invest for cashflows or capital gains

[Shane D]

So Shane
Interested to know how you calculate 8% yield as cashflow +ve. ?
Say rent = $400 pw = $20k pa (allowing for 2wk vacancy)
Mortgage io (say 6.5%) = $15600
Rates = say $2000 ?
Insurance = $600 ?
prop management + inspection fees $2000
Accountant $1000
Maintenance = $2000 average ?

Total exp = $23200
Cashflow = -$3200

You may have lower costs if you manage it yourself, and some years maintenance will be lower, but there is not much room for movement if interest rates go up?

Jumpin,

since we are thowing numbers around, lets use my real figures

Rent = $680 pw = $34k pa (allowing for 2wk vacancy)
Mortgage io (say 6.5%) = $24,960
Rates = $1,738.91
Insurance = $900 (with Landlord policy)
prop management + inspection fees $3000
Accountant $1000
Maintenance = $2000 average ?

Total exp = $33,598.91
Cashflow = +$401.09

I am not going to get rich in a hurry on $401.09 a year in positive cashflow but it is paying for itself :-).

Shane

[NovInvestor]

Even -$401.09 a year is a good deal to me (provided I can get the property for nothing).

I think positive cash flow is not gonna make anyone rich, unless you can pay the mortgage off, which requires much more effort than simply saving from your pay packet, especially if you got millions dollars worth of loans.

[olliestyles]

But what will make you money (not necessarily rich) is the increase in value over time, which you can borrow against to get in to another cashflow positive property. Furthermore, in years to come, the rent will increase, if you manage to maintain the interest at a relatively low level then you will be sweet.

[ENP]

Shane, what if interest rates go up to 8-9%

Then you will be losing quite a bit of money out of your pocket each week? If they went up to 8% thats an extra $100+ more expenses a week.

[ENP]

I think positive cash flow is not gonna make anyone rich

Well negative cashflow isn't either

[Shane D]

Shane, what if interest rates go up to 8-9%

Then you will be losing quite a bit of money out of your pocket each week? If they went up to 8% thats an extra $100+ more expenses a week.

ENP

I'm an inflationist. That is why I also invested in gold a few years back...but that's another story, another thread :-).

So I believe interest rates WILL go up. But I am also very conservative with my LVR @ 30+ % (well actually the bank forced me) so I won't actually have to pull extra money from my pockets as my loans are lower (LVR 30%).

But you also have to look at the other side of the inflation coin. House prices and rents are likley to get some lift from inflation eventually...especially if you look out 10 to 20 years, which is my property investing timeline.

Shane

[Shane D]

So Shane,

With the 8% gross yields, that would mean you would have to put new cash deposits in everytime?

You wouldn't be able to recycle the equity into the next place because the banks only take into account 75% of the rental income.

Is that right?

Right, I am having to put in new deposits for each purchase. The upside of this is I tend to be VERY careful and negotiate hard on a purchase when I know I only have one bullet left in the gun.

I don't have the luxury of a never ending stream of cash that I can being firing off my gun willy-nilly.

Shane

[auckland investor]

Mr Nov Investor,

Why you invest in 2 bedrooms unit and not 3 bedrooms house? I thought 3 bedrooms house was best investment?

[eri]

here's a story about a man who decided to change his investment focus from cash flow to capital gain, ..................costing him a lot...

He said the banks were concerned that Crafar Farms was selling cattle in order to buy more land, and that this could affect the group's control over stock which were the principal revenue generator for the companies.

Instead Mr Crafar "was simply focused on his view that land prices were going to go up over the next year or two", he said.

http://www.stuff.co.nz/business/farming/4225705/Crafar-banked-on-land-prices-rising

[Jumpin]

here's a story about a man who decided to change his investment focus from cash flow to capital gain, ..................costing him a lot...

He said the banks were concerned that Crafar Farms was selling cattle in order to buy more land, and that this could affect the group's control over stock which were the principal revenue generator for the companies.

Instead Mr Crafar "was simply focused on his view that land prices were going to go up over the next year or two", he said.

http://www.stuff.co.nz/business/farm...-prices-rising

This strategy is called gambling.

[AMR]

Does anyone here do a full risk management process? (Like a construction company, etc)

What sort of stress-testing do you put your porfolio through?

[eri]

i have a very wealthy friend who is 1 of the top risk management people in his field

his advice is very, very expensive

he lost a load during the share market crash.........i presume his clients did to

black swan stuff

The term black swan was a Latin expression — its oldest known reference comes from the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" (6.165).[1] In English, this Latin phrase means "a rare bird in the lands, and very like a black swan." When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproven. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic.
Juvenal's phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers.[2] In that context, a black swan was impossible or at least nonexistent. After a Dutch expedition led by explorer Willem de Vlamingh on the Swan River in 1697, discovered black swans in Western Australia[3], the term metamorphosed to connote that a perceived impossibility might later be disproven.

http://en.wikipedia.org/wiki/Black_swan_theory

[eri]

The main idea in Taleb's book is not to attempt to predict Black Swan Events, but to build robustness against negative ones that occur and being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.
Taleb states that a Black Swan Event depends on the observer—using a simple example, what may be a Black Swan surprise for a turkey is not a Black Swan surprise for its butcher—hence the objective should be to "avoid being the turkey" by identifying areas of vulnerability in order to "turn the Black Swans white".


Taleb enumerates ten principles for building systems that are robust to Black Swan Events:[10]

1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
2. No socialisation of losses and privatisation of gains.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.
5. Counter-balance complexity with simplicity.
6. Do not give children sticks of dynamite, even if they come with a warning.
7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence".
8. Do not give an addict more drugs if he has withdrawal pains.
9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
10. Make an omelette with the broken eggs.

[ENP]

Ok all that Black Swan stuff just went over my head.

[speights boy]

Basically, people used to think all swans were white.
Therefore they thought it impossible that black swans existed.
Until they discovered they did.

The US sub prime crises was predictable, although not by enough people unfortunately.
The fact that this would bring down Lehman Brothers was not foreseen, so could be regarded as a Black Swan event.

Bit like Donald Rumsfeld and his "there are things we know we don't know, but there are also things we don't know we don't know "analogy.

That's my understanding anyway, I'm sure others will explain better.

SB