I was enjoying a nice relaxing afternnon at home when the phone rang. The nextdoor neighbour of our rental property asked "Do you know that there's a big tree fallen on top of your house?" [our rental property]. It was news to me. So, we all jumped into the car and drove over to our property to inspect the damage. The tree was bigger than the house and had just missed landing on the house and flattening it completely. As it is, few large branches have gone through the roof, and the lounge room was full of debris.

Luckily the tennants weren't home at the time - they usually park their car where the trunk of the tree landed. As no-one was home at the time I'm a little disappointed that the tree didn't drop two metres further to the left, in which case it would have entirely demolished the house. The house is insured for aroung $385,000, which would have gone a long way towards building a nice, new house on the block. As it is, I guess that the house is probably repairable, so we'll just get the inconvenience of getting repairs done and end up with the same 50-year old house as before.

Apparently the tree fell over in a strong wind gust around 2pm this afternoon. All the heavy rain in the past month has made the ground very wet and spongy, so any strong winds are likely to make lots of tree uproot. When we got to the property at 4:30pm and saw the damage I called the local State Emergency Service (SES). The SES volunteers arrived within 15 minutes and will clear off the branches embedded in the roof and cover the gaping holes with a tarpaulin (to keep out any rain).

When we got back home at 5:30pm I called our insurance company to lodge a claim. The assessor should inspect the property tomorrow and let us know if the tenant can stay there while repairs are made, or has to move out, and the extent of the damage. Our insurance also covers loss of rent, but I've no idea what happens if the tennat decides to just give four weeks notice and move our (their 6 month lease expired last month).

I'm also not sure if the insurance will cover the cost of getting the main body of the tree removed, or just the actual house repairs. Best case we'll be out of pocket for the $100 excess. Worst case we'll also have to pay for getting the tree removed, landscaping the damaged rockery, lose some rent while the property is getting repaired, etc. etc. That's why, since no-one was home at the time, I'd have preferred the tree to land square on the house and demolish it completely.

Sydney prices for established homes in the more desireable suburbs have tended to increase by around 6% in the long term. After the boom in prices between 1998-2003 we've now had several years of flat prices. According to Australian Property Monitors there will be a 5% increase in property prices in the next 12 months. This agrees with the recent increases observed in average home sales prices in the two suburbs where we have our home and rental property. There have also been reports that the boom in Western Australian house prices over the past three years (driven by the commondity/mining boom) has come to an end, so I expect house prices in WA and NT to be flat or decrease in the next 12 months and house prices in Sydney to increase by more than 5% - perhaps as much as 10%. This will be good news for my net worth as DW and I have equal shares in around $1.4m of real estate with about $0.7m of mortgage debt. With a mix of variable and fixed rate loans, our overall mortgage interest rate is currently around 7.25%, so an increase in house prices of 10% would boost our home equity by 12.75%.

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Enough Wealth 2007

After a couple of months of exceptional gains in the reported average sales price for the suburbs our houses are in, this months figures show a drop back to the long-term trend (as I'd expected). This won't be reflected in my net worth figure until the end of July, but will knock about $30K off my net worth figure at that time.

It's been twelve months since our last annual review of the amount of rent being charged for our rental property. But the "new" tenants have only been in the house since last December so I think I'll wait until the end of the year before increasing the rent. We had raised the rent from $400 per week to $410 late last year, but this encouraged the previous tenants to move to a nearby house that was available for a similar amount (but also had a pool). As we had trouble quickly finding a new tenant just before Christmas, we decided to advertise the property at the previous $400 rate in order to find a tenant as soon as possible. This means that come December we won't have raised the rent for two years, and during this period rents for houses in this area have increased by over 10%. On the one hand if you don't raise the rent for a long while it's very hard to increase the rent back up to the market rate if your tenants stay on. On the other hand if you increase the rent every year and tenants are encouraged to move out, you can easily lose more rent from the vacancy rate than you get from the rent increase. Rents in Sydney are fairly low as a percentage of the property value, although with vacancy rates very low at the moment, rents have started to rise quite rapidly.

Mighty Bargain Hunter recently posted about paying off Mortgage debt sooner rather than later. The point being that a mortgage is like any other debt and in the early days of a loan the interest cost eats up a huge amount of each repayment, so making some extra payments can have a huge impact in getting the loan paid off sooner.

