what are fellow australians investing in?

[theconcierge]

Hi all

I am pretty green to this site. After a few months of reading I have really slashed my budget (still a bit to go) and I saving more than I have ever in my life. Now I am wondering what to do. My only debt is my home loan (220K), no credit cards etc. Should I just pay this down as quick as possible. It seems that the share market is riding a bull run and property starting to come of the boil.

What is everyone investing in?

[travelbug]

I would pay down the mortgage first and then look at blue chip shares that pay a good dividend.

That's what we are doing/have done, amongst other business investments, but they are more personalised.

[theconcierge]

Thanks travelbug - I had a bit of a read of your past posts - you seem to know your stuff :) would love to be in your position one day.

[PKFFW]

Wife and I have 5 IP's rented through the NRAS, plus have turned our home into an IP since work is paying our rent while we work in Dubbo.  2.45mil in property that, assuming no capital growth and rents keep up with inflation, will be paid off in 12 years.  If we get some growth the plan is to sell one or two in order to pay off the debt quicker and be left with approximately 1.7mil in IP's plus our own home debt free.  That should take care of our income needs prior to accessing super.

We will be looking at starting our own SMSF later this year with the intention of putting it all into index funds rather than paying a company to lose money for us.  Since we wont be able to touch that until at least 65 we don't see the point in maxing it out at this stage since we plan on being retired long before then.  So it's more important to build up our passive income investments outside super first.  We will just let that grow with the standard contributions until we retire and then it will sit there for 15-20 years until we can access it.

[Sunnymo]

Hi Concierge,

I would not be waiting until the mortgage is paid off to start investing. Focus on the mortgage (the best tax free return you can get) but start investing as well.

Why? If life throws you a few curveballs and your mortgage payoff plans get delayed you may never start investing. Start now, start small and educate yourself as you go. If you have only small amounts, yes you will only get small returns but you will also minimise any losses. Your lessons through losses will hopefully ensure that you do not replicate that mistake again when you are dealing with larger amounts. It takes time to learn about investing, what is your investing style, what is your risk profile what processes work for you.

I have started my husband on this path in the last 18 months. He sets aside $100 per fortnight, when he has $2,000 to $2,500 in cash he buys a parcel of shares. He takes the dividends in cash, adds them to funds from his pay, holds them in the home loan offset (helps with the mortgage) and accumulates again. As the dividends grow the time to accumulate the funds for the next share purchase gets shorter. I have found this process provides discipline, you buy when you have funds in the account, not when you think it is time - this makes you practise dollar cost averaging, sometimes you buy more, sometimes less.

If you don't have the confidence to buy direct shares or an amount to buy a few there are a couple of options 1) Managed Funds 2) Commsec has a share pack option (other brokerages may have similar setups). The pack has 6 shares that have been selected by Commsec for a particular aim (eg Tax effective income, Capital Growth, Income, Market Leaders). The minimum purchase is $4,000 and the brokerage is less than buying the individual shares separately. Once bought you can then trade each company separately (buy more, sell some or all).

A side benefit is that in extreme circumstances where funds are needed in a hurry and there is nothing available in the emergency fund/credit cards you can sell shares or managed funds in just the quantity you need to raise the required funds. And you can do it quickly, you can't sell a spare bedroom in a mostly paid off house.

All the best

Sunnymo

[happy]

Currently I am paying off the mortgage and maxing super into a diversified premix option with a few years cash buffer. Too much  of my asset base is in my PPR, so I'm also invested in tax free real estate . But almost certainly that may not be the correct answer for you.
It depends on a whole number of things such as your age, time to FIRE i.e. age at FIRE, your income and marginal tax bracket,  as well as your personal views on how much you trust the govt with your super money,  appetite for risk, whether you want to set and forget or are prepared to do more legwork yourself..

So it depends whether you are just doing a bit of a survey to get ideas etc or whether you want more tailored answers  from randoms on the internets - some of whom know a lot and like me who don't.

[Wildflame]

I go purely Vanguard Index Funds (specifically high-yield shares because their long-term return was higher than the regular share index at the time of choosing which to open), but I have no debt other than HECS.

Calculating whether to pay down your mortgage or invest is fairly straightforward once you understand the effect that tax has on your investments.

