If I still owned every property... ?changes my mind on negative cashflow investing

[BigSheep]

I am relatively new to property investing, started in 2003 after long discussions with a work colleague, who loaned me books and discussed all my many objections.

I have moved city (and once country) frequently for work over 20 years. My pattern was to buy in each city, then sell when it was time to move on.

Today I had access to a real estate program looked up all my old property values and worked out the gains. So here are my purchases for 20 years:

1. Chch bought 11/2/88 $63,000 CV $39,500; May 2009 RV $294,000 last sale 11/09/2007 $320,000
Total increase $254,500 Average increase $12,000/yr

2. Chch bought 28/11/89 $115, 000 CV $90,000; May 2009 RV $405,000 Last sale 27/2/1992 $179,000 Total increase $315,000 Average increase $15,750/yr

3. Eastbourne bought 18/11/92 $172,500 CV $160,000; May 2009 RV $520,000 Last sale 20/9/97 $200,000 Total increase $360,000 Average increase $21,000/yr

4. Dunedin bought 6/5/96 $85,000 CV $82,000; May 2009 RV $230,000 last sale 10/8/07 $230,000 Total increase $148,000 Average increase $11,000/yr

5. Investment bought 30/7/04 $95,000 CV $87,000 ; May 2009 CV $205,000, last sale 15/6/07 $210,000 Total increase $118,000 Average increase $23,600/yr

6. Investment bought 10/03 $51,000 ; May 2009 CV $170,000 Total increase $119,000 Average increase $12,000/yr

7. Investment bought 6/04 $62,000; May 2009 CV $180,000 Total increase $119,000 Average increase $20,000/yr
8. Own home bought 2/3/04 $275,000 CV$ ; May 2009 CV $450,000, Total increase $175,000, Average increase $35,000/yr

Not included is a property bought in 2002 in Brisbane - I just don't have the figures, but I can only imagine it would make the total look better.

Total RV value now $2,454,000
Total combined cost at day of purchase: $918,500
Increase in value over 20 years: $1,535,500

Most of these homes were bought because we wanted to live in them; we didn't negotiate hard, we couldn't walk away, we loved the houses. we paid above the GV for most. The current values are calculated using present day GV/RV/CV - you could argue that that doesn't represent true value, but still, the results make the statement. Also I only broke even, made a small profit or a small loss on each property with my move - buy - sell approach... NEVER made a killing on any deal.

I now own my own home and 2 investment properties, both significantly positive cashflow, I made them pos cashflow by buying low and improving them significantly and renting them high, Has served me very well - Properties 6 & 7 are rented at $240 each/week, but I did spend $70k between them to get them to their present std.

So i have pushed very hard to find positive cashflow, it is out there, but I have been unsuccessful with offers or have seen the potential for so much tenant damage that i shied away from other 'low decile' areas. I have read Jan Somers books and she has a negative cashflow approach - buy a solid family house in a reasonable suburb that is median in most ways, rent it and wait.It may cost $70/week but you get the capital gains of the house. Look at the first ever property, I can't remember going rents at the times, but possbly $80-100/week. Would've been negative cashflow but time would have fixed that.

My goal is to get a total of at least 10 investment properties over the next 10 years. In reviewing these figures, and looking at what i can find that is positive cashflow, I do wonder if buying a solid family home returning 5-6% may be a reasonable option. Those properties are much easier to find...

Any ideas or especially experiences? this has amazed me...

[drelly]

Hi BigSheep,

The trouble with doing calculations like this is that it's all theoretical. What isn't factored in is any of the downside... repairs, vacancies, nightmare tenants, court dates, maintenance - the harsh reality. What you've found in your figures if you'd kept everything is the absolute best-case result.

Consider the alternative that a number of landlords are now facing right now... forced mortgagee sales. I'm guessing these would be mainly the negatively geared investors that have hit the wall of their ability to prop up their debt.

Getting that best-case result isn't impossible but it does require some key ingredients.
- financial fat: the ability to survive in lean times and be able to finance the odd hit to cashflow. $15k for a new roof, $1.5k for a new water cylinder, $??? for plumbing/electrical repairs, $3k for ruined carpet... the possibilities are endless!
- ability to hold on long enough: this has a lot to do with financial fat but there's personal factors like income security, health, family, economic disasters(!), marriage, kids and so on.
- luck: While I'm sick of hearing how "lucky" I am (not so much these days!), we all need it. There's only so much you can plan for and surviving long enough to get your end result relies on a good dose of luck.

