Analysis Paralysis-what would you do?

Hi Everyone, this is my first post after having been reading SS forums for a while.

I have been going round and round in circles driving myself crazy as to how to proceed and have decided to see if any of the experienced property investors on SS can give me some advice after reading the Ozperp interview where she(?) recommends putting out your circumstances to the forum if you are at a loss how to proceed.

Our goal is to get to a point of financial independence and semi-retirement ASAP.

Our circumstances are as follows;-

PPOR(3x1) – Value approx $450K with IO loan approx $160K (with approval for drawdown up to $400K) with offset account (debt is fully deductible)

IP1 (3x1) – Value approx $400K with IO loan approx $310K rented at $360 pw

IP2 (4x1/2 )– Value approx $600K with IO loan approx $470K rented at $370 pw (rented below market value to family member).

The IP’s are both within 10-12km of CBD. Loans are all with separate lenders and we have no personal or undeductible debt.

Therefore overall LVR is about 65% but we are Cash Flow (-ve)

IP2 is on a corner subdivisible block with possibility of retaining existence house and getting a green title block with own street frontage. I estimate sub-division costs would be approx $30-50K. The subdivided lot would be worth approx $300K and existing house value would become approx $450,000 with no change to amount of rent.

I do not believe that our PPoR would be suitable to be rented as it is on a large block with lots of gum trees and pool ie too much maintenance.

Now where I am going round and round is whether to leave everything as is and patiently wait for capital Growth or whether to get things moving again with either more purchases or subdividing and selling or subdividing and building.

Like I said for some reason I feel like we are getting nowhere and sometimes I feel like it is all too much bother and selling up everything and living in our PPoR with a bit left over in the bank but maybe I’m just too impatient. Below are some of the options which endlessly go round in my head and I think my calculator keys are wearing out

1. Subdivide IP2 and sell off block paying down debt or buy another IP

2. Subdivide IP2 and build townhouse to rent out probably at around $420-450 pw

3. Do 1 or 2 above and then buy another IP

4. Sell PPoR move into IP2 and renovate and then subdivide as above and either remain in existing house or move into new townhouse.

5. Leave things as they are and go out and purchase another IP elsewhere….this would increase our LVR

6. Do nothing

7. Buy shares instead etc etc etc

Hope you get the idea I am probably over analysing. I am sorry for such a long-winded first post but wanted to know what you would do?

Thankyou in advance for any responses
 
I'd do numbers 5 & 7. Subdividing could be good as well depending on your figures, but I'm lazy and would probably just purchase more assets elsewhere for the time being without the hassle. :D

But please, whatever you decide - don't do this!:
Like I said for some reason I feel like we are getting nowhere and sometimes I feel like it is all too much bother and selling up everything and living in our PPoR with a bit left over in the bank but maybe I’m just too impatient.

Though re-reading your first couple paragraphs - if you want to semi-retire ASAP, then perhaps another IP is not the best idea unless it's CF+ from the start. Perhaps diversifying into some safe, higher yielding shares may be a better option.
 
I would build on IP 2.

I would look at the possibility of building on it without officially subdividing. Alot of councils will allow dual occupancy on a block depending on its size.

So you spend say 150 to 200k to put a house on it and get back what ever is the market rent. Depending on the rent value this could make this particular property (as a dual occupancy) either CF + or neutral. You'd have to do the sums on this.

I would think it would increase the equity you have in that particular property above what the cost of the construction would be. You are effectively getting the block for free.

That would sort out your cash flow and equity, the only thing is the amount you owe would be larger.... so what, if you have the CF its only a number. And the figures will only get better over the years even if you only do this one thing and leave time to weave its magic.

For gods sake dont sell up just to pay of the PPOR (although I have to admit I get down sometimes and think about doing the same thing). You've done the hard work to get to where you are. Just either plug along or put in one more effort to build on that IP2 land and reap the rewards down the track.

