sharetrader
Page 2 of 13 FirstFirst 12345612 ... LastLast
Results 11 to 20 of 126
  1. #11
    Member
    Join Date
    Dec 2000
    Location
    Auckland, , New Zealand.
    Posts
    94

    Default

    In many ways, property is no different than any other business. Ultimately, it is a service business - you provide somebody with a place to live in exchange for a weekly fee.

    Because of this, an investment in property should be treated in the same manner, and with the same valuation metrics, as one would apply to any other business they would consider investing in. And like most investments, it can be a good investment at one price and a poor one at another.

    People often site the low-risk of property, and the fact that there is always some inherent value there. This is, to a large extent true, given that the ongoing costs (exc. interest) are usually pretty low and fixed, and that the rental market is a large one that will always exist, such that one can attract a buyer (renter) at some price. And given the low cost structure, almost always the rent will be high enough to cover operating costs. To this extent, it is true that there is always "value" there.

    [It is also true, that with 100% ownership, you are not exposed to risks associated with others running the business in a manner to which you would not approve. This is a risk you run when you invest in stocks.]

    However, doing a Leveraged Buyout of a house (which is effectively what you do when you buy a property partly financed by a mortgage) can change this.

    Many people are negatively gearing today. They may be picking up a 5.0% gross yield after costs, but paying 8.0% to service the mortgage. This is a loss-making business, full-stop.

    On a $300,000 property, with 20% down:

    Rent after costs (but before tax) = $15,000
    Interest = $240k x 8.0% = $19,200

    Loss before tax = $4,200

    Now, some will say "but you will get a capital gain". Perhaps, but this should only occur if the value of the underlying property also goes up, and this can only happen if the "rent after costs" increases. If it increases at 3.0%pa, then yes, you should get a capital gain of 3.0%.

    Capitalise 450$pa @ 5% = $9,000 capital gain. One is ahead, just, by, $4,800. ROE = 8.0%

    But this is a risky game to play. Rent may not increase by 3.0%. The drivers are:
    -increased population
    -inflation
    -supply of housing stock
    -concentration of population (can you build out or only up?)
    -movement among suburbs to preferred/less preferred areas (driven by economic performance).

    These factors must be assessed carefully. Buying in good areas in Auckland, one could expect annual rent increases of, say, 2% inflation + 2% comprised of population growth and economic growth driving people into more attractive areas.

    [Less attractive areas might experience a mere 2.5%pa]

    So that's 4%pa growth.

    The prospective return offered by a a property is therefore equal to its gross yield (after costs) + 4%. So a property yielding 4%pa + 4%pa growth = 8.0% yield before tax. The tax relief on capital gains, and deferrals due to depreciation allowances etc is probably enough to offset maintenance requirements and actual depreciation etc, and add 1% pa to value; therefore, the total "comparable" return is about 9.0%.

    That's probably about fair value. You can't make much money borrowing at 8.0% to invest it at 9.0% with considerable costs involved. But 9.0% gross is probably reasonably fair given (1) current interest rates, and (2) the levels of risk associated with property.

    However, changes in interest rates will measurably impact the returns realised. Rises in interest rates will force yields on properties up, devaluing them, and vice versa.

    For many New Zealanders, 9.0% is a pretty good return and a mortgage enforces some saving discipline on holders. I think that this is good. As such, the rent or buy decisions is fairly neutral, but geared towards "buy" for those with otherwise poor saving discipline.

    However, owners should be wary of overgearing themselves. If interest rates rise, will they be able to take the pain? They will realise substantial losses if such rate increases are permanent. A "low-risk" property investment can become high-r

  2. #12
    Advanced Member
    Join Date
    Jun 2004
    Location
    Auckland, , New Zealand.
    Posts
    2,314