Paying down your mortgage gives you a return in after-tax dollars equal to the interest % of your loan. The return is in after-tax dollars because each dollar you need to pay in interest is an after-tax dollar. Say your interest rate is 5% (reasonable atm). If you pay off $100 of your loan, you are better off by $5 each year, permanently. But! That is an after-tax dollar. Someone in the 34% tax bracket (earning $37,000-$80,000 and including medicare levy) would need to earn $5/0.66 = $7.58 before tax in order to be $5 better off after tax.

Therefore, a person in the 34% tax bracket should consider repayment of a 5% loan as a risk-free 7.58% pre-tax return.

Can you get a return of better than 7.58% risk free - or are you willing to take a risk in order to get an extra return? If so, invest. If not, pay down debt.

For reference, Australian Real Estate Investment Trusts (REITs) returned 9% per year over the 20 years to 2011; shares returned 8.7%; bonds returned 7.6%. All pre-tax.

For a person in the 34% tax bracket, these would be equivalent to paying down a mortgage charging 5.94%, 5.74% and 5.02% respectively. So the best after-tax benefit our hypothetical 34% tax, 5% loan person could get by investing instead of paying down their loan is... 1%ish. That's $1 a year for every $100, and in return you have the risk of enjoying the next crash and needing to wait a long time to end up in front.

In other words, if you're paying 5% and in the 34% bracket, you just might consider investing instead of paying off the loan. Might.
If you're paying 5.5%, don't bother.

On this basis, I am very confident in advising* you that you should focus on paying off your home loan first. It frees you not only from the financial burden of needing regular cash but also the psychological burden of always needing to come up with cash every payment period.


However, I do recommend holding an emergency fund of some kind. How much do you need? I can't give you an exact figure. Factors include health (including immediate family), prospects of losing work / seasonality (and expected time to gain new employment if necessary), psychological need for reassurance, and many more (car ownership springs to mind). I don't have much in emergency fund because: I don't have children; my rental arrangement is very secure; I have good employment prospects; I am in good health; no car; I have rellies I could beg from if worse came to worst. Think about the worst thing that could happen to you, and try to sit down and figure out how much money you would need to be able to deal with it.

Generally the amount is based on some period of time and either income or expenses over that period of time. Some people like having 2 weeks' expenses, some 4 weeks', some even 3-6 months' income set aside. Mine is about 4 weeks' expenses. Decide on a figure that gives you reassurance - that's the most valuable part of the emergency fund, to me. If in doubt, hold more in reserve.

My preferred method would be to have an offset facility on the home loan, so you can redraw your extra repayments and they reduce your interest burden. If you don't already have one, it may be expensive to set one up; I'm not too familiar with this, though. Talk to your lender.

My next preferred option would be to hold a bare minimum, 1-2 weeks' income in a bank account and any extra in an index fund. There's a little extra hassle: Vanguard requires a mailed or faxed form, and generally send money in one week or so - but that timeframe is not guaranteed.

More cautious types would suggest keeping the whole amount in a regular bank account, or split across two bank accounts across two different banks, or even under-the-mattress. I don't see any reason why a regular bank account wouldn't suffice, but then I've never witnessed a bank run, either.

Dump every cent left over into your home loan and watch that sucker wither and die as it should. =)

Links:
Long-term return figures: http://www.asx.com.au/documents/products/ASX_Report_2012.pdf
Home loan rates: http://www.canstar.com.au/home-loans/compare-home-loan-interest-rates/

Appendix (because forum posts with appendices aren't pretentious in the slightest):
Mini-table of tax rates and effective returns for paying a debt:

                                       Interest rate
Taxrate          3%             4%            5%           6%           7%            10%
0%                3%             4%            5%           6%           7%            10%
19%              3.70%         4.94%       6.17%       7.41%      8.64%        12.35%                                                     
34%              4.55%         6.06%       7.58%       9.09%      10.61%       15.15%                                                 
38.5%           4.88%         6.50%       8.13%       9.76%      11.38%       16.26%                                                     


Includes ML @ 1.5% for 32.5%+ brackets; does not include ML for 19% bracket; does not include ML-Surcharge. If you're earning enough to worry about ML-Surcharge or the 45% bracket, hire a professional, or wait a few years until I finish qualifying. =)

Also, this table should identify why anyone earning decent money in 'Straya should NOT have a credit card balance.

EDIT: forgot the *:
*Not a professional. Not professional advice. Magical fairy on an internet forum.

[The Hamster]

I'm extremely property heavy and have decided not to pay any extra off the mortgages and instead start putting extra into super and an emergency fund.
I plan on focusing on STW and direct bank shares for dividends, capital growth and their stability during market downturns.  And maybe a little TLS and RIO.

