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duncan macgregor
12-11-2004, 08:01 AM
Lets presume you are a complete first timer looking for a residential property to rent out. This is business and business is numbers so how do the numbers stack up. The numbers must clear 8pc. That means for every $100000-00 the house costs you must get $8000 per annum in rent or the house is overpriced. That way with a bit of luck and a 10pc deposit the house is self funding. Lets say you buy a house at $250000 pay $25000 deposit you need to have it rented out at $385-00 pw to cover the outgoings. So back to your numbers property doubles in value every ten years on average so your $25000 deposit in ten years has made a capital gain of $250000.
macdunk

duncan macgregor
15-11-2004, 06:45 PM
ASPEX, you raise some valid points, but in general miss the point. It is not a case of i am right you are wrong, or visa versa. Let me give you a real example then you tell me what you think again. 4 years ago i paid $125000 for an 18 month old brick and tile house at randwick park auckland, at a mortgagee auction. I leased it to the The housing corp for $250-00 per wk who looked after it rent gauranteed. They do maintenance whatever any malicious damage is on them. I sold it to my daughter and her girlfriend I was trying to teach them How to make money without even trying. They paid me $145000 for the property on a $15000 deposit and a loan from the bank. They have only visited the property once, at the very start and never been back. The property has been self funding, the rent went up to $300 pw and they managed to pay for everything from the rent money, in other words they invested $15000 and that was the end of it. They recently sold The property and after agent and lawyer fees ended up with $207050.
In four years they turned $15000 into $62050 or over 400pc.
Macdunk the smart one bought KIP and CNZ and held them for a couple of years until i woke up to myself and made roughly 18pc pa. You Aspex are telling the wrong person about buying into shares like that. The way to make money is borrow, and have someone else pay the loan and pocket the capital gain. Incidentely my daughter and her pal want me to buy a block of units so that they can buy from me like the last time. macdunk

duncan macgregor
17-11-2004, 04:05 PM
aspex, if i had geared up on KIP or CNZ with a ninety pc gearing i might have increased my profit to lets be generous and say 80pc return on the origonal stake. how long to play catch up to 400pc over three and a half years. Property goes up 10pc a year good times and bad. Place a big enough deposit down until it is self funding. You will then have a 10pc capital gain on the total. Buy right do the sums it works out 10pc deposit gets a 10pc capital gain over 100pc.
Beat that on the share market year in and year out i cant and i am vcry much in front of the average at that. Most people only save and prosper with property it is the backbone of the country. The average person makes more paying a house off than whatever else they do in life. macdunk

Runswifscissors
17-11-2004, 06:21 PM
quote:Originally posted by duncan macgregor

aspex, if i had geared up on KIP or CNZ with a ninety pc gearing i might have increased my profit to lets be generous and say 80pc return on the origonal stake. how long to play catch up to 400pc over three and a half years. Property goes up 10pc a year good times and bad. Place a big enough deposit down until it is self funding. You will then have a 10pc capital gain on the total. Buy right do the sums it works out 10pc deposit gets a 10pc capital gain over 100pc.
Beat that on the share market year in and year out i cant and i am vcry much in front of the average at that. Most people only save and prosper with property it is the backbone of the country. The average person makes more paying a house off than whatever else they do in life. macdunk
This is an interesting debate but for someone trying to decide which is better this deate has its problems
That D McG is able to get a better return on property than on shares is useful for D McG but not for me, as D McG doesn't make my buying decisions on property or shares.
For myself I am repeatedly informed that the long term ROI is better on shares than on property, and since I cannot unlike D McG gaurantee to be much better than average, This should be the guiding principle for me.
However, it is not quite that simple. The rates of return are based on a fixed sum invested, and when Gearing is factered in aspex and D McG suggest then some slightly different arguments must apply.
Banks seem to prefer the security of lending on property, and are prepared to lend either at a lower rate of interest or a higher amount, on the same security. So what (anyone other than D McG who knows for himself) wants to know is.... what is the long run rate of return on geared up property, (less cost of investment) compared to the same for the ROE of shares. If anyone knows where you can find those figures I'd be interested

