Real estate 'university'

I've done moderately well with real estate investing over the years. I bought a vacant 2.5 acre block of land at Winmalee in the blue mountains in the early 80's which more than doubled in a few years. I originally bought it with the intention to build a house there, as I fancied the idea of living on a large block with some privacy, close to the Blue Mountains national park. However, I sold the block after a few years when I realised that it was just too far to commute from there to work every day. I wouldn't be able to live there until retirement, so I had to either borrow and build a couple of duplex townhouses on the block to rent out, or take the profit and invest elsewhere. In the end I decided it was too far out of town to even work as a self-managed rental property, so I sold out.

My next real estate investment was less successful - I bought a "cheap" rental property one of the cheapest suburbs in Western Sydney. My theory at the time was that top-end properties were rapidly becoming unaffordable compared to average wages, whereas houses at the bottom end could still appreciate and remain within reach of the typical first-time homeowner. In practice prices stagnated for several years and I had to make innumerable trips to the property and spend weekends renovating the property back to rentable standard as a series of tenants moved out (usually without notice and owing more back rent than they'd paid in rental bond). After I got married I sold the property (for slightly less than I paid, although the rental yield was more than the interest costs, so I probably broke even overall) so I could "go halves" in purchasing a rental property close to home with DW. That property has doubled in price since we bought it eight years ago, and rent has been more than interest costs for several years (although we put in a large deposit when buying the property, so the opportunity cost of those funds needs to be considered).

Since then we've also bought our own home, which is more of a lifestyle expense than an investment, with interest costs on the mortgage being considerably more than rent for equivalent accommodation. Whether or not any capital gains will make this "investment" pay off remains to be seen.

I think we're fairly typical "mom and dad" real estate investors, in that we haven't borrowed more than our salary income can service, and haven't used increased equity to immediately go out and buy additional properties using "liar loans" (no doc loans, or ones where we claim to be "owner occupiers" in order to get to get financing for rental property purchases). We're probably also fairly typical in that we've approached real estate investing as amateurs - often evaluating prospective properties on the basis of a quick visual inspection and biased by our own preferences (would WE like to live here?) when looking at possible rental properties.

This probably isn't the best way to approach what are, after all, very large, illiquid investments ;)

The problem though, is how to approach real estate investing in a more "professional" manner? There are innumerable books out there purporting to tell you how make a fortune from real estate investing, but many of those are based on 'rags to riches' stories that are based largely on luck (market timing) and using massive amounts of leverage (that would have produced very different results in less favourable market conditions). Many of these books are really just teasers to attract people to investments seminars that are now the main source of the author's income.

It would be nice to be able to get a proper "education" in real estate investing, but traditional universities don't offer a course in "Real Estate Investing 101". Nouveau Riche has an interesting concept in the form of Nouveau Riche University - a website that provides access to a home study course in real estate investing. I've no idea if the course is any good (the website itself is typically glitzy and definitely not your typical educational site - just look at the graphic below which accompanied the announcement of a new 'Independent National Senior Advisor') but it might be a less expensive lesson in real estate investing than the usual method of just diving straight in and buying a property. The 15-volume course costs $300 per month (one volume per month, so total cost is $4,500), and you can cancel if you don't find the material useful. You can get a $700 discount by buying the entire set in one hit, but seems a bit high-risk to me. The volumes cover the basics of real estate investing such as selecting properties, arranging financing and taxation issues. But they also cover topics such as "Flippin’ Explosion" which they call
"the Fastest Growing Trend in Real Estate" which I think isn't in sync with the current US real estate environment ;)

Anyhow, anyone in the US thinking of investing in real estate might want to check out the Nouveau Riche website for themselves. Just be careful that you don't end up being funnelled into buying an over-priced real estate "bargain" that is being off-loaded at a time of market weakness to unsuspecting "students". As the old saying goes, "if it looks too good to be true, it probably is", although like all bursting investment bubbles, the US real estate markets will probably provide opportunities for great buys when the correction finally bottoms out.

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to Enough Wealth. Copyright 2006-2008

Property portfolio update: May 2008

The latest monthly sales figures (April) for the suburbs of our home and investment property have just come out. Last month the total value of my equity in our home and rental property dropped by around $15,000 (which will be a drag on this month's net worth figure), but the latest figures shows a gain of around $20,000 - bringing the value of my property portfolio equity to an all time high of almost $487,000. The 12-month gain in average price for the two suburbs we're invested has dropped back to around 7.8%, slightly above the long term average of about 6%. The first tranche of this year's rent increase has now come into effect, but the rent rise has been more than offset my the rise in standard variable loan interest rates.

