Financially stuck for ideas - HELP.

Hi Everyone, apologise for the long post but I am in a financial situation that is quite challenging and looking for input.

With all the experience on this forum I know I will get far better independent input than a financial planner !

So here goes …

I am happily married with 2 young toddlers. I work in Sales and earn a healthy salary six figure salary . My wife is a full time housewife and does not work.

The wife and I got ourselves into trouble with a business venture 2 years ago that cost us dearly. We have had to pick ourselves up and get on with things. This has taken lots of energy and motivation and I think we are now at the point where we are ready to re-build our wealth. I am investing a lot of time to personal development and coming to the conclusion that anything is possible if you set your mind to it. I know many on this forum will agree from the stories I have read. It does however take time.

I don’t feel we have a clear strategy given the emotional component of our financial loss hence looking to bounce a few ideas around.

Our goal is clear – we would like to have a PPOR paid and relative’s debt paid within the next 15 years and enjoy life. We are over the flashy cars, clothes, etc stage …

Our balance sheet looks like this.

PPOR (Sydney) – Worth $980K / Owe $654K
IP 1 (Sydney) – Worth $450K/ Owe $382K
IP 2 (Sydney) - Worth $870K / Owe $721K
IP 3(Brisbane) - Worth $490K/ Owe 416K
Loan to relative - $450K/ Owe $450K

The loan above is from a uncle who chipped in money @0% to get us out of the mess we where in with business that went severely pear shaped . Aside from 1 car we own outright and super we have no other assets/ liabilities.

So moving forward I am looking a few options.

Option 1 - Sell all IP’s and reduce PPOR debt. This is non-deductible debt. The PPOR we have is our dream home and we would like to save at all cost. Cashflow right now is not an issue and I am comfortably holding on to everything until int rates reach 8%. After that it’s going to be tough. This means giving up and CG in next few year.

Option 2 – Sell PPOR and go back to renting.

Option 3 – Downgrade PPOR.

Option 4 – Rent PPOR and move into something small.

Option 5 - ?????? Sell EVERYTHING and start again. Huge costs involved in buying/ selling !

I am happy to hear others opinions/ views/ suggestions, etc… as I feel stuck. Once you are stuck it’s important to reach out and learn from others more experienced. Don’t think there is a better place than this forum.

There are a number of variables you don't give us which may affect what the best strategy for tackling this debt and getting on top, would be for you to employ. For example your age, income, expenses (completely understand why you wouldn't want to share all these details on a public forum). Because of this any advice you get here would be incomplete and you will have to make a judgement call as to what would be best to do in your situation.

The first thing you need to get rid of (IMHO) is the debt to the relative. I am not sure why you think you should get rid of your PPOR debt first??? That would be the second debt to deal with in my opinion. Focus on paying off one debt at a time.

I assume you have some kind of payment plan set up for this debt to your relative already? If not you need to set one up. ALL extra money should be going to pay off this debt first and foremost. If you want you could sell off either one or all of your IP's to help out with this ( you would need to run the figures on after sales costs and CGT to find out if it is worth doing that though). Personally I think that if there is anyway you can get by without selling up then you are better off to do so - but it is not always that straight forward.

You need to go back to basics. draw up a spreadsheet with ALL of your cashflow on it. You need to know what ALL of your incomings and outgings are and the budget - which means actually accounting for everysingle cent you spend (even the $1.80 you spent on a mars bar at the servo on the way home from work). Once you have your budget, see where you can cut costs. Any extra money you have left over needs to go on your priority debt.

Good luck with it all. Although it isn't the best situation to be in, you could certainly be in a worse situation.

Success said:

Our goal is clear – we would like to have a PPOR paid and relative’s debt paid within the next 15 years and enjoy life. We are over the flashy cars, clothes, etc stage …

Our balance sheet looks like this.

