An objective view please

[JohnA]

We are just about to finish renovating our IP. It certainly has been a rollercoaster ride. We are leaning towards selling it. To be honest the reasons for selling are partly emotional in that we would be glad to see the back of the place ... and if we rent it we dread the thought of someone wrecking all the hard work we have put in. The house also has a few areas that will need tending to in a couple of years that we did not address due to our budget ie. Re-roofing. The profits would also enable us to reduce our PPOR debt.

I would like to get an objective viewpoint or some advice based on the numbers and not my emotions.
Value 330-340k Owe 200k After CGT will have close to 100k to pay off home. (PPOR debt 200k)
Rent 340 pw – +ve geared $40 pw after interest, rates, ins, water, agents commission.
It is in a good location. It has subdivision potential. I don't know how to work out projections on say 5 and 10 years to compare each option.
We are in the accumulation phase. Equity either in IP or PPOR will be used in the future to buy more IPs. I am 10 years away from planned semi-retirement.

 

[alexlee]

The objective viewpoint won't help you, because you're not capable of being objective with this property.

Emotional wellbeing is worth a lot of money. Sell, reduce the PPOR debt, and refinance to buy another IP, if you're still looking to accumulate.

Next time, though, try to be objective. Being objective is something that happens right from the beginning. You don't move from being emotionally involved with a property to being objective about it.

 

[wylie]

Value 330-340k Owe 200k After CGT will have close to 100k to pay off home. (PPOR debt 200k)
Rent 340 pw – +ve geared $40 pw after interest, rates, ins, water, agents commission.
It is in a good location. It has subdivision potential.

I'm not much good at projections but if this is in a good location with subdivision potential and is putting $40 in your pocket per week after all outgoings, I would not be selling it, without really looking at where you are headed and whether this can help you get there.

You will pay commission on the sale and if you buy another one to do up, you will pay stamp duty to buy it, then the cost of doing it up.

Don't sell just because you have had enough of this place or because it needs re-roofing in a few years. You'll lose more than the cost of a new roof in sales commission.

I think you need to sit and wait a bit until you no longer are so sick of the place, and I understand that. After slaving my buns off doing a place up, I often think "I never want to see this place again".

Take your time making this decision. I've regretted each time we have sold, even though at the time we needed to sell to reduce debt, but I do remember our loan broker telling us we were silly to sell an IP several years ago in our quest to pay off our own housing loan. I'm glad we listened to him.

 

[The Y-man]

.. and if we rent it we dread the thought of someone wrecking all the hard work we have put in.

That's actually called "over capitalising" - it's not just in $ terms but time, effort and attachment terms.

Whenever we reno, it is to be "tenant ready" - not to be "magazine ready".

The Y-man

 

[wylie]

I don't see JohnA's statement as showing he has overcapitalised (though that could be the case) but more that having just cleaned, painted (whatever?) a house, it is always hard to allow tenants back in, never sure whether they will damage the hard work you've just done. We've done it plenty of times over many years, and most tenants don't wreck a place.

They will leave it dirty and not clean it like I would, but as long as, at the end of the lease, they leave it clean, I don't care how they live. I do care about them damaging things, but dirt can be cleaned.

Regular inspections will help sort out the good tenants from the bad, and landlord insurance is a good idea.

 

[JohnA]

Thanks for the replies.

We haven't over capitalised. It is a good quality renovation suited to tenants as we knew that could be one of our options. We did the sums before we started and are within the set budget. What we did wrong was not have a set plan in place for when we finished and this has been the part that has see-sawed with our emotions. The time thing has blown out as I work and have a young family. We don't have any friends that invest so it is difficult to talk to others about our situation. It would be great to talk through the options, pros and cons etc.

 

[The Y-man]

I don't see JohnA's statement as showing he has overcapitalised (though that could be the case) .

We haven't over capitalised. It is a good quality renovation suited to tenants as we knew that could be one of our options. We did the sums before we started and are within the set budget. What we did wrong was not have a set plan in place for when we finished and this has been the part that has see-sawed with our emotions. The time thing has blown out as I work and have a young family. .

Perhaps I didn't make it very clear in my post - I believe overcapitalisation comes in an emotional (and time) sense as well as a purely financial sense.

If you spend too much "emotion" on the reno (i.e. getting emotionally attached to the work), then I call it "emotional overcapitalisation".

In your case, you also had "time overcapitalisation" - but this also links to the emotions (as you discovered).

