AussieRodney

Positive Real Estate reports:

The meagre share market returns, rising property values and increasing yields in Australia’s current economic market is encouraging investors to return to the residential property market during 2008.

Craig James, Chief Equities Economist at Commsec, has been quoted saying that residential property prices will grow by 10 to 15 per cent in most capital cities this year while the share market returns will grow by only 3 per cent.

In addition to the rising value of property, we are also seeing an unprecedented rental demand as a result of our rapidly growing population. When you couple this with the undersupply of new housing, it results in much higher yields for investors.

Positive Real Estate reports:

Australia’s housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.

Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.

BIS Shrapnel director and chief economist Frank Gelber said an annual construction shortfall of 30,000 dwellings was set to double to 60,000 by June this year and rise to 129,000 by June 2009.

The shortfall in supply will put further upward pressure on rents and house prices, further exacerbating the affordability problem caused by the house price boom of 2002-03.

At that time, official interest rates were at 4.25 per cent but have since risen to a 12-year high of 7.25 per cent.

Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property.

This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion.

“We’ve got rising interest rates suppressing any upswing in demand for housing … and we need to wait now before that demand comes through,” Mr Gelber said.

“But when it does, it will be very strong.”

With interest rates rising slowly & possibly looking to rise even further, it’s potentially an exciting time for an investor. As rates rise, people become nervous about their ability to repay their loans & start to reconsider whether they can afford to stay in the beautiful home that they saved & slaved so much to get into. And think about selling it.

Which becomes “buy” time for investors. The trend is that prices go down & rents go up. Perfect.

This week, I came across a “deal I couldn’t refuse”. A large 4 bedroom house in a suburb of Townsville, with just $100 down & the remainder on settlement sometime around October. I sent a return e-mail within minutes, received the notice of intention document back, filled it in & shoved it onto the fax, & made my $100 deposit into the solicitor’s trust account by Internet transfer, all within a matter of 10 minutes.

In a phone discussion with the buyer’s agent a couple of days later, he mentioned that I had done well to get in so quickly, because the ones in the next stage were going to be about $20k more. Pays to be quick, huh?

Julie & I have just had our whole portfolio re-valued. And we have been able to borrow against the increased valuations. Let’s just say it was enough to pay out the credit cards (they were nearly maxed out from deposits & other activity), pay the full deposit on the property in Cairns (the one that settles late next year), put evaporative air conditioning into the house, put some cash into a couple of investments, buy the plane tickets for this year’s trip to Seattle, and still have a very handy buffer.

Wow, the system works!

OK, we’ve had problems getting finance for the chalets in the Health Resort. It seems that backs & other lenders want to be able to take possession of a property in the event of a loan default, so that they can then get someone to occupy it (& pay them the rent, I guess), or arrange to sell it. This process has a bit of a roadblock when the chalets are behind a large locked gate, with entry only at certain times or by prior arrangement. Even applications for a commercial loan, which tend to loan much less than a residential one, were rejected.

So we were obliged to ask the vendor (via our solicitor to his solicitor) for an extension of time to arrange finance. Of course, at this time I still thought that getting a loan would be relatively easy. After all, it’s not a huge amount & they will only loan 70% of the price. So when our broker finally found a bank that might be willing to talk to us, I asked for another extension. Consider my amazement when the reply came back that they would happily extend both the finance date & the settlement date if we agreed to pay default interest at 12.25% on all of the delayed dates - all up, over $2,000 for a month. While he is still receiving rent from the property! Needless to say, the contract was promptly terminated.

So, the vendor now has to start again on finding a buyer, having them hit the same obstacles with their finance, ask for the same delays all over again, and so on. Good luck, pal.

Last weekend, Julie & I flew to Brisbane to check out the latest property purchase, which just happens to be 2 Hilltop Chalets in a complex managed by the Golden Door Health Resort. It’s way up in the hills opposite Dream World, on the way to the Gold Coast. Not only does it provide a 10% return on investment, but it also includes one week at the resort for two people each year, per chalet. So that’s a $10,000 holiday thrown in for good measure. I will just have to convince that giving up her caffeine, & alcohol for 2 weeks is actually a good thing.