Finally, there's the reality of the situation that you've worked out. Being a "paper millionaire" doesn't necessarily mean travel and champagne. For most investors with around 10 properties, I'd say they're still focussed on paying the bills and keeping everything on track.

[Viking]

Drelly, still plenty of fat in the system with 1.5 mil assets to lean on if you need a few thousand. Cashflow maybe another issue but had some of those properties been P&I over that time then the cashflow would have taken care of itself.

[tpr2]

Hi BigSheep,

......Finally, there's the reality of the situation that you've worked out. Being a "paper millionaire" doesn't necessarily mean travel and champagne. For most investors with around 10 properties, I'd say they're still focussed on paying the bills and keeping everything on track.

Ahhhh thats where I went wrong...too much champagne and travel...lol

Drelly, still plenty of fat in the system with 1.5 mil assets to lean on if you need a few thousand. Cashflow maybe another issue but had some of those properties been P&I over that time then the cashflow would have taken care of itself.

I agree.

Pretty much what Big sheep has described is exactly what I did. The only properties I sold were the ones 15 years ago when I didn't know what I was doing and then the stuff I started trading a few years ago.

My Mount Maunganui properties I have had for probably 16 or so years now. (hmmmm best check my dates ...things get fuzzy as I grow older

[Viking]

Thought it would be interesting to have a look at these figures. Dolf de Rue always taught that property doubles in value approximately every 7 - 10 years depending on when you buy into that cycle. Because we have these numbers lets have a look. Now I know that they are be subject to estimates but here goes.

1. bought 88 for 63000 current est rv 294000
7 year cycles are 88-95- 02- 09
63000 -126000 -252000 so done better than doubled each seven years.

2.bought 89 for 115000 rv 09 est 405000
cycles 89 -96 -03 -10
115000 -230000 -460000 so again done better than double each 7 years.

3. Bought 92 for 172500 rv est. 09 520000
cycles 92 -99 -06 -13
172500 -345000 --690000
So estimated value in 13 should at least be 690000
therefore estimated value 09 is probably between 515100 and 588800
RV estimated at 520000 so close to average of 7 year cycle.

4.Bought 96 for 85000 rv est. 09 230000
Cycles 96 -03 -10
85000 -170000 -340000
Falling behind the average

5. Bought 04 for 95000 est. rv 09 205000
Cycles 04 -11
95000 -190000
So slightly better

6.Bought 03 for 51000 est. rv 09 170000
Cycles 03 -10
51000 -102000
So considerably better than average

7.Bought 04 for 62000 rv Est. 09 180000
Cycles 04 -11
62000 -124000
Again doing better than average.

8.Bought 04 for 275000 est.rv 09 459000
Cycles 04 -11
275000 -550000
Would appear to be on track for average doubling in value each seven years.

So what we see is in all cases bar one , no 4, there is a doubling of values each 7 years and some have done better.
What 1 & 2 tell us is that longevity is the key to sustainable wealth accreation.

Be interested to hear what BigSheep can tell us about location etc for each property. What it has cost in Agents and Lawyers fees. Probably those alone would have paid for a couple of the houses.

[tpr2]

Hang on Viking

I just look ed at the first set of number.

Bought for 63k and so would have doubled to 126k by 1995

1995 to 2002 doubles again to 252k

To double again between 2002 to 2009 means it should now be 504k

So it hasn't bettered the doubling every 7 years principle which is an average of 10% per annum.

If you drop that back to 7% so doubling every 10 years we might have a dog that flies.

Lets see.

88 to 98 $63,000 to $126,000
98 to 08 $126,000 to $252,000
Plus a little bit for 2009.

[Viking]

I knew someone would find any errors.
Keep looking.

[drelly]

Drelly, still plenty of fat in the system with 1.5 mil assets to lean on if you need a few thousand. Cashflow maybe another issue but had some of those properties been P&I over that time then the cashflow would have taken care of itself.

BigSheep's example is quite close to my own portfolio build over the last 11 years - although I only really started buying in 2002. I've paid off considerable principle over the years - equivalent to P&I. While I can use revolving credit to get myself by, I very rarely have and prefer to use my personal income rather than any cashflow, which I use to improve and maintain the rentals.