Although interest rate rises are painful in the short term, if rates drop back again in a couple of years time we'll actually be better off - inflation tends to push up real estate prices (due to increased construction costs for new homes, which tends to flow on to existing home prices) whereas the amount of home loan debt stays constant. If wages also rise in line with inflation, when rates (and monthly repayments) drop back down the loan repayments will then be consuming a smaller part of our wage income.

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Building our Square Foot Garden (2)

I ended up not doing much work on the DS1's vegetable garden last weekend. I spent a while chatting with my parents on Sunday afternoon when I dropped DS1 off for a visit, and then when I started digging out the remaining grass and levelling the area I got a bad headache and called it quits for the rest of Sunday afternoon.

I did manage to track down a supplier of 'bulk' bags of vermiculite in Sydney via the internet. On Monday I ordered 2x100L bags for $72 ($24 each plus $24 delivery), which is less than 1/4 the price per L that I paid for the 5L bags from Bunnings on Saturday! The bulk vermiculate was delivered today, so when I have a day off work on Friday I'll return the small bags to Bunnings and exchange them for some additional blocks of compressed cocopeat. If I get the boxes built on Friday and varnished I should be able to mix the soil mix on the weekend and DS1 can start planting out the seedlings he got for his birthday.

Subscribe to Enough Wealth. Copyright 2006-2008

Horror budget?

Most commentators seem to think that the Australia Budget announced this evening was quite good. The Labor government has apparently delivered on it's election promises, has socked a large part of the surplus into various "Funds" ear-marked for future spending, and has moved to close some "tax loop-holes" and reducing benefits for the well-paid.

However, I found the budget to be more obscure than usual, and haven't as yet worked out what the impact will be on our finances and plans for next financial year. There were many announcements such as new income limits for Family tax benefit B and child care rebate eligibility that might, or might not, have a big impact on us. While at first glance it would seem that the income limits won't affect us (I've seen figures of $150,000 highest income earner limit for Family Tax Benefit B and $110,000 combined income limit for the 50% child care rebate), there were other changes that may apply. For example, there was mention that amounts salary sacrificed into superannuation will now be counted as part of your "income". This could mean that DW's "grossed up" income will be too high to be eligible for the Family Tax Benefit next financial year, even while she's only working a couple of days a week.

It would be nice to think that the increase in child care rebate from 30% to 50% may offset this by making it more worthwhile for DW to work an extra day each week. However, we were never able to claim the child care rebate for DS1 (even though it was costing $75 a day at the only centre close to our workplace that had a vacancy) because the child care was only "registered" and not "approved". Chances are that whatever Child Care centre we can find for DS2 to attend two days a week later this year (after we return from our holiday) will turn out to not be an "approved" centre either. Even if we can find an "approved" centre with a vacancy, the new $110,000 household income limit may preclude us from getting a rebate due to the new way of calculating "income" - apparently tax deductions against rental and dividend income won't be counted when working out "income". This will mean that even though we are negatively geared (overall) into property and shares (and therefore have LESS cashflow than our take-home pay would indicate), the gross value of rent, dividends and superannuation contributions would be included when working out our eligibility for the Child Care rebate.

This may be yet another reason for reducing my level of gearing in the new financial year (the main one is that the interest rate on my margin loans has increased so much in that past year that it's now doubtful that total ROI on the geared investment will exceed the borrowing cost). There's no point borrowing to increase my stock portfolio if it simply boosts my "income" to a level that costs us other benefits.

Overall, I shouldn't be surprised that a Labor budget that delivers a $21 billion surplus might well end up costing my "working family" several thousand dollars a year.

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Will it be worth having private hospital insurance any more?

The Australian Federal budget for 2008/9 will be unveiled tomorrow, but a lot of the details have already been "leaked" by the government in advance. One of the changes will apparently be an increase in the threshold at which the "medicare surcharge" (tax) kicks in. Currently if a couple has a combined income over $100,000 and doesn't have private hospital insurance they have to pay an extra 1% medicare surcharge (on top of the normal medicare levy).

