may be very different - that sort of asset is more likely to hold its value.
     
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  13. Gockie

    Gockie Life is good ☺️ Premium Member

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    Investments tend to go up in value so your total return is both the capital gain plus dividends or rental yield.
    To beat 5.6% isn't difficult if you look at it in that way. And if you borrow funds for an investment these borrowings become tax deductible. Therefore it's actually better than your calculation. So if you pull out equity, do a loan split then that new borrowing becomes fully tax deducible. With the extra income you can start to put more into the PPOR offset.....
     
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  14. hammer

    hammer Well-Known Member

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    You're in an awesome position.

    I'm not good at all the complicated stuff....there are many people on here who excel at that stuff....but as a simpleton I reckon the easiest, simplest way forward to keep going exactly as you are.

    The offset is the key.

    Keeping putting money into the offset gives you options. Should fertiliser hit oscillator the offset will shield you and allow you to sleep at night, comfortably.

    Once the dust settles the offset gives you the ability to go shopping. In a big, happy way.

    Remember that that crashes are not all bad!

    As for your place being worthless after the bubble bursts? Doubt it. You might lose the capital growth that you have made so far...definately plan for that but anything more than that would be unlikely.

    But then again, none of this matters if you have a big fat offset just chilling in the background...

    Rent that car space out, get your budget in order and shovel acorns away for winter.

    That way when summer rolls around it will be a bright, happy, sunny day...
     
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  15. Newtothisgame

    Newtothisgame Member

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    Thanks for informing me of this, I wasn't aware that was the case, it certainlty changes the numbers I'll need to hit for investing elsewhere, I'll be researching this to try and understand the tax component in more detail. Then next step is to brush up on my stock trading research skills I guess.
     
  16. Newtothisgame

    Newtothisgame Member

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    Thanks, I guess if the value drops back to what I paid for it, then I would have had capital tied up with 0% return (but only if I sell at that point). I guess regardless buying the property has forced us to spend less, hopefully that will end up being a wise investment. Fingers crossed I'll be in a good place to invest during the upturn in the next cycle when ever that is.
     
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  17. Gockie

    Gockie Life is good ☺️ Premium Member

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    As a start, look up the LIC threads and Peter Thornhill. The trick for shares is... don't trade. Accumulate! :)
     
  18. Newtothisgame

    Newtothisgame Member

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    Thanks for taking the time to provide your point of view, really appreciated.

    In a hypothetical scenario of a big burst, depending on how high interests rates go even on P&I and with one of us losing our job we should still be able to make the repayments (if it was really bad we may need to dip into the offset a bit), but things would get very tight and it doesn't sound fun!

    At the moment I see my local area as being extremely hot, there are not many places on the market at present and the ones that are up for selling are often selling pre-auction at rates higher than expected, recent comparable sold for 8% above guide price (and this is one guide price I trusted). The area does not have significant substitutes available on the market at present, its strolling distance to labour side parks, great transportation links (buses & KX station), walking distance to the city & botanical gardens, choice of supermarkets on the doorstep & extensive restaurant and bar options. I don't see the areas where lots of apartments are being built (Mascot, Zetland, etc) as being an immediate substitute (although if offered at a low enough price I'm sure they would become at some point).

    I do see the area as a growth area, the cross now on a Saturday night is completely different to what is was 4 years ago, only seems to be a few hen parties and out of towners that are turning up expecting it to be like the Vegas strip. There are still the druggies, hopefully though as the rougher places / strip joints close up and the area gentrifies things will be cleaned up further. Supply may well increase in the near future as developers are buying up the clubs, bars and strip joints, at present they are modest in size and would require planning changes to build high tower blocks. One current developments Omnia - was selling at a significant premium over comparable, I'm hoping that this will continue to support the gentrification of the KX main strip as more money comes to area.

    Nothing is necessarily holding me to a 4 year time frame, we can defiantly run longer.

    My current thinking is to continue to hold (while closely watching the market) and set a 'release level' (i.e. 10% further in the next year), where if the market does get to that point then I'll put my place up, take the profit and ride out the next few years in the rental market until the fundamentals are more logical.
     
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  19. highlighter

    highlighter Well-Known Member

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    I think given the above, hold is best - but consider looking to other ways you might be able to diversify, perhaps into shares.
     
  20. Chris Au

    Chris Au Well-Known Member

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    Income shares (fully franked) would be my choice here. You don't need to be risking funds (not that I think your approach to this IP and how you've paid down the mortgage to a sustainable LVR), just saying that you don't need to look at the high risk (possibly) high return shares.

    As @Gockie said, there's some great info in other assets threads, but one step at a time so it's considered rather than rash.
     
    highlighter likes this.

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