RBA says 'Merry Christmas", but banks say 'Humbug!"

So it looks like the RBA has done the nice thing and dropped the rate again, in what seemingly is a wonderful boost for the average mortgage owner's hip pocket, but wait.....there's a catch. The banks, well, the four majors, have not moved yet, and, as has been the practice over the last year or so, they are waiting until 'the board meets' and as a result, they will still pocket an extra few million just for their troubles. PS. please CBA, just flick us 1 mil of this, I'd be very thankful. In fact, CBA, just pay off my mortgage and I'll never say another bad thing about you ever again...promise.

Anyway, so the reality is, this early 'Christmas present' that is spoken about, in fact, will not be a Christmas present at all for many of us, as once the respective boards meet, it's then at least another week or two before it comes into effect, and the next time your will actually see your interest repayments go down will be at the end of January (all assuming the banks do lower their rates).

In other financial news, I am almost at the stage of switching to UBank. I am not overly happy with the ever growing gap between what I am being offered from CBA and UBank is starting to look tasty. The only problem is, I have absolutely NO IDEA, whether they'll lend for another investment property. This is a bad thing and a major one as to the decision of why I am holding off the switch. I think maybe once everything has been consolidated and I'm left with a tiny mortgage, it may be time to do it, but unfortunately it looks like a distance away before this comes to fruition. 

Oh well, CBA it is. 

I think my brain has gone loopdy-loop!

Staring at the screen, my eyes bloodshot, my body trembling with the energy drink I've just consumed, my mind flying at 100 miles an hour, I am not doing anything special, just looking at our finances. You see, I've just sold my motorbike and it has made a slight change to our cash flow; I'm adjusting the spreadsheet to reflect the changes and just as a matter of curiosity, I check the bank balances. 

I've been putting cash away for a few months and have now amassed a small fortune the equivalent of which I could spend on a new, low-budget small car, you know, a Cherry or something. So I'm looking at this amount of cash, earning a modest percentage in an online saver, thinking surely there is a better use for it. And there is. I COULD put it onto one of our mortgages, heaven forbid, reduce our PPOR, but then I would be left thinking, where has this money gone? I had a moderate amount sitting in my account and now it's gone, only to reduce ONE massive mortgage by a small amount. Psychology is a funny thing.

In essence, I am wondering what to do with this money, because as nice at it is to look at, I'm reminded of a Pearl Jam song:

Oh what to do...the heart says keep it in there, looking nice and tasty, but the mind says, be logical, there are other more useful things you can do with it. 

But it looooks sooooo niiiiiceeeeeeeee!

Hmmm.......I think my brain has gone loopdy-loop.

There is a little Facebook/Twitter/other social media sharing options thingy underneath this post. Spread the word. As much as I love writing on this blog, it would be great if I had more 'followers' or 'disciples' who read the word of the great Andrew. 

Ownership pushed to the suburbs?

I often fail to see past the obvious notion that our nation's journalists are a bunch of idiotic, moronic, 'non-life experienced' idiots. I mean for instance, read this article. 

While the statistics about how far people travel for work are indeed very interesting, the wording is just all wrong:

"Young people are most at risk as housing affordability worsens and first-home buyers are increasingly pushed to outer suburbs."

Does this writer suggest first home buyers should be buying the premium properties in the exclusive suburbs AS THEIR FIRST HOME? Get a grip please, a grip on the reality that the typical first home owner SHOULD NEVER buy ANYWHERE NEAR the CBD. No wonder we have our 20 and 30-somethings complaining about 'affordability'. 

In Brisbane, where should a typical first home owner, in 2011, buy their home? It isn't going to be any of the 'leafy' burbs, not the Indooroopily corridor, definitely not the CBD, not St Lucia, not Kangaroo Point, none of these places are for FHOBs. 

Young people need to get a grip on reality and realise that home ownership is rarely about living where you want to, but rather a compromise between four main factors: distance to work, the suburb 'age', the size of the property and the entry cost. 

