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Sell or Keep, thats the question

Discussion in 'Real Estate' started by Cooky3, 2nd Aug, 2010.

  1. Cooky3

    Cooky3 New Member

    Joined:
    2nd Aug, 2010
    Posts:
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    Location:
    Vic
    Hey,
    Ive been reading on this forum for a while and have picked up some really good information so far, but this is my first post.

    I purchased my first property when i was 20, im now 29 and so far i have developed a portfolio of 4 IP and my PPOR,

    Ive now come to the time in my life where im about to start a family.
    The problem is when this all happens will be down to mostly one income for a while.

    So my question is do i sell off an IP and reduce the loan on the PPOR to create some more expenable income during this time or keep them and 'tighten the purse strings'.


    So here is my current situation.

    PPOR (new built) Value: $520,000 / Loan: $400,000
    IP #1 (22yrs old) Value: $300,000 / Loan: $0 / Rent $300
    IP #2 (23yrs old) Value: $260,000 / Loan: $150,000 / Rent $260
    IP #3 (60yrs old) Value: $270,000 / Loan: $220,000 / Rent $280
    IP #4 (new built) Value: $290,000 / Loan: $170,000 / Rent $300

    So the total Value: $1.64m / Loan $940,000 / Rent $1140

    On paper i can afford the loans while we go to one wage, however the wife feels that things will be tight and would get tighter if one the IPs are not tennanted for some time.

    So now i feel that i need to decide if i should sell 1 or 2 IPs and use the gains to reduce the PPOR loan to lower the weekly repayments and to have some extra cash flow while we go through the "kids" stage.


    Any recommendations would be much appreciated.
     
  2. Jacque

    Jacque Team InvestEd

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    16th Jun, 2005
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    Location:
    Sydney
    Hi Cooky

    When you have non-tax deductible debt such as that on your PPOR you do need to weigh up the benefits of cashflow here. There's certainly nothing wrong with selling down an IP or two to be comfortable in your decision to only retain tax deductible debt however run the numbers (including selling costs and cap gains) to ensure it's a worthwhile project.

    If you have a capable mortgage broker I'd recommend having a chat to him/her about loan options and possibly refinancing so you can still maximise your cashflow situation as well.
     
  3. D&K

    D&K Well-Known Member

    Joined:
    14th Nov, 2005
    Posts:
    206
    Location:
    Canberra
    Hey Cooky,

    That's a neat little protfolio you have, it appears that #1 should be a good earner and #2 also positive cashflow - or close to it? So you have a few options.

    You obviously see the long term trend for rents to increase while the loan amount stays stead, hence if interest rates were stable, rent will eventually overtake costs. As you seem to have a lot of equity (except #3 with LVR at 80%), it is feasible to extend one or two loans or add a LOC and use the equity to pay off interest if you fall short - effectively capitalising interest but only at the rate you wish and when you need it. Or take the loan out and park it in a liquid investment that you can convert to interest payments when you need to.

    You don't state the nature of the debt on your PPOR. It could be all bad debt, or was some of it used for deposits on IPs and is therefore deductible? Like Jacque says, there can be benefits in getting rid of that. I've sold IPs to take gains and get rid of non-deductible debt, then drawn a new loan to use for deposits on IPs, effectively recycling the debt from non-deductible to deductible. The conversion takes a few years, but it was worth it in terms of long term cashflow. This may be an opportune moment for such a plan.

    I'd always sell the most recently bought properties for CGT purposes, and if you offload 2 you may want to do it over two tax years.

    Cheers, Dave
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
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    Location:
    Sydney, Australia
    Hi Cooky3, welcome to InvestEd!

    Do you have any cash in the bank as a buffer, or is all your income going towards maintaining your debt and living expenses?

    I would generally aim to have at least 6 months worth of expenses (12 month if you want to be really cautious), sitting as cash in the bank (or in an offset account which gives a greater benefit).

    This will help cover any shortfalls due to tenancy difficulties and any unexpected expense. The worst thing to do is to take on extra personal debt (personal loan or cash advance on credit cards) to help pay for the unexpected emergency.

    I think having that spare cash (if you can manage it) sitting in a bank account somewhere will help make your wife more comfortable with the situation.

    If you can't afford to set aside that much of your cashflow, then perhaps things are a little too tight and reducing your debt burden might be a good idea?

    I would try and work things out without needing to sell, but if it helps the SANF (Sleep At Night Factor) while you are raising a family, then I say do what you need to do.

    While selling the PPOR (and either downgrading or renting) is going to be the obvious place to free up a lot of cashflow ... that might not be a palatable option given your family requirements over the next few years. In saying that, I'm assuming that your current PPOR is actually suitable for raising a family? If not, that might be an easier decision to make.

    When deciding which property to sell, I would look at the maintenance costs of each and compare that with what you feel the potential for future capital gains and/or rental growth is.

    So when it comes to selling IPs - unless your 60yo IP is in a location about to become gentrified (ie quick capital gains), then I would guess that the maintenance on this place is probably much higher than the others. You'd need to make a judgement call on whether the potential gains outweighs the extra costs.

    Hope this helps a little.
     
  5. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Cookie,
    You have what appears to be a positive investment property (IP) cashflow.
    Well done for investing and continuing to invest. You have choices which the vast majority of Australians do not.

    What you do is determined by what your goals are.

    On the basis that you would prefer to hold and build that portfolio, if you are still in a position to borrow, set up a LOC against one of your IP's. Whether it is $50 or $200k will depend on your borrowing capacity. If your wife is still working, even more important you do it now while she is still working. This LOC becomes your investment safety net. You use this to pay IP expenses so you do not need to use your own income.

    You then set up a 100% offset against your PPOR loan, if not already, change it to an IO 5 years. Direct all rental income into your Offset building up your private safety net even faster for when you do go to one income. This also has the benefit of reducing your PPOR interest cost.

    I look at numbers, do I sell an IP, selling agents fees, CGT and loss of future growth or do I keep that IP, still growing at 5% or 10% pa and earning rental returns and incur no additional costs?

    If your goal is to reduce debt (why did you borrow so much for a PPOR?), which IP performs worst, which gives the most trouble, which is in an area with lower growth prospects, which will cost the most in terms of CGT? These are the type of questions to ask yourself to decide which IP should be sold if that is your goal.

    You have choices, how you use them is up to you.
    Good luck
    Greg
     
  6. Billv

    Billv Getting there

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    15th Jul, 2007
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    1,796
    Location:
    Sydney, NSW
    Personally I hate selling but I'd consider selling IP1 if the numbers made sense.

    Before you make such a decision you should consider the following factors:

    Your current financial situation
    when you bought IP1,
    how much you paid for it
    and if you lived in it

    Are the IPs only in your name?