PPOR (Sydney) – Worth $980K / Owe $654K
IP 1 (Sydney) – Worth $450K/ Owe $382K
IP 2 (Sydney) - Worth $870K / Owe $721K
IP 3(Brisbane) - Worth $490K/ Owe 416K
Loan to relative - $450K/ Owe $450K

The loan above is from a uncle who chipped in money @0% to get us out of the mess we where in with business that went severely pear shaped . Aside from 1 car we own outright and super we have no other assets/ liabilities.

So moving forward I am looking a few options.

Option 1 - Sell all IP’s and reduce PPOR debt. This is non-deductible debt. The PPOR we have is our dream home and we would like to save at all cost. Cashflow right now is not an issue and I am comfortably holding on to everything until int rates reach 8%. After that it’s going to be tough. This means giving up and CG in next few year.

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Emphasis added

I think that is the key point here. All in all, assuming you can still service the mortgages, you're in a reasonable position to move forward. If that house is your dream home and it's your main priority, then don't let anything get in the way of it. Hedonism has it's place and this seems like a good example. So, options two through four, and five if you meant that to include the PPOR, would seem to be out.

Now, even if you sold all three IP's, you still won't cover the family debt. Refinancing the lot will get you a long way towards that, but then you are paying interest on the $450k (talk to your accountant about whether it will be deductible, or not) whereas presently, you're not. It does remove that burden though and means you can move on with a clear head. Something to consider.

If your wife able to work from home? Or, perhaps better, is she able to invest in some capacity or run a small business from home?

Or in simpler terms; you want $654k and $450k paid off within 15 years. That's a shade under $74k in repayments (before interest) per year. If that's not realistically feasible, then you'll need to focus on either increasing the income, or selling down assets, to do so. May not be easy, but as you said,

Success said:

anything is possible if you set your mind to it.

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Good luck with it, mate.

My initial thought was sell the PPOR, move into one of the IPs, reduce the loan to the relative and then pay as much as you can spare into the loan to the relative.

Then I read further that the PPOR is your dream home. I suppose after selling costs you would clear only about $280K which would put a big dent in the loan from the relative but still leaves a substantial debt, and you are living in a house that was an IP and which may not be ideal.

There is always another dream home, but only you can decide. You will probably have people say your wife should get a job, but as a stay home mum, I understand her desire to be home with toddlers. I also feel that the costs of childcare for two toddlers will possibly mean she is working for next to nothing.

I notice there is no interest on the uncle's loan. I would be trying to pay that loan off quickly, as I don't like being in the position of owing to relatives.

Here are a few brainstorming ideas, just to throw some "outside the box" ideas at you....

I don't know how long your uncle is prepared to have you owe $450K. Is it a short term loan or is he happy to have that loan for a while?

What about paying interest only to your uncle and having an agreement that when you have gained more equity in one of the IPs, you sell it and pay back the capital. If he doesn't need the money back quickly, this may appeal to him.

Would your uncle be interested in buying one of your IPs instead of you having to pay him back? Of course, you are still left with the debt, and it depends on whether you can service it, without the rent.

If you can hold onto all the property until the market rises (which could be a while.... who knows) then the debt to your uncle could be paid out with the increased capital gains. It depends on whether you can hold and for how long.

To do this, I would be wanting to pay him interest while you are holding the properties, but that depends on your circumstances and his.

You don't have a huge amount of equity and as you say, selling costs will eat into a lot of that, and that is money down the drain. If you can hold for a bit longer, your equity may reach the stage where it covers the uncle's loan, you get to keep your dream home and you can then start building up more assets.

We have been in this position before, owing money to my parents, which we paid bank interest on, but still I didn't like it. We sold an IP to pay them out and reduce IP debt. We could have held the IP for longer and made more money, but holding costs were eating into our lifestyle (modest, but three growing boys start to cost more as time goes by).

I haven't really through these through to conclusions, but they are just a few ideas that you may already have considered.

Thanks rugrat.

Few more details - We are in our mid 30's and super healthy and fit. Agree - there is worse problems one can have. We have drawn up a VERY detailed spreadsheet where we capture EVERY expense. Even the $2.50 for a latte.

