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October 2013 – Points to Ponder

31 Oct

What is happening in our economy … How are financial markets doing … And a question from one of our readers; “How do I know if I have made or lost money on my property?”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation and feedback. Your positive feedback inspires me to explore new ideas and topics. We look forward to more of your active participation.

You have read our discussion on the most important asset we are likely to buy in our lifetime – “Our Home” – And some thoughts on how to go about decision making – July 2012 Blog; “Is it the right time to buy property?”http://tinyurl.com/n9x3yqq
You have noted our thoughts on the subtle difference between “Price and Value” of any asset, especially your family home – November 2012 Blog; “What is the Value of My Property?”http://tinyurl.com/lxu33n8
You are now familiar with the young couple Shaun & Sarah, who share and benefit from our stories and thoughts – December 2012 Bloghttp://tinyurl.com/ljl4lke
You have read our thoughts on ‘what to look for’ when buying a property – August 2013 Blog; “True costs of owning your home”http://tinyurl.com/l7v6ckn

This month’s blog is a response to conversations I am had with readers in response to our September blog. But first ….

The Big Picture

Global Overview: We do not see any substantive positive change from our September 2013 outlook.
The mega drama that went on re; “Debt Ceiling” in the US, the absurd theatre performed by US lawmakers of both parties, and the repeated broadcast of this epic all over the world, has not changed a fundamental fact;
The US government is deeply, some would say fatally, in debt to the tune of around 17 trillion USD (how many zero’s in a trillion ….. anyone?).
Some go as far to say it is closer to 60 trillion, if you take into account all the “unfunded liabilities / promises” that the US government has to fund (The ‘cradle to grave’ welfare and other programs).
So the battle has been postponed for a few months (‘the can kicked further down the road’); and the business of “over-spending money that they do not have” (created out of thin air) continues.

Local Impact: A mind boggling USD 85 Billion is being printed by the US ‘FED’, every month, and is flooding (and distorting) global financial markets; creating asset bubbles, mal-investment, risk-return-distortions, etc.
It is harming the most productive and prudent section of any prosperous economy – The people who produce (earn) surpluses, who plan long term, who save for the future (these ‘savings’ being the vital capital needed to build and sustain our economy, in the long term).
Please read our July 2013 Blog – http://tinyurl.com/m3z736t – for details on this subject.

Topic of the Month:
I had a stimulating conversation with one of our readers based on our September blog, and the question was; “How do we know if we have made or lost money on our property?”
Good question.
How many times have we not heard, (on most social occasions when the conversation eventually turns to ‘property and prices’);
Did you hear … seems xyz bought property five years ago for 500k … recently sold it for 650k … that’s a cool 150k in the pocket, right? …

Let us stop right there and consider a scenario; Say a couple (typical family) bought investment property 5 years ago; they paid 500k purchase price; it cost them approx. 25k to purchase; total outlay 525k.
Say they (as usually happens) borrowed 525k to fund this purchase (they had equity in their home and used it to borrow the full amount);
Property was rented out through an agent; rental yield (income) was reasonable and steady.
Now fast forward 5 years … let us say they sold the property recently for 656k …
Well, there it is … 156k profit … right?
Wrong …
Let us consider costs of buying property (purchase costs), of keeping it (debt servicing and maintenance costs), and of disposal (selling costs).
It works out about 156k.
What do you mean? We have not made any money over the last 5 years”? You may ask.
You are right; this is break even (before tax – remember capital gains tax), no actual profit made.

One important NOTE: We have deliberately not considered ‘negative gearing’ aspect (or what we call “getting some of our tax money back” …)
But you may say; “why not … We do get some tax benefits … silly to ignore this fact” …

There is a reason why I play devil’s advocate here. Some sobering facts for us to consider;
70 – 80% of investment property owners have, on an average, total family income of less than 100k.
A typical working family may have one full time and one part time income.
A majority of investment property owners seem to not use their ‘negative gearing’ benefits for future investment (savings and wealth-creation) purposes; it is more likely to be used for discretionary spending (‘a reward or treat for the family’).

So, let us assume this couple are an exception; say the couple have annual income of 60k and 30k each (total 90k).
Let us take full ‘negative gearing benefits’ into consideration.
They bought for 500k five years ago, borrowed 525k, sold for 656k recently.
Total cost (costs of buying + costs of keeping + costs of disposal) = Approx 127k.
Actual profit made = 29k (before tax – remember capital gains tax).

All above calculations are based on sound/practical assumptions. Your individual circumstances are different, and calculation will vary based on your particular circumstances.

We are more than happy to work out numbers and discuss your particular needs, wants and goals.

I will leave the forum open to you now.
What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas and experiences.
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you

Hari

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Posted by on October 31, 2013 in Uncategorized

 

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