Property rocks

[Halebop]

MacDunk everybody understands what you are saying but you never once answer the question of risk.

As a business property is cyclical, capital intensive and low yielding. Leverage is the only way to turbo-charge performance in the long term. However, to keep this performance up in the long term you must then remain leveraged or have returns drop away. If you remain leveraged you increase the probability of being stretched at cyclical low period in rental returns. This in turn increases risk and volatility, defeating the perceived defensive benefits.

Now if someone is supposed to pick cycles in interest rates, capital values and rental returns to achieve superior results then unfortuntely they cannot be one of your "dummys". So if I have to be a "smarty" to achieve I'll stick with share investing...

As a share investor I can maintain a higher cash income than a leveraged property investor just in the form of a modest dividend income. Additionally, I can exit and enter different businesses with much more ease than a property investment and in a timely manner. Counter-intuitively with shares, by mitigating rather than increasing risk and leverage I will also enjoy higher long term capital gains and income growth.

I agree on one aspect. The argument for direct property investment versus direct share investment is indeed suited towards less sophisticated investors for no other reason than its easier for a dummy to understand and then leave it alone once they've committed.

[cdt18]

No doubt aspex. Generation X & Y aint having kids. Baby boomers who are 45 - 65 now own 3 - 5 bedroom houses. Hello ! who needs these, not gen x or y. They need 1 or 2 bedroom houses. We all know our own house is not an investment & I bet in the next 5 - 10 years alot of baby boomers will have large paper losses on their houses if they consider time to repair, opportunity cost and the final resale value.

It is absurd to propose property will outperform shares as an investment. Shares are the driving force of the economy. Property is just a byproduct of the wealth created by companies. If there are no jobs, there are no houses. If companies perform, people have more money & buy more expensive house Plus the shareholders get richer. The NZ sharemarket is perhaps not the best indication of returns as it is so small. But as an asset class share must outperform property or else the property market is being inefficient ( which is the case at the moment).

[Dimebag]

Duncan: You state:

ELFER, My idea of a good investment is a 10pc deposit of your own money,self funding, and a capital gain of 10pc pa.

I would respond by saying "bloody oath"!! If I could buy such properties, believe me, I would be ditching many shares and buying as much as I could.

The issue for me is that you cannot obtain this type of return.

The Westpac data presented ealier shows that the average rental yield is now 5%pa. Deducting costs, your looking at 3.5%-4.0%.

We have also clearly determined that a capital gain of more than 5.0%, in a good area in a growing city like Auckland, is the most one can realistically hope for.

This is a far stretch from your 9-10% yield and 10% property growth. For me this makes all the difference, as there is no dispute that based on your assumptions property would be by far the best bet for 99% of people.

Dimebag

[dingdong]

quote:Originally posted by duncan macgregor

How much do you think your initial deposit is worth in 10 years?. It is a better investment than owning a gold mine.

O Property Worshipper I suggest ANY investment is better than owning a gold mine.

[skinny]

Nice discussion. To set one thing straight I never said that the NZ property market will last another couple of years as Cap states at the start of the thread. What I said was now is not a good time to buy IMO, but long term I am bullish about NZ property. If prices did come off such that you could earn a decent yield (say 10% gross and at least 5% net) then I would get in. At the end of the day if a property investment is not comfortably cash flow positive on a fairly high level of gearing (say 75% or more) I don't want to know about it. Currently I own just one rental property yielding 9% gross and 6% net on cost price and an initial debt level of 80%. Now its net yield would probably be negative on current valuations -- a strong signal to sell perhaps but the section is sub-dividable with really good sea views at the top...

Anyways, why I like property for the long term includes:

1) NZ income levels are around 20% below OECD average levels, 25% below Australia's and close to 40% below that of the US. IMO the really good growth NZ has seen since '97 is not a flash in the pan - the country is starting to converge back towards OECD average levels. This could be a *very* strong driver of property going forward. House prices would be expected to move in some multiple of any increase in incomes as households discount their elevated lifetime income paths into current house prices. E.g. if we take a historically conservative 5:1 ratio a 20% permanent shift in incomes implies house prices double.

