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Help/direction with property

Discussion in 'Real Estate' started by CCinvest, 6th Sep, 2008.

  1. CCinvest

    CCinvest Member

    Joined:
    6th Sep, 2008
    Posts:
    13
    Location:
    Sydney, NSW
    Hi there guys,

    Having a read at all the post makes for some interesting reading, yet also raises many questions as to what I should do.

    I have recently given some thought to my situation and was looking for help and perhaps direction from some of the more experienced members here.

    I currently own a brand new 3 bedroom 2 storey unit in Sydney's inner west (more west than inner) new housing estate, purchased in mid 2002 for $485,000. I borrowed around $450,000.

    For the last 3 years I have partly used the unit as a business site, operating out of 2 of the bedrooms. I have claimed 43% of the floor space as business. I hence am able to claim the proportionate amount of expenses, including interest in loan, strata, depreciation, utilities etc. I also am aware of the capital gains when time to sell.

    The current balance of the loan is $270,000. Hence giving me equity of around $300k

    Despite my unit being relatively unique and a premium (in fittings, space, position) over other units in the suburb, the value is well below my thoughts. Having a look at the current market, there are a number of similar
    units for sale around $560,000 - $580,000, although with less 'enhancements'. To be honest though, I was expecting mine to be values around $630k-$650K. As the area in general is going through a massive redevelopment and bringing in commercial and residential interest, I would imagine the desire for people to live here will increase in years to come.

    Currently the unit is great, modern, close to everything and spacious enough. However I want to maximize my profits and wealth. I have learnt to avoid emotions when building wealth, and so I am looking at options.

    Seeing that the value of the property has not increased as perhaps other sydney suburbs, I want to explore other options.

    This is what I am thinking of at the moment, and would appreciate your thoughts on pros/cons

    1. sell the unit, pay CGT, purchase a 3-4bdr house in the lower north shore, inner west suburb for around $800K+

    2. keep the unit and remain living in it, use the equity, and purchase another property (preferably a house as above)

    3. keep the unit, rent it out (market value is around $600-$650 pw), and purchase a house as above. I would re-finance, so the unit would be totally borrowed, and hence greater negative geared, whilst putting the equity from the unit into the house

    I understand my loan will be quite high, yet I could service the loan with my income, plus rental should I keep the unit.

    I appreciate any thoughts and suggestions.

    I am also looking for some professional help with tax implications etc, and so was thinking of a 'property tax' specialist. Needed? and whom?

    cheers

    CC
     
  2. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
    Posts:
    1,367
    Location:
    Melbourne, VIC
    Problem with property is its very expensive to sell, so its usually best bet to keep once you have it, unless you really think that getting something else will give you better results. I personally favor houses over units. I didn't understand from your post if its a townhouse or actual apartment. Town houses are also great, I don't generally like apartments, due to their historical lower capital gains and higher holding costs, ie body corp etc.

    Plus you need to remember that areas go in cycles, so even though your area may not have grown as well as a neighbouring suburb, the ripple effect should flow to your area as well. Having said that, you certainly did get a reasonable capital growth.

    You equity could be used to buy another IP, or buy some shares. With your situation, I would rather diversfy into shares, so as you have the benefits and diversification of both.
     
  3. Young Gun

    Young Gun Guest

    so really what your saying is.... your property hasn't doubled in value in 7 years like its suppose to... and you want to sell out (or reborrow) to find a "better" suburb where property does.

    Looking at the growth rate of your property, it's returned an annual growth rate of about 3.5% (your unit would be worth $570K by the sounds of it) which after inflation is a 0% real return. After you count back all the interest you've paid, rates, insurances you've made a loss on this property. Selling it now would incur further costs and crystallise your loss. Then using the funds to repurchase another property would incur another round of costs making you much more worse off than you are now.

    My view would be to not sell your unit and hang on to it. Whether you buy another property is up to you and I'm sure you'll get plenty of people saying its a great time to buy, but I'd err on the side of caution and not rush into anything.

    The Sydney property market is the most overpriced market in the world, the ability for it boom again is servely limited by the fact that people simply cannot afford to borrow any more money (Which you should be able to witness by the poor capital growth of your own property). And with banks tightening credit conditions its going to make it even harder to grow.

    being a non-Sydney resident you'll have to take my opinion with a grain of salt, but I see the Sydney market remaining stagnant like it has been for at least another 3 - 5 years. Buying into a stagnant market is not a good idea....

    just buy some high yielding blue chip shares, thats where the value is at the moment.
     