duncan macgregor
18-11-2004, 08:20 AM
ASPEX, Interesting post taking in in slowly. We both agree on one point, and that is to use other peoples money to make money. The risk factor is the next point. Shares can drop suddenly overnight giving a substantial loss, but are easy to cut and run. Property will only level off in the short term, then continue to uptrend. Property is a long term investment shares can be a very short term. Property is the slow sure easy way to riches with very little input.
Property is more a gauranteed investment than shares where to a certain extent you are forced to take someones word for what is really going on. Having said all that i am looking at gearing up on shares so you are making me think. cheers macdunk.

Sauce
18-11-2004, 08:32 AM
Aspex, Macd etc...

Talk about a moot point.

I have been investing in property for years, and my day to day business is in property transactions. I deal with developers, speculators, investors etc etc on a daily basis and I have seen people make and loose fortunes through every conceivable instrument and technique in the property market.

I have also been activily investing in shares (directly) for around four years and know less about it. I Actually averaged higher returns (even considering the booming property market) over the last two years, percentage wise, from shares - although my gearing is 80% on property and usually only 30% on shares (with less money involved) - so my ROE is still higher from property.

For some examples, I bought into SEN on the ASX with borrowed funds (margin) and made over 70% in 2.5 weeks. I have also bought properties on 100% financing and made 100% capital gain in 18 months giving me a total capital gain of 189K from essentially no money down (cross colatoralised of course). The SEN trade made me 20k in 2.5 weeks. Both of these investments are excellent, but dont think of either of them as being any better than the other.

Comparing asset classes is fraught with problems, and people will always be able to put forward a good argument for whatever suits their opinion. Using historical performance and real world examples is rediculous as well.

Its natural to gear into property - shares are more liquid - its easy to ad value to property - derivatives can provide incredible leverage - you have more control over property - you can let incredible business minds make money for you with shares and its less hassle - blah blah blah blah blah

Get over it, learn as much as you can about investments, business, leverage and diversification and then go and make as much money as you can utilising any or every asset class that suits.

Kind regards,

Sauce [}:)]

Sauce
18-11-2004, 08:42 AM
Macd -

Saying that property doesnt go down in value is one of the most common misconceptions around.

Property values trend up and down in VERY real terms. There have indeed been many falls in property values, as a whole accross NZ (and elsewhere) and of course some individual cases are worse than others. People also do loose their shirt in property.

Its not the be all and end all.

In saying that, there are some fantastic things about property, it is a great investment tool no doubt about it.

Property on AVERAGE may have provided approximately 10pc over the last ten years (this is in fact quite accurate) - but dont forget that A HUGE amount of that has been in the last two years.

We are now way above the long term average for property gains in NZ.

Regards,

Sauce [}:)]

Runswifscissors
18-11-2004, 08:46 AM
Aspex thank you for your resonse to my post. but please don't apologise for the length of it . I am interested in all forms of investment and in gearing. But my knowledge and confidence are limited. So I put up a post hoping to get some replies and a discussion going, so I could read and think and maybe learn. So far I have had some success with this. Thanks

Sauce
18-11-2004, 09:13 AM
Just re-read my posts and realised they might have seemed abit arrogant [:I]

Wasnt suggesting i know everything about anything, just trying to make a point that comparing the two asset classes is flawed to begin with, and that they are both great wealth creation tools [:p]

:D:D:D

Hows the sunshine in Wellington today! w0000t

Regards,

Sauce [}:)]

Runswifscissors
18-11-2004, 09:28 AM
I'm sorry Sauce I see the interesting bits but missedd the bits that seemed arrogant. Maybe you need to work on that arrogance so that its more recognisable.