The Y-man

 

[JohnA]

Hi Y-Man

Yes we have definately over capitalised in time and emotion.

If / when we do this again we will approach it differently as we have learned a lot in the process and also from this forum.

Do you have any advice to offer on selling v holding this property?

 

[Propertunity]

Just my 2c from an unemotional detached perspective:
1. You don't SELL property during the accumulation phase UNLESS it is to create a deposit for another IP which you did not have before. (and in your case, you have not stated that to be what you'd do with the cash).
2. You don't necessarily retire debt (on your PPOR) during the accumulation phase either.
3. You will burn a lot of cash in transaction fees - stamps, legals in and out, selling coms on the way out and then CGT. Are you insane?
4. You are too emotionally invested. Tenants wear things out and sometimes damage things that you decorated - get over it and look at the big picture.

 

[JohnA]

Thank you Propertunity - I appreciate your direct response.

You are right that we need to get over the fact that there will be wear and tear.

If we sell the money would go into PPOR and then equity used to purchase another IP.

If we keep then equity in the IP can be used to buy more IPs.

I have never used PIA software before but I have tried the demo version tonight and entred the figures for holding and then comparing to selling. Eg in 5 years it would have saved us 30k in interest on our PPOR if we sold. If we hold and assume CG at 4% for 5 years then we accumulate 70k in equity.

 

[JohnA]

Wylie - I like your point about the roof. We allowed 10k for Agent selling and yes that would cover the cost of the new roof.

I am starting to get a better perspective of how holding it will be more beneficial to the end goal.

 

[mattnz]

Can you subdivide while leaving the nicely renovated house where it is? If so is there a good profit in it? If the answer to both is yes, why sell it before developing?

 

[BayView]

We are just about to finish renovating our IP. It certainly has been a rollercoaster ride. We are leaning towards selling it. To be honest the reasons for selling are partly emotional in that we would be glad to see the back of the place....

We are in the accumulation phase

Selling is not accumulating.

As for angst over renoing and seeing the tenants wreck it; we've done a few renos and then tenants have moved in after....

After the rent starts to come in you don't care. Make sure you have LL insurance.

 

[matto_]

Do you think you would be able to find a better "use" for the money elsewhere - whether that be a different property which has as good prospects - adding back in the selling/purchasing costs which you would need to fork out if you were to choose to sell.

 

[JohnA]

Bayview - good points. Yes we are in the accumulation stage - when I look at it from this viewpoint and think of the end game then the answer is hold.

Another +ve is we could have tenants in there in 3 weeks time.

Mattnz - yes we can leave the house where it is and develop. We removed the old sheds and have cleared the backyard. There is one tree that may need to fall over in a storm though. So we could rent it for now while looking into how much it will cost to subdivide, and possibly how much to build a 1 or 2 bed unit and hold. The new lot would be 250sqm battleaxe set up. 10m wide by 25 deep.

What is considered good profit / worth doing?

 

[mattnz]

Mattnz - yes we can leave the house where it is and develop. We removed the old sheds and have cleared the backyard. There is one tree that may need to fall over in a storm though. So we could rent it for now while looking into how much it will cost to subdivide, and possibly how much to build a 1 or 2 bed unit and hold. The new lot would be 250sqm battleaxe set up. 10m wide by 25 deep.

What is considered good profit / worth doing?

Typically people will tell you 20% profit margin on costs, but I prefer to only do projects at 35%+. Given that you already own the property though, 20% should be sufficient to make it worthwhile. Often where you can leave the existing house in place, the profit margins are really strong. Just be aware of the tax implications as well though, if you intend to sell immediately.

 

[JohnA]

Thanks Matt

I googled costs for subvivision and had a read on here. They range from 15-20k to 60k. I came across a link on here to a detailed outline of approximate costs which came to around 60k. Can it cost that much?

Is this roughly how to work it out (numbers approx)
Council Rates Land Value 170k
250sqm or 45% is 76k
Add Subdividion costs 60k
Interest on subdivision costs 12mths 4k
Selling costs 8k
Total 148k
Add 20% = 177600

There is a 200sqm block a few streets away for sale at 198k - not battleaxe. So it that a good sign? Developers are paying around 220k for renovate/detonate houses in the area on 530-600sqm blocks. 270k for 1000sqm.

And yes then there is tax to consider. Can the new land be put in my wife's name so less CGT? She owns 50% of it now. Are these the other things to nut out?