Rent - Don't buy

[duncan macgregor]

Mick, what you fail to see is it is not your money that only makes 2pc its the banks money. once you have invested enough in a property to make it self funding showing a decent profit you refinance and get your money out. You then start all over again your first property will end up financing a dozen properties if you work it right. Lets not argue the figures if you can borrow money and make money from it and this is only a basic example do it. macdunk

[Mick100]

Have you actually done what you talk of doing Macdunk? - like buying ten houses all on borrowed money
I think your just making noises through that hole in your head again as usual

allso ,it obviously hasn't occured to you yet that you can borrow against shares as well as property.
.

[duncan macgregor]

MICK100, Your reply was fully anticipated still laughing at you. macdunk

[Mick100]

I'v noticed that your usual boasting about all the easy money to be made in the sharemarket has been absent this year Macdunk.

Are you still making 20% pa

I must check the stock picking comp to see how well your going this year.

Another question for you
If returns on property are so constant and certain, why do you even bother with shares
.

[Halebop]

Mick the same thought has occured to me. If I could borrow 90% and earn 10% capital growth with certainty I'd be doing it too.

I still note that those who grace the "Rich Lists" in NBR, Forbes, BRW etc both generate their wealth from and direct their investments towards Businesses, Shares and Commercial Property. Those who are involved in the residential sector are typically developers and/or financiers.

[Mick Jagger]

don't get me wrong resi propertry is great and ion usual circumstances you get a decent yield and then gross that uop for the tax benefits and its well worth it... but in the current state of things theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result... and I've gotta say that by any measure house prices look hopelessly overvalued, and as they have throughout history, will come down as a result... this is the economic golden age at the moment, and it won't continue... so why would anyone be buying one now.. its a pretty brave person who suggests that house prices will increase over the next few years... why not wait for them to fall and buy one when the numbers stack up again... ie when rental yields have increased fornm the 4 or 5% current back to 8 or 9%...

[minimoke]

quote:Originally posted by Mick Jagger

..... then gross that uop for the tax benefits and its well worth it...

And this is something I don’t understand. Why do we seem to see the tax benefits of rental property (which in reality is a reduction in tax payable due to losses made) a virtue when we should be trumpeting how much tax we have to pay – which is then a reflection of how much profit we have achieved!

[stephen]

"theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result"

Yeah, when I look at prices where I am currently renting (Greenlane/One Tree Hill area) I cannot understand how anyone could be a landlord as a business proposition. When I worked it out I came to exactly the conclusion you did above.

[duncan macgregor]

That is quite correct mick, property ebbs and flows in cycles a time to buy, and a time to sell. It is a much easier market to read than the sharemarket. Whangarei for instance over the last 12 months the values increased by 33pc but it would take a brave or foolish person to think that will continue. The advantage of the prices dropping but not collapsing is it gives good buying opportunities for the next cycle. the reason prices in the house market dont collapse is that people unless forced wont sell at a stupid price and the ones that do are fodder for the buyers to sell, when the market turns. the market at the moment is in decline, the smart people have moved on sitting on the fence like vultures ready to gobble up the cheap assets of the weak. macdunk

quote:Originally posted by Mick Jagger

don't get me wrong resi propertry is great and ion usual circumstances you get a decent yield and then gross that uop for the tax benefits and its well worth it... but in the current state of things theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result... and I've gotta say that by any measure house prices look hopelessly overvalued, and as they have throughout history, will come down as a result... this is the economic golden age at the moment, and it won't continue... so why would anyone be buying one now.. its a pretty brave person who suggests that house prices will increase over the next few years... why not wait for them to fall and buy one when the numbers stack up again... ie when rental yields have increased fornm the 4 or 5% current back to 8 or 9%...

[Dimebag]

I've been taking a look at the issue of property recently, and have done a bit of analysis. The view I have formed is that a case can still be made for investing in property, even at current apparently excessive valuations. Whilst I certainly do not agree with Duncan's figures or unsubstantiated assumptions about future capital growth or the realistic rental yields that are available in this market, the numbers still seem to stack up. The clincher, it seems, is the preferential tax treatment property attracts in NZ.

The average Auckland property should appreciate in value at about 5%pa in nominal terms over the long-term. The two key drivers are inflation and economic growth, and if we assume that inflation will sit at about 2-2.5%, and economic growth similarly, we get about 5%pa. With the continuing favourable outlook for commodities, NZ's economy may in fact perform much better than this, providing additional upside.

The inflationary component is self-explanatory. The economic growth component rests on the assumption that over time, people will expend approximately the same proportion of income on property. As incomes rise, people opt for bigger and better houses in better areas. In doing so, they will spend about the same proportion of income on their property, but "trade up".

Properties that are above average should therefore grow at a rate greater than economic growth, and inferior properties at a rate somewhat less. The average property ought to grow at about the same rate.

These figures are aggregates; to assess the outlook for a particular region, one must assess the economic performance of that region. Population growth is automatically factored into the equation as an increase in population will increase the size of the economy, and vice versa. If a regional economy is losing its population, its regional economy will dwindle, and with it property values.

Rents and property values should therefore advance at about 5% pa. And owing to the (effective) lack of capital gains tax in NZ, this 5% is tax free.

This is the underlying increase in ECONOMIC value of the property. As anyone familiar with the sharemarket knows, short-term property values can fluctuate above and below fair value, disguising this figure. But the underlying increment in economic worth should approximate 5%, given enough time for things to even out.

Interest rates play a part, of course, in the setting of property values, as interest rates represent the opportunity cost of capital. Yet changes in interest rates essentially result in "one-off" adjustments in value, as ought to be the case in any asset class. If one has no particular view on whether interest rates long-term will rise or fall from present levels (as is the case with me currently), they can be ignored. They are ever present in assessing whether property is under or overvalued at current prices however. If property is generally overvalued, a one-time adjustment below the 5%pa rate of increase must occur at some point in the absense of falling interest rates.

It has been estimated that the average rental yield in Auckland is now about 5.0% gross. If we estimate costs as being 1.5% pa (including property managemetn fees), we get an estimate of a pre-tax return of 3.5% on a property, excludign the effects of leverage.

If we take the example of a $400,000 house, that is a weekly rental of $400 (assuming 2 week vacancy); annual rental of $20,000 less $6,000 in costs is $14,000.

If one were to gear the property 90%, as suggested by Duncan, one would borrow $360k and would be forking out, in interest, $30,600 per annum at a rate of 8.5%.

That tallies to a loss of $16,600 pa. However, the kicker is that a 39% taxpayer can claim back a tax loss of $6,474; the loss after tax falls to approximately $10,000. Further tax advantages will be available if one elects to claim depreciation deductions.

If the postulated 5%pa capital growth materialises, one has a tax-free $20,000 capital gain, for a net profit after tax of $10,000.

Based on th