Sauce
18-11-2004, 04:51 PM
Runswif: [8D]


Aspex: Totally agree with your examples of gearing and the sharemarket. I would like to comment that the examples you have given are faitrly advanced trading techniques and the average mum & dad (and "who" exactly we are hypothetically talking about is just another perfect example of why copmparing these asset returns against each other is very much a waste of time) investor is hardly going to run out and jump straight into that kind of thing. People who excell at the kind of share trading you are talkign about tend to have a higher understanding of general finance & mathmatics, have a higher risk profile along with the ability to analysise and minimise risk and generally probably be a little more intelligent than your average mum & dad. (ok so i am generalising, but thats all one can do in this context and its all IMO).

this is not to say your points arent right on the button. There is alot of money to be made in the sharemarket and leverage is a great tool when used correctly and not just limited to property.

i think macd's point originally is that for your average person its easier to understand, find information about and enter the property market and make decent long term average returns with leveraged investment property. I dont disagree with him at all really, but i think, that everything has its place depending on the person and the circumstances/opportunities/experience and you cant really try and argue either way.

In regards to your comments about risk, just like the sharemarket you can make property investment as risky or conservative as you like at the expense of returns.

For instance you could buy a low yeilding property in a good area that is solid, put 40% deposit down to ensure that the low yeild covers all outgoings and then put the property on a 20 year principal and interest loan. In this scenario regardless of any capital gain,worst case scenario (within reason) at the end of the 20 years the house is owned outright and the income is ours, and we only paid 40% of the initial capital but the income paid off the rest. The returns are low comparitively, but with very little risk and a clear goal. Obviously the preferable option for someone like myself (young - no kids) is to gear up 100% and go interest only on the term - but the risk is much greater. There are an infinite amount ways to structure these things, with both shares and property, but each person has to work out where they fit into it by analysing their age, sleep-at-night, capital requirements, income, family situation etc etc etc.

Does anyone actually want to make the statement that property is better than shares or vice versa? IMHO its much more complicated than that statement.

All I can say, is start as young as possible, with no family to feed and learn as much as you can and you would be unlucky (or stupid) to not make it to where you want to be.

Regards,

(Sunburnt) Sauce [}:)]


[8D][8D][8D]

Sauce
18-11-2004, 09:46 PM
Aspex, while I agree totally with nearly everything you have said in this thread, if you are insinuating that buying a property UT is ALWAYS better than buying a rental property, then I definitely disagree. ;);) Its all covered in my above posts so I wont bother repeating [^]

Anyway, im over this topic, ive heard his all before a thousand times and its just all so predictable! But good luck to you all, and Aspex i'm sure if you stick to the sharemarket it will be fantastic for you, but don't discredit direct investment in property as an investment, even if your not into it (personally I love both!), alot of people make alot of money in property, both residential and commercial and while some people might fall over over the next year or two because they went too to many richmastery seminars and got carried away, plenty of people will continue to make smart moves in the industry and outperform the rest - I see it every day :D:D:D [:p]

Regards,

Sauce [}:)]

rmbbrave
20-11-2004, 09:03 PM
quote:Originally posted by Sauce

Macd -

Saying that property doesnt go down in value is one of the most common misconceptions around.

Property values trend up and down in VERY real terms. There have indeed been many falls in property values, as a whole accross NZ (and elsewhere) and of course some individual cases are worse than others. People also do loose their shirt in property.



Yes indeed! Just ask Matthew Ridge.

duncan macgregor
20-11-2004, 09:22 PM
RMBBRAVE, Mathew ridge is a good example of getting into something with limited knowledge and high expectation. macdunk

port hills
21-11-2004, 02:47 PM
Thanks guys I've enjoyed reading this thread it is a very interesting topic.

I agree that both property and shares can be profitable and enjoyable and both have advantages over the other.

One advantage with direct property investment that I think you've over looked is that when you've made a capital gain you can borrow most of it against the property so that you don't need to sell to realise it.
I guesss you could borrow some against a capital gain in shares but a much lower percentage of it and selling either property or shares to realise the capital gain leaves you open to be labelled a trader and suffer the taxation consequences of that. [V][xx(]

Thanks for the topic. Food for thought.

duncan macgregor
21-11-2004, 03:15 PM
PORT HILLS, You have now woken up to the fact go for it. Most people never see that best of luck macdunk.

Sauce
23-11-2004, 03:57 PM
You can borrow against anything that a lender is happy to have interest over as security. I can (and do) leverage out capital gains up to 70% of my portfolios value.

the LVR (loan to value ratio) that most banks allow on property is 80%. Hardly much difference at all. Plus as already gone over, these are such very small points that dont conclude anything is better than anything else. The interest rates might be slightly better, and some shares you cant borrow against, but the same applies to property. Properties with company share titles, apartments less than 50m2 and all sorts of other examples of property that banks have lower or varied lending criteria for.

The best way to look at investment is from a business/finance perspective - understand the tools, the critieria, the debt and security aspects and utilise it to your advantage. Be wise and dont overstretch yourself. Once you get the hang of it you soon realise that owning a hotel, a small business, a share portfolio, exposure to derivatives, a rental or two, debt instruments like fixed interest, loan agreements - its all just business and the more you understand about how each one works the more you will see that they are not so different.

In regards to taxation, I disagree with your comments regarding borrowing from or selling shares or property. There is no such thing as "capital gains tax" only "income tax" on gains made where your intentionis to trade the gains for "income" purposes (dividends excluded which are of course already taxed) rather than investment. I borrowed 80K on margin against some shares to fund a loan agreement with an associate to achieve an interest rate spread of 21% per annum in my favour, this does not make me liable for tax at all. I sell shares all the time to re-arrange my portfolio, and sometimes to send me off to a remote island.

In fact even if i bought a mercedes with that money I would still not be liable for tax because my intention when I bought it was long term investment. Same if it was against my properties.

And another point in favour of shares, at least you CAN exit and re-enter easily. Anyway going round in circles again.

selling either property or shares to rearrange your portfolio, buy a car, buy a new house or go on holiday would not make you liable for "income tax" on your "capital gains".

On the other hand if you bought a property, did it up, on sold at a profit, and then bought another one etc etc etc you could quite likely be liable for gains tax.

If you wash dividends, trade on TA trends regurlarly and exit and enter stocks intra-day/week etc and live off the proceeds then you could well catch the eye of the IRD as well.

Regards,

Sauce [}:)]





quote:Originally posted by port hills


One advantage with direct property investment that I think you've over looked is that when you've made a capital gain you can borrow most of it against the property so that you don't need to sell to realise it.

I guesss you could borrow some against a capital gain in shares but a much lower percentage of it and selling either property or shares to realise the capital gain leaves you open to be labelled a trader and suffer the taxation consequences of that. [V][xx(]

Thanks for the topic. Food for thought.

Sauce
23-11-2004, 04:27 PM
Also i would note that you can cross collatoralise security do all sorts of things. Debt, leverage, gearing etc it comes in many forms.

As you go from a growth phase to a consolidation phase your investment strategies will change also. Generally age and family/work requirements are what will influence this.

We havent even touched on commercial property (which for interest banks LVR is only around 60% on commercial and generally has an interest rate as high as 1.5% above residential- I have done some cross collatorised deals against residential property to garner a better interest rate and to allow a higher level of gearing against some retail space- this is a good example of how debt and equity can be used smartly to ensure the maximum benifit).

MArgin can be expensive in comparision but has the benifit of its ease of use and repayment (i.e. no fixed terms, breaking fees, and also being able to simply transfer it to your account over the internet).

Credit is handy to have access and it comes in many forms, shapes and sized.

Sauce [}:)]

Sauce
23-11-2004, 06:10 PM
And as apex has also mentioned in another, you can also borrow against property and use the money to buy shares.

Sauce
24-11-2004, 01:47 PM
Sounds like a revolving credit loan?

Revolving credit is available from most major lenders against property. Great facility to have much like margin against shares. Not so good for people who are not good at controlling their spending, but at the same time I would guess not too many people that take the time to read this site reguraly are all that financially inept all though I could be wrong ;););).