We also arranged a visit to the home office & manufacturing site of Swagman Motorhomes, where we were able to take our time looking at some of their offerings. Mmmm, very nice, but also very expensive. The base price for a small-ish one is around AUD600,000. But hey, if you have a $3M portfolio that is growing exponentially & a debt that is either static or linear, then all you have to do to have that sort of cash available is to sit back & wait for a while. After all, the $3m will be $6M in 10 years. Which is why we have accelerated the investment program over the last couple of years. I have had enough of working & I want out.

OK, so I want to retire, sooner rather than later. Hey, how about we put some of that workplace training into effect here? If it’s good enough to run multi-million dollar projects for the company (not that I did any of those), then it’s good enough to use towards planning for retirement. Come to think of it, given that I’d like to retire on somewhere my current income, let’s say $100k in rough terms, and I need the income to keep up with inflation, I’m going to need a slush fund of somewhere around 2 million dollars to do it.

Huh? Did you just say $2M? Uh, yeah, I did! I’m told that in the English language, two negatives usually make a positive, but two positives never make a negative. Hmm, how about, “Yeah, right!”

So, what was all that management stuff again? Oh yeah, planning, targets, goals, … Alright, let’s start with a goal. Is it in fact the $2m in the bank, or it is access to $100k indexed to inflation? Which is easier to achieve?

Then all the other questions come up. What’s the time frame? What are the constraints? What’s realistic and achievable? When do I start? What do I need to do to get there?

• Time frame: Is 10 years enough? 20 years perhaps? How about if we plan for 10 and allow for 20?
• Constraints: Bound to be some. How about we wing it on that for a while & see how it pans out?
• Realistic and achievable: Well, if someone can explain the plan to me in considerable detail, sufficient for me to fully understand it, then maybe it is achievable.
• Start: Sooner rather than later would be good.
• How to get there: I’m sure there are many scenarios. Let’s look at just one.

About 9 years ago, someone told me that I could retire in 10 years if I went about it the right way. I told them to prove it. Fortunately, they did. “10 properties in 10 years, and retire by borrowing against the capital growth”, they said. Huh? Let’s just analyse that one for a moment. Where you have capital growth, you have as good as, or better than, the inflation rate. Aha! Indexed to inflation. Maybe we don’t need the $2M after all.

For more on that, you’ll need to go here.

A term that has been around for a very long time - The Great Australian Dream, which, along with the Great American Dream, is owning your own home.

OK, so how important is it really – to own your own home? More important, for example, than being healthy? Or happy in your relationships? Or having enough money to live on? Or having enough to retire?

More on those later. For now, by way of introduction, I’m going to retire. Soon. The sooner the better actually. OK, and just what am I going to live on? How am I going to make sure that I have enough? And if I live on to the ripe old age of nearly 90 like my father, will I still have enough? All very good questions.

Just thinking back to all that management training I’ve received over the years, such as -

• Project Management
• Planning, defining, implementing & reviewing
• Setting targets & goals, making them realistic & achievable
• Risk mitigation, disaster planning, taking backups

And some of the more esoteric stuff, like -

• Why are we here? - sacred contracts and the search for spiritual truth
• Being in the present – “yesterday is history, tomorrow is mystery, today is all we have”
• Believing and visualising – “what the mind can conceive & believe, the spirit can achieve”

And my favourite - “MBWA” - Managing By Wandering Around. It originally came from Tom Peters in his book, “Towards Excellence” and was introduced to me as part of Telecom Australia’s “Towards 2000” management series.

It’s all about being right there in the present with whoever you are talking to, finding out about their dreams & disasters, getting to know them. Making sure that you are out of your office, with your customers or colleagues, finding out what they want & what they don’t want. During one of the toughest times of my working life, going through a divorce, I trusted my boss enough to tell him what was happening, and he willing to cut me some slack. Later on, when the pressure was on, I put in many extra hours, and would have shed blood for him if it had been necessary.

Some time later, when I was working on an IT Help Desk, many of our customers were in the same building. I used the MBWA process to do exactly that – wander around, chat to people, ask whether they had any network problems. On the average wander of perhaps half to one hour, I got the opportunity to fix up to half a dozen problems before they became another call to the Help Desk and more frustration all round.

And the retirement? I’ll come to that later.