Originally Posted by
Beagle
Thanks for your kind words, much appreciated. I act for a number of small investors, mostly Mum's and Dad's with one or two rental properties and a couple of professional investors with multiple rentals. Most have built their wealth using a fair chunk of borrowed funds and if they are not able to claim the mortgage interest as being tax deductible then they're paying tax on profit they didn't actually make. Typically this might add something like $6,000 per annum per property to their costs.
Over the long run many properties go through a cycle of what I call "deep cycle" maintenance that many investors without proper advice don't budget for. It can costs tens of thousands every 7-10 years to keep a property looking fresh with new paint inside and out and replacement carpets, drapes, lino and that's without budgeting for modernizing bathrooms and kitchens which can get dated fairly quickly. When you factor in deep cycle maintenance as well as other far more regular maintenance, ever increasing rates and insurance and assuming interest costs were deductible many properties are cash flow negative already...(and that assumes no untoward major disasters like methamphetamine contamination and leaky buildings of which I have seen countless examples).
From a property investors perspective what they're telling me is that this change to non deductibility of mortgage interest is an egregious breech of trust and breaks a fundamental principle of business costs tax deductibility that goes back over 100 years. Many people are extremely upset about this and the thrust of many discussions has been how do I got about getting my property(s) back to a cash flow positive situation. To be honest I haven't had a single conversation about where else to invest the money YET. There's a 4 year phased transition so many investors are sitting nervously on their hands at present and hoping the effect is minimal.
I am advising some investors with multiple properties to sell as many properties as needed to eliminate debt altogether. Others will simply give up in due course because its simply too hard...like many I have seen give up before when lumbered with a massive meth contamination clean-up or a major water ingress problem.
My role is to help my clients, not wait for many months of a confirmed downtrend and then call it. I'm telling clients I think this change is a game-changer and its likely the tide has turned. Very few people invest in residential property for the yield, most are chasing tax free capital gains.
Better sheet all this back to OCA which I estimate will have a NAV of about $1.30 as at balance date. The share price is well supported by hard assets and work in progress and the yield on OCA is probably better than your average rental property (after all expenses including deep cycle maintenance) and future gains will hopefully stay being tax free and not subject to a Brightline test so this is probably better than residential property. I prefer the lower care business model of SUM but their shares are a little expensive for me on a forward PE basis at present and certainly nowhere near NTA.