    Default

    Most people fail to see or understand property investment. It is the complete numbers game, that makes millionaires out of people that otherwise are only wage earners. To understand property is to understand the rules and how to invest. I said it before it really doesnt matter at what the property cycle is up to when you buy, property only falls slightly at the top of the cycle. Property increases in value by 10pc pa over the long term, and that is what property is,it is a long term investment, that leaves the sharemarket for dead, if you play it right. In order to play it right means to understand, and learn the rules of property investment. The very first rule is to remember it is the banks money you use with the least ammount of your own. The second rule is to have enough behind you if there is a hiccup, either an interest hike,or someone not paying rent. The third rule is to have a deposit only large enough that peter pays paul, and it self funds. After three or four years get it revalued and take out a bigger loan, and buy your next property and so forth. If you start in your twenties,your first property will turn you into a multi millionaire without adding any more of your own money towards it allowing you to play the sharemarket in your doteage. Property never crashes like the share market, your first investment can be your last,and with time make you rich if you play by the rules. MACDUNK

  3. #13
    Member
    Join Date
    Dec 2000
    Location
    Auckland, , New Zealand.
    Posts
    94

    Default

    Duncan

    It cannot be correct that property increases at 10pc over the long-term. I don't have the figures, but I acknowledge that that may have been the case over the past few decades. However, I think there are grave dangers in extrapolating this experience forward.

    The reason I say that is that returns can be hugely enhanced in a falling-interest rate environment. If interest rates are 15%, and property is price in line with rates, an area with a 4% expected nominal growth in rentals will have to sell at a 11% gross yield to provide a return = to the mortgage rate (the "no arbitrage" situation).

    However, if interest rates fall to 8%, the property can sell on a mere 4% gross yield for the same result.

    A property returning $300 p/w, or $15,000, less $2,000 = $13,000 pa in gross rental, a valuation based on a 11% yield is $118,000, whilst a valuation based on a 4% yield is $325,000!!! Great gains, but they can only be achieved in a falling interest rate environment. The reverse situation will prevail in a rising interest rate situation.

    These tailwinds also have buoyed equity markets since the early-mid 80s. People who don't recognise this are apt to wildly overestimate sustainable long-term returns.

    The fact is, 10%pa growth would mean that, given time, nobody would be able to afford properties. GDP is only growing at 3%pa. Property values cannot outpace GDP growth + inflation. 5%pa in the absolute maximum anyone can expect in the absense of further falls in interest rates.

    Quote
    Property never crashes like the share market, your first investment can be your last,and with time make you rich if you play by the rules.
    Not correct; I believe property prices have fallen every year for the last 13 years in Japan! Property is an asset class like any other, and can be wildly overpriced just as stocks can. If such a situation prevails, the correction can be messy!

    Dimebag

  4. #14
    Advanced Member
    Join Date
    Jun 2004
    Location
    Auckland, , New Zealand.
    Posts
    2,314

    Default

    DIMEBAG, Take it over the last firty years the price of property has averaged up 10 pc pa in loose mathematical terms upwards or downwards but near enough. Let us presume you bought a house today with a thirty year term in mind as your old age pension fund for your retirement. You pay Thirty thousand deposit on a $300000 property and get an 8pc yeild at the start which is the yeild to strive for. After the first year the capital gain is $30000 equal to your initial deposit or 100pc on your investment less whatever cost it takes to keep up with the bills. After a couple of years the property will run at a profit, with an increase in returns with the capital gain increasing as the price rises. By refinancing and doing it over, and over you increase your wealth without adding another cent to it. I know people that do this, it is not complicated, and is a non risk way to getting rich. Leaves share trading for dead, but not as much fun. macdunk

  5. #15
    Member
    Join Date
    Jun 2004
    Location
    NZ
    Posts
    68

    Default

    O MacAdder you have been reading too many Dolf De Roos books.

    A 10% pa increase compounded over 50 years is 11600% or 117x. You can't tell me the average NZ property price was only worth £1000 in 1955?