Right now the detailed spreadsheet shows us saving approx. $90K per year. I am a high income earner and we live a frugile life these days due to bus venture going pear shaped.

wylie said:

I don't know how long your uncle is prepared to have you owe $450K. Is it a short term loan or is he happy to have that loan for a while?

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Agreed that we would START payments in 5 years time.

Success said:

Loan to relative - $450K/ Owe $450K
.

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Hope that's FROM relative, not TO relative!

Have a talk to your uncle.

I suggest you offer him interest payments on his money, at a rate LOWER than your current home/IP loans, but higher than current term deposit rates (eg 5%-5.5%). See if he is happy with capitalising the interest (if he doesn't need the cashflow). This should result in 2 things:

1. you'll feel less pressure to pay him off
2. he'll get something out of this

With your current cashflow, start paying off the highest effective cost loan (i.e. it might be ppor or a high interest IP loan, depending on your tax situation).

Cheers,

The Y-man

If you're comfortably able to afford all the loans, I don't think selling any properties will get you very far, and no point selling the PPOR if that's your dream as it means you'll only have to try and achieve it again down the track.

Firstly, you may want to think about fixing some/all of your loans if you haven't already as rates are only going up from here. Secondly, you didn't mention this - are all the loans on interest only payments ie. you're not paying P&I on the IP's?

If not I would convert them all to IO, and if it was me I would also convert the PPOR (for now) to IO if like you said your Uncle's debt take top priority and you want to get rid of this first. This will free up more cash to plow into your uncle's loan, and once that's gone - or at least decreased somewhat - you can always change the PPOR back to P&I (or conversely take out a LOC from the bank to pay his loan, but you will then have a large sum of non deductible debt I would assume).

Holding on to all the properties will also allow you to achieve more overall growth in your net assets. Selling now won't give you much, but if they experience a decent rate of growth over the next few years, it may then be a good option to sell one for a $200k cash amount over it's debt and whack it off the last of your uncle's loan.

Thanks everyone for your input so far.

All our loans are I/O loans currently @4.81%

Let's hope they stay low for a little while yet.

I think you need a good accountant

With your position, you should be able to do some fancy (and 100% legal!!!) accounting work to "recycle" your non-deductable debt into your deductable debt - thus paying off your home loan much faster.

I'm friends with a couple, the wife is an accountant, and they have used some intelligent accounting structures to be in a position where they will pay off their home loan in about 18 months (iirc).
They have good cashflow, like you, and a couple of IPs - so there is no reason you couldnt do the same.

As for the loan from your Uncle - me personally, i would try and put that onto the mortgage on the PPOR and pay him out after the 5 years is up.... you might be able to get this amount as a deductable debt since it was a business cost?? (talk to accountant!!)

With your cashflow position - i think you can do it. Good luck

JamesGG, All in all, assuming you can still service the mortgages, you're in a reasonable position to move forward.

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What? Which planet are you on. The guys got a 95% LVR with $2.6 million in debt, borrowing from relatives, etc. (Values $2.79million), loans $2.62 million).

Time to tighten the belt "Success". Can't remember how many dinner parties we had with people like "Success" early this decade, going on, and on about what good investors they were in property. Sales, MBA, marketing types who though they knew how to get rick quick.

How sweet it is now to have the same types coming back for advise.

Now that I have that off my shoulders, here is my suggestion

Loan to relative - $450K/ Owe $450K As this is interest free, maybe leave this for now.

IP 2 (Sydney) - Worth $870K / Owe $721K - $150K in equity. Sell this one. Once interest rates head up (or values at that range come back more), this one may hurt you the most. Use the money to pay down your PPOR loan.

Concentrate on PPOR loan for the next 4-5yrs. Equity in other IP's should increase over 5yrs. Sell one IP to pay out uncle in 5yrs time.

I say that "all in all, you're in a reasonable position to move forward" because, all in all, things could be a lot worse and if he's smart from here then should be able to make good things happen.

