Disillusioned with our property folio

[ellers]

Hi,

I'm not sure if this will be the right place to air this, but I'm not sure where else to start.

My wife and I have built a folio of 13 properties since 1998 (when we were just out of uni and girlfriend/boyfriend). I know this is a small folio by some standards but by others, it's a good achievement.

We worked overseas for a number of years and management companies looked after the properties adequately, though as you know, management companies rarely push hard at rent so although our head was above water, it wasn't by much. We accumulated useful tax losses that we haven't used up yet.

On return we sold the 6 properties in another state. This reduced debt and overhead somewhat - certainly, it's nice to feel a little less encumbered.

Capital gains have been good. Post sales, the folio is worth around A$4.5m with debt around A$1.5m.

Since returning, we've taken over management of the properties (as they're all in the same city as us) and this experience has been either "quite ok" or "quite