However, while it is true that most people want to pay off their home loan as soon as possible, or at least before they retire (so they don't have to fund loan repayments out of their retirement income), it's not true of all mortgages. In particular many people will borrow to invest in a rental property, and, at least in Australia, most of the long term benefit of this type of investment is expected to come from eventual capital gains, rather than the rental income. For example, rent yield is taxable income, but at around 3%-4% of the value of the property, it will be less than the tax deduction provided by the interest on the property loan (say 8%). This means that you will be losing money on the investment property on a cash flow basis, at around 4% of the property value each year (this is known as "negative gearing"). But this interest is tax deductible, so 30%, 40% or more of this amount is effectively being paid from money you'd otherwise lose to income taxes anyhow. The payoff comes (hopefully) when the property is eventually sold for a capital gain. As the Capital Gains Tax rate for assets held over 12 months is half the normal marginal income tax rate the total return on the investment property (rent plus capital gains) can be slightly less than the interest cost and you will still end up ahead due to the tax savings. Many property investors therefore choose to use "interest only" loans for the purchase of investment properties, and would choose to use any spare cash flow to pay interest on an additional investment property rather than pay off principal on one of their investment properties. Not to say that this is the best option for all investors, or even most real estate investors, but it just goes to show that paying off the morgage as fast as possible doesn't apply in all situations either.

Enough Wealth

The area in which we have both our home and our investment property (coloured green in the diagram below (adapted from a recent

SMH article) is surrounded by suburbs where the average house price is now over A$1m. This is quite reassuring as in Sydney it seems that the higher-priced suburbs have been the most resilient in the recent property downturn, and over time experience the greatest gains. Apparently while it is hard for the average worker in Sydney to afford a house with average prices approaching the half-million dollar mark, executives working for investment banks are awash with cash and snapping up any multi-million-dollar houses that come up for sale.



Enough Wealth

Our Real Estate "Portfolio" consists of just two houses in adjacent suburbs. With the ridiculously high property prices in Sydney, it's amazing we even managed to end up owning two properties. The first one was an investment property we bought soon after we were married, at which time we were both living rent free in my parent's old house (they've moved to a "retirement" farm up north, and are in the process of renovating the old family home in order to sell it and help fund their retirement). We were lucky to buy the investment property just before the last Sydney property boom really gathered steam, but even so it consumed all the equity DW had from selling her unit and an equal sum from me to meet the deposit.

The Sydney property boom gave us a significant boost in equity, and this, combined a promotion and increased salary allowed us to purchase our current home. We had previously been toying with the idea of buying an investment unit in Queensland or New Zealand (both of which has since had property booms, so would have been good investments), so when my parents decided to renovate and sell their Sydney house it wasn't too much of a stretch to buy another house - with the minimum deposit needed to avoid paying mortgage insurance, and taking out a 25-year loan.

Soon after moving into our own home the Sydney property boom ended. Fortunately the suburbs where our properties are located only declined 5% or so in value, before levelling off. The past current months have shown good increases in the median sale price for houses in both suburbs, so it looks like prices may be starting to pick up again. Despite prices being very high, and almost unaffordable as a multiple of average weekly earnings, there is an undersupply of new housing construction in Sydney, and a shortage of new land zoned for development. This has started to force rents to increase, which is encouraging people to look at buying their own homes, even though mortgage interest rates have increased 0.75% since the start of 2006.

Our property portfolio is shown below:



A plot of monthly changes in estimated house valuations clearly shows the recent "boom and bust" housing cycle in these suburbs of Sydney:

Enough Wealth

My Networth as at 30 April totalled $1,116,129 (AUD), an impressive overall increase of $45,141 (4.21%) for the month. My stock leveraged stock portfolios increased by a net 5.10% during April, and the estimated valuations for my share of our home and investment property increased 2.10% compared to last month, continuing the mild uptrend that began last month. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,082 (0.30%) due to our monthly redraw of $3,500. We're continue redrawing some of our advance mortgage payments each month to help meet our mortgage repayments while DW is on maternity leave for another two months. Unlike last month's big drop in the valuation of my retirement account, this month my retirement account balance went back up $10,919 (3.37%).

So far this year my Net Worth has gone up by $83,346 (8.07%), which is 59.53% of my goal for the entire year.

Enough Wealth

Owning our own home plus an investment rental property (albeit with large mortgages) means that my net worth is dependent in large part to the vagaries of the Sydney property market. The latest average house prices for the adjacent suburbs where our home and investment property are located shows considerably higher averages prices for house sales than were reported for the previous month:



Combined with the recent strength in the Australian stock market it looks like this month will give a boost to my net worth. Hopefully todays CPI figures will mean the interest rate on our mortgages doesn't increase again (our house is a variable rate loan, and the rental property is a 5-year fixed rate loan, with four years left to run). It may also help breath some life back into the property market - new house construction is running below the required rate to meet increased housing demand, which is starting to make rents increase. Any confidence that interest rates have now peaked will encourage both investors and home buyers back into the market, which should form the basis for the next increase in house prices in Sydney. Housing in Sydney tends to run in a 7-10 year cycle, and it's now been almost three years since the last peak in house prices.