2) Even if NZ incomes do not converge towards average OECD levels, to some extent we are seeing a convergence in international house price levels, at least in desirable locations such as along coasts or in pretty countryside settings which NZ has in abundance. To take an admittedly extreme example, I was reading an article in the US press recently that the State of Hawaii has the 2nd highest house prices in the country yet its income levels are only around 75% of average US levels.

3) The demographic drag that people have bought up here is IMO overplayed. NZ's population level is still projected to keep on climbing until around 2050 on quite conservative net migration and fertility assumptions (see file below). Sure, there will be a shift in the type of dwellings demanded as the population ages - relatively less demand for the large family homes, more for 1 and 2 bdrm units closer to amenities. But this trend actually implies that there will be even more pressure bought to bear on land prices in the "right" locations -- not too difficult to figure out where they are!

http://unpan1.un.org/intradoc/groups...NPAN016778.pdf

[Capitalist]

Right Skinny - never forget I have a photographic memory:

I am shocked by how much prices have gone up but how cheap they are still! If we take the view that the better growth performance in NZ over the past 5 years is a sign that the economy is starting to converge back towards upper OECD income levels then it follow house prices may have many years to run yet

F.E.T.E.

[Halebop]

Perhaps your photographic memory is a bit selective Cap. Even my less than photographic memory can recall Skinny later saying what he just re-related above.

[skinny]

Good memory Cap, that is point (1) of the epistle. As an economist I always reserve the right to distinguish between forces driving the the short and long runs though []

...this is what I had to say on buying now:

Like Duncan I reckon NZ housing a good investment for the longer run, however, IMO Rmbbrave the stars are not in your favour at the moment at all. Over the next few years the NZ housing market could show negative real returns and its quite likely the NZD will fall against the USD -- if it does swings of over 30% are not unusual by historical standards. Have you factored such a fall into your sums? My advice is to wait out the next few months to see which way the wind blows.

[wns]

What no-one has mentioned yet on this discussion is that buy and hold rental isn't the only way to make money in real estate.

You can make very healthy returns using vendor financing techniques.

For example:

Search for properties until you can negotiate one at a discount to market. Let's say you find one that is worth about $100,000 but you negotiate and buy it for $87,000.

Buy a house for $87,000. 10% deposit = $8,700.
At 90% LVR, take a loan for $78,300.
Closing costs @ say 6% of purchase price = $5,220.
Your initial investment = $8,700 + $5,220 = $13,920.

Let's say your loan is 7% interest only, that's $5,481 pa interest expense.

Now, resell it to someone who can't get a loan from a bank etc (eg. credit problem, doesn't have large enough deposit etc etc).

Mark it up to a bit above market price (but not too excessive). Let's say $105,000.

They pay you a deposit of $3,000 and take out that rest as a loan to you of $102,000.

Mark up the interest rate you charge them by say 2% principal & interest, so that's 9% p&i. Term of 25 years.

Their payments to you = $10,272 pa.
Plus the buyer covers the expense of rates and insurance.

Let's calculate your profit in year one.

$3,000 buyer's deposit
+
$10,272 their interest payments to you
-
$5,481 your interest payments
=
$7,791

Your cash-on-cash return in year one = $7,791/$13,920 = 55.96%.

If the buyer refinances in the first year, then your return is even higher.

In year two, if the buyer still hasn't refinanced, then your return is 34.42%, that's a passive income of $399 per month while the deal is in progress ($10,272-$5,481)/12.

When the buyer refinances, you get a chunk of cash amount equal to the principal left on their loan to you minus your purchase cost.

[duncan macgregor]

WNS,You give a simplistict example that is full of thorns. A person with a bad credit record, or limited capital that will buy a property at an inflated price to the market is a bad business risk. When you seek out the fool to exploit remember the other guy might be doing likewise. The chances of finding a trouble free deal with an honest buyer, are remote with a deal like that, and shows a lack of business experience on your part. Questions to ask yourself.
1 How long to get them out with a mortgagee auction
2 how much will that cost.
3 The person in the house owns the chattels and sells them.
4 You got paid a few lousey dollars given someone a free house for six months find it trashed with everything gone, the owner overseas, paid an auction, got less than you paid for it, and think you are smart. That is a stupid business risk.
macdunk