Have a read of this thread I posted about my motivation to keep going.

http://www.somersoft.com/forums/showthread.php?p=600480#post600480


You'll see you arn't the first to think what you are thinking and won't be the last. We probably all have thoughts of selling all the IP's and cruising sometime.

Keep the faith man:D
 
Hi steveadl

Re-reading my goals, I should expand that a bit and say that I am more going for the financial independence part with the option of semi retiring. What I mean is that I would like the option of working or working part-time etc because I choose to.

We still have investment time up our sleeves and still have a quarter century or so until official retirement age :) I wonder if that makes me middle aged yet hehe :eek:
 
Therefore overall LVR is about 65% but we are Cash Flow (-ve)
That's your problem right there. To be at 65% LVR and still be CF- means you're under-renting those assets. Most resi yields are around 5% now which would be almost neutral at 100% LVR.

IP2 being rented so far below market to a family member is killing your cash flow. You could sell it and buy 2 smaller units for about $300K each renting for $250-300pw each. That would give you another $270pw odd in rent.

Either that or press the button on developing it. I like option 2, subdividing and putting a townhouse on it. This is in line with my thinking of putting a $100K granny flat on my former PPOR and renting it for $400pw. That certainly helps the cash flow.

Basically, you've got a decent little portfolio and a manageable level of debt. But your cash flow is screwed as its under-let. Fix the cash flow by developing or trading for better yielding assets. I'd develop them so as to avoid the transaction costs.

Cheers,
Michael
 
Well in that case I'd go for another property (work out what's best for you ie. just buying another or subdividing) or get into some equities. Increase your asset base to as much as your comfortable with, which will then give you a bigger income base when you do get to the semi-retirement stage.
 
IP2 (4x1/2 )– Value approx $600K with IO loan approx $470K rented at $370 pw (rented below market value to family member).


Who is this property rented to?

Why are you subsiding their lifestyle?

As interest rates go up - you need to be putting up rent!


Regards
Sheryn
 
Thankyou to the replies I have had so far.

One thing that is coming through all the posts is that we definitely should not sell up just to live debt free in our PPoR. Thanks for that link to that thread bespoke. I fully agree that everytime I have thoughts of selling up that the fear of not having an asset base to provide me with an income in retirement keeps me going :)


I would look at the possibility of building on it without officially subdividing. Alot of councils will allow dual occupancy on a block depending on its size.

I am not sure if this would be a possibility in WA. If I did this would it be difficult to get subdivision approval at a later date, say if I wanted to sell either the original house or the new townhouse seperately or would I be better off from the start subdividing and getting two completely separate titles.


Well in that case I'd go for another property (work out what's best for you ie. just buying another or subdividing) or get into some equities. Increase your asset base to as much as your comfortable with

By buying another IP I would be increasing our LVR. Purchasing say a 3x1 up to about $400K could increase this up to 80%... given a time frame of at say another ten years or more what would be a reasonable level LVR to go with.

On the other hand if I subdivide and build our LVR would remain about the same but our cash flow would improve. However considering that we already control the land, by doing this would you consider that we are truly expanding our asset base?

I suppose we are in a catch 22 situation because on the one hand the land is under-utilised and it is affecting our cash flow which is holding us back and this pulls me towards subdividing and building. However on the other hand I keep getting these nagging thoughts that if we tough it out (with lesser cash flow) will the large unsubivided plot be more valuable in the future and will more profitable opportunities may present themselves? The reason I keep having these nagging doubts is that the land is only one block from water (river)....if we build a two story townhouse it could have a view to water from the upper level.....but on the other hand would a larger block be more valuable for perhaps our own or someone elses PPoR at some point in the future. However the trend in this area seems to be to subdivide and put up townhouses.

So should we simply go for it regarding subdivision and take whatever gains we can now and look towards new or other opportunities in the future or wait?


That's your problem right there. To be at 65% LVR and still be CF- means you're under-renting those assets.............. But your cash flow is screwed as its under-let.

Yes this is the frustrating part and puts us in a kind of catch-22 situation.
One question I have is that I included our PPoR in the LVR calculations. Is this the norm or should I do the calculations using only the IP's?


