What would you do?

[djsherly]

How's this for a hypothetical. OK, it's my situation...

I have the following properties.

PPOR - worth $280 owe $150
IP1 - worth $235 owe $135 + $50 (for IP3) - rent $240
IP2 - worth $245 owe $165 + $20 (for IP3) - rent $250

IP3 bought earlier in the year into a hybrid trust
worth $265 - owe $211 - rent $290

My wife and I have decided that she should go back to uni. This would mean that she works part time, if at all over the next 18 months. All the economic data points roughly in twelve directions, so I have no idea about what I should be doing. Interest rates up, interest rates down. Prices down, prices up. jobs down, jobs up.

Should I shed IP3, possible take a 15k loss and get some cashflow back? Or should I hold on to all of them. Or do something else?


My Fears are this:

1. cashflow is greatly reduced because of IP3's income going into the trust account.
2. interest rates - i can cope with around 8pc without my wife;s income, but it won't be pretty.
3. flat CG - this is already a reality. All the properties are in roughly the same geographical area.
4. SANF.

If I sell, I'm much more comfortable with my previous situation (without the hybrid trust IP). I wouldn't mind so much the $15k hit.

If I keep, I get the feeling that I'm going to be a bit exposed.

I had toyed with selling it all and paying down most of my PPOR. We do plan to go overseas about 12 months after she finishes her degree - about three years away.

What to do? I feel like I'm at a crossroads..


Chris./

[Aceyducey]

It appears you're fairly risk-adverse...otherwise you wouldn't be asking this question :)

My suggestion to you would be safety first.

Look at selling an IP - BUT not necessarily IP3......Having it in a Trust and losing money could be useful to your situation. It also is providing your best rental return.

Your LVR is 73%

If you sell IP3 at the $265 price - less 10K for costs....you're in the hole for $26K debt for simply buying the property (265-10-211-20-50=-26)

If you sold IP1 under the same conditions (235-10-135-50=40) you have $40K cash to allocate for CG purposes....hopefully only 50% and divisible between you & your wife to minimise tax.....say you can keep $25 of this...

If you sold IP2 you'd have a similar situation with $50K cash (245-10-165-20=50)....meaning you probably could hold onto $35 or so.

Put that amount into your PPOR mortgage & you're reducing your payments, improving your rental return and getting rid of non-deductible debt....actually it's slightly better as you don't need to pay tax for almost 12 months, so the full $40K or $50K could sit in your PPOR mortgage & whatever is required be extracted back out at tax time.

Think about it :)

Cheers,

Aceyducey

[djsherly]

Hi Acey,

your post is food for thought and i thank you for it. However, I thought the best return would have been for IP1 which is getting a rental yield of approx 9%. 240wk/135000. IP2 is nearly 8pc on the same basis.

IP3 is returning 280wk/280,000 or 5.2pc.

I expect these numbers to improve in the next few months, but even if I negatively gear, which I clearly am, overall, sometimes I don't see the point if the asset is not gaining in value, which it isn't, and probably won't for a couple of years.

i did muck around with the idea of selling the lot, but only a complete nutjob would do this for IP1 and IP2 which are basically paying for them selves.

If is sold the middle one, yields on IP1 would remain the same, but on IP3, it would be 280wk/260000 or 5.6%

[Aceyducey]

djsherly,

Sounds good. I didn't realise your IP3 cost $280, that does change the picture :)

Cheers,

Aceyducey

[kierank]

djsherly,

Slightly different angle. According to my calcs, your LVR is around 71%. That leaves around $30,000 equity in your properties before you get to 80% LVR.

As you are aware, selling property costs money. If you really want to keep all the properties, can you gain access to this $30,000 equity via a loan (say LoC) and use it as your reserve. That is, if/when things get tight from a cashflow perspective, dip into this loan and pay it back asap. If things don't get tight, don't touch it.

If you can't get the loan as described above, what about considering an unsecured loan. I know the interest rate is higher but this may be better than selling, incurring selling costs, paying CGT, etc.

Don't forget, even with low CG, on your portfolio of over $1million, 1% CG equal $10,000pa; 2% CG equal $20,000pa; 3% CG equal $30,000pa; etc. So dipping into the above loan may mean that you are just spending this CG now.

Lastly, if you sell an IP now, to get back to your current situation of 3 IPs, you will have to buy another property in the future. That's going to cost more money. This is another argument for the above option of getting a loan and only using it if you have too.

I am not a mortgage broker, accountant , etc but hopefully my thoughts above make sense. I just don't selling property unless there is a good reason to do so.

Kieran

[djsherly]

I'm a little torn on the whole issue, because our five year plan has us living overseas, but not necessarily earning the same kind of money in relative terms. I'd prefer to leave things as little maintenance as possible - this is fuelling my leaning toward selling the my recent acquisition as the other two IPs in conjunction with my PPOR would pay for them selves in this scenario.

I do have a slush fund acting as an offset against my PPOR, which would cover me for some time if I have to.

I thought about selling IP1 which would put about $20k in my pocket after all expenses, and also reduce the loan on the most recent acquisition by $50k. A small side effect of this would be 50,000 units in the trust not being secured with a loan, so when or if they are redeemed, the money would go straight to me.

Have I got this right?

Thanks kieran and acey, if anyone else wants to proffer advice, I am all ears!

[Les]

G'day Djsherly,

Just wanted to add a little more to this comment:-

My Fears are this:

1. cashflow is greatly reduced because of IP3's income going into the trust account.

I believe the income going into Trust may be liberated during the year (I've only just started mine, so can't be sure, but check this out with someone - Dale?) I don't think you have to wait to the end of FY !!!

Also, be sure to "do the numbers" before making your decision. As Acey suggested, selling one of the others may be preferable - why? Well, here are some thoughts:-

1. By liberating $40k (or thereabouts, as outlined by Acey) this would cover ALL of the remaining mortgages for more than a year. Of course, with rents incoming, this time could grow to be 2 years (?) If IP3 is sold, you said yourself, this could lead to a $15k loss - perhaps a $40k gain is preferable?

2. The HDT is set up as "the way of the future" (I guess - for protection, etc) so it seems a shame to negate it so quickly. By selling one of the others, this may not "set you back so far" as selling IP3 would....

3. IP1 is carrying $50k of IP3's loan. Can this be assimilated into the "negative gearing" of the HDT and claimed against IP3? i.e. without "paying it back when IP1 sold"? If yes, then sell IP1. If not, then sell IP2 (only $20k paid back).

4. Can any of the rents be increased to offset some of this? i.e. is IP1 due to get a rent increase? IP2? etc.


Mate, I'm certainly no "adviser" - no qualifications - so be sure to check your thoughts with your good people (Acct, sol'r, etc). Hope these thoughts are some help....

Regards,