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Discussion in 'Introductions' started by boringbanker, 23rd Jul, 2008.

  1. boringbanker

    boringbanker Member

    Joined:
    20th Jul, 2008
    Posts:
    6
    Location:
    melbourne
    Hi there

    great forum.

    I got bored so i started a site Boringbanker.com - free online finance magazine blog as hobby to share some finance tips. I hope to call on my experiences as a banker and write a few useful tips that you may find interesting, so please drop by and check it out.

    thanks
     
  2. Smartypants

    Smartypants Well-Known Member

    Joined:
    2nd Jun, 2006
    Posts:
    226
    Location:
    NSW
    Good stuff BB.

    Hopefully this sort of education can only help people.

    Only skimmed through the site, will check it out properly when I have more time.
     
  3. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    BBanker

    Welcome to the forum and stick around if you can.
    It would be good to have your opinion on certain issues.

    Cheers
     
  4. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
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    1,448
    Location:
    Sydney, NSW
  5. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    I share bb's views about the majority of seminar spruikers but the contention that those on an average income cannot build a substantial portfolio is patently incorrect.

    I know of several people who fa into that category. Also, a quick flick through some past issues of API magazine also demonstrates bb's position is incorrect.

    Best regards
    N
     
  6. DotnetKris

    DotnetKris Member

    Joined:
    22nd Jul, 2008
    Posts:
    18
    Location:
    Canberra
    Hi Nigel,

    I've just read boring bankers blog post, and I can't seem to find any holes in his mathematics to disprove his argument.

    Please explain the reasoning behind your statement that people can build substantial property / investment portfolios on average incomes. It would also be appreciated if you could supply some numbers as well.

    This is by no means taking a shot at you, I am just very interested to see your reasoning and numbers to see how it can be done.

    Regards,
    Kris
     
  7. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    I agree with NigelW.

    BB's article is relevant but it's not accurate.
    What BB failed to recognise is that at the time these people started building up their property portfolio interest rates were quite low so loan repayments were small, and property prices had not gone up so the holding costs were minimal. Some properties were even cashflow positive.

    Even at a later stage of the property cycle people could still build up a sizable portfolio by buying properties in country towns.

    Also, lending was not a problem because the lending criteria were often bypassed by taking the LO DOC or NO DOC lending option.

    The revaluation can be done at 6 monthly intervals but you pay for it.
    The revaluation period actually depends on what the lender allows and this varies between lenders.
    Some are more flexible other's are not, BB's bank is obviously not so flexible.

    Building up a big property portfolio on an average sallary is not possible today, but in an increasing market a few years back, people who bought run down properties, fixed them up and bit and revalued them in 6 months time they would have increased the value by at least 20% and they could then borrow against this equity and buy their next IP.

    It's not rocket science, it's more like timing the market and finding a lender who is willing to lend you the money.

    Cheers
     
    Last edited by a moderator: 25th Jul, 2008
  8. BlueFire

    BlueFire New Member

    Joined:
    25th Jul, 2008
    Posts:
    3
    Location:
    Sydney
    Hey BB,

    Great blog.

    I agree to some extent, that in this market, it is difficult to build a decent portfolio on an average income.

    But... as others have pointed out, we're in tougher times than usual. Although, there's no reason why conditions have to get better anytime soon.

    To add to the discussion, I've thought this through, run my own numbers and have a thought. We all talk about buying the "right" property, but what does that mean? My numbers suggest the right property is one that balances returns between growth and income, for an investor interested on continually drawing down equity and reinvesting. In layman's terms, that means not being so enamoured or besotted with the traditional house and looking towards higher yielding properties, but still in blue chip and dress circle locations.

    Of course you won't get the same growth per property, because essentially you're buying lower growth properties, but my numbers show a higher portfolio growth, coupled with higher debt and hence higher risk.

    If anyone is handy with Excel, build a model and see for yourself. It will take you a while to do it and to consider all variables, but it's worth the work. Make sure you account for drawing down equity and reinvesting for when capital appreciation allows it. You might get a different outcome to me, and that still be great, but my model shows high yield is the way to go. I know this goes totally against what most of these seminar and forum junkies say, but I doubt 99.9% have ever modelled it.

    With all of that said, I do believe property investment is mostly about being a disciplined savings plan, because it's so hard to get your money out and no one wants to default with a major bank. I have modelled the exact return of a few example IPs and the returns really aren't that great when you consider absolutely everything. But it's a way to help you save and you can get lucky, and most of the time, that's more than enough.

    And of course there's nothing like buying property before a boom and watching its value double in 12 months. Of course that's a good return, but we all know that's not the norm.

    It's an interesting discussion to have; that's for sure. And most places you won't get people talking candidly, which is a shame.

    Peace.
     
  9. boringbanker

    boringbanker Member

    Joined:
    20th Jul, 2008
    Posts:
    6
    Location:
    melbourne
    Hi All,

    Thanks for reading my post and for the discussion here.

    Perhaps I should qualify my post a little by stating that this post was aim at the property seminars pruikers promising riches through property.

    I agree with some of your views that you can build a substantial property portfolio with average income, However, you will need to build up your equity first, and it will take a long time (depending on the market). My post was targeted at the claim that you can buy a property at 90 to 95% LVR then revalue after only 6 months to release equity and buy another one. This is impossible unless your property increase substantially in 6-12 months.

    My other argument was cash flow. Again targeted at the get quick rich property schemes, if you bought your first property at 90% and above, on average income you won't be able to service an extra property without stretching your budget to the max. In this current market, even 2-3 years ago when interest was low, it's impossible to find a positively geared property without going to small country towns. Of course if you hold your property for say 5 years, then it may become positively geared. However, that's 5 years away.

    As for BV's point about low docs, no docs. You have LVR restrictions with this type of loans, most low docs are 80 LVR or less (in this market good luck finding a low doc loan that's affordable). Thus you will need a bit of capital or equity anyway to use low docs. I can't stress enough that banks look at serviceability first, especially when you're highly geared.

    As for valuations, i have not seen a valuation that increase enough to make a substantial difference to leverage against in just 6 to 12 months, say you decided to buy another property for $350K, and you borrow at 95%, you will need $17.5K (5) + stamp duty (say $12K)+ mortgage insurance (say $10K) = $39.5K. That means you have to have increased in equity of at least $41.5K (95% LVR). I can't see that happening on an average property in 6-12 months in this market.

    I call this "chase the market" strategy, works if you have the cash flow and equity to back you up, but if you're highly geared as promoted by these pruikers, when the market turns you'll get caught.

    Thanks for the feedback and i hope we can continue this robust discussion.


    BB
     
  10. DotnetKris

    DotnetKris Member

    Joined:
    22nd Jul, 2008
    Posts:
    18
    Location:
    Canberra
    I don't suppose theres any chance of being able to snooker a copy of that model you've created?

    If possible that would be highly appreciated :)

    Regards,
    Kris