What are the really big ideas?

[McDuck]

Hi, all..
at the moment I’m studying the mind sets that shift market prices around.

So it dawned on me that there must be some mind sets in the PI world.

What are they? ( I ask myself.)

The first one I ever encountered was,
#1 “Get someone else to pay off your mortgage for you”
The basic idea is that (at no cost to yourself), a tenant paying rent will eventually give you a freehold asset.

That has to be the main idea ..right?
Is the idea sound?
Is it flawed?


What other big ideas are there?

[PC]

As an ex-tenant (now a landlord) I have no interest at all in paying someone elses mortgage off.

I will happily pay for good accommodation though!

Better idea:
What do people want/need?
How can I meet that need profitably?

[McDuck]

Yup…that’s even a bigger idea.

I was thinking of limiting the scope of the ideas to just the ones within the topic of PI.

Like for example the next Big idea around PI is “capital gain”.

#2: Realty will appreciate at 8% pa in the long term.

Is this a valid mind set?
Is it possible to get it totally wrong… ( by badly timing the buy sell dates ).
Does this mind set allow for inflation?

[Monid]

I'd call idea 2 the dangerous one...

Since firstly it doesn't account for inflation... So lots of people think they make more money from appreciate than they actually do.

And secondly if all you are going to do with the money on disposal is buy more property then the asset class is likely to have appreciated at much the same rate... Meaning at the end of the day you are not really better off.

I'm hoping that people will lose this idea since I think it is one of the reasons people are paying silly prices for IPs...

David

[RentMaster]

While idea #2 is probably about right in the very long term, the reality is that capital gains fluctuates a lot in the shorter term. And property prices also go down from time to time as well. So I agree with Monid - it should not be something you just assume will arrive and count on. It is a bonus when it comes.

Quite a few investors also only invest for a short period of time. They want a get-rich-quick scheme, and property is normally not that. But if you survive the long term, you will probably average about 8% capital gains.

[xris]

Quite a few investors also only invest for a short period of time. They want a get-rich-quick scheme, and property is normally not that. But if you survive the long term, you will probably average about 8% capital gains.

Did anybody buy in 1975 or 1986 or 1997 and think to themselves three years later that it was utter rubbish that property was supposed to about double every ten years?

xris

[McDuck]

I agree…but c’mon, fess up…how many people have entered into a borderline cash flow positive situation, with the idea of “possible capital gains” pushing them over the decision line.

So, if it were not for idea #:1 and idea #:2…would it be fair to say that no property investment would go on?

The third idea .

#3: “Get your tax back from the Government”

The basic idea here is that claiming expenses incurred during property investment, you can divert some of the money you would have paid to the bad old tax man back into assets that you actually own.

This is a whole can of worms in itself.
Perhaps just consider if it is the third most important idea or if there are other ideas jockeying for position.

[whitt]

Did anybody buy in 1975 or 1986 or 1997 and think to themselves three years later that it was utter rubbish that property was supposed to about double every ten years?

xris

1998. Thought for several years what did I do that for? Market went no were basically, rents stalled. Hard to reassure myself I did fundamentals OK and all would work out.

Amazing thing hindsight is!!

[tricky]

1998. Market went no were basically, rents stalled.

Sounds like now in the Akld cbd. So this is the slump?

[McDuck]

Slump?…too soon to tell.

So what next?…ahhh yes…other people's money.

#4: Use other people's money to make money for yourself.

The basic idea here is that borrowing money is the way to go.
If you only use your money you will never wind up in debt…but it takes an awfully long time and some good brains to become wealthy.
By borrowing money you can speed the whole process up greatly.

Some folk will never borrow money.
Some will borrow it to buy an asset only.
Some will go into debt for a television set.

Property investors fall into the second category.

[RentMaster]

#4: Use other people's money to make money for yourself.

Absolutely! Of course other peoples money is not just limited to the banks money. The tenant paying rent on your property is also other peoples money. If the tenant can pay off your mortgage for you, then you end up with an asset of substantial value without paying for it. (We are almost back at #2 again - capital gains mean the asset could have a very substantial value - bonus).

[McDuck]

So all the basic concepts are out of the bag?

Every property investor juggles these basic simple ideas to work their magic.

But wait…there’s more.

#5: Gearing.

This is the strangest of all the ideas.
The basic concept is that even though you only own say 10% of a property (with the bank owning the remaining 90%)
…if that property is rented out or has capital gain….you are entitled to all of the profit.

Why?…It beats me?

Common sense dictates that if you own a 10% share in something, then you are entitled to only 10 % of the profit that that something generates.

I would love to hear opinions on this one.

[Muffin]

I must admit upfront to being a debt junkie. And love educated risk.

Risk = Returns, therefore the risk you are taking is that you only own 10%, but if it falls by 10% you are out of action...

I guess the concept of risk needs to replace that of ownership. It is the level of risk that you are willing to undertake as opposed to the % ownership you have...

[McDuck]

Who dares wins?

So either the rewards from property are far less than represented…or the risks are far greater.

Which do you think?

[tricky]

Common sense dictates that if you own a 10% share in something, then you are entitled to only 10 % of the profit that that something generates.

And if that something makes a loss then you should only be required to cover 10% of the loss? (and the bank covers the remaining 90%?)

Hmmm - can you find me a lender who would agree to this at 8%?