When DW was working full time this meant that taking out basic hospital cover didn't cost much more than the extra tax liability would have cost (if we didn't have insurance). However, over the years I've been less than impressed with the benefits of having private hospital cover. When DS2 was born we weren't even able to use our private hospital cover for the birth as there were no beds available in the private hospital. In any event, there are so many "gaps" in private hospital insurance that we would have ended up paying a few thousand dollars "out of pocket" if we hadn't used the public hospital for the birth. Each year the cost of private hospital insurance goes up, so that it now costs me $153 per month for the most basic level of family cover. I recently looked into enhancing our cover to included dental costs (in case DS1 or DS2 need braces), but the extra $70 a month is unlikely to be worthwhile (especially since having insurance doesn't cover 100% of the cost of all expenses).

Now that DW is working part-time (and I'm using salary sacrifice to contribute pre-tax into my superannuation account) our combined taxable income is too low for us to be liable for the surcharge if I dropped our insurance cover. If the proposed budget change takes effect we also wouldn't be in danger of exceeding the threshold when DW returns to work full-time. I'm giving serious thought to cancelling our private hospital cover and saving the extra $1,836 pa and relying on the public health system. There are plans to build a new public hospital less than one kilometer from where we live (if the State government ever allocates the required funding), so even if we keep our private hospital insurance we'd probably end up using the public hospital in case of emergency!

Subscribe to Enough Wealth. Copyright 2006-2008

How I plan on saving 50% of investment trailing fees

I'd seen a couple of services advertised that will rebate you part of the trailing fees that many investment products pay to financial planners, insurance and loan brokers. So I recently visited YourShare.com.au and joined up. The service offers an annual rebate of 50% of the trailing fees they get paid if you nominate them as your "fund broker" (70% for trails above $4000pa). I sent in completed nomination forms for my income protection insurance, three margin lending accounts, and various fund investments. I got a confirmation email acknowledging receipt and processing of my forms a few days later, and was advised that a few of the investments didn't actually pay any trail (Timbercorp and Rewards agribusiness investments). Also, Commonwealth Securities doesn't pay a trail on margin loan balances, although the form will still be processed so I receive a 100% rebate of the entry fee on any mutual fund investments I make via Comsec.

This means I should be getting a rebate on the trailing fee paid on my "loss of income" insurance premiums (probably 1%-2% of the amount paid), plus I'll get a around 0.25% of the value of my margin loans with Leveraged Equities and St George Margin lending. The rebate cheque is due each anniversary after joining the service, and will cover all trailing fees received during the year.

Although I'd always known that margin loan interest rates are around 1% higher than variable rate home loans, I hadn't realised that most margin lenders are paying 0.25%-0.35% trail to financial planners! As with most investments, if you invest directly in these products (without going through a financial planner or broker) you don't normally get any of this fee rebated (the investment manager simply pockets the trailing fee). Since I have investment loans of around $220,000 through LE and St George, assigning YourShare as my "broker" for these accounts should generate an annual trailing fee rebate of around $550. Not bad for a few minutes work.

There is at least one other similar trailing fee rebate service available, but although it rebates a larger percentage of trailing fees it also charges an annual fee. This makes it better for investors with a large portfolio, but would be similar (or slightly worse) in my case. Anyhow, once I get the first annual fee rebate cheque I'll be able to tell if the other service would provide a larger rebate, and can change broker nomination on my investments if that is the case.

Subscribe to Enough Wealth. Copyright 2006-2008

Net Worth of PF Bloggers: April 2008

Here's the current financial situation of some personal finance bloggers who post their net worth each month.

Monthly Net Worth of some PF Bloggers for April 2008:

Blogger    Age   Net Worth      $ Change  % Change
An English Major's Money  24    $23,613.00   $1,052.00   N/A
Aspire 2 Wealth           2x    $31,326.00   $2,489.00   N/A
Blogging Away Debt        2x   -$27,616.00   $2,827.00   N/A
Consumerism Commentary    30   $146,738.00   $3,564.00  2.5%
Debt Free 4 Ever          39    $50,099.00     $183.00   N/A
Enough Wealth             46 $1,072,448.00  $27,840.00  2.7%
How I Save Money          27   -$17,128.00     $657.00   N/A
Lazy Man and Money        2x   $218,825.00   $5,794.00  2.7%
Map Girl                  32    $50,847.00   $1,802.00  N/A
MaxLoot                   25    $42,986.00   $2,747.00  N/A
Moomin Valley             42   $485,756.00  $19,130.00  4.1%
My Money Blog             28   $257,939.00  $15,592.00  6.3%

nb. Some ages have been adjusted as follows:exact age provided = listed as given"20's" = listed as 2x"early 20's" = listed as 22"mid-late 20's" = listed as 27and so on.

