when you stretch something too much, it breaks
Quote:
Originally Posted by
minimoke
Its not so much that the value in property will cause one to loose equity - its the increase in interest rates or lack of tennants prepared to pay the rent which become the problem.
The former has not been a problem so far for those who bought for long term.
The latter is where the cashflow continues to take a hit for this asset type. Further, as:
Interest rates rise = cashflow suffers (rentals business or any other).
Lending constraints = cashflow suffers + asset values strait jacketed ..
Current environment = weak economy, fickle recovery, high unemployment lingers...
Here's a typical M&D rental investment example (currently 0 gain play):
Asset GV: $325,000 (currently on unrealised loss, 3% CG expectation = 9,750 pa)
Rent pa: $ 16,000 (market based, no franchise power)
Insurance: $ 500 (rises yearly, regardless)
Rates: $ 1,750 (= tax, including ARC (= tax), but not water rates in some areas)
Maintenance: $ 1,000 (labour of love unaccounted, self managed)
Accounting : $ 500 (assumes simple book and record keeping)
Intt paid $18,000 (assumes LTV 70%, 8% pa intt only, no bank fees included)
Rent arrears :$ 1,000 (no substantial damage, weak economy, most likely to be written off
regardless of Tenancy Tribunal and court collections hassles)
Yearly Tax Paid:$ 0 (6,000 cash outflow, 9,000 loss with depreciation which is clawed
back by IRD on sale anyway, reducing your capital gain)
Buy Intent : Build retirement nest egg, holder for passive rental income
Reality : Buying future capital gain via tax relief instalments n regaular cash contribution
Add to this mix any further tax on rental property ( even risk-free rate of return tax on equity) and you squeeze cashflow even more - to the point that you'll end up waking the sleepy M&D investor to see how this investment class sucks.
Solution hoped for: They'll migrate to other risk assets
Result probable in my book: They'll migrate. Full stop. (or at least migrate their cash = economy suffers, downward spiral begins).