1. Distance to work: As in the article, the closer the better, but this needs to be balance with other factors. 

2. Some suburbs, like those popping up near Ipswich at present, are new suburbs with new homes. These come at a premium. Some more established suburbs, say, Oxley, have generally older homes, but are a tad closer to the city. 

3. The size of the property is always a factor, and as the typical back yard becomes smaller and smaller (read 250 square), a premium is paid for the 'larger' lots.

4. Entry cost is probably the most important factor for FHOBs. The market dictates the overall value of a property, considering ALL factors related to the 'livability' of a property, and this is continually forgotten by many many people. Entry cost dictates basically where you will live, but FHOBs can not enter the market with a $700,000 inner ring home. The article talks about stress etc., imagine what it would be like when you need to make the repayments on something like that, AS YOUR FIRST HOME. 

Ciao.

RBA keeps rates the same and at the same time, becomes boring as batshit

News that the Reserve Bank has kept interest rates exactly where they have since the start of the year is no surprise, and in doing so, have shown how 'safe' the RBA has been over the last little period. Although many of our shares investor cousins are doing it tough (although the smart active ones probably making a lot of dough), the RBA continues to hold the rates. I am beginning to think they are so fixated on keeping inflation at bay, that they are not actually looking at the rest of the data. Of course you'll 'hear' reports that they are, but currently the markets are, in my opinion, looking so negative, that this should have pre-empted a drop in the cash rate, and if this doesn't then what does? For property investors, this continual inflation minimisation policy that the RBA have in place is bad news; we need inflation to help boost our capital gains, but for the immediate future, its not look positive.   

The real world of a property investor

Before you read this post, checkout this link:

What is your Cash Flow Position of your IPs?

Somehow I missed this thread on Somersoft until today, but I'm glad it was resurrected, because it's an important poll. If you do the quick math, you'll find that only approximately 23% of investors on the forum have a positively geared portfolio, with the balance made up of those on neutral terms and at the other pointy end of the data, 7% who are way into the negative territory. This comes as somewhat of a surprise to me, I would have thought there'd be a much higher percentage who have 'successfully' achieved the CF+ stage, but alas no, a lot are still paying out more than they are getting back. Of course looking at this data in its singularity is flawed and, as I have here, it's easy to jump to conclusions without seeing the whole picture. For example, those on negative geared portfolios may have properties performing extremely high in terms of capital gain. Those with CF+ portfolios could have one small unit returning $10/week profit. Perhaps there could be a better way to calculate a number to indicate with greater depth the true worth of their portfolios.
Something for me to think about and perhaps come back to in the future.

Finally, finance has been approved!

I won't bore you too much with the details, but organising the finance for this purchase has been a mini nightmare, with one stupid unnecessary delay after another. After a lot of stuffing about, finance was approved today, about a week and a half late.

I pondered on this scenario for a while and I now ask myself are banks THAT BUSY right now that it takes them over 4 weeks to approve a loan to a relatively low risk client? We have NEVER missed a payment, not even close, we have cross-collateralised way below 80% LVR, and the house we're buying a is a solid place which we will be living in. Considering the above, perhaps maybe I should apply to become a bank lender, as I can not see how ANY approval would take any more than 30 minutes. Banks, surely, SURELY, would have a lending criteria tick-and-flick, finance approved or valuations, or not. Come to think of it, a large chunk of the issue was getting to the valuer stage, which is bizarre! I'll role play a lending officer for a moment:

1. Receive loan application

2. Observe on the application that the mortgagee wants to cross collateralise with a list of properties: Order valuations.

3. Continue process of organising paperwork and making an ad-hoc decision based on paper estimates.

4. Receive valuations, approve loan.

5. Go and eat KFC.

So why does this take 4 WEEKS PEOPLE! 4 WEEKS? A load of crap...

Time to stocktake the portfolio

It's the end of financial year 09/10 and it's time for my little "business" to have a stocktake. So, let's see what we have now:

Bought this year:

1. Ingham (north Queensland) 3 bedroom highset. Currently our PPOR.

Continued to hold:

1. Ferny Hills (north Brisbane) 3 bedroom brick and tile. This was supposed to be our PPOR one day. Mortgaged. Rented. CF-

2. Invermay (Launceston, Tasmania) 3 bedroom + sunroom, dodgy weatherboard in an excellent location. Mortgaged. Rented (sort of...in the process of eviction). CF-

3. Glen Aplin (near Stanthorpe, south Queensland), 810 square block in an old small subdivision. Sitting pretty. Not mortgaged. No income.

