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No I think we just identified something before it was gone as it were. I would hate to be starting out again now it is much harder. But the reality is yes there are virtually no risks to a low geared positive cashflow portfolio, outside of global issues and acts of God. I have always thought you'd have to have a screw loose to buy shares, compared to property.
Indeed Bobsyouruncle. But i do not think this is the end of the road. I am thinking about my young relatives who want to start investing in property, and on the one hand i feel like saying that property prices a close to peak so they can not start, or certainly not now, but at the same time i am reading with admiration what Graeme Fowler is going with this experiment and how he is getting his new property portfolio built that it makes me think - there is a way to make money in property in any market, even in today's market.
The "leverage" and "bricks and mortar" aspects of property investments are unbeatable IMHO.
That's true Judge but it's not as easy to start as it was. Graeme couldn't do what he did so fast if he was starting with no skills, no history, no established relationships and no existing portfolio etc. It is much harder now for sure.
That's true Judge but it's not as easy to start as it was. Graeme couldn't do what he did so fast if he was starting with no skills, no history, no established relationships and no existing portfolio etc. It is much harder now for sure.
Agreed, but one thing that youngsters do have it their energy and time. As i was writing my previous reply i googled Graeme and came across this quote from an old article about him:
"Graeme has been a property investor since purchasing his first property in 1988 (which he sold 7-years later for a $40,000 loss!) at the age of 24 years, and although still totally broke at age 28, knew someday soon he would succeed financially."
The key is to start young, and be determined to learn and open minded. Mistakes will be made (i lost $30k on the second rental i bought. It was 3% yield at the time when interest rates where 8%. I just did not understand the concept of yield). But for this $30k i learned a huge lesson, which was totally worth it.
Some risks:
Leaky Building
Bad tenants
house burns down & it is under insured, or CHCH style natural disaster, with only a partial EQC payout & 5 years arguing over rebulld costs.
new multi storey building goes up next door restricting sunlight / views, severely devaluing property, stopping any further borrowing for more properties.
Reserve Bank implements 50% LVR or stupid loan to income ratio, causing restriction on how much you can borrow & maybe prevent refinancing when the loans roll over.
GFC II - calling in of loans, followed by interest rate hikes to over 10% due to Reserve Bank insisting Banks (that survive) carry much more reserves and are required to fund from deposits not from overseas borrowings, while at same time people have lost their savings due to GFC II so have little to deposit, pushing up interest rates required to attract deposits.
There are many possibilities of undesirable situations, some more likely than others, but just being cash positive does not make it safe.
Leaky building is a serious one, but hopefully this one is behind us now and people know enough about them not to buy one.
Bad tenants is a temporary problem. Tenants come and go. I do not think bad tenants can can affect one's portfolio long term.
Under insurance is same as not having insurance. Its an each person's personal responsibility to insure the property. If one does not insure (or under insures) then they take a risk.
Chch style natural disaster is an interesting one. This is really a risk that one can not prepare for. if EQC does not pay, or takes a long time to pay, it can really cripple one's portfolio. it would be very interesting to hear from investors in Christchurch how they went and whether they had any strategies to mitigate this situation...
GFC II - if its anything like GFC I then i can not see it being a risk. Interest rates go down at the time of crisis. So as long as GFC II is not accompanied by a massive recession which brings mass unemployment GFC II should not affect us too much. People still need places to leave and as long as they have a job,, they will pay rent.
For those investing for rental income - increasing prices will be good at keeping demand high for rentals but also keeping out competition (the more house prices rise = less yield = less new long term investors) so you are on a sure thing.
Potential problems who knows when
- global economic downturn /GFC
- South Sea conflict - decrease in Immigration and available capital
- unemployment increasing - technology/automation of more service jobs or government reform to tertiary education such as interest free student loans = less people will study, less students moving from small town to big, increasing real unemployment numbers.
- government reform health/pensions forcing boomers to sell up = lower house prices, less demand for rentals
- government mass building/apartment scheme = lower or stagnating house prices, less demand for rentals
- government builds effective mass rail - significantly reduces travel time between Auckland and smaller towns = less demand to live so close.
*most likely option = government borrows billions more to spend widening roads for more traffic and congestion worsens
- Natural disaster - depends which type. EQ unlikely to affect rental demand negatively - would actually see rental demand increase as seen with Chch. Volcanic - doubt anyone will stay in Auckland post eruption!
There's a variety of factors. I think long term those who have invested and are well covered now and not heavily negatively geared and borrowed will be able to ride out any storm.
Agree with your last comment Boom. Though a Chch type earthquake with property destroyed, mortgage still repayable and EQC not paying may be a black swan that can not be mitigated really. Re your other comments i think:
- global economic downturn /GFC Judge: you are the third of fourth person saying GFC may be bad for property. I am not sure i can see why. The last GFC was good for property invvestors. Rents and property value where effectively unaffected, but interest rates went down. I still beleive if GFC II will be like GFC I we have nothing to worry about.
- South Sea conflict - decrease in Immigration and available capital Judge: Would not affect those of us who already have our property with reasonable equity.
- unemployment increasing - technology/automation of more service jobs or government reform to tertiary education such as interest free student loans = less people will study, less students moving from small town to big, increasing real unemployment numbers.
Judge: agree. this is a mmassive one. Real risk
- government reform health/pensions forcing boomers to sell up = lower house prices, less demand for rentals Judge: not sure how likely this is. Sounds far fetched.
- government mass building/apartment scheme = lower or stagnating house prices, less demand for rentals Judge: Extremely unlikely and will take a very long time to actually have any effect. In the short term this will drive prices for properties up as the govt will use all building resources and increase prices for labour and materials.