The capital gain looks great on paper but it has not made one ounce of difference to the way I lead my life (yet). I don't and never have drawn any rent for personal spending and it will probably be another 10 years before I do.

Property investing seems to be romanticised by many people and the simplicity of capital gains on paper make it look far easier than it really is. Also, I think people over-estimate the incomes that they can realistically draw from a few rentals after all the usual costs.

I'm sure not trying to put anyone off but the rip, shit and bust approach of getting into as much debt as possible and riding the capital gain wave is a dangerous strategy that relies on a lot of the "luck" factor I mentioned. I was fortunate to start when I did and not in say, 2007.

[BigSheep]

The capital gain looks great on paper but it has not made one ounce of difference to the way I lead my life (yet). I don't and never have drawn any rent for personal spending and it will probably be another 10 years before I do.

Property investing seems to be romanticised by many people and the simplicity of capital gains on paper make it look far easier than it really is.

I wonder if you're going on a tangent here - the aim of the exercise was to demonstrate using a real world example of what time has done to the value of the properties I have owned.

[BigSheep]

Be interested to hear what BigSheep can tell us about location etc for each property. What it has cost in Agents and Lawyers fees. Probably those alone would have paid for a couple of the houses.

I am still weeping thinking of those costs - don't have them to hand, but they will be bad...

[drelly]

I wonder if you're going on a tangent here - the aim of the exercise was to demonstrate using a real world example of what time has done to the value of the properties I have owned.

I do wonder if buying a solid family home returning 5-6% may be a reasonable option. Those properties are much easier to find...

You gave examples of capital gains and asked about the benefits of negative gearing. I have tried to explain that surviving long enough to get the capital gains even with CF+ properties is not as easy as it looks on paper. Trying to do it with negatively geared properties is a game for someone who is already cashflow wealthy. So no, not a tangent.

[Magnum PI]

HEY I started in 2007!

And man it is tough...

I only have one property... brought for 245,000.
15,000 deposit.
It is now worth 215,000 on paper.
Rented at 265pw (no rent increase for two years most are now 270-280)
and the mortage has 3 years to run at $814 a fortnight. (tried to break with Kiwi bank and was smacked in the face with a BS stick of a formula that was higher than any other bank!)

Not looking to flash I must say... But I did buy in Auckland in an area I know was good enough. Its a 2 brm place I myself would have lived in. 5 mins walking distance to the train station, 5 mins walk to a all levels of schooling (except uni).
So I am hopeing over time things will work out. Right now I am just saving, saving saving!

I also am part owner of land in another county... I am looking into using it as scurity on a new loan... but I'm not sure that will fly.

I would agree... hidden costs really hit you if you are not prepared for them.

[BigSheep]

Thanks

surviving long enough to get the capital gains even with CF+ properties is not as easy as it looks on paper. Trying to do it with negatively geared properties is a game for someone who is already cashflow wealthy. So no, not a tangent.

Thanks for your comments, you are right

But with the correctly geared properties, presumably time will out... And i have positively geared properties, so maybe could use that income to finance a capital growth negatively geared property - and with time that will become positively geared.

[drelly]

But with the correctly geared properties, presumably time will out... And i have positively geared properties, so maybe could use that income to finance a capital growth negatively geared property - and with time that will become positively geared.

I hope time will out! I've done that. I had a few CF+ and then bought two more houses on a commercial zoned section that were -ve geared. It has increased in value and given enough time will probably grow very well. However, in the meantime, it's a millstone that has held back my ability to make further investments. Given my time again, I wouldn't buy anything that wasn't at least neutral after all expenses. CF-ve is just another term for "buy and hope". If you're looking to increase the quality of your investments, then I'd look to buy something that you can add value to in some way to improve the cashflow and make it pay it's own way. Anything that doesn't will only hold you back.

[tpr2]

Drelly is right however remember some people actually do have the cashflow to buy neg geared properties.

Yield and Capital Growth are usually inversely proportional to each other over the long term, i.e Beach Front Property has generally grown very quickly over the years but provides very low yields, Inner City Apartments provide great yields but the potential for growth over the long term is uncertain.

Which one is appropriate for you?

A property that costs you nothing but may also not ever grow in value or something that has all the right variables to provide capital growth over the long term but will cost you a few dollars per week?