[PKFFW]

I go purely Vanguard Index Funds (specifically high-yield shares because their long-term return was higher than the regular share index at the time of choosing which to open), but I have no debt other than HECS.

Calculating whether to pay down your mortgage or invest is fairly straightforward once you understand the effect that tax has on your investments.

Paying down your mortgage gives you a return in after-tax dollars equal to the interest % of your loan. The return is in after-tax dollars because each dollar you need to pay in interest is an after-tax dollar. Say your interest rate is 5% (reasonable atm). If you pay off $100 of your loan, you are better off by $5 each year, permanently. But! That is an after-tax dollar. Someone in the 34% tax bracket (earning $37,000-$80,000 and including medicare levy) would need to earn $5/0.66 = $7.58 before tax in order to be $5 better off after tax.

Therefore, a person in the 34% tax bracket should consider repayment of a 5% loan as a risk-free 7.58% pre-tax return.

Can you get a return of better than 7.58% risk free - or are you willing to take a risk in order to get an extra return? If so, invest. If not, pay down debt..........

Snipped the rest for brevety

Your post is excellent, and whilst you did mention the possible greater return of investing if one is willing to take on some risk, you did leave out one important factor to consider.  Leverage.

On a dollar for dollar basis, it is difficult to beat the risk free return of simply paying off your mortgage.  However, by leveraging into an investment such as property(simply as an example) you can magnify your returns in a way that you simply can not do by paying off your mortgage.

Lets say you are $100k ahead on your mortgage.  Your interest rate is 5% so you are making $5k tax free per year.

If you invest that $100k in property you could purchase a $500k property.  With an 80% LVR and some decent research it should not be hard to find a neutrally geared property in a safe location.  So for the sake of the discussion I'm going to assume all costs are offset by income from rent.  Lets assume a below average capital growth rate of only 5% pa.  5% of $500k is $25k.  Minus the extra $5k you would have to pay in interest on your home loan and your wealth is growing by $20k pa instead of $5k.

On top of that, if you do your homework and invest wisely you could find properties that are better than neutrally geared.  My wife and I will receive nearly $20k tax free from our properties this FY and more than $50k tax free next year.  That's on top of any capital growth that may happen.

Of course leverage is another type of risk that would need to be managed and it isn't everyone's cup of tea.  Just something to think about though.

[Ozstache]

I FIRED late last year @ age 45. My Defence pension currently easily covers my annual expenses and then some, but it being CPI-indexed for now means that it will slowly erode in real terms over time against wage growth. As such, I have a backup stash that I will continue to grow until such time as my pension has eroded below my annual expenses, then I start to draw from it.

Drawing from Nord's book on retiring military folk, if I count the present value of my pension as the cash component of my asset allocation, it means I can afford to put the entire remainder of my stash into riskier assets like shares or property. Again, good in theory, but with both share and property markets in Australia having had a couple of years of good runs, I cannot help but think they are due for a correction or at the very least a good few years of consolidation at current levels.

Nonetheless, I have about 50% of my stash in a balanced industry super fund, 10% in a growth retail super fund, 15% in the VAS Vanguard index ETF and the rest in fixed interest. By a strange quirk of my super payout from Defence, I can actually access about half of the balanced industry super fund right now (unrestricted, non-preserved), albeit with a 17% tax hit. Because of this, I have the option of diversifying my current portfolio by buying a cheapish investment property outright, however yields with reasonable quality Oz resi real estate are rubbish (3.5% net and lower) and, as mentioned before, the market seems to be at a high, so the math just doesn't add up.

Despite many warnings from seasoned property investors, I have been considering buying a serviced apartment, because they offer higher yields (6% net) and guaranteed rent and rent rises. The disadvantages are many though, such as low management control by you, crappy capital growth, difficulty selling (due to restricted market) and difficulty getting a loan. The latter issue is resolved by buying outright, but the other issues still loom.

With all the hassle associated with buying and managing property for marginal yield gains, if any, over shares, I am thinking of just putting the rest of my cash into Vanguard index funds, not worry about which direction the market goes, and just wait at the mailbox for my quarterly dividend cheque.

[theconcierge]

thanks guys - some really good points to start looking at.

At this stage i am going to pay down the mortgage as quickly as I can ( well, put all my money into my 100% offset account ) and be ready to pounce if an opportunity comes up in the share market or property (ie, big falls).