  6. #16
    Advanced Member
    Join Date
    Jun 2004
    Location
    Auckland, , New Zealand.
    Posts
    2,314

    Default

    ABDAB, your arithmatic is a credit to your teacher. even although your numbers are wrong. If you take a great oak tree back far enough you will find it is an acorn. If you take the tree forward far enough you will find a pile of dust. You are doing this and fail to see where you are mistaken. Let me give you a real life situation. I bought a lifestyle bare block of land in 1994, and paid $75000 which was the valuation price. Todays valuation price is $315000 plus the price of the house i built. If a persons house increases at less than 10pc pa it only means that they made a bad buy in the first place. We have people in the share market that make bad buys, like wise the property market. We have people in the sharemarket that sell their advice to the dummies, same with property. I have averaged a lot more than 10pc pa on every property deal i have made, and i have bought and sold a lot more than the average person.
    When i raise my mathematical standards to a worthy standard i will debate this further. your old mate macdunk.

  7. #17
    Member
    Join Date
    Nov 2001
    Location
    Auckland, NZ
    Posts
    116

    Default

    quote:Originally posted by duncan macgregor

    ABDAB, your arithmatic is a credit to your teacher. even although your numbers are wrong. If you take a great oak tree back far enough you will find it is an acorn. If you take the tree forward far enough you will find a pile of dust. You are doing this and fail to see where you are mistaken. Let me give you a real life situation. I bought a lifestyle bare block of land in 1994, and paid $75000 which was the valuation price. Todays valuation price is $315000 plus the price of the house i built. If a persons house increases at less than 10pc pa it only means that they made a bad buy in the first place. We have people in the share market that make bad buys, like wise the property market. We have people in the sharemarket that sell their advice to the dummies, same with property. I have averaged a lot more than 10pc pa on every property deal i have made, and i have bought and sold a lot more than the average person.
    When i raise my mathematical standards to a worthy standard i will debate this further. your old mate macdunk.
    I agree MacDunk. Property leaves the Sharemarket FOR DEAD, and is where everyone I know has made their money. Apart from one commercial property my investments are bare land and I get real estate agents phoning up on a regular basis. You can't go wrong if you are in the know or get good advice from people who are, like I do.

  8. #18
    Member
    Join Date
    Dec 2000
    Location
    Auckland, , New Zealand.
    Posts
    94

    Default

    At a 10%pa annual compound growth rate, in 2025 the median property price in Auckland would be $2.4m. Adjusting for a 2%pa inflation rate, that is still $1.6m in today's dollars.

    Surely this cannot happen. Firstly, for 20% down, a deposit of $320k would be needed; secondly, on a 20 year mortgage, based on morgage rates of 8.5%pa, weekly mortgage payments would be $2,600 a week!!

    That means a family would require a gross salary of $207,000pa just to meet mortgage payments (before rates, maintenance, electricity, water, insurance, and that's not even getting to food, clothing, and lifestyle expenses!)

    This just ain't going to happen. If you think it is you're dreaming.

    Dimebag

  9. #19
    Senior Member Halebop's Avatar
    Join Date
    Jun 2003
    Location
    New Zealand
    Posts
    1,172

    Default

    Cap the fact that everyone you know made their money in real estate is hardly proof of a concept. If I were an All Black everyone I know would have made their money in Rugby and owning bars (and maybe one or two league mates lost money in property!).

    What we do know is that property does not compound at 10% per annum ad-infinitum. A simple process of maths shows this to be impossible. Quite obviously Dr de Roos' PHD is in neither Math nor Statistics.

    My net worth has increased 137% last year and with a couple of days to go this period I will confidently pick 96% for this year. All without leverage and without a single house, section or tin shed in sight.

    Whenever I look at an NBR / BRW / Forbes etc Rich List they seem remarkebly devoid of people who own 4 rental properties in Mt Eden. Now I'm not knocking property investment - merely having a plan will make you richer than 95% of the population. Will property beat the sharemarket hands down? Quite simply no. Its just another choice.

  10. #20
    Member
    Join Date
    Apr 2004
    Location
    Dunedin, New Zealand.
    Posts
    193

    Default

    High inflation rates in previous eras need to be taken into account as well... ie 15% return in a period of 12% inflation gives a real return of 3%. 70's, 80's etc, double digit inflation was the norm so any calcs going back 50 years would have to account for this.
    Undisputed 2006 World Cup Premierleague Champion

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •