Capital gain or accumulating more than 1 IP

[888Katone]

Hi all

Just having second thoughts about a sale. We have 1 IP - a unit that was purchased for $185K in 2001 which is now valued at $350K. It can be rented out for $300 if we want to at the end of the current lease in a couple of months. Problem is it is heavily mortgaged and we are only just scraping by to keep it going as the rent is currently $220pw and putting in more than $10,000 of our own money into it each year. We can no longer do this as we did not fix the interest rate a couple of years ago and it is variable.

I am hesitant to sell it because of the capital gain but my husband says we should so we can switch to a positive cashflow mindset and get more than 1 investment property.

What would you do ? Keep the unit and keep scraping by for a couple of years until interest rates drop and rent starts to increase well, or sell now and by an IP at positive cashflow or near enough as possible for around $150K, then purchase another if possible..... We need a cash injection of $100K in order to keep the unit comfortably by the way....

 

[jingo]

Hi all

Just having second thoughts about a sale. We have 1 IP - a unit that was purchased for $185K in 2001 which is now valued at $350K. It can be rented out for $300 if we want to at the end of the current lease in a couple of months. Problem is it is heavily mortgaged and we are only just scraping by to keep it going as the rent is currently $220pw and putting in more than $10,000 of our own money into it each year. We can no longer do this as we did not fix the interest rate a couple of years ago and it is variable.

I am hesitant to sell it because of the capital gain but my husband says we should so we can switch to a positive cashflow mindset and get more than 1 investment property.

What would you do ? Keep the unit and keep scraping by for a couple of years until interest rates drop and rent starts to increase well, or sell now and by an IP at positive cashflow or near enough as possible for around $150K, then purchase another if possible..... We need a cash injection of $100K in order to keep the unit comfortably by the way....

If you borrowed $185,000 plus costs of $10,000 @ current interest rate (interest only) of 10% that is $18500. Less Rental of $15600 leaves a shortfall of $2900 p/a plus holding costs. (Rates, Water, etc).

That is before tax.

Not sure how you have a $10,000 shortfall each year unless your loan is principle and interest?

Changing over to an interest only loan will lessen your shortfall.

Regards Jason.

 

[888Katone]

I should explain - we paid off our unit in our first yr of marriage and remortgaged it after a few years on buying our PPOR.

The mortgage on the unit is currently $242K.

We did well with the PPOR - bought that in 2005 for $445000 - currently worth $650K in 2008 - with no improvements done. Buying in a blue chip suburb helped.

I'm considering looking into whether our unit could be attractive to a corporate tenant - any experience with them ? If I could get an extra $100 rent pw we could keep the unit. Already getting what we can out of depreciation and every other thing.

 

[boomtown]

It seems to me the source of the problem is the PPOR not the IP.

How about you rent out the PPOR and the IP. You can then negatively gear both of them. You can rent somewhere modest until your cashflow improves which should only take a couple of years.

 

[twobobsworth]

Are you claiming depreciation on your IP?

 

[murtagh]

I might be wrong ..

but have you spoken to anyone about improving the structure of your purchases so far? One of the fine mortgage brokers on SS might be able to lend you an ear, and suggest a way forwards?

It seems to me, from your snippet above that you bought your IP, paid it off, then borrowed against it for your PPOR? This would leave you with the current setup:

1IP - value $350k, loan $242k (loan was for purchase of PPOR)
PPOR - value $650k, loan $203k (guessing this!)

Is that about right?

 

[888Katone]

Thanks Murtagh - not far off - mortgage on PPOR is actually 170K.

What would you do ?

We have thought of everything so far and cannot do anything further with structure of loans - so we believe....

 

[murtagh]

Thanks Murtagh - not far off - mortgage on PPOR is actually 170K.

What would you do ?

We have thought of everything so far and cannot do anything further with structure of loans - so we believe....

I was hoping to scare some of the more experienced investors into replying .. it seemed on first glance that debt-recycling your non-tax-deductible debt into tax-deductible debt would help your position. But because you've effectively borrowed from the IP to fund the purchase of the PPOR .. debt recycling won't really help much - none of your borrowings are "for investment purposes".

So yes, I can see where you are stuck now!

One option would be to borrow against your PPOR or IP to buy income producing assets, and over time debt recycle while growing that asset base. This would rely on you having some spare perceived serviceability to make the borrowings required (even though you would be capitalizing all costs in the short term anyway).

 

[888Katone]

Murtagh What kind of income producing assets do you suggest ?

 

[BayView]

If you are committed to a long term love affair with property investing, then the emotion-less option would be to move out of the PPoR and make it an IP also.

Then all your loan interest will be tax deductible, as well as all the rates, insurances etc.

Most people struggle with this strategy as the emotional attachment to their PPoR is strong.

After 4 PPoR's (moving onto no.5, and no.4 is an IP now) we have found you can detach yourself emotionally from the property quite easily. It is just another house, and there are millions more out there.

Try to pay out less rent for the property you live in than you get back for your PPoR to create an excess cashflow. We have done this.

You can always move back into the PPoR later on if you wish, and any tenant damage will be minor and can be spruced up with a repaint etc down the track.

If you move back in within 6 years, there is no CGT on the PPoR should you decide to sell it.

Ensure you have IO loans in place for both properties to minimise loan repayments and make sure you have a DS completed as well for each property to maximise tax benefits.

 

[murtagh]

If you are committed to a long term love affair with property investing, then the emotion-less option would be to move out of the PPoR and make it an IP also.

Ah, good call! That solves everything (from a tax/cashflow view) nicely.. but moving house is not for everybody (but in this case, you could knock up a spreadsheet to show how much cashflow would improve, and see if that makes it an easier choice?).

Re: 888katone's question .. I meant "income producing" in the ATO sense - another property, or shares, or any other investment that would allow you to sort debt from the "bad debt" to the "good debt" column.