4. Lachlan (40min from Hobart) 29 acres of splendid mountain/valley/river/town views and about an 8 minutes drive to New Norfolk. Sitting pretty, but looking to do SOMETHING to derive income. Not mortgaged. No income.

Sold this year:

1. Toowoomba (1 hour west of Brissie) 3 bedroom colonial in a historic estate. Was a dog when it came to cash flow.

So overall, our portfolio has entered a "consolidation" phase. By buying Ingham to live in (in town, better for missus and myself), our earlier Toowoomba purchase had to go. Cash flow this year reduced thanks to my beautiful little baby boy arriving and allowing my missus to be a stay at home mum, which far outweighs the benefit of additional cash flow. This does hurt our ability to maintain a negatively geared portfolio though. Balancing act anyone?

So how are we travelling? With the sale of the Toowoomba dog, we are OK. Capital gain (CG) has, according to valuations, dropped, but I am putting that down to the bank being cautious. I think at worst, we have increased our CG by approximately 2% this year. In my day job, I have yet again received a pay rise, so things are comfortable, but that bloody Rich Dad, Poor Dad book is still fresh in my mind. Look out for news around a business I may be buying.

Where to in 10/11? The portfolio is negatively geared and our serviceability is low. There are a number of scenarios, such as further down selling, which could increase our ability to service another property or two, but do I really want to? It would involve selling Lachlan, the block which I think has so much potential. I can't bear the thought of "little short term gain" over the "massive capital gain" that COULD occur. It's all a question of time. I will probably put it on the market, mainly because I see bargains EVERYWHERE at the moment and I want to jump in...BUT CAN'T!!!!! I have found some very good properties, close to CF+ and in great up and coming areas....what to do, oh what to do???

PS. Don't forget to vote on the right, some clear patterns are developing, but it would be great to get a few more people's opinions.

Shhh!!!! The market is sleeping....

Property investment land is a funny place. One minute, you are running off to KFC, blabbering off about how well everything is going, the next, dark clouds gather, the day turns gloomy and you wonder if you will make it through the day with a cent to your name. The market has been very very (and just in case you missed it the first two times, VERY) quiet. A few of my real estate buddies are reporting quiet times and in Ingham, where there are 6 agencies, re.com.au is only indicating TWO SALES PER MONTH!!! I wonder how long before a few of them will shut.

I do see light at the end of the proverbial tunnel. If interest rate rises finally stop this month, investors will jump. Yes, the share market is up the shit, but who cares? It's volatility is having an impact but investor sentiment regarding property should be high, especially after seeing how the market battled through the GFC strongly.

So one day, it's sleepy and not a lot of action, the next, perhaps after an interest rate announcement, KAPOW!!!, things will move again. It's the up and down tipsy turvy world that is property investing.

A bit of action around the two cheepies I have for sale, but I don't count sheep until they're in my bank account.

Ciao...

Could this be the world's best mortgage calculator???

I think so...what do you think?

http://www.drcalculator.com/mortgage/

Are investors back?

a turbulent month folks we have had. Apart from me starting this post with Yoda speak, the Reserve Bank, or as I like to call it, GOD, has not only began lifting the reserve rate, but is warning of a volatile year ahead with as much as 5 consecutive rises in the next 6 months if you believe some of the media reports. This is not new news though. GOD has warned people not to be too greedy, to take it easy, but no, just like Adam, many people were not listening. I for one. So now I'm in a pickle of some sort, having to sell at least one property before the repayments get out of control and I'm left eating tripe, which, as I'm sure many of you know, is a bargain for only $7/kg from Woolies.