I still need to trim my budget even more to get my savings up there 

[Wildflame]

@PKFFW: I absolutely agree that leverage is the optimal way to play the game of wealth accumulation, assuming you have the skills and nerve to use it wisely. My primary rationale for disregarding leverage in my past post is that for beginners it is like playing with fire. I could not in good conscience recommend that to theconcierge - heck, I'm not ready to use it myself. Understanding the tax effect of reducing debt versus adding investments is a good starting point. ^_^

The best part about leveraged investment in property is that as rents increase over time but the loan balance is fixed, even a negatively geared investment will eventually become positively geared (influenced by rent growth rate and movements in interest rates), and then all else being equal the debt pays itself and leaves you a surplus.

@Ozstache: PKFFW raises a very good point regarding the unique advantage provided by leverage (which is particularly evident in property due to favourable loan terms relative to say, margin lending for shares). That is why we currently have low yields for property in many areas - people willing to take the cash flow hit in exchange for capital appreciation magnified by using debt try to out-bid each other. If you are buying cash, I reckon you are going to be paying over the odds.

I certainly wouldn't bother buying a property for cash except for my primary residence for peace of mind / minimising recurring expenditure by eliminating rent and mortgage repayments from my living expenses. I would doubly avoid serviced apartments for exactly the reasons you mention - what advantages do you really gain from owning one that you couldn't get from a dividend-oriented index fund or even just a portfolio of blue chips, without the illiquidity?

EDIT: fixed some unclear phrasing.

[Ozstache]

As you say Wildflame, leverage is what makes property really work as an investment vehicle but illiquidity is what makes accessing capital gains difficult, if not impractical, without using something like a LOC or selling the property in its entirety. Shares seem like the low-effort, liquid go as a retirement income stream, albeit with much greater volatility in your asset base than property.

[urbanista]

If you invest that $100k in property you could purchase a $500k property.  With an 80% LVR and some decent research it should not be hard to find a neutrally geared property in a safe location. 

Imho, it is very hard to find a neutrally geared property with 80% LVR. Unless you consider mining towns a "safe" location. My research shows that at least 50% LVR required for a neutrally geared property in Melbourne.

[urbanista]

The best part about leveraged investment in property is that as rents increase over time but the loan balance is fixed, even a negatively geared investment will eventually become positively geared (influenced by rent growth rate and movements in interest rates), and then all else being equal the debt pays itself and leaves you a surplus.

Oh yeah... unless interest rates go up. Like what happened in 2008, when I went from paying 7% to 8.5% in a matter of 12 months (?). Then the fact that the loan balance was fixed did not provide much relief.

Investing in residential property has its own high risks... which are ignored too many times that I would like to see.

[PKFFW]

Imho, it is very hard to find a neutrally geared property with 80% LVR. Unless you consider mining towns a "safe" location. My research shows that at least 50% LVR required for a neutrally geared property in Melbourne.

I have a property in Ropes Crossing in Sydney that is brand new and is positive cash flow of nearly $2000pa(after tax) with a 95% lend.  Sydney's pretty safe I reckon.

I have properties in Townsville and Gladstone.  Both mining influenced towns but with plenty of other industry and ports to support them.  I consider Townsville very safe.  Gladstone can be up and down but over the long term is a safe bet too in my opinion.  You can find neutrally geared properties(even before tax) at 80% LVR in both if you look around.

I'm not advocating anyone invest in residential property though.  It was merely an example to illustrate the possible advantages of leverage.

[urbanista]

Imho, it is very hard to find a neutrally geared property with 80% LVR. Unless you consider mining towns a "safe" location. My research shows that at least 50% LVR required for a neutrally geared property in Melbourne.

I have a property in Ropes Crossing in Sydney that is brand new and is positive cash flow of nearly $2000pa(after tax) with a 95% lend.  Sydney's pretty safe I reckon.

I have properties in Townsville and Gladstone.  Both mining influenced towns but with plenty of other industry and ports to support them.  I consider Townsville very safe.  Gladstone can be up and down but over the long term is a safe bet too in my opinion.  You can find neutrally geared properties(even before tax) at 80% LVR in both if you look around.

I'm not advocating anyone invest in residential property though.  It was merely an example to illustrate the possible advantages of leverage.

When I run the numbers on median house price & rents in Ropes Crossing for a 3-bed house, I get $2000 annual loss on 95% LVR with 0 vacancy and 0 maintenance costs (which is unrealistic).

