Does the past matter?
06/02/10 22:38 Filed in: Real Estate
John’s quote was in the Financial Times and he was
discussing the stock market. The statement applies to
other markets and many other aspects of life. You
want to learn from the past but assuming it will
repeat is naive. For something to happen twice the
conditions would have to be the same or at least
very, very similar. Until we invent a time machine we
cannot go backwards and recreate the past.
Some recent conversations highlighted the point for me. It should say ‘highlighted again’.
The present Bank of England (BoE) base rate is at a 315 year low. Stated another way the rate has never been this low since the founding of the BoE. Is it reasonable to assume that the rate is more likely to go up than continue at the present level? Will the BoE reduce rates by any significant amount?
If you speak with any investor they are very happy to acknowledge that rates will rise rather than fall. That the rate int he future could be significantly higher (from 0.5% today to 6%? in the future).
How many are really taking action now to prepare for the higher rates? How many have a clue as to what rate would tip their business into a negative cashflow situation.
For most UK investors and to a lesser extent in the US, now is a time ‘grind it out’ and reduce the debt level secured by one’s portfolio. To raise the cashflow by making changes to the mix of units. If that means renting rooms individually (HMOs in the UK) then that should be considered. It could mean selling off part of the portfolio that has below average cashflow. Where it makes sense shift the debt so that any future blow up can be contained (firewall one part of the portfolio from another part).
No one can predict the future. We can look at possible scenarios and then draw logical conclusions. We can then put in place plans that prepare for that which is common across the possible scenarios. In other words look at multiple scenarios and then only do what will generally work for all of the scenarios. You cannot predict a specific future. You can prepare for what will happen in any event.
For the investors in the room who are concerned about paying down the debt, what is the real downside if you do? You have more cashflow, you pay a bit more in taxes (lower interest expense to offset against your income) and you might have equity tied up if lenders are still not lending. Compare that to having too much debt when interest rates go up. What happens then?
Cashflow keeps you in the game. Appreciation happens to those still in the game. Plan your cashflow so you are not forced out at the wrong time.
Some recent conversations highlighted the point for me. It should say ‘highlighted again’.
The present Bank of England (BoE) base rate is at a 315 year low. Stated another way the rate has never been this low since the founding of the BoE. Is it reasonable to assume that the rate is more likely to go up than continue at the present level? Will the BoE reduce rates by any significant amount?
If you speak with any investor they are very happy to acknowledge that rates will rise rather than fall. That the rate int he future could be significantly higher (from 0.5% today to 6%? in the future).
How many are really taking action now to prepare for the higher rates? How many have a clue as to what rate would tip their business into a negative cashflow situation.
For most UK investors and to a lesser extent in the US, now is a time ‘grind it out’ and reduce the debt level secured by one’s portfolio. To raise the cashflow by making changes to the mix of units. If that means renting rooms individually (HMOs in the UK) then that should be considered. It could mean selling off part of the portfolio that has below average cashflow. Where it makes sense shift the debt so that any future blow up can be contained (firewall one part of the portfolio from another part).
No one can predict the future. We can look at possible scenarios and then draw logical conclusions. We can then put in place plans that prepare for that which is common across the possible scenarios. In other words look at multiple scenarios and then only do what will generally work for all of the scenarios. You cannot predict a specific future. You can prepare for what will happen in any event.
For the investors in the room who are concerned about paying down the debt, what is the real downside if you do? You have more cashflow, you pay a bit more in taxes (lower interest expense to offset against your income) and you might have equity tied up if lenders are still not lending. Compare that to having too much debt when interest rates go up. What happens then?
Cashflow keeps you in the game. Appreciation happens to those still in the game. Plan your cashflow so you are not forced out at the wrong time.
|