Saying this, I would surely love to keep all my properties, since all signs are pointing to a boom, or more realistically, a tiny spark compared to what we have enjoyed for soooo long. I mean people are getting all too excited over a 20% increase in three years, as has been reported for Sydney, and a 10-15% for most of Australia. But come on, 3 years? My first IP bought in 2004 went up approximately 80% in three years, and that was bought immediately after the all so sweet 2003 price sillyness. The market seems similar to back then, especially in Brisbane. A lot of houses on the market, at cheapish prices in the middle ring and quite a few bargains in the outer ring right now. It was similar in 2004, it's just that we were young and naive, thinking it was going to be really hard to pay back a $172,000 loan, instead of picking up a massive bargain int he mid 200s. We have learned now though, that the Brisbane "rings" behave in a very funny way. In my opinion, the inner ring does not start the price jumps anymore, since it's so over heated. No, the price rises now begin in the middle ring, the typical leafy suburbs of Indooroopilly and Corinda, and up towards the Grange, this are the real indicators, the real kings of property booms in Brisvegas. And right now, these are the type of suburbs that the first home owners have began devouring and, investors are starting to play here too.

Anyway, if you're interested in a property in Toowoomba or Launceston, send me an email.

Ciao

I got a little bit excited this morning...

No, it wasn't that I had a dream of eating KFC, it was a realisation upon reading this forum post. Rixter quite rightly puts forward a good argument here. After I read it, I decided to do a little tinkering and I have come up with my own strategy. I'm going to call it the "5/7 Strategy". It all makes so much sense with numbers, I got a little bit excited with the prospect that I could retire in 5 years time. Anyway, let's see it I can explain the 5/7 as clearly as possible:

In a nutshell, the 5/7 Strategy will allow you to retire in 5 years, by owning 7 investment properties.

This strategy assumes that the 7% annual growth that has historically continued, keeps going...there is little to suggest it wont.

In Year 1, you buy two houses, valued at a measly @200,000 each.

In Year 2, you buy one more.

Year 3, one more.

Year 4, one more.

Year 5, two more.

I would assume it would be vital to not cross-collateralise, as you will be drawing down on each properties' individual equity.

Year 6 - first year of semi-retirement

So by Year 5, you have accumulated 7 properties. The first property would now be worth $300,000 and you draw down the equity in this property to the maximum 80% LVR (loan to value ratio). So this gives you $40,000 for the year. You perhaps will need to continue to work part time to really sustain a higher standard of living, but you could easily live on this. This will provide you with approximately $770/week. Admittedly, this is not a huge amount, but you don't have to lift a single finger, or pay any tax on this amount. It's the equivalent of a $57,000 annual wage, before tax.

Year 7

It's now time to draw down on IP2 - Another $40,000 for the year.

Year 8-12

You continue to draw down 80% LVR on all of your acquisitions with 40K in your pocket every year.

Year 13: Jackpot!

By now, you have owned your first purchase for 12 years and, by following historical data, it will have doubled in value and it's now worth $400,000. This will mean you can now draw down the remaining $120,000 of your 80%LVR and this is the equivalent of a $171,000 pre tax wage.

That's it! It's really quite simple, well, definitely sounds very simple and it seems reasonable. Here is a little catch. If you can do this with $250,000 properties, EVERY YEAR you could draw down $96,000 and it would mean that by Year 13, you would draw down $104,000 tax free as well! Imagine that! Yes, you will have to repay the mortgages, but you have rental income coming in helping and you MAY need to work. At a minimum, imagine the extra cash coming in, tax free!

I think I may be able to do this...I'm getting a bit excited though and I'm sure there will be something that I missed and will mean this dream will crash. BUT, I'm optimistic. So here is where things get interesting (for me at least).

I have just purchased a $255,000 house, I also have another that was purchased for $390,000 and one for $151,000. I'm about to purchase another for $195,000. So I am possibly ALREADY in Year 2 of this plan. Furthermore, I have a block of land that has at least $100,000 in equity. The only issue for me, is that they are cross collateralised, but I'm sure my trusty broker and I can change that. SO, I have to acquire three more, one next year, one after that and one after that. THEN, I can possibly retire, or at least, a scenario that allows me to have some choices in my life. Like how much KFC I want to eat.

