The End is Nigh!

[red750]

There is a growing movement for tiny houses, not much more than a fixed caravan, converted shipping container or large bathing box (a la Mornington Peninsula beaches. There is a company creating prefabs which can be assembled in a few hours, like Ikea furniture.

 

 

 

 

 

 

[pmccarthy]

Years ago I renovated a house built in 1865. I still own it, it is my only 'real estate' investment. It is rented out for $400 a week, the market rate here. Based on the council valuation, my return on investment is 1.4%.  The lease has expired. Should I renew the lease, the tenant wants to stay, or sell it?

[spacesailor]

Financial 'rip-offs ' & A Ponzi scheme ! .

before we 'payed off our mortgage,  we were warned ,to be careful were the " title deeds " end up .

It seems , left with the ' lawyer's ' they could be used by said ' solicitors office ' . 

As collateral for their schemes . 

I looked at our title deed & found a miscellaneous entry. 

The previous , & first owner said he didn't know anything about it , as he had never seen those deeds .

My lawyer told me it could have been the first owners,  solicitor company .

spacesailor

Edited 11 hours ago by spacesailor
Tidy up

[old man emu]

30 minutes ago, pmccarthy said:

Should I renew the lease, the tenant wants to stay, or sell it?

As a lifetime renter, I offer this: if the tenant has been satisfactory; paid rent on time and looked after the property, then renew the lease. A good tenant is a bird in hand. If you sell the house, you will only end up with a wad of money that is decreasing in value due to inflation. If you have already paid off any mortgage on the house, then the $400 per week is mostly yours, after allowing for maintenance and agent's fees. And don't let the agent con you into upping the rent. Agent's only do that to increase their cut. If your tenant has been good to you, why not give a reward by not increasing the rent. You can always let the tenant know that it might go up later if costs rise too much.

[onetrack]

A good tenant is worth their weight in gold, but a bad one will cost you a fortune. I know people who thought they could make a motza buying and renting properties, but quite a few got badly burnt by bad tenants.

[octave]

Even if you have a great tenant, it is a little unrealistic not to increase the rent. Every year, council rates increase, as well as insurance costs.  A landlord also has to have enough money put aside for future repairs. Modest rent increases in line with increased costs and inflation are reasonable and necessary.

[Jerry_Atrick]

11 hours ago, old man emu said:

Getting back to the original theme of this thread, we are facing a total collapse of our global civilisation simply due to the imminent collapse of the financial system. At the moment the global financial system is backed by a sort of promisory note called a Derivative.

 

Jerry will correct me if I am misunderstanding what a derivative is used for. Basically money is loaned on a promise to repay it. The lender holds the record of the promise, but can use it to borrow money from a third party. The third party can then use the second party's promise to borrow from a fourth party. The problem arises if the first borrower fails to pay back the original loan. Then the original lender, who has become a borrower, cannot pay back what was borrowed from the third party, who can't pay back the fourth. The arrangement collapses. It has been estimated that currently the amount of money involved in these promises amounts to 600 trillion dollars - more money than actually exists in the global economy.

 

And who thought up this wonderful financial scheme? Pretty sure you would fing the brilliant minds if you walked along Wall Street.

 

A derivative is a financial instrument that derives its value from an underlying financial instrument. The most commonly known one is an option - the right - but not the obligation - to buy or sell a financial instrument at some future time for an agreed (strike) price. Depending on whether the option is on the buy or sell side, it will rise and fall with the underlying instrument - typically shares for retail investors. 

 

What your describing could be a derivative, but is more likely the credit multiplier effect which exists in any economy that facilitates lending. What is happening is collateral, in the form of future promised cash flows, is being put up as collateral for borrowing money. This is a form of leveraged finance and has leverage risk. It can be a derivative (such as a repurchase agreement, commonly known as a repo), or it could be a bog standard loan sold off in the loan markets. Or it could be an asset backed security (ABS), which package loans into an asset pool and sell cash bonds off the back of them. They are not technically derivatives, but collateralised loans. Although the structures are different, they are all forms of financing lending. A repo, is considered a securities financing transaction as it offers up a financial security (e.g. bond, share, exchange traded commodity derivative) and receives money in return; at the end of the agreement, the security is returned to the borrower, and the cash is returned to the lender. 

 

Different structures have different rules and problems associated with them. ABS is the riskiest to the economy, however, Lehmans failed by gaming the repo market in what was called repo105. (https://en.wikipedia.org/wiki/Repo_105). It used short dated repo agreements to get risky assets off its balance sheet and have case in the bank at reporting times.. was the gist of it, anyway. But that was a fraud as opposed to market operation.

 

The value of USD $610tn in OTC derivatves was a couple of years ago from memory. This oft quoted value, whilst true, is the notional value of the market which bears little semblance to the amount of the actual value of the market, which as I recall was arounf $20tn. And that is because almost all derivatives are a future swap of cash flows based on some financial measure. For example, an FX forward is where two counterparties agree to swap foreign currency at some pre-agreed exchange rate, sometime in the future. For example, I may enter into a forward rate fx contract with you, where I give you $100,000 AUD, at .63 USD. On that future daye, I will give you $100,000USD and you will give me $63,000 USD. The notional in USD is $63,000, but that is not the value of the trade. The reason is that is not the value of the trade is because if I default on the $100,000, you don't give me anything. You keep your $63,000 and have lost nothing. Well, sort of..