- government builds effective mass rail - significantly reduces travel time between Auckland and smaller towns = less demand to live so close. *most likely option = government borrows billions more to spend widening roads for more traffic and congestion worsens
Judge: extremely unlikely. And again, it may affect prices, but we do not care about prices. We care about stable rental pool and stable level of rent. Neither will be affected by this.
Sounds like mass unemployment and earthquake combined with slow EQC are the real risks so far?
Leaky building is a serious one, but hopefully this one is behind us now and people know enough about them not to buy one.
Bad tenants is a temporary problem. Tenants come and go. I do not think bad tenants can can affect one's portfolio long term.
Under insurance is same as not having insurance. Its an each person's personal responsibility to insure the property. If one does not insure (or under insures) then they take a risk.
Chch style natural disaster is an interesting one. This is really a risk that one can not prepare for. if EQC does not pay, or takes a long time to pay, it can really cripple one's portfolio. it would be very interesting to hear from investors in Christchurch how they went and whether they had any strategies to mitigate this situation...
GFC II - if its anything like GFC I then i can not see it being a risk. Interest rates go down at the time of crisis. So as long as GFC II is not accompanied by a massive recession which brings mass unemployment GFC II should not affect us too much. People still need places to leave and as long as they have a job,, they will pay rent.
That's my take on these risks anyway.
Regarding bad tenants: one meth cook can cost ten years of profits from a rental property.
Regarding bad tenants: one meth cook can cost ten years of profits from a rental property.
exactly and does scare me away from rental properties .... that and the fact we live on the shaky isles ...talk of more Chch type earthquakes to come .. GFC stage 2 also on it's way which will make the 08 GFC look like a picnic ......yet kiwis can't wait to tick themselves up to the eyeballs
in property ...
elguapo, i do not mind you patronizing me, but only if you let me know what makes you more of an expert in the area of risk than i am.
I've been through at least 4 downturns of a sizable nature. When I see people saying they don't see any significant risks in a market as heated as Auckland is, I reach for my crash helmet. That's not a prediction, but there is no doubt that the market is at a high risk of correction.
I've been through at least 4 downturns of a sizable nature. When I see people saying they don't see any significant risks in a market as heated as Auckland is, I reach for my crash helmet. That's not a prediction, but there is no doubt that the market is at a high risk of correction.
Thanks Elguapo. I guess it means you are more experienced than i am. I have only been through the latest GFC as an investor. But i am not investing in the Auckland market and (as suggested in the initial post) property prices do not worry me or other buy and holders (at least those with reasonable equity in the portfolio).
Assuming the Auckland market did have a massive correction (say 40%), what would that mean for buy and holders who have 20% of equity in their portfolio and are cashflow positive? My view is that they will be just fine. If they can pay mortgage (which they should be able to even if they reduce the rents a bit and remain cashflow neutral rather than positive) the banks would not want to sell them up even if they will have negative equity of 20% in their portfolio. Banks will wait and work with them. with property prices in Auckland falling 40% the last thing the banks will want is to add fuel to the fire by adding more properties on mortgagee sale. What do you think? This is certainly what happened last downturn. What happened in the previous downturns?
Regarding bad tenants: one meth cook can cost ten years of profits from a rental property.
Agreed, though this is a risk that applies to traders as much as buy and holders, and can be mitigated (to a degree) with good property management discipline.
exactly and does scare me away from rental properties .... that and the fact we live on the shaky isles ...talk of more Chch type earthquakes to come .. GFC stage 2 also on it's way which will make the 08 GFC look like a picnic ......yet kiwis can't wait to tick themselves up to the eyeballs
in property ...
A few articles today about Chch rental market tanking completely. I guess a risk of oversupply following a major seismic event is another risk. Somehow the demand has been overestimated or investors got too zealous buying properties. But valid point agreed.
Re GFC II, i still have not heard a valid argument as to how it will be bad for buy and holders. If we can keep paying mortgage (and come GFC II interest rates in NZ will get close to zero like they did everywhere else) then the banks will work with us i am confident. its not in their interest to sell us up. Plus, central banks seem to have learned to cure GFCs with easing, which means more money floating around immediately post GFC, so prices for real assets will go up like crazy. Just like they did after GFC I. So we just need to be in a good position to weather the actual storm of the crisis itself (say 6-12 months) and then we should be looking to buy distressed assets from over leveraged traders.
I may be dreaming, but i am yet to hear a good solid argument to the contrary.
I think the problem we could see from a GFC stage 2 would see banks having to lift interest rates along with much tighter lending as the interbank lending might well hit major hurdles like GFC1(trust goes out the door if a big International Bank crashes) ...as we know the likes of ANZ have pretty large exposure to energy sector loans that are underwater ....Dairy sector debt also hitting many NZ bank's books in turn adding pressure to their balance sheets....
How much money has been loaned to speculate on further Cap gains ...negative geared holdings
How much International investor funds have been parked into NZ R.E(many empty homes here) .....just as quick as these non residents buy they could sell even if they don't want too... but more so forced to,,,
Demand is always meet by supply.... it's only a matter of time ......only a couple years ago we talked off $150-$200bbl crude oil peak oil supply etc with a very tight market ...today we have hundreds of super tankers full of oil anchored offshore ...some very large Oil&Gas producers going bankrupt and will continue to do if Oil doesn't head much higher soon ...massive debt roll-over in the sector ..(anybody want to buy a Oil&Gas producer Debt ?? that is losing money)
---Aging population Vs poorer younger generations Vs low average income nation =major issues
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