Stuff > General Discussion

Decision Journal

<< < (7/23) > >>

galumay:
Ok, we have pre approval for a loan of $275,000

So with the money in the offset, $134,000 currently, we could buy for $400,000 with costs.

If we added our share portfolio we could buy for $550,000

More options have become apparent,

as above,

and buy a IP that is a more profitable IP than the current one and move into current IP.

Pros - there are better yielding properties than ours. Particularly because we paid so much for the IP.

Cons - we potentially lose a great tenant in Care flight

Also buy another property as PPOR but rent it out in the short term and keep paying rent while we can in Lacebark.

- pros - Rental income would far exceed rental expense at this time.

cons -

Other thoughts,

If we are going to move into AIsa St we should spend money now to improve while its still an IP.

(in any case if we move into Aisa St we need a valuation for CGT purposes.)

RISKS - mine closing and values falling hard again, housing crash in Australia generally, Sal looses her job and cant get another, I cant make enough from the business and cant get a job. Over invested in a high risk, low growth town with no exit strategy, or an exit strategy trap of falling values. Rio puts its vacant houses on the rental market at true market rates.

Safest option is continuing to rent here and paying down and improving Aisa St.

If Wuyal Rd houses are an option then selling Aisa, buying Wuyal Rd and continuing to rent here is another option

...or sell Aisa, buy Wuyal and move in.

Problem to be considered - bank will lend an extra $275K so if we buy a new property as an IP & move into South, or stay here, then we would need a bigger deposit than 20% to buy a suitable property. ($275K + 20% is $330K) This is not tax effective so we would need to talk to the bank about restructuring.

Another couple of days thinking has us deciding not to proceed with any of these options. We have a number of issues with buying another property, or even selling one and buying another. Firstly we would be totally committing all of our savings and investments into property in Gove, we would have no buffer at all and if anything went wrong we could lose everything. The transaction costs and realised capital loss on Aisa St if we sold it to buy say a Wuyal Rd house would also leave us fully committed with no buffer and all for a bigger and newer house.

If property values fell further, if we were unable to rent out properties, if our income dropped significantly - any of these things could basically wipe us out.

On the other hand, even if things went well, we ould have an IP we have 0 equity in, and a PPOR with a large mortgage, so its hard to forsee anyway that we would not have ongoing significant mortgage or rent obligations when we want to reduce our working hours as we approach retirement.

By not borrowing and purchasing another property we retain our investments, have a healthy balance in the ofset account and we can continue to rent here while we do any improvements we want to Aisa St while its tax effective due to the IP status of the property. It is possible to see us owning this property outright in our retirement which really should be our primary objective for the next 10 years.

Next issue to explore is converting Lacebark to a DEAL property so we can continue to rent here if we wish to.

galumay:
Made a decision to sell DWS shares after they announced another aquisition, this has transformed them from a net cash business to a heavily net debt, and they would fail to meet my criteria for debt to equity if I were looking to buy. I have made a profit of over 38% before dividends in 2 years so its time to take the profit. There are signs the business is in structural decline, this table from Madamswer over at HC shows the problem in brief,

"NPAT ($m)
DH2011: 9.5
JH2012: 8.7
DH2012: 8.4 ($10m acquisition made)
JH2013: 8.5
DH2013: 7.8
JH2014: 6.7
DH2014: 5.7
JH2015: 5.0 ($10m acquisition made)
DH2015: 7.7 ($17.7m acquisition)
JH2016: 9.0 ($7m acquisition)
DH2016: 9.1 ($1.0m acquisition)

Put into context, the company is basically at the same level of profitability as it was 5 years ago, except that it has needed to spend over $40m in acquisitions - a not-insignificant ~25% of the value of the business today - in order to just maintain profits."

I am increasingly wary of businesses try to build balance sheets purely with aquisitions as a proxy for growth and will look to disinvest where I hold.

I expect that this may well prove to be a poor choice of acquisition for DWS, and unless it can quickly translate some synergies by mid year it may suffer a strong re-rating by then.

galumay:
Well its dividend time again and we have accumulated quite a wad of cash to spend, in the end I added 2 parcels of SRV to the SMSF. I felt that of all our holdings they were currently the most undervalued. Also we had only entered with a small parcel so this gave us the opportunity to average the price down while increasing the position size to nearer the average.

We picked up the first parcel last year at $7.70, some more in March at $6.09 and now more at $6.16 for an average price of $6.96

Hopefully a bright half year will see a recovery in the price and we can get back in the black!

galumay:
Although not good news, its nice to see a considered investment decision turn out to be correct, I first looked at Nant Whiskey and the investment in their barrels of Whiskey about 4 years ago, basically the whole thing has gone to shit in a hand basket - worse than i predicted. I was concerned about the risk of ending up holding the Whiskey in bonded storage if things went wrong - but they were actually crooks and people didnt even end up with the whiskey!

Bad enough if you could at least drown your sorrows, but losing capital and being sober is a poor combination!!

Here is what I posted on ASF 4 years ago,

"I did a bit more research on this company and found they are also seeking to raise money via a $5m convertible note issue, minimum $50K, 3 year term, 10% paid quarterly.

I thought a bit more about the risks with either investing in the barrels or the notes and I dont think the returns are enough to offset the risks.

The barrels in particular would leave you in a very bad situation if Nant folds, sure you own them and the whiskey within, but they are in bonded store in Tasmania, you will need to pay excise and then find a buyer, organise freight and gain access to the store to secure possession - the potential to earn 9.2% compounding seems to me to be far too little for the risk.

The other thought that I had was I would only risk a small amount of capital in such a high risk and speculative purchase, so even if everything went smoothly the overall gain in dollar terms would be small - i would then regret not having risked more capital! Conversely, if they folded I would likely lose most of my initial capital - and regret having gambled on such a risky proposition.

So at the end of my consideration it appears to be a "lose, lose" situation and I decided to give it a miss."

and elsewhere, more recently, ( i under estimated the worst case here too!)

" a nice case where my due diligence paid off. I looked into in detail and posted my thoughts in an earlier thread on the subject. One of the assessments for any investment for me is what i call 'catastrophic risk' � what is the worst possible outcome I could imagine and what would the impact be for me.

In the case of Nant the high returns were compensation for very real catastrophic risk, if the main business went under for any reason, the best case scenario were that you were left with barrels of whiskey, in bonded storage, at the end of the earth � with no idea of the potential cost to retain that storage and no practical way to recover any capital. In my assessment that made the risk/reward matrix untenable and I passed."

Anyhoo here is how the story ended,

http://www.abc.net.au/news/2017-03-09/hundreds-of-nant-whisky-barrels-never-filled-audit/8338106

...well not quite ended yet!

http://www.abc.net.au/news/2017-08-23/nant-whisky-to-be-investigated-by-tasmania-police/8836186

galumay:
I am thinking of selling our holdings in SIG, for my thoughts to date see this thread,

click here to view

I will do some more thinking, practice a bit of inversion and see where we end up!

Navigation

[0] Message Index

[#] Next page

[*] Previous page