I believe that Ropes Crossing is a high risk investment. It is 60 km from the CBD in a low social-economic area, so low quality tenants that goes together with lots of available comparable housing around.

And don't even get me started on the risk of interest rates going up (every 0.25% increase adds $1100 loss pa) or investor losing their source of income (job) to cover investment losses that leads to a fire sale.

Maybe you have special knowledge of local RE markets and can do better than average investor, that's great for you. But I don't think it is reasonable to suggest that average person with no such knowledge would obtain higher return from Australian RE now than plain-vanilla index funds in shares.

[PKFFW]

When I run the numbers on median house price & rents in Ropes Crossing for a 3-bed house, I get $2000 annual loss on 95% LVR with 0 vacancy and 0 maintenance costs (which is unrealistic).

I believe that Ropes Crossing is a high risk investment. It is 60 km from the CBD in a low social-economic area, so low quality tenants that goes together with lots of available comparable housing around.

And don't even get me started on the risk of interest rates going up (every 0.25% increase adds $1100 loss pa) or investor losing their source of income (job) to cover investment losses that leads to a fire sale.

Maybe you have special knowledge of local RE markets and can do better than average investor, that's great for you.

I don't have any interest in debating individual properties or areas.  Suffice it to say one needs to do more than run the numbers on median house prices in an area to decide if a property is a good investment or not.  I would never suggest successful property investing is such a simple matter.  If that is all the work one is willing to put in, they are very likely to end up with sub par investments that will probably cost them money rather than make them money.

I don't consider myself an exceptional property investor yet with some mentoring, reading, groundwork and persistence I have managed to find good deals that put money in my pocket each week and are likely to grow over the long term.(I say likely to grow because no one has a crystal ball)  I believe others can as well if they so choose.  Or they can sit back and say it isn't possible.  It's entirely up to them.

But I don't think it is reasonable to suggest that average person with no such knowledge would obtain higher return from Australian RE now than plain-vanilla index funds in shares.

At no time did I ever even hint at suggesting such a thing.  I specifically stated I was using property merely as an example to illustrate leverage.  So please refrain from straw man arguments when replying to my posts.

[AustralianMustachio]

Back to the original general question of Australian investing - are many Aussies here investing in index funds? I'd be keen to hear how you're doing if so. And if investing in ETF funds of the US stock market, how do you all feel about the added currency risk? As far as I could tell the Vanguard funds are not hedged against currency risk.

I am a beginning investor looking to invest in some ETFs as the core of my portfolio. Some Australian stocks, some US stocks. To me it actually seems an attractive time to buy ETFs of US stocks, since the Australian dollar is high. Though of course it may just stay that way for a long time.

[agent_clone]

AustralianMustachio you may also wanted to consider listed investment companies that have a good reputation (I have some money in Australian Foundation Investment Company and another recommended to me was ARGO).  My understanding is that a lot of the companies that you are investing in in the Australian stock market are also internationally exposed so you may or may not want to factor that into what you want to do.

As a personal thing I would do marjority Australian Company shares (e.g. VAS, AFI, ARG, some of the banks) with some international shares (e.g. VTS, VEU).  Also do dividend reinvestment where possible (e.g. you can't dividend reinvest for VTS).  Personally I would agree with you on now potentially being a good time to buy US ETF's.  I had some shares in VTS but I have just begun the process of buying a house and needed the money for this.

The strategy of mostly australian shares limits your exposure to currency fluctuations, but some money in international shares gives you exposure to these if Australia tanks.

[Wildflame]

I'm regularly contemplating dumping my whole Oz share portfolio with Vanguard and switching to their international shares (unhedged) fund (mostly US, some Euro and Japan). On the one hand, there is considerable negative sentiment in Oz thanks to the Budget furore and so there is the possibility of interest rate drops to try and keep growth ticking over - which should cause a fall in the exchange rate leading to a nice windfall gain if I time it right. On the other, US stocks are pushing all-time highs and the Shiller P/E suggests they are quite overvalued. Hm hmm... I will probably just sit on my hands and keep ploughing money into Oz shares, but it's fun to speculate about speculation!

