No, as I have tried to explain, there is no aggregate profit because the number of individuals in positions A through D is larger than the number of individuals in positions F through H. This doesn't prevent any of the individuals in positions A to D from moving up the ranks to becoming profitable. Its just that there are always far more investors joining at the bottom, which maintains the aggregate loss. If new quarantining laws were introduced then investors will just wait until they reach positions F to H, and stay there until they have offset their losses accumulated during their time in positions A to D.
Your claim that most investors must be selling before making a rental profit is proven wrong by my example that shows every single investor could sell while making a rental profit, yet the aggregate data could still show a rental loss simply because the number of individuals making a rental loss at any one time is higher.
Imagine a new law was passed preventing any more investors from joining the pool. Eventually the entire pool would be cash flow positive. The pool only remains negative in aggregate due to the hordes of new investors joining.
Imagine a new law was passed preventing any more investors from joining the pool. Eventually the entire pool would be cash flow positive. The pool only remains negative in aggregate due to the hordes of new investors joining.
Hilarious - I like the line "hordes of new investors joining". What makes you think the entire pool would become cash flow positive? The pool includes investors that have held for 20 years and more, and still they are not enough to offset the losses bleeding from the majority of PIs. The fact of the matter is that most PIs sell before turning a rental profit.
Actually lets focus on that one contention - do you agree or disagree that the average PI sells before turning an aggregate rental profit (i.e. their accumulated rental profits are greater than their accumulated rental losses)? Do you even concede that any PIs do this? If so what percentage do you think?
We would just need to look at average holding period for investors, and average time it takes for a PI to accumulate rental profits that exceed their accumulated rental losses.
What makes you think the entire pool would become cash flow positive?
Because as rents rise, every property must eventually become cashflow positive if held for long enough.
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The pool includes investors that have held for 20 years and more, and still they are not enough to offset the losses bleeding from the majority of PIs
Irrelevant. The typical investor who has held for 20+ years is almost certainly cashflow positive. Their rent would have at least doubled or tripled over that time. But there are still far more new investors joining at the bottom which results in an aggregate loss.
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The fact of the matter is that most PIs sell before turning a rental profit.
You have made this claim several times yet provided nothing to back it up. Evidence please?
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Actually lets focus on that one contention - do you agree or disagree that the average PI sells before turning an aggregate rental profit
I've never seen any data on that, so I don't know, but my guess is most investors would hold for long enough to make a rental profit.
But I wouldn't state it as 'the fact of the matter' (as you have done) unless I had some data to back it up.
The average hold time is ten years. This is for all properties, I don't know the breakdown for investors vs owner occupiers.
If an investor buys today with interest rates at 5% and rental yield at 4%, they will be cashflow negative initially, but after ten years the rental yield on original purchase price will have increased to 4 x 1.35 = 5.4 (assuming 3% per annum rent inflation), so they will be cashflow positive. They actually become CF neutral after 7 years. And that's assuming they don't pay off any of the principal on the loan, in which case they become CF+ even faster.
In fact current interest rates are below 5% and national gross rental yields are around 4.5% so under the current interest rate environment they're probably going to be CF+ within just a few years.
Because as rents rise, every property must eventually become cashflow positive if held for long enough.
Irrelevant. The typical investor who has held for 20+ years is almost certainly cashflow positive. Their rent would have at least doubled or tripled over that time. But there are still far more new investors joining at the bottom which results in an aggregate loss.
You have made this claim several times yet provided nothing to back it up. Evidence please?
I've never seen any data on that, so I don't know, but my guess is most investors would hold for long enough to make a rental profit.
But I wouldn't state it as 'the fact of the matter' (as you have done) unless I had some data to back it up.
Because as rents rise, every property must eventually become cashflow positive if held for long enough.
What makes you think the average PI holds for long enough?
my guess is most investors would hold for long enough to make a rental profit.
We're making progress, you are conceding that some investors don't ever make a rental profit before selling. Now lets broaden it to an accumulated rental profit for each investment (i.e. after accumulated losses over the years, the accumulated profits outweigh the accumulated losses). What percentage of PI properties do you think are held long enough to make an accumulated rental profit? Because it is the percentage that have made an accumulated rental loss since holding the property that are receiving a tax break that is never recovered.
You surely would have some data on average holding time for property investors?
What makes you think the average PI holds for long enough?
The proposition was that a new law is enacted preventing any more further property investment. Under that scenario all the people who currently have an IP must either hold it indefinitely and become CF+, or sell it and exit the pool. The only possible outcome is that the entire pool becomes CF+
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We're making progress, you are conceding that some investors don't ever make a rental profit before selling.
I never claimed there were no investors who sold before making a rental profit.
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What percentage of PI properties do you think are held long enough to make an accumulated rental profit?
As I said in my last post, I don't know. I have never seen any data on that.
You are the one making the claim, and stating it as 'fact' that the majority sell before making a rental profit.
The proposition was that a new law is enacted preventing any more further property investment. Under that scenario all the people who currently have an IP must either hold it indefinitely and become CF+, or sell it and exit the pool. The only possible outcome is that the entire pool becomes CF+
I never claimed there were no investors who sold before making a rental profit.