Regards,

Sauce [}:)]

Studson
04-02-2005, 11:00 AM
Just wanted to say thanks to Sauce, aspex, macdunk and others who contribute to this site. I'm young and am doing whatever it takes to get where I wanna be 10 yrs (net worth of 500K). I love taking all this stuff in and I dont always understand it all but I do my darndest. Why dont they teach any of this stuff in school?? How the F*%k is algebra gonna help me get ahead in this cut throat world?

Thanks again and keep those opinions flowing. Studson.

stephen
10-02-2005, 09:26 AM
How are you going to do your books, or make financial plans, or figure out whether you're ahead or not, without algebra, studson? If you hand off the accounting to someone else, how will you trust them if you can't understand the numbers? How will you see if a property deal is going to work if you can't understand compound interest?

You want to do whatever it takes, well decent maths is one of the things it takes. I bet macdunk knows how many beans make five.

Studson
10-02-2005, 03:14 PM
Stephen, you miss the point!! I used algebra as an EXAMPLE, it could have just as easily been geometry, matracies or calculus, or even chemistry. The question was 'why dont they teach us this in school?' It would seem to be alot more useful than algebra or have you used algebra in the last 10 yrs? [:p] I'm pretty sure accountants dont use it either.

Five beans make five stephen, five beans (eyes closed)[:0][^];).

Steve
10-02-2005, 03:39 PM
quote:Originally posted by Studson

The question was 'why dont they teach us this in school?'

Because if they did, scammers like Entrepreneurs Success Centre & Investors Fourum would not be able to take advantage of the 'uneducated' and then they would miss out on all those expensive course fees...;)

stormrose
10-02-2005, 06:18 PM
Train harder than the race. That's why you learn 'useless' things.

morpork
25-02-2005, 04:35 PM
There was a program on TV last night about property investment , it had a formula for working out return , was hoping someone was watching and noted it down

port hills
25-02-2005, 04:52 PM
quote:Originally posted by morpork

There was a program on TV last night about property investment , it had a formula for working out return , was hoping someone was watching and noted it down


I saw most of the programme but the only formulas I recall was the suggestion that the annual rent should be 9% or more of the purchase price or if you like the purchase price should be 11.11 X annual rent or less.

And they said money spent on a property should add 4 x what spent too the value eg spend $10 000 to add $40 000 to the value.

It wasn't too bad a programme, not too over the top positive.
They were calling this a falling market (probably the first time I've heard anyone on TV say it's here now)

I wonder how many developers and shisters go under over the next 2 years. ;)

25-02-2005, 06:43 PM
Port Hills & Morpork that formula only acceptable for a low maintence home in excellent condition and with interest rates increasing you would still be pushing money into it. Myself I would want 12% to 15% and close to 20% for an old villa.

Sauce
28-02-2005, 06:35 PM
12-20%!

If you were to buy at that kind of yeild in any of the major cities in NZ you would most likely be ripping off an old lady. Rental yeilds at less than 7% in most places.

I'm not saying its impossible, but you would be buying way below "current" market value and could turn it instantly for a profit.

whether currnet market value turns out to be over valued is another story. Probably. Still we have some of the highest rental yeilds in the world (along with high interest rates of course).

Tony Alexandra the chief enonomist from the BNZ released a great graph showing how property was 20% over inflation adjusted long term trends. I will see if i can post it tommorrow.


Morepork: The simplist back of the envelope property investment analysis is the following:

1. conservatively estimate your outgoings i.e. rates insurance maintanence etc then calculate your total interest bill on your borrowings for the year and add these together. (to quickly calculate interest payments try multiplying the borrowing amount by 0.075 if you are borrowing at 7.5%pa. I.e. $200,000 * 0.075 = $15,000 - this will not include principal repayments but you should go interest only on your loan anyway).

