Advice needed to move forward!

[TSO]

Hi all,

We are fairly new at property investing and would like some advice on how to move forward.

We currently have 3 investment properties in Melbourne, and would like to buy another, however we are nearing the end of our borrowing capacity.

Our properties are listed below:

Property 1 – 2 bedroom apartment. Purchased 212k now worth 600k.

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Rental 400/week.

Property 2 – 1 bedroom apartment. Purchased 250k now worth 400k.

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Rental 320/week.

Property 3 – 3 bedroom Villa Unit. Purchased 2 years ago for 320k,

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now worth ?380k. Rental 330/week

As we want to buy another property, we have been discussing our options.

We have thought of the following:

1) Sell all properties, buy a house which we can renovate and add value, with the idea to eventually have that as our PPR.

2) Keep all properties, move to property 3 and renovate. When the market picks up, sell no. 3 and use the funds to purchase a house to use as our PPR.

Your thoughts and advice would be greatly appreciated.

Thanks,
TSO

 

[Terryw]

If you sell you pay CGT.

Was one of them your main residence before?

What are the loan amounts?

 

[TSO]

Hi Terry,

Property 2 is still my PPR. The 6 years is up in 2012, where if I can, I might sell to my husband to release the equity.

The loans are as follows:

Property 1 + 2 are on the same loan and it stands at 592k

Property 3 - 373k

Thanks!

 

[Terryw]

TSO

Not good generally to have one big loan for 2 properties. And it looks like loan 3 is secured by 2 properties. Its a bit messy so if you do sell you could take the opportunity to clean things up.

If you do sell consider selling in different financial years to minimise CGT.

Transferring to husband may be a way to release equity and keep and might be done without stamp duty in vic. Are you aware you can only have 1 main residence per couple.

But, if you are going to sell only to buy another you will have costs out and in such as legals and stamp duty.

 

[Aaron_C]

What is your current PPOR like? value/rental?

 

[TSO]

My current PPR is property 2, a renovated 1 bedroom appartment < 10k from the city. Purchased 250k now approximately 400k. It is currently rented out for 320/week.

Property 1 + 2 are neutrally geared, property 3 is negative.

 

[DaveM]

Are you renting now? Since 2 is your PPOR and is rented out??

 

[TSO]

Yes, we are currently renting, but would like to be living in a house (as out PPR) within the next couple of years to support our growing family, hence this post.

 

[jingo]

Yes, we are currently renting, but would like to be living in a house (as out PPR) within the next couple of years to support our growing family, hence this post.

Congratulations on accumulating your 3 properties. Some nice gains on the first two!

Would you consider keeping your IP's and renting a house for your family? This way you get to keep them and avoid the CGT and associated costs when selling.

Would it be possible for you to set up an offset account against one of the investment loans and stash as much money/cash into it as possible? That would reduce interest payments on the investment loans. Then, when you have more funds in the offset, you could take these out again to help fund the purchase of a PPOR.

You may eventually get to the stage whereby the rents you receive from your IP's are covering all of the interest expenses and outgoings. Any surplus funds could be used to help fund the payments on a PPOR.

Admittedly this may take a while - but you would benefit in the long term by holding onto the IPs and in the end you would have your own PPOR as well!

Just some random thoughts - and I don't know your income or family situation at all, so the above thoughts may not be applicable.

Hope you can sort out what to do soon. Sometimes putting all the pieces in the investment jigsaw together can be challenging!

Regards Jason.

 

[Lofty]

Hi TSO

If property number 3 isn't "crossed" too badly, I'd probably sell it with a vendor finance Instalment Contract. This would allow me to fix the capital gain on property 3 and, most likely, generate sufficient positive monthly cash flow to support all three properties.

In the current market, I would then find a motivated seller to sell me a house (new PPOR) with vendor finance. If this sounds too hard, I can let you know that in the last couple of weeks we've now had nine people contact us, asking for help to sell their properties with vendor finance.

Cheers, Paul

 

[Deltaberry]

Hi Terry,

Property 2 is still my PPR. The 6 years is up in 2012, where if I can, I might sell to my husband to release the equity.

The loans are as follows:

Property 1 + 2 are on the same loan and it stands at 592k

Property 3 - 373k

Thanks!

Your combined loans are more than your combined purchase prices?

If you've been refinancing to buy cars, go on holidays etc, perhaps the first step to moving forward would be to look at how you live your life?

 

[TSO]

Terry, thanks for your input, if and when we purchase again, we will look more closely at our loan structure.

Jason, thanks for your comments, we do have offset accounts at the moment, and 2 of the 3 are neutrally geared. As you said, we can wait to build more savings, but I guess we are a bit inpatient and want to go again. We can continue renting, but eventually, ideally, I would like to live in my PPR, so we can put our stamp on where we live!

Paul, I have thought about vendor finance in the past. I guess we can investigate again.

Deltaberry, I wish we had new cars, and were going on holidays, but unfortunately I misquoted purchase prices earlier in the thread. I jointly owned property no.1 and recently purchased the other 50% to own it outright.

 

[Deltaberry]

I see - sounds like you're on pretty high gearing (85%+) so would assume you get hit with all sorts of nasty things like LMI etc...

Not much you can do to move forward, though would suggest:

- Move out of PPOR
- Rent out PPOR so interest becomes tax deductible
- Downsize if possible

If you have excess equity, chuck it in to American equities or something like that, rather than keeping it in the offset account to save 4.7% net interest

 

[skater]

Let me get this right.

Prop 1 is worth approx $600k
Prop 2 is worth approx $400k Purchase price $250k. Total owing on these two combined is $592k.


IF you were to consider selling, then I would sell your No 2 property. Since it used to be your PPOR, it is CGT free for six years. Selling now, would mean no CGT.

Numbers could look like this: Sell price $400k less purchase price of $250k, giving you CG of $150k to use as a nice deposit for your PPOR (should you choose to do this with the money). Of course, you would have to pay around $250k back into your loan, now giving you a balance of $342k.

It looks like this is tied to the loan for property 3, so you would have to do some wheeling & dealing with the bank for them to allow you to do this. It should not be too much trouble since the loan for property 3 is $373k. Total both loans up and you get $342 + 373 = $715k in total borrowings against valuations of $600k & $380k. Total valuation of $980k. This is less than 80% LVR.

Talk to one of the brokers here. I'm sure one of them can set you on the right path.

On the otherhand, if you don't sell it, and you continue renting, then in order to keep your CGT free status on that property it would be prudent to move back into it in the short term, even if it really is too small for your comfort, financially it would well be worthwhile.

 

[TSO]

Thanks Deltaberry - I will take a look at American Equities as we do have a substantial amount of $ in our offset account.

Skater - Thanks, I didn't think of speaking to a broker here. That may be a good option, to see what they can come up with. I have thought about moving back to my PPR, but unfortunatley it would be impossible, as it is a 1 bedroom appartment, and wouldn't work with a 9 month old!