Something you may not have known about our banks...

The other month, my bank manager got a shock when I refinanced and took all my business away from the money hungry, paperwork losing, miss-communicating bank. Unfortunately I ended up with another money hungry, paperwork losing, miss-communicating bank, which begs the question, are all middle managers and loan account personnel in major banks idiots?

While I let you ponder over that question, I did bring up this topic for a reason. The banker called me, that's right, personally called me and asked why I hadn't spoken to him. So I proceeded to tell him, using very simple language just to make sure he understood, that my broker found a better deal. What happened next surprised me. He said, "You know I could have matched that rate?"

This blew me away. Is it possible that I can haggle and bargain my way to better deals with the banks? Is it possible that all those published rates are a crock of shit and I am actually able to "shop around" until I get to the lowest rate?

He actually informed me that yes, he is able to offer better rates to keep my business and to continue to use the services of his money hungry, paperwork losing, miss-communicating bank (lets call itmhplmcb for short).

Next time it comes time to refinance, I will put this to the test with my new mhplmcb. Maybe you should try it too...:)

Interest Rate Prediction

Hello all, well I finally have some time to continue blogging, so I thought todays topic should probably be centered around the recent interest rate rises. My personal opinion and prediction is that interest rates will continue to rise until mid 2010. Australia's prosperity is ongoing, the mining boom is still in its infantile stage and hence money into Australia is going to continue. We all know the RBAs strategy of lifting rates to slow inflation, so rates, as far as I can see, will continue to rise for a while yet. I am suggesting that people fix a portion of their loan (I am not a finance adviser) for 2 years.

What I am seeing is a slight downturn in the market, so if you can buy, the next 6 months will be full of bargains.

Bye for now...

www.ozpropertyinvesting.com.au

Paying off your house vs. buying an investment....

Oh, the eternal debate continues!!! Two general trains of thought say this: 1. Pay off your house (PPOR) and thus save interest and 2. Leave repayments as they are and buy an investment property (IP), making money by the capital gain. So here we are presented with two valid ways of "making money" by using extra funds. I am of the belief that either method is worthwhile, however there is one factor that I believe tips the favor of acquiring additional IP. Think about the theory....

Making extra repayments = reducing interest in 1 property, which is increasing in value.
Buying an additional IP = rental income helping make repayments and 2 properties increasing in value + tax benefits.

So lets look at it for those who like numbers.

Extra Repayments
$400,000 loan, making extra repayments of 300/week = Approx increase of 34K/year + value of property lets say a conservative 6% approx. $24K/year, total $58K annual benefit.

Buying 1 other IPBuying another IP of $400K making extra repayments at same increase:
You have 2 times the increase because you are holding 2 properties = $48,000/year and remember that you are still reducing you home loan and maybe even your second loan if its P+I also.

But hang on, making extra repayments is worth more, isn't it?Here is where it gets a bit tricky. There are numerous factors which make IP more attractive, such as increases in rental return, the ability to improve the property, get a tax break and increase growth faster and following the theory of equalisation (buying at the bottom, or near the bottom of the market, if you follow this strategy) also strengthening growth. Overall, this will yield greater returns.

The beauty of this system, is that once the rental increase starts kicking in, it costs you less to hold this IP and that's when you can buy another. Lets not forget, that you can continue to acquire and acquire and acquire, multiplying your yearly gain. Essentially this allows you to diversify your portfolio, allows you to access property markets that are not necessarily near you and, if you are making informed acquisitions, can yield much better returns (I've been lucky with approx. 16% on my IPs). Multiple properties increasing in value is much better than one only. However, with a single house, you are basically "stuck" with the one property market and the singular value growth.

So in essence, three main points to sum up my ramblings:

1. Paying off your PPOR is a safe way of "making money" by reducing your interest.
2. Making informed purchasing decisions allows you to enter different markets and diversify your investment portfolio.
3. Tax breaks and rental increases along the way are possible gateways for making IP a better proposition.
4. Multiple IP acquisitions make it worthwhile.

Ciao for now...

www.ozpropertyinvesting.com.au