Previous monthly reports can be found in the Net Worth category.

If you have any corrections, let me know as soon as possible after the post and I'll edit immediately. If it's more than a few days after the post, email me and I'll make the change the following month.

Note: Most of these figures are in USD, but some are not (eg. mine are in AUD). Also, some bloggers post combined net worth of a couple, others are single, or, like me, only post their personal net worth.

The N/A figures are either a lack of monthly data, or where I've not included % change data because the net worth is less than +/- $100K.
I've had some appreciative comments about this regular monthly post - if you like it, please link to it from your blog, or add a link to EnoughWealth to your blogroll. ;)

Subscribe to Enough Wealth. Copyright 2006-2008

Building our Square Foot Garden

I bought more materials today for constructing DS1's vegetable garden. It's loosely based on Mel Bartholomew's "Square Foot Gardening" concept, but I may end up compromising on the soil composition. The official "Mel's Mix" is supposed to be 1/3 compost, 1/3 peat moss, and 1/3 vermiculite. I had 1 cubic meter of "vegetable soil" delivered last Wednesday (which is around 75% compost), so today I wanted to purchase some peat moss and vermiculite to make up the required mix. It turned out that peat moss is not readily available, so the closest I could get was Cocopeat, which has very similar properties to peat moss, but is produced sustainably from coconut husks rather than strip mining peat bogs. Although I could only buy it in small packages (a brick that makes up 15L of peat when rehydrated), this isn't too expensive at $1.81 per pack (around $120 per cubic meter).

The vermiculite was another story. Although it's available (in small packs), the cost is very high at $7.51 per 5L bag. That works out the $1,500 per cubic meter, which is ridiculous. I bought three packs, but unless I can source vermiculite in bulk for lower cost I'll have to use around 5% rather than 35% vermiculite in my soil mix.

I'm building two 5' x 3' wood boxes for the vegetable garden, which will fit nicely into the available courtyard outside DS1's bedroom window. I happen to have a few nice 88x44cm granite slabs (benchtops that someone was throwing out when remodelling a kitchen) that will make a nice access path between the garden boxes. Each box has a volume of 1/3 cubic meter and will provide 24 square "plots" for planting a variety of DS1's favourite vegetables.

I also bought a timer tap and a simple sprinkler, so DS1 can just turn on the timer each morning before school to give the vegetable garden a good watering a few days a week. On the days when watering by hose isn't permitted he can keep the plants moist using his new watering can.

Tommorrow I'll cut and assemble the pine garden boxes and give them a coat of marine varnish spray. The boxes will be sitting on a layer of leaf mulch and be lined with a damp course (to make the wood box last a bit longer). Since the varnish takes 8 hours to dry we probably won't be able to fill them with soil and start planting seedlings and seeds until next weekend. We're starting with a selection of carrots, onions, brocolli, cauliflower, corn and chinese cabbage. I'll have to buy a few potatoes with lots of eyes at the supermarket and leave them in the sun to see if any sprout and can be planted.

This vegetable patch looks like it will end up costing a few hundred dollars altogether in materials (it could be built much cheaper using second hand lumber etc) and take several hours work putting it together. It should provide lots of fun for DS1 (and some educational value), but I'll be interested to see how much produce we get from this small area, and will track the quantities and calculate their value (based on the local supermarket prices).



I'll post some before and after shots of the couryard and assembled garden boxes, then some photos of whatever produce we get by springtime.

Copyright Enough Wealth 2008

Is water frugality worth the effort?

There are many places on earth where water is a precious, finite resource. Sydney isn't one of them. Yes, Sydney recently had an extended drought - one of the worst in a hundred years - but our overall water storage never dropped below about 35%. Although this seemed very alarming at the time (the State government signed contracts to build a large desalination plant just before the last election, which is now being building but will probably never really be needed), it's actually a pretty good figure for the lowest point in storage. After all, if the low point was never less than say, 60%, you'd obviously have too much storage capacity.