Who is this property rented to?

Why are you subsiding their lifestyle?

It is complicated but it involves divorce of a family member and children having a place to live..initially they were only going to stay at the house as a stop gap measure till they sorted themselves out but I suppose we are suckers and we have this sense of obligation. Families hey.....they can be a real hazard to your wealth :( Our PM has already told us we are nuts.

However we are asking ourselves your second question more and more (and we are feeling taken advantage of) and with rising interest rates when the lease comes up for renewal we will basically be saying that you have had long enough and that we really can't afford to carry you any longer and we will need to chage market rates. We have our own family to look after :mad:
 
I am not sure if this would be a possibility in WA. If I did this would it be difficult to get subdivision approval at a later date, say if I wanted to sell either the original house or the new townhouse seperately or would I be better off from the start subdividing and getting two completely separate titles.

You really need to go to your council to see what is possible and ask lots of questions.

For example, we have a property that has a second dwelling on it. The block is not quite big enough to just subdivide a bit off the back and sell as a seperate block (with no building) BUT after talking to council we found out that we CAN subdivide if we build on it and keep within councils rules for the correct amount of outdoor space/car parking for each dwelling. The subdivision application can be done at the time of putting in plans or later. This is my council though and all are different but you have to go and ask.

I would say though that if you do subdivide, you will be paying out 2 lots of council rates instead of 1. Plus your division costs.


If you are time poor, a consultation with a private Town Planner will save you alot of time. They will know exactly what you can do.

I agree with others that you should move on the relatives- you've done your bit to help and with cheap rent there is no incentive to move on. They may even be expecting you to move them on soon but don't say anything cause you may seem OK about it. Reasonable people would say thanks for helping me out.

You seem to be getting on with it, your doing better than most of the population so keep plugging away, you'll get there.
 
I don't really agree with the below. BlueCard would know more about it, but it's very common (I would say more common) for the owner of a property to build first then do a "built strata" afterwards. i.e. you would have the two houses, they would both be rented out, then you would go through the time (3-4 months) and expense ($30K+ as you mentioned) to do the strata.

The small con with this procedure, is the council needs to sign off on the old house as well as the new house, so they might make you do work on the old house...

The pro is you save 3 months. Instead of nothing happening for 3 months, then you start building, you start building and the three months of strata-ing occurs after completion when you have the rental income helping your cashflow. Plus once their completed (or before) you can sell subject to strata and lock in a price if that is your motivation. But like one of the previous posters said, building for $200K and renting for $400 per week sounds like a good plan to me.


Thankyou to the replies I have had so far.


I am not sure if this would be a possibility in WA. If I did this would it be difficult to get subdivision approval at a later date, say if I wanted to sell either the original house or the new townhouse seperately or would I be better off from the start subdividing and getting two completely separate titles.



:mad:
 
I would build on IP 2.

I would look at the possibility of building on it without officially subdividing. Alot of councils will allow dual occupancy on a block depending on its size.

I'm with Bespoke. Why pay extra fees and taxes if you are holding for the long term - and I would be holding in a close to water possy like yours. Check with council about just going dual occ to start with and then either strata or full subdivision later on if you ever want to sell. This will be great for your cashflow and add to your asset base.

And don't sell anything if your current cashflow is easily manageable - despite being -ve geared.

Just another thought. You could hand over the property to a PM that you are renting under market to family and get them to set the rent at a fair level for both parties. This would take the decision out of your hands. :)
 
It is complicated but it involves divorce of a family member and children having a place to live..initially they were only going to stay at the house as a stop gap measure till they sorted themselves out but I suppose we are suckers and we have this sense of obligation. Families hey.....they can be a real hazard to your wealth :( Our PM has already told us we are nuts.

However we are asking ourselves your second question more and more (and we are feeling taken advantage of) and with rising interest rates when the lease comes up for renewal we will basically be saying that you have had long enough and that we really can't afford to carry you any longer and we will need to chage market rates. We have our own family to look after :mad:

Now you are seeing the light, ask PM to type out a nice letter saying that the rent will increase by $xxx to bring it up to market rental as you know you are subsiding their lifestyle.