As I said in my last post, I don't know. I have never seen any data on that.
You are the one making the claim, and stating it as 'fact' that the majority sell before making a rental profit.
Either back it up, or admit you're just guessing.
When talking about rental profit we are referring to making enough profit to have offset all previous rental losses?
If that's the case then propertymogul is undoubtedly right. Average investor hold time is somewhere around 7 years. Typical NG investor claiming $200 per week in losses. Do you expect a typical property investor to be turning a profit of $200 per week within 5 years. Nah.
I don't think you can really compare anything before the mid-80s with today, because before then it was very difficult indeed to borrow money to buy an IP. The rental stock was either bought with cash or inherited. And obviously it took quite some years for that stock to be sold off to people who used credit to buy.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Because as rents rise, every property must eventually become cashflow positive if held for long enough.
What makes you think the average PI holds for long enough?
my guess is most investors would hold for long enough to make a rental profit.
We're making progress, you are conceding that some investors don't ever make a rental profit before selling. Now lets broaden it to an accumulated rental profit for each investment (i.e. after accumulated losses over the years, the accumulated profits outweigh the accumulated losses). What percentage of PI properties do you think are held long enough to make an accumulated rental profit? Because it is the percentage that have made an accumulated rental loss since holding the property that are receiving a tax break that is never recovered.
You surely would have some data on average holding time for property investors?
So far I haven't been able to find investors only, but it would surely be lower than the average OO, wouldn't you agree, due to cashing in on quick gains when and if they arise? OO are less likely to do this. If you agree how about we say 8 years? Actually lets just go with 10 years and give you the benefit.
How long do you think it takes to turn a rental profit on average? I would say around 7-8 years. And then another 6-7 years for the rental profits to match or exceed the accumulated losses. Whatever figure you think it is, we can work backwards. If for example you think it takes 5 years on average, to turn a rental profit, and the average hold is 10 years, it would mean that approx. 50% of the PIs from 2004 are still holding and all of them are making a profit. For the 2005-2009 investors more than 50% would still be holding and also almost all of them would be making a rental profit. In addition the PIs who bought prior to 2004 a declining % (the further back we go) would still be holding and all of them would be making a profit. If we add all those up I'm virtually certain it would be greater than the total number of PIs who bought during the last 5 years, and yet 2/3 of PIs are negatively geared. Happy to run some more detailed analysis on this when I have time, I'll put it in Excel. I think you can see though the average time to turn a profit therefore must be significantly greater than 5 years. I'm going to go with an estimate of 8 years, once we crunch the numbers in more detail though we can get an accurate number, if anything it will probably be higher. So the average holder at 10 years definitely hasn't turned enough rental profits to soak up their accumulated rental losses. So, on average, the PI when they sell has received a tax break funded by other taxpayers that will never be recovered, i.e. it has not just been 'deferred' as you claim.
Proof of this is that since 2001, per your chart approximately $54B is the aggregate rental loss claimed by PIs. Note that it coincides with higher home prices. That sure is a lot of deferred profits to catch up on to make that up!
Average investor hold time is somewhere around 7 years.
Evidence please?
propertymogul
22 Aug 2014, 04:39 PM
So far I haven't been able to find investors only, but it would surely be lower than the average OO, wouldn't you agree, due to cashing in on quick gains
No I wouldn't agree. Most property investors aren't in it for 'quick gains'.
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How long do you think it takes to turn a rental profit on average? I would say around 7-8 years. And then another 6-7 years for the rental profits to match or exceed the accumulated losses
It would be less now with current low interest rates, but I'll go with 15 years as per your scenario. If new laws were introduced to quarantine losses then I can't see why the typical investor would not be able to hold for 15 years in order to offset all those losses. They could begin claiming the losses after 6-7 years and finish claiming them after 15 years.
If an investor buys today with interest rates at 5% and rental yield at 4%, they will be cashflow negative initially, but after ten years the rental yield on original purchase price will have increased to 4 x 1.35 = 5.4 (assuming 3% per annum rent inflation), so they will be cashflow positive. They actually become CF neutral after 7 years. And that's assuming they don't pay off any of the principal on the loan, in which case they become CF+ even faster. In fact current interest rates are below 5% and national gross rental yields are around 4.5% so under the current interest rate environment they're probably going to be CF+ within just a few years.
Evidence please? No I wouldn't agree. Most property investors aren't in it for 'quick gains'.
Would be less now with current low interest rates, but I'll go with 15 years as per your scenario. If new laws were introduced to quarantine losses then I can't see why the typical investor would not be able to hold for 15 years in order to offset all those losses. The current average hold time is ten years.
So if we can agree on approximately 15 years to make an accumulated rental profit. And we're saying 10 years average hold time (I think it would be less for PIs). That means that well over 50% (probably 70-80%) have sold at an accumulated loss on which they receive a tax break that will never be recovered. Do you agree that this means over 50% of the net rental losses to date have resulted in a permanent tax break for PIs, not just a deferral?
The quarantining of losses would greatly increase the quality of investors in property, the resultant decline in dumb money in the sector would also result in lower home prices. Bring it!
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