2. Multiply your weekly rent by 48 (weeks - this allows for 4 weeks in the year with the property vacant). Now subtract your outgoings caculated above and what you have left is a consevative estimate of your annual earnings before tax and depreciation.


This should be enough to figure out if its on or its not pretty quickly - if its a negative figure then you better hope the bubble doesnt burst after you buy it :D:D:D

Your equity position (or lack of it) will heavily influence the bottom line (more real equity down will mean more cashflow), but you will make a higher return on your equity if you can find properties that will pay for themselves with very little money down. Though this is much easier said than done in the current climate. 3 years ago it was easy.

Regards,

Sauce [}:)]

28-02-2005, 09:47 PM
Good stuff Sauce. Four weeks vacancy provision's a bit tough and the 400% return on improvement/refurbishment figure was startling although I've heard 300% commonly enough and even struggle with that one.
I have an interest in a 7-bedroom furnished & serviced new house. Currently 6 of the 7 rooms are let and the net return is about 12% pre-tax. We're (mainly me I guess) getting together a price for me to divide one of the rooms into two en-suites so the the adjacent two rooms can use them. We believe the additional en-suite and storage rent will compensate for the loss of the room and as there will be fewer people sharing the bathrooms now a little rent increase for the non en-suited rooms is justified. Quite important for many people to have an en-suite now and we're happy to meet the mkt. I reckon $15K tops would do it and the best thing is that it wld take only two years to pay back the capital outlay.
Anyone else have a similar letting situation with high en-suite/bathroom ratio??

Sauce
01-03-2005, 01:23 PM
Hi Longtack

I didnt actually watch the program on TV that was mentioned, but I think aiming for 4 times improvement cost is not such a bad idea because it leaves lots of risk margin in case you much it up. I.e. if you calculate to earn 4x and actually only earn 2x youve still done well. Whereas if you aim for 2x and make a loss your not a happy camper.

Of course it all comes down to how you are doing those sums anyway. Doing up houses and flicking them has negative tax implications and doing them up and not selling them poses the problem of valuation as any gains are not realised and untill you sell you never really know what value you have actually added, regardless of what a valuer might tell you.

Unfortunately we dont have the benifit of seeing the buy and sell bids (depth) with property like we can with shares. Would be nice though!

I have a similar property to the one you mention, but I did the opposite. My fully furnished and serviced property (otherwise known as a boarding house ;)) had 12 bedrooms and two bathrooms (one of the bathrooms has 3 showers and two toilets in it). I put an extra wall and door in the living area which created another room so now it has 13 rooms. This cost me $4100 and added $130pw in exta rent - if I could recreate that return on a refular basis i would be a very happy young lad.

If you can up your rents to offset the loss of the room, then you will be ok, but personally my opinion is that adding rooms is best and will add more value than just about anything else you can do. an extra $130pw is a 9% yeild on $75,000 so you should ad at least 75k in capital value to an investment property (on current yeilds)if you can lift the income by $130pw. So 4k down is peanuts.

So i guess just be carefull that if you spend 15k to remove a room, that you definitely get the return back elsewhere, otherwise you could potentially reduce your capital value after spending money on it!

Those sorts of properties are a bit more trouble for your yeild, I get a 14% gross return on mine which equates to about 11.5% after expenses and provides the cashflow that has allowed me to buy lower yeilding (higher cap gain) properties over the years in comfort.

Interesting that they dont fall under the residential tenancies act, although that is due to change with the bill in front of parlaiment at the moment.

Regards,

Sauce [}:)]

01-03-2005, 08:23 PM
Thanks Sauce. Good points there.
We're getting a bit sick of dealing with the lower end of the mkt as they require a bit more mngmnt and frankly they're bloody hopeless.
If you can get good tenants (not young single working males)it's great - even the two flats full of young NZ-born students are low mtce and reliable. They're practical, got plenty of commonsense, (and don't tip fat down the sink.):(
My niece has a $1.3m (R.V.) multi-bdrm villa place in New/Grey Lynn I think. Lawdy knows how she copes as she's off-shore most of the time.