Gees just imagine if relations are living in the property for the next 50 years - work out how much you are subsiding their lifestyle. PM's are to distance you from dealing with problems.

If relations 'cry poor mouth' be ready to say a) we need you to pay the rent increase OR b) we have to sell the property as we can't afford to subside the interest repayments & cost of property anymore.

Emotions.....
We have friends who are subsiding their daughter's rent (she has one child) by $175 per week. This couple don't even own their own house and daughter is renting a 3 bedroom house for 1 adult & 1 child.


Sheryn
 
As interest rates go up - you need to be putting up rent!

Regards
Sheryn

It doesn't work this way.

The rent increases are market driven; not rate driven - unfortunately.

Analysis Paralysis-what would you do?
Back to this question; if you can comfortably handle the neg cashflow now, it might be an idea to look at the subdivision of one of those blocks and use the profit from that as the deposit on the next IP.

This way, you will feel as though you are "doing" something again.

One of the frustrating aspects of investing is the sitting around waiting.

By the way; you're not "getting nowhere" - you are ahead of probably 80% of the world's population in assets already.
 
Thanks to all the responses. I definitely have some more ideas to think about now.


By BayView
One of the frustrating aspects of investing is the sitting around waiting.

I think this little quote hits the nail on the head.

I am frustrated especially when I see the net effect of the last two years is not that much movement at all. I saw our property values soften due to GFC and then recover to a degree but overall the whole period has been quite flat and a lesson in extreme patience.

Another really frustrating thing is that IP2 is actually a more suitable and better located property for us than our PPoR. Lots of our friends say we are mad suffering a small 3x1 with absolutely no storage space and clutter everywhere when we have a well located 4 Bdrm house with heaps of storage at our disposal and we often think the same.

If our PPor was suitable as a rental I think we would have done a house swap ages ago but the PPoR is getting older, it is on a huge plot with heaps of gum trees and a pool that is getting older (mystery leaks somewhere in the piping system) and basically a gardening nightmare.

I am wondering if it would be worth copping the transaction fees and selling PPoR to move into IP2. Also by living in IP2 we would get a feel for what renos we could do to add value and then do these renos while living there.

With the the proceeds from sale of PPOR would could bide our time and look for another investment opportunity.

Or alternatively it would reduce our holding costs if we decide to do the subdivision and build. I suppose living at the property would make for easier supervision of such a project.

My only concern if we do this is whether the market will explode as soon as we sell PPoR. Or is the time to do this now???

Or would this be an exercise in stupidity? :confused:
 
I would say subdivide also. The reason I have decided to do the same is as follows. I currently have enough cash to buy 1 more property. If I buy another property after this I would have to save or wait for capital gain.

If I subdivide instead the end product will be cash flow neutral and should have instant equity to purchase another property straight away.

So what I am saying is you will be in the position to add to your asset base with no effect on your cash flow and a likely increase in equity. No brainer really.
 
Thanks to all the replies to my questions. I have become a lot clearer in what I need to do


By devo76:

I would say subdivide also. The reason I have decided to do the same is as follows. I currently have enough cash to buy 1 more property. If I buy another property after this I would have to save or wait for capital gain.

If I subdivide instead the end product will be cash flow neutral and should have instant equity to purchase another property straight away.

So what I am saying is you will be in the position to add to your asset base with no effect on your cash flow and a likely increase in equity. No brainer really.


Thanks for this clear summary devo76. All my calculations have been pushing me in this direction.

Now that I have been able to reflect some more on why I have been doubting which path is the best way forward I can definitely say that a lot of my frustration has stemmed from the fact that our PPoR is not as nice a place to live as IP2 which was making me doubt our lifestyle now versus our investment for the future balance.

I somehow think that i am not the first property investor to face this dilemma :p
 
Just do something! :)

serious, but being a little constructive I would aim for neutral to positive cashflow properties.
 
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