Which brings up the obvious solution to Sydney's variable rainfall - more storage capacity. Our main dam (Warragamba) was originally planned in 1845, but construction was deferred until the severe 1934-42 drought got things moving. The dam was built in 1948-60, and it's capacity was actually reduced late last century when a new, lower spillway was constructed to guard against a "1-in-100-year" FLOOD!

Since Sydney has adequate, but highly variable, rainfall, there were plans for a second large dam to supply Sydney. Unfortunately the previous State Premier was a firm friend of the anti-dam green lobby, and declared part of the new dam site a national park in order to prevent a second dam being built.

So, we're stuck with an expensive desalination plant that will only be able to provide relatively small quantities of very expensive potable water during a severe drought. It also needs to be kept running the rest of the time (using expensive and environmentally unfriendly fossil-fuel generated power) in order to remain in working order. If we had a second dam of similar size to Warragamba our overall water storage would not have dropped below about 63% at it's low point, and we'd now be sitting at 80% of maximum capacity. A side benefit would have been some hydro-electric power generation to feed into the grid during times of high rainfall, when storage went above 90%.

Aside from the desalination plant, the government's main solution to solving Sydney's water problem during droughts is for consumers to "conserve" water. However, aside from the propaganda and peer-pressure value of small fines for "banned" water usage (eg. watering the garden on the wrong day of the week), there is actually little or no pricing signal used to encourage water conservation. For example, out last water bill was for average daily usage of 879 kL (down from 931 last quarter, and 934 the same time last year). However, out of the total $213.70, only $96.74 was "usage charge" - the remainder was for the general water service and sewerage service fees.

Therefore, in the past year we have reduced our water consumption by almost 6%, yet this would only reduce the bill by 2.7% (if water price and fees remain constant). The water bill was accompanied by a leaflet showing average daily water use targets for families of different sizes. For our household the target is around 750 kL/day. (They don't mention what the actual average figures are, or how an older house is expected to meet a target that is based on a modern house that uses all the latest water-efficiency devices!). If we somehow managed to reduce our water consumption by almost 15% to meet this target, our water bill would only go down by $14.66 (or less than 18c per day), or 6.9%! In reality, they are about to raise the water service pricing (to pay for the desalination plant!), so even if we cut our usage to the target figure we'll probably be paying more for our water bill this time next year.

Another example of government red-tape and ineffective incentives is the "incentive" offered to install rain water tanks for use as "grey water" (ie. flushing toilets, watering gardens etc.). Although quite large amounts are paid out by the government for installing a new rainwater tank, it's only available if you buy a brand new tank and get it installed by a licensed plumber. This means that you still end up with an "out of pocket" cost for installing a rainwater tank, and will take many years to recoup the cost through any water savings. Since the tank water can't be connected to the normal water reticulation system (as it isn't considered "potable" and isn't treated - some houses have dead birds, possums etc. on their roofs - yuk!), I can't see why a plumber is needed to stick a tank between your roof down pipe and the garden hose. I may install a small (preferably used) tank in our front garden to provide water for DS1's new vegetable garden, but it won't be eligible for the government subsidy.

Copyright Enough Wealth 2008

Forex CFD Trading Update: April 2008

April continued my run of profitably months trading AUDUSD foreign exchange rate (the "Aussie"). I continued trading the minimum contract size (A$25,000) and using OCO (One-cancels-other) stop/limit pairs when I left a position open unattended (eg. while at work or overnight). Depending on volatility the stop-loss order would be priced 10-20 pips from my entry price, and the limit price (to take a profit) at least 30 pips from the entry price. The limit was set based on recent charting behaviour - resistance/support levels, previous retracements etc. Attended open positions were often much shorter opportunistic trades, where the price had dipped 10-15 pip below the trend line, and had started to retrace. Often a small profit of 5-10 pips (worth $12-$25) could be made in a few minutes. I think I overtraded a bit this month as the number of trades was higher than previous months, and the average profit per trade was very low. This month I'll try to only trade when there seems to be a clear opportunity, and also try to let my winning trades run a bit longer (probably need to cancel and reset my OCO orders when I'm approaching my limit).

I don't have figures on the win-loss ratio of trades as I sometimes open a second trade overlapping the previous position, so I have to manually sort through and pair up my trading history to determine the result of each trade pair. I did that for last financial year (up to 30 June), and I'll get the figures up to date before the end of this FY. Meanwhile I can get the overall profit(loss) and number of completed orders from the CMC Markets monthly account summary.



Copyright Enough Wealth 2008