Can my bad investment be saved?

[Sandman87]

Hi all,

Long time lurker, first time poster. Hopefully this is in the right area of the forum since it sort of fit into a few categories.

I currently have an IP townhouse plus my PPOR house.

The IP was once my PPOR so I bought it with emotion instead of maths.. so now it?s quite heavily negatively geared and is affecting my cashflow quite a bit.

I bought it for $247k in 2009 and stretched myself to get into it with a 95% loan. The loan has always been IO and is around $238k. Townhouse values in the area have dropped since then and haven?t recovered, so it?s now worth about $220k at the most.

Body Corporate has climbed and as there are no separate water meters, I have to pay that as well. Weekly before tax, it?s costing me $172 out of my pocket. The IO period finishes in September and I can?t extend it with the current lender. I can?t change lenders because of the value of the property either, so my out of pocket expense is going to go up even more with P&I.

Rent is at market value ($290pw), so I really can?t see any other ways to turn this place around. Do I sell it and cut my losses or is there another option that I haven?t thought of??

Thanks - learning every day as I read the forum more and more!

 

[Ausprop]

you are stuck, it is cheaper to hold than sell it. My concern with you holding is the downturn in mining and how hard that will hit the brisbane market. This is a candidate for sale by instalment contract.

 

[SK Investments]

My concern with you holding is the downturn in mining and how hard that will hit the brisbane market.

I don't think Brisbane investors are very concerned about the impact of the mining industry, there are many other factors at play, it seems to be an 'all roads lead to Brisbane' for investors this year.

 

[Ausprop]

hmm I think they need to reassess risk, reports from on the ground (see other thread running on this) is that there are fields of equipment parked up. The offsetting factor is that rates will most likely be slashed before mid year to try and arrest consumer confidence but what that will do for inflation is the concern - particularly if oil is being manipulated and that shoots back up.

http://somersoft.com/forums/showthread.php?t=102139&page=4


"Literally hundreds of machines parked up, both in town and the side of the roads up here. Salmon, McMahon, Orionstone, Emeco, Hastings, Komatsu, MH Hire.......................

Pretty grim when you drive out to the mines!


pinkboy"

 

[albanga]

Personally I am a big believer in cutting your losses, learning from your mistakes and then reinvesting with your new knowledge for a higher return.

Your exit costs for this property are going to only be minimal (3-4k agent fees). Any losses you have made can be written off against future capital gains (get specific tax advice on this) and then of course there will be re-entry fees on a new investment.

Also the brokers on here can offer better advice but perhaps the LMI credits you may have already paid with that lender can be used for your next purchase? Brokers?

So getting out of this property may not cost that much and given your cashflow issues I think it would be unwise to hold such an investment and wait for the market to move in your favour.

 

[MRO]

Personally I am a big believer in cutting your losses, learning from your mistakes and then reinvesting with your new knowledge for a higher return.

This is great advice.
It is not only the dollar cost per week but also the opportunity cost of what else you money could be doing for you

 

[Redom]

Also the brokers on here can offer better advice but perhaps the LMI credits you may have already paid with that lender can be used for your next purchase? Brokers?

So getting out of this property may not cost that much and given your cashflow issues I think it would be unwise to hold such an investment and wait for the market to move in your favour.

No LMI credits for different securities.

 

[Redom]

This is great advice.
It is not only the dollar cost per week but also the opportunity cost of what else you money could be doing for you

Great advice, but cutting your losses on this is likely to involve a 20-25k exit cost (quick sum) - 18k loss + other fees.

That may restrict OP from making that choice.

 

[Redom]

Hi all,

Long time lurker, first time poster. Hopefully this is in the right area of the forum since it sort of fit into a few categories.

I currently have an IP townhouse plus my PPOR house.

The IP was once my PPOR so I bought it with emotion instead of maths.. so now it?s quite heavily negatively geared and is affecting my cashflow quite a bit.

I bought it for $247k in 2009 and stretched myself to get into it with a 95% loan. The loan has always been IO and is around $238k. Townhouse values in the area have dropped since then and haven?t recovered, so it?s now worth about $220k at the most.

Body Corporate has climbed and as there are no separate water meters, I have to pay that as well. Weekly before tax, it?s costing me $172 out of my pocket. The IO period finishes in September and I can?t extend it with the current lender. I can?t change lenders because of the value of the property either, so my out of pocket expense is going to go up even more with P&I.