Of the three goals I set at the start of this year (see side bar), my Net Worth and US Stock Portfolio goals are on track, but unfortunately my goal of getting down to my ideal weight by 30 June is not progressing as well as I'd planned.

In some ways diet and saving plans are similar - you pick your ideal behaviour and make an effort to stick to it until it becomes habitual or "automatic" behaviour. Unfortunately it seems easier to eliminate "junk spending" than it is to eliminate "junk food". I think the problem is that while you can arrange for your "essential" expenses (utility bills, home loan etc) to be paid automatically and can therefore focus on eliminating spending entirely (eg. "no spend" days), some basic level of food consumption is needed to maintain health. Food intake can't just be set on autopilot - every time you eat there is the chance you'll choose junk food instead of a more healthy food. I find that I'm most successful in sticking to a healthy eating plan if I have a fixed menu of healthy items for my breakfast, lunch and dinner - that way I CAN completely exclude eating anything that isn't "on my list".

Ah well, time to start writing down what I eat every day and tracking it on my diet spreadsheet...

Enough Wealth

My Networth as at 31 Mar totalled $1,070,988 (AUD), an overall increase of only $4,210 (0.39%) for the month. My stock leveraged stock portfolios increased by a net 3.52% during March, and the estimated valuations for my share of our home and investment property increased 1.42% compared to last month, which is encouraging. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,084 (0.30%) due to our monthly redraw of $3,500. We're redrawing some of our advance mortgage payments to help with our repayments while DW is on maternity leave.

The biggest negative for the month was a sharp drop in the valuation of my retirement account, which wasn't recovered fully by the stock market recovery - possibly some fee or tax liability was paid out during the month. The retirement account balance ended down $6,628 (2.00%) for the month. I'll have to check all the transactions for the month online to confirm exactly what was going on, but the online transactions are a pain to analyse - having half a dozen investment options (mutual funds) in my retirement account, each and every transaction is split into a separate transaction for each investment option. The easiest method is to download the relevant date range and import it into excel, then sort by transaction type and description and total up all the related items for each date to work out the total amounts being deducted for fees, insurance premium, fee rebate, tax etc.

Enough Wealth

Oh, the joys of being a landlord! Aside from having to accept a lower rent in order to find a tenant for our rental property last year ($400 a week, rather than the $410 we'd been getting from the previous tenant or the $420 a week I thought we should be able to ask based on average rent rises for this suburb over the past few years), after spending a couple of thousand dollars getting new carpet and lino laid, the new tenant had a couple of plumbing repair requests immediately after moving in, and then last month wanted the TV antenna fixed. I hadn't been expecting the TV costs as the previous two tenants hadn't complained, and the last one even had a large screen TV - perhaps he only watched DVDs? Anyhow, an inspection from the TV antenna service apparently found that not only was the cabling damaged but the existing antenna wasn't really suitable for the location (I have to take his word for it as it's not feasible to get several quotes for a job that should only cost a couple of hundred dollars max), which accounted for the poor reception the tenant was reporting. Long story short, a new digital/analogue antenna, cable run, sockets and a couple of hours work resulted in a bill for $395 - just about 1 weeks rent!

As I earn a higher salary than DW, I pay all the rates, repairs, land tax etc. on the investment property which we share equal interest in, and DW just makes half the loan repayments. So all these extra costs are starting to be a pain in my hip pocket. With the DW on maternity leave since last August, we're already having to redraw the loan payments we had made in advance over the past five years to meet the fortnightly payments (actually, I could afford to make the loan payments myself, but I'd rather use the redraw facility so we are still sharing the loan costs 50/50). Hopefully there are no more repair bills in the immediate future.

One brighter note is that after a couple of years of flat to declining house prices, the latest monthly average prices for the suburb have gone up 2.9%! There's a fair amount of "noise" in the monthly average sale data due to the mix of properies being sold, but at least it offers some hope that we may be getting back towards the long-term trend rate of around 6% pa growth in house prices for this area. We certainly need some capital gains on this property in the long term, as the rental yield is only 1.44% (before expenses), and the current interest rate on the investment loan is over 7% - although we only owe $238,000 on the property.