 

We measue the loss in what is called xva and credit risk, as well as the difference in the spot price and the forward price. If the AUD was up a a lot, say it went to .68, that would mean you could have converted yout $100,000 received from me into $68,000 USD; you have lost $5,000 on my default. Of course, it the AUD went down, you are ahead of th curve because it means you don't have to worry about taking less from my $100K then you gave me.   The true value of the derivative is calculateed daily with discounted net present valuation calculations well into the future. Some derivatives can go on for 50 or so years..  But we tend to value them on 1 day, 3 day, 5 day, 7 day/2week, month, 3 month, 6 moonth, 12 month, 3 year, 5 year, 7 year, 5 year and 30 year basis - depending on how long they have to run. The maths is complex, and I don't pretend to uinderstand 1/10th of it.

 

The chaining of loans as collateral is an oversimplification of the issue, especially in the credit multiplier sense. Yes, bonds can be reused as collateral. But, a) they have haircuts to their value applied; b) wrong way risk further recudes the value we can take, and c) there is usually some economic value/output added along each link. And, at least in Europe, there are tight controls on this and big fines for not complying (reporting is mandatory). So far, these seem to have acted as a strong deterrent.. I know from experience how seriously we take compliance and only a buy side firm, Aviva has had a breach worth fining - and that was for the breach of reporting rather than collateral reuse (we self-declare breaches of reporting and fix them very quickly).

Edited 10 hours ago by Jerry_Atrick

[old man emu]

Thanks for that explanation. Unfortunately, like most people, I did not understand concepts whose word describing them was not defined. That's not a complaint against you. It just means that to understand it all, one has to be involved in it. It's a bit like looking at musical notation. I can't understand what it means, but when a musician interprets it, I can enjoy the sounds.

 

The thing is, is the use of derivatives something that could go bad and destroy the global economy?

[pmccarthy]

I should have explained in my story, that the question of selling my property now arises because half of the $400 rent goes in costs. That now includes the Vic government land tax, rates, services etc etc. costs were much lower a couple of years ago. I will let you know what I decide, has to be decided quickly if the lease is to be renewed.

[onetrack]

Is the 1.4% ROI based on just the rent return, or are you counting the capital gain increase as well? That capital gain must be running at least around another 5% annually?

Here on the Left Coast, houses have gone up more than 10% in value, just in the last year alone.

If you put the money you get from the rental house into a term deposit, will you get a better return overall? Remembering that term deposit rates can go down, but (good) property prices rarely do.

Then there's the issue of CGT that you will possibly incur as well, if you sell the house? I guess that depends a lot on timing of the original purchase, and your financial (tax) position.

[Jerry_Atrick]

Sorry OME.. I tried to break it down in terms of derivatives. There is a lot to go through to make sense, I suppose. I just don't have the time to write up the real basics, but there is plenty online. If you have the inclination to spend the time, you can do the foundation level of the chartered financial  analyst course here: 

 

You can skip the quantitative methods and go straight to issuers. It will give you good insight to the markets and basic instruments. 

 

Here is his level II stuff: 

 

 

And here is a level II course (the above fella doesn't seem to have one)

 

Note, this is not a trading course. but from a buy side, or asset manager perspective. 

 

There doesn't seem too be free video courses of Chartered Institute of Securities and Investments.. which has a trading component. 

 

 

[Jerry_Atrick]

3 hours ago, onetrack said:

Is the 1.4% ROI based on just the rent return, or are you counting the capital gain increase as well?

Until one sells, one can't realise the capital gain as a return. But, what residential investors have been doing in Australia for years is to profit from that + negative gearing. It goes something like this. Buy a run down hovel at next to nothing. Refurb it as cheaply as possible to increase the value of the property. Have the bank value the property, which goes up - often by multiples of 10%. The loan to value ratio decreases. So, say you bought a house for $400K (I know, an impossibiolity in the cities in Australia anymore). Say you borrowed $300K to buy it. You renovate it for $15K and it takes the value to $500K. Where you had a 75% loan to value, you now have a 60% loan to value. You use the additional value as collateral on the next loan. Some banks will proxy this as a deposit on the next house, because they will poolk the houses as collateral under the one loan, and increase that one loan. Therefore, you don't need a new deposit because the icreased value of the first home means allows you to increase your borrowing as your collateral has increased. So, you buy a second home to tip in as collateral on your first loan, and because that house has value, it increases the collateral, which allows you to borrow the cost of buying that second house without having to put in more money yourself (maybe except for legals/converyancing and stamp duty). You refurb that house, and so the cycle goes on.

 

Sadly, I was financially illeterate, like most of us are, for a very long time. By the time, I learned about what was possible, it was too late - at least for the Aussie market, which is a perfect residential investment market - for investors. Over here, the dynamics are totally different and it doesn't pay at all unless you incorporate and make it your full time occupation. Unless you want to get ionto a certain segment which should have been outlawed decades ago.

 

You may be paying back more than the rent pays, in which case you can offset that against your income as negative gearing. Done properly, you don't have to pay any tax on your normal income. Which frees up money to put into the legals and stamp duty of the next property. Rinse, and repeat. 

 

@onetrack is correct - with property, it is both income and capital gains that should be taken into account. However, our tax standards don't require it. 

Edited 2 hours ago by Jerry_Atrick