  4. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    CCinvest

    To give you an opinion I need some more info.
    Do you mind telling me the suburb and what type of property it is?

    Cheers
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Posts:
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    Location:
    Sydney, Australia
    You definitely need some tax advice before attempting this.

    It's not quite as easy as just refinancing to increase the negative gearing ... since it is the purpose of the funds you borrow which determines the deductibility - if you were to use some of that refinance money to pay for a house which you live in, it won't be deductible, and your finances will be quite messy given the mixed usage of the borrowed money.

    There are a couple of good property-savvy accountants around, our own NickM from Strategic Wealth Management is one.
     
  6. CCinvest

    CCinvest Member

    Joined:
    6th Sep, 2008
    Posts:
    13
    Location:
    Sydney, NSW
    Thanks guys for your comments, keep them coming

    To answer some of the questions asked
    - I am about to invest in some blue chip shares at the end of the year

    - my place is an apartment in Newington (former Olympic village). 3bdr 2 storey unit, in a low rise (3 levels) block of 24 units, no lift, shared pool and strata about $1200/qtr. 210 sq mtre, 2 car garage, 3 balconies, 15 sp/mtr lock up storage

    Young Gun - your summary is a correct reflection of my position. Depressing a little

    Sim- In my head this what I am thinking
    - buy a house, say for $800k, and live in there
    - if my current unit is valued at $570k, then I would have $300k equity and $270k owing.
    - if I take the $300k equity and borrow another $500k to purchase the house. This $500k is a typical non-deductible home loan
    - i then have the unit value of $570k borrowed, hence allowing full deductions as this is a IP

    does this make sense?

    thanks guys

    CC
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    Nope - unfortunately that's not how it works.

    The $300k equity you borrow from the IP is for the purposes of purchasing your PPOR, so it is not deductible, even though it came from your IP.

    The only way you could make those borrowings deductible is to use them to buy another IP or some other investment.
     
  8. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    CCinvest

    It's not only your unit which is under performing.
    Sydney property has not done particularly well after 2004.
    This is because prices had already gone up and interest rates kept on increasing.

    I believe that you should keep your unit because the mortgage is now down to an affordable level. It's costing you nearly the same as paying rent so why sell it? Interest rates should come down a little as well so when they do it will be a bonus.

    I also believe that now it's not a good time to buy an expensive property
    because if in the short term credit markets don't recover there could be further price corrections. By living in the new place you also won't be getting any tax advantages.

    Shares are not a good option atm either.
    Therefore, IMHO the best thing you can do at the moment is to keep paying down your mortgage.

    Cheers
     
  9. D&K

    D&K Well-Known Member

    Joined:
    14th Nov, 2005
    Posts:
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    Location:
    Canberra
    Or a more optimistic view is that it is at the bottom of the cycle and a buyers market, and there could be a bargain out there if you've got time to find it. ... The NSW population is still growing (outpaced by MLB & Brissy nonetheless), undersupply remains, interest rates coming down... Depends if you're in a position to take on a risk with the rates, and the desire to do so.

    CCinvest,

    Another option, depending on cashflow, risk tolerance and the right property, would be to draw equity from your townhouse and use it as a deposit for the house - the purpose of the loan being 'for investment', hence tax deductible. Go to another lender for the rest of the house loan. Make the house an IP to begin with (realising that it will be very negative).

    When the market does turn up, you will then have two houses growing (about 1.35M @ 7%pa). I wouldn't expect this to start inside the next year though.

    When you're ready and they've both moved up in value, move to the house and sell the townhouse to recover the rest of your equity and paydown the mortgage on the new PPOR, since neither the loan for the deposit (secured from the town house) or the balance on the house will remain deductible (minimise 'bad debt').

    Of course, you could always take the equity loan on the townhouse and go into more shares or a managed fund, try and get faster growth to put towards a later purchase of a house. But you'd want to be confident in doing better than the cost of the interest on that loan.

    Just alternative ideas. Definately seek proper financial advice on either strategy.

    Cheers, Dave