Rent is at market value ($290pw), so I really can?t see any other ways to turn this place around. Do I sell it and cut my losses or is there another option that I haven?t thought of??

Thanks - learning every day as I read the forum more and more!

Is it really that costly per week?! Whats its numbers after tax?

$290 pw is around 15k p.a. $240k loan is what, 12kp.a? Other fees amount to 12k p.a?!

Using the opportunity cost argument, assuming you have the money available TO sell - what else can you do with that cash? Your options are: put another 25k into this to walk away, or put 25k into another investment with your knowledge and work to offset this?

 

[Ausprop]

This is great advice.
It is not only the dollar cost per week but also the opportunity cost of what else you money could be doing for you

there is no opportunity cost as there is no money available. Indeed the cost of exiting will create the opportunity cost

 

[Ausprop]

just so the message is not lost... investigate vendor finance instalment sales. IMO this is the best solution to this problem

 

[Sandman87]

Thanks for the advice so far guys!
Ausprop - installment contacts are the same as vendor finance aren't they; just a different name?

Yes, finding the extra 20-25k to sell is the challenge. I would have to take it from extra payments made/equity in the PPOR which would then increase my non deductible debt..

 

[Sandman87]

That answers that question Ausprop - must have been typing my reply as you replied!

 

[Sandman87]

Is it really that costly per week?! Whats its numbers after tax?

$290 pw is around 15k p.a. $240k loan is what, 12kp.a? Other fees amount to 12k p.a?!

Using the opportunity cost argument, assuming you have the money available TO sell - what else can you do with that cash? Your options are: put another 25k into this to walk away, or put 25k into another investment with your knowledge and work to offset this?

Hi Redom,
Loan repayments are about 14k pa - slightly higher interest rate than the going rate out there.
Body corporate is mid $3000's, plus rates/water, PM fees, maintenance etc etc. After tax brings it down to about the $100pw mark.

 

[Redom]

I would have to take it from extra payments made/equity in the PPOR which would then increase my non deductible debt..

Check tax advice on this - I think it may be deductible.

If you set up a new loan on your PPOR (split it so its easy to track) - then the purpose of that new loan is investment related. Therefore it may be deductible.

Not an accountant, so I cant say for sure, but that's how it generally works when equity from PPOR is used to fund NEW IP's - don't see why it wouldn't be the same in this case.

Cheers,
Redom

 

[MRO]

there is no opportunity cost as there is no money available. Indeed the cost of exiting will create the opportunity cost

The weekly outgoings and borrowing capacity currently tied up in this IP could possibly be used to purchase another IP, reduce debt on PPR, etc.

Is that not opportunity cost?

 

[albanga]

Great advice, but cutting your losses on this is likely to involve a 20-25k exit cost (quick sum) - 18k loss + other fees.

That may restrict OP from making that choice.

As I said get specific tax advice but it is my understanding that some of this loss can be offset against any future capital gains?

Ausprop there most definitely is opportunity cost invested in this property. The property would be greatly hampering serviceability and would give the OP little option to move on a better investment if it were to become available.

The OP has stated the property cashflow is affecting him quite a bit as well. If he continues to hold and the market makes no movement then he will continue to pour money into this investment.

Sandman ask yourself this. Would you be more upset if the property was to drop another 20k or more pleased if it bounced back 20k?

 

[Jess Peletier]

The thing is that if the IP is expensive to hold now, it's going to be way more expensive by September. If he holds, how is the OP going to fund this shortfall?

Thinking outside the box, if his current PPOR is a better 'investment' ie has better potential cashflow and depreciation, it could be worth looking at moving back into the IP and renting out ppor.

Also, think about getting a tax variation done, this could help ease the burden week to week.

 

[Ausprop]

I agree sell, but on vendor terms. You won't need to pay an agent, you can sell it at it's debt value and the buyer picks up the servicing. It's a walk away which is better than facing further capital losses, crystalising losses or enduring a cash grind

 

[jpcashflow]

Hi

Keep it simple and walk away if its not performing.

I once sold a business of mine for 20K under the market value just to get rid of it. People said to me that's a big hit be patient etc... I sold on the basis that my time and money could be better used else where.

Once I sold the business, I was more motivated then ever and I recovered the 20K in a few months and then even made more coin through out the year.

Speak to your accountant about capital loss, ask him or her the question that if you sold for a capital loss how and when can you use these tax credits.

A successful business person is not about how much money they made when things are going well, but how that person learns and recovers in a challenging situation