Again, assuming that he can service the loans, having a multi-million dollar asset base is a good thing. Cashflow doesn't seem to be the issue here, it's the debt. So, he's identified that paying down some of those loans is the next point of action. Fantastic. Once that's achieved, he'll have a multi-million dollar asset base with much less debt.

Sounds like a reasonable position to move forward with, to me.

The leverage-like-crazy-and-consolidate-later theory is a common one on this board and whilst not without risk, can be proven successful in time.

Welcome Success,

Before I give you my opinion, can I ask under what terms your uncle loaned you the 450k?

It goes without saying you must have a fantastic relationship with him.

Regards JO

Success said:

All our loans are I/O loans currently @4.81%

.

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In that case, you need to factor in break costs if your strategy is to sell property.

Having said, that I note you don't have an option to sell down one or 2 ip's?

Cheers,

The Y-man

whilst disagreeing with investor888's attitude and logic, I think the path of action proposed is not a bad compromise. a small step back.

if uncle can wait then he should - he won't/can't foreclose you

Success, you say you are in your mid-thirties.

Your first goal should be to stand on your own feet.

Your first priority should be to pay off your debt to your uncle. Even if you keep a "steady as she goes" course, you say you can save $90K a year.

That will pay your uncle off in 5 years, and retain ownership of all properties.

When interest rates rise (and they will), you may have to consider selling an IP to ahieve goal #1 - pay off your uncle.

And yes, if practicable, your wife should look at part time work. Even if she does not earn much more than the child care fees it will give her experience in her field and give her more future career options. Maybe minding another child or two a couple of days a week would bring in more income and avoid child care costs for you.
Marg

Can you transfer the PPOR to your uncle and he takes out a loan to pay out your PPOR loan or pays out the loan with his own funds.

You stay in the PPOR then as tenants and pay market rent to the uncle.

Uncle effectively then has 326K of the loan returned to him (as equity in your former PPOR).

It's kind of hard without knowing exact figures of what you earn, interest you pay on your IPs, etc. Are your IPs cash flow neutral or positive by any chance?

You are still in a pretty good position IMO, you have nearly $3 million worth of property under control, so if we're conservative it's fair enough to assume you will gain at least $150k in equity a year within the next several years when Sydney booms again.. so that will cover your $450k debt and probably more.

Are you paying interest ONLY on your IPs? I would be paying interest only, even on the PPOR too for a while until you pay off that $450k of bad debt.

Maybe set up a LOC, draw down on it and pay out your relative... then focus on reducing the debt of your PPOR after that.

Btw, I would NOT SELL A THING! I would do everything I could to hold onto every single property, even if it meant making sacrifices.

My 2c anyway.

Bon,

that's a good 2c worth.

"You are still in a pretty good position IMO, you have nearly $3 million worth of property under control, so if we're conservative it's fair enough to assume you will gain at least $150k in equity a year within the next several years when Sydney booms again"

Especially if Success agrees witht Herron Tood White August report that Sydney houses and units are now in a rising market (Brisbane is shown as bottom of market).

http://www.htw.com.au/Downloads/Files/210_August_2009_Month_In_Review.pdf

I'd be tempted to factor in possible higher growth than 5%p.a. (maybe something like 7%+) for Sydney. The gross value of the properties is so large that this could result in substantial captital gains for each additional year held.

P.S. I wonder if the uncle were reading this what he would think about not receiving the 450k now so that you can receive anticpated capital gains.

... what Bon and Ajax have suggested is my reason for not paying your uncle back for the 5 years you have agreed on. By hanging onto all your properties (which sounds like it is easy for you in your cashflow position), then you have 5 years in which to pay down as much PPOR debt as possible (you say $90K p.a.) and benefit from any capital growth over the next 5 years.

Worst case scenario - properties are worth the same in 5 years time (highly freaken unlikely!!), but you have paid down your PPOR by $450K (5yrs @ $90K/yr) which you could then draw on as a LOC to pay out your uncle.....and you still have all your properties!

WIN-WIN-WIN!