One of our myriad state taxes is land tax. It's not that I hate land taxes per se, it's just that the state government keeps changing the rules, making it impossible to budget or plan for this tax. For example, our past bills (with no change in the properties we own and pay land tax on) have been:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2001 $695.00 $240,000.00 not provided $100
+ 1.7c per $1 over $205,000 threshold

2002 $848.00 $264,000.00 not provided $100
+ 1.7c per $1 over $220,000 threshold

2003 $814.00 $303,000.00 not provided $100
+ 1.7c per $1 over $261,000 threshold

2004 $372.00 $333,000.00 not provided $100
+ 1.7c per $1 over $317,000 threshold

2005 $1,332.00 $333,000.00 not provided 0.4c per $1 up to $400K,
0.6c per $1 on next $100K,
1.4c per $1 above $500K

2006 $0.00 $349,000.00 not provided $100
+ 1.7c per $1 over $352,000 threshold

2007 $451.30 $372,667.00 $407,000.00 $100
+ 1.7c per $1 over $353,000 threshold

* Land used for principal place of residence (ie. our home) is tax exempt

Apart from a short lived attempt to remove the tax threshold (which was repealed after one year due to all the "small" landholders who just had a tiny tax bill due on the land associated with a investment apartment), the rate has been fairly constant but the thresholds were adjusted based on average state property values, whereas land values in Sydney tend to change more erratically, and outpace the threshold increase over time. The government reintroduced the old tax rates and threshold for 2006, but didn't index the threshold in 2006, which has brought our one investment property back over the threshold.

Due to sudden jumps in land valuations under the old method of reviewing land values every 3-4 years, a new method has been introduced that provides a valuation each year, and averages the past three years valuations to smooth out any tax increases.

Year Property #1 Property #2
Valuation Valuation *
2005 $333,000.00 $387,000.00
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
Avg: $372,667.00 $407,000.00

At least this allows me to make a rough guess of what the land tax bill will be for the next two years, assuming
a) rates stay same and threshold goes up 5%pa
b) land valuation only goes up 5%pa for the next 2 years (due to the property slump)

Estimated Values and averages:

Year Property #1 Property #2
Valuation Valuation *
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
Avg: $414,333.00 $427,667.00

2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
2009 $481,000.00 $471,000.00
Avg: $458,333.00 $449,333.00



My estimates for 2008 and 2009 are therefore:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2008 $836.67 $414,333.00 $427,667.00 $100
+ 1.7c per $1 over $371,000 threshold

2009 $1,261.67 $458,333.00 $449,333.00 $100
+ 1.7c per $1 over $390,000 threshold


We'll see if this comes anywhere close to the actual bills. As there is a state election due next year I wouldn't be surprised if the rules are changed again!

The past month provided more good gains in my stock portfolio and retirement account, offset only slightly by a small drop in the valuations of my real estate assets:
* Average property prices were slightly down, dropping my property equity by $4,146 or 0.58%. We also had to redraw $3,500 from our home loan prepayments to meet our repayments as DW is on maternity leave and not earning any income at the moment.
* My stock portfolio equity went up another $19,568 (5.50%) this month and my retirement account also increased significantly, although it was boosted a bit by some extra contributions being deposited by my employer this month - up by $12,561 to $324,598 (up 4.03%).

My Networth as at 31 Jan now totals $1,058,372 (AUD), an overall increase of 2.48% for the month.

As discussed in a previous post, I'm looking into either buying Index Put options to protect against significant losses if the market drops, or else selling off some of my stocks to repay my margin loans and eliminate my gearing while the market is at the current high level. I'm leaning towards the Put Options idea as I don't want to realise capital gains this financial year, and most of my margin loans have had the interest prepaid until 30th June, so I should keep my investments until then (and keep my fingers crossed that the market goes up a bit more until then).

Finally a new tenant has been found for our investment property - the rent was lowered back to the previous rate ($400 per week), so this means that we haven't raised the rent for a couple of years now. It's more important to have a tenant than hold out for an extra $10 a week. The new tenants have only signed a 6 month lease, but will stay on thereafter on an ongoing basis (4 weeks notice is required to terminate after the lease period ends). I'm hopeful that they may stay for several years as they have no kids (yet) and seem happy enough with the property and location.

My wife seems to have lost a bit of interest in being a "landlord" now that the property market has been stagnant for a couple of years, and because having no tenants for over three months was stretching our finances a bit. She was also a bit shocked by the costs of plumbing repairs and getting the place recarpeted and new kitchen lino last year (even though I meet all the "miscellaneous" costs of this investment - we just split the loan repayments 50:50).

The "experts" in the local papers are predicting rents will increase 5%-10% in Sydney over the next 12 months due to more people renting due to high property prices and a drop off in the construction of new housing due to the lack of capital gains in the past couple of years. We only just took out a 5 year fixed rate loan for the investment property last year (the variable rate is already higher than the fixed rate we got, so this will probably work out well for this 5 year term), so we won't be looking to sell the property for at least 4 years. Hopefully by then rents will have picked up and interest rates dropped a bit which should rekindle interest in property investment and trigger some price appreciation. The long term rate of price appreciation in Sydney is around 6% pa, so hopefully after two years of flat or decreasing prices, we may see a gain of 20%-30% from present levels by the time we want to sell the property in '11 or thereabouts.

If we do sell the investment property I'll be happy to invest in property via listed property trusts in future.