I think my overall investment has returned around 11% this year in dividends and capital appreciation (not as great as it could be because I made a few larger buy-ins when prices were relatively high), but I'll have to wait until I get my next distribution on 1 July and do my taxes to let you know for sure. Watch this space! =D

I don't know about any hedged ETFs but Vanguard does do a retail mutual fund in international shares hedged into AUD. I stick with mutual funds because I'm not in the habit of making acquisitions in $2k or larger chunks to mitigate the effects of paying brokerage - instead chucking in $100 here, $200 here. It adds up! I might xfer some of my funds out in a chunk to put in the equivalent ETF once I've passed the 1-year threshold for discounted capital gains. That way I can save ~0.5%pa in lower MER. Might be a hassle to manage tax-wise, though. I do so like how I just get a statement at the end of the year telling me what to put in which box. Easy peasy!

@urbanista: I agree that interest rate risk is a very pertinent risk when highly leveraged, especially due to the negative influence rising interest rates have on both cash flow and asset prices. My point about 'eventually' is precisely that it is dependent on rent growth and movements in interest rates. As you say, if interest rates spike early in your ownership before rents have risen substantially, you'll be in trouble - but barring a complete reset of the housing market, which is a black swan event, it is inevitable that at some point rent will exceed interest and outgoings. It's a matter of when, not if.

As for calculating median yields, prices, etc - it's a fun exercise, but there's no such thing as a median property. You have to evaluate each individual property on its merits.

@PKFFW: roughly how much time do you spend evaluating a prospective house purchase, and what's your general process like? Is it a matter of a few hours with spreadsheets and an inspection here or there of a place you see online or in the papers, or a more exhaustive analysis starting from a very high level and gradually scoping in to what you're after, or something else entirely? Alternatively, if you're not at liberty to or not comfortable with discussing your practices, can you recommend a good source to learn from? I am familiar with the financial theory behind property investing, not so much the actual practice of it. My father's disastrous foray into property investment a decade or so ago left me rather underwhelmed. Poor bugger thought he could renovate the place from scratch on his weekends...

[PKFFW]

@PKFFW: roughly how much time do you spend evaluating a prospective house purchase, and what's your general process like? Is it a matter of a few hours with spreadsheets and an inspection here or there of a place you see online or in the papers, or a more exhaustive analysis starting from a very high level and gradually scoping in to what you're after, or something else entirely? Alternatively, if you're not at liberty to or not comfortable with discussing your practices, can you recommend a good source to learn from? I am familiar with the financial theory behind property investing, not so much the actual practice of it. My father's disastrous foray into property investment a decade or so ago left me rather underwhelmed. Poor bugger thought he could renovate the place from scratch on his weekends...

No problem at all.....

Firstly, after reading pretty much every property book and magazine I could and attending a few free introductory seminars I decided on the strategy that would best suit my wife and I.  Basically put that was to invest only in areas that I thought had the drivers for growth and then choose only properties that would be at minimum neutrally geared after tax.  That process took around 6-12 months before we felt comfortable that we had some idea of what property investing was all about.

During that 6-12 months, I had heard about National Rental Affordability Scheme(NRAS) and it sounded good so I next thoroughly investigated that and found that the numbers stacked up and it was basically money for jam.  So we decided that we would focus on purchasing only NRAS properties that fulfilled the above criteria.  That took another few months.

So after that we started investigating general areas for growth drivers.  I'd say that process took a few months averaging around 10-15 hours a week in order to firmly choose a few areas we thought were worth investing in.  We then worked our way down into specific areas of the general locations we had chosen.  That was another couple of months to choose specific suburbs.  Next was to ascertain if there were any good NRAS opportunities available in those suburbs.

From there we began running specific numbers on specific NRAS properties to see if they stacked up.  We had been in contact with a number of NRAS specialist marketers and developers and had decided upon one specific gentleman who we felt was genuine and whose properties seemed like the best opportunities.  Analysis of each individual property was fairly quick by this stage as it was merely a matter of plugging some numbers into the analysis program we use and seeing how they looked.

So in total I would say it was a good 18 months at about 10-15 hours a week of learning and research before we felt comfortable buying.

After all that, our portfolio stands at our PPoR which just recently turned into an IP since we are renting for a while and 4 individual properties, 2 of which are dual occupancy, making a total of 5 properties covering 7 residences.  We have 5 NRAS entitlements which will fully kick in next year which total just over $50,000 pa tax free.  Our total LVR is currently at 83%.  After tax every property is cash flow positive.  Interest rates will need to rise to 8% before the portfolio as a whole will enter negative cash flow and that is assuming rents remain the same as interest rates go up.  Rents on the NRAS properties are guaranteed to rise in line with the rental component of the CPI.  That is around 4.8% pa over the last 10 years.

As for good places to learn, I would suggest two things......read everything you can and visit www.somersoft.com and scour the forums there.  If you know anyone who has successfully invested in property pick their brain.  If after all that you want some more guidance there are courses you can do but I'd use them only as a last resort.  They are usually way over priced and they will only teach one specific strategy or technique.  Successful property investing is much more about developing a strategy that works for you than it is about buying properties.

[urbanista]

At no time did I ever even hint at suggesting such a thing.  I specifically stated I was using property merely as an example to illustrate leverage.  So please refrain from straw man arguments when replying to my posts.

Looks like I misunderstood what you were trying to say, my apology.

[Wildflame]

Bah! Such a shame the NRAS scheme has been axed. If I'm reading this right that's a $10,661 payment this year (etc for up to 10 years) in exchange for collecting rent 20% or more below market value to poor tenants on new construction and jumping through the regulatory hoops. That would certainly tip the scales towards being cash flow positive!

Thanks for your answer, it has been most informative, and again for the link: time to soak myself in information. ^_^

[PKFFW]

Looks like I misunderstood what you were trying to say, my apology.

No worries.

[PKFFW]

Bah! Such a shame the NRAS scheme has been axed. If I'm reading this right that's a $10,661 payment this year (etc for up to 10 years) in exchange for collecting rent 20% or more below market value to poor tenants on new construction and jumping through the regulatory hoops. That would certainly tip the scales towards being cash flow positive!

Thanks for your answer, it has been most informative, and again for the link: time to soak myself in information. ^_^

Only round 5 of NRAS has been scrapped and even that isn't through the house yet so reinstating it may end up being used as a bargaining chip to get other parts of the budget through.

There are still many NRAS approved properties available with round 4 allocations in place.

[The Hamster]

The best part about leveraged investment in property is that as rents increase over time but the loan balance is fixed, even a negatively geared investment will eventually become positively geared (influenced by rent growth rate and movements in interest rates), and then all else being equal the debt pays itself and leaves you a surplus.

Oh yeah... unless interest rates go up. Like what happened in 2008, when I went from paying 7% to 8.5% in a matter of 12 months (?). Then the fact that the loan balance was fixed did not provide much relief.

Investing in residential property has its own high risks... which are ignored too many times that I would like to see.

I completely agree, and there is absolutely no guarantee that the value of your property will rise by X% each year as is often touted by property spruikers.  In fact, historically, property does not perform as well as shares.  After 10 years of property investing I will be switching to shares as my calculations show that the exact same amount of money I have poured into my properties would have done a lot better in the share market.  This includes mortgage interest, rates, maintenance, insurance expenses etc etc.  Yes, the leverage is great and the tax perks are OK but there are a lot of risks and expenses you simply don't get with a share portfolio eg bad tenants, unexpected and very expensive repairs and ongoing rates and maintenance costs.

Plus, the amount of debt you need to carry (especially these days) + the illiquidity of property and the buying/selling costs should also be a factor.

[urbanista]

The best part about leveraged investment in property is that as rents increase over time but the loan balance is fixed, even a negatively geared investment will eventually become positively geared (influenced by rent growth rate and movements in interest rates), and then all else being equal the debt pays itself and leaves you a surplus.

Oh yeah... unless interest rates go up. Like what happened in 2008, when I went from paying 7% to 8.5% in a matter of 12 months (?). Then the fact that the loan balance was fixed did not provide much relief.

Investing in residential property has its own high risks... which are ignored too many times that I would like to see.

I completely agree, and there is absolutely no guarantee that the value of your property will rise by X% each year as is often touted by property spruikers.  In fact, historically, property does not perform as well as shares.  After 10 years of property investing I will be switching to shares as my calculations show that the exact same amount of money I have poured into my properties would have done a lot better in the share market.  This includes mortgage interest, rates, maintenance, insurance expenses etc etc.  Yes, the leverage is great and the tax perks are OK but there are a lot of risks and expenses you simply don't get with a share portfolio eg bad tenants, unexpected and very expensive repairs and ongoing rates and maintenance costs.

Plus, the amount of debt you need to carry (especially these days) + the illiquidity of property and the buying/selling costs should also be a factor.

My sentiment exactly. I have bought 6 & sold 4 properties, out which 4 were investments. It was so much work, I am over it. Every now and then DH raises an issue that we are too cashed-up and need to buy an IP, but we just don't want to do the work. On top of two full time jobs, mind you. Going to inspections, auctions, dealing with RE agents, renovations, tenants, etc. I don't see the point in IP investments now. It is so much easier to invest in the share market with the index funds automatic investments. At least my weekends belong to myself only.

[Wildflame]

@PKFFW: I hadn't realised that since the funding was ongoing for 10 years, that properties could change hands without losing the funding. I'll have to do more digging, I think. I must admit it is not clear what the advantage is to the developer of these sites. Quick return and conversion to cash to invest in the next project, I guess...

@Urbanista: But of course, it is precisely those tasks involved with acquiring and operating an IP that yields bumper returns - those who are lazy stay out of the market, lowering the price and increasing the return for those willing to take it on. Also, if you're operating more than a handful of properties, wouldn't the returns on them start to have sufficient prominence to replace your primary full-time job as a source of income? I suspect it's the combination of dual-full-time-income and extensive property investment that is overburdening. But then, I guess if you're getting all of 1%, 2% per annum over shares, is the extra work worth it?

Let's see... There are a lot of assumptions involved, but the most critical items are total value, the advantage of leverage and the amount of time spent. WARNING: Numbers-pulled-out-of-arse-for-fun-time-wink-dirty-mind. Cough. If you value your time at a mere $25 an hour, LVR of 80%, every $100k of property would require tying up $20k in capital. If you are getting a 5% rental yield and 5% capital appreciation, your loan interest is 5% and your other outgoings are 2% of property value per year, you're looking at a net loss of 2% pre-tax in exchange for a 5% capital appreciation. For someone in the 34% tax bracket, that means your net loss is 1.32% or $1320 per $100k of property per year, which you would have to take out of your cash flow from working or other investments. However, the property appreciates 5% or $5000 per $100k of investments, which gives you a yield overall of $3680 over your $20k initial investment for a return of 18.4% pa. I'll assume the taxation treatment on disposal is broadly similar for the two (say you buy all the shares for a lump sum on day 1).

If for the sake of my being lazy a comparable share portfolio returns 8.4% pa with zero work involved, you're looking at a 10% pa return premium in exchange for x hours worked per year managing the property and the risk of adverse interest rate movements, long periods without tenants, damage to the property, etc. Let's be lazy again and dismiss these risks out of hand (proving myself not to be an apt property investor, eh). You're looking at 10% on $20k or $2000 per $100k of property value in higher yield in exchange for the extra time and hassle. If you pay yourself $25 an hour, you should be willing to spend 80 hours a year for every $100k of property value in order to break even. So for a typical $500k property, that's 400 hours, or 7.7 hours a week.

If you value your time at a more reasonable $50 an hour, that's just under 4 hours a week for a $500k property ($100k of your own money). If you're managing $1m in properties, you should be willing to spend 7.7 hours a week managing them (one day a week). Such is the advantage of leverage.


I'm contemplating going down the margin lending path to increase my exposure to shares, since I don't yet have the deposit to avoid LMI, though that gap is diminishing every week. The upside, of course, is magnified potential returns. The downside is magnified potential losses, higher rates than secured lending, and the threat of the dreaded margin call.

Does anyone have any experience with playing with that variety of combustible? Any horror stories of someone you know losing everything you can tell me to clear the stars from my eyes?

[agent_clone]

Wildflame I believe bigchrisb used a large margin loan.  I'm not sure on others.

[Cashup]

I've decided that trying to beat the market over the long term is a mug's game. I like to monitor what my money is doing but I don't want to spend a lot of time obsessing over every gain or loss in the market. I especially don't like paying Management Expense fees more than I have to. I have a long term (> 10 years) view so I moved most of the funds in my SMSF into just three Vanguard index funds. 75% into International Shares Index (unhedged), 15% into International Credit Securities Index (Hedged) and 10% into Australian Shares High Yield Fund. I periodically rebalance by selling the Shares and buying the Securities or vice versa as the market dictates.

It's a long term growth strategy that's predicated on not trying to second guess the market and minimizing fees to maximize return. There's high risk/high return in the Australian Shares fund which is why it's limited to 10% but the franking credits are too good to pass up. I'm sure when, not if, the market tanks I won't feel good about it...but that's where the long term view applies....treat it as a buying opportunity...rebalance and hang in there!

If, over the long term, I can make 7% and draw down 4% to live on (allowing for 3% inflation)...I'll be happy and won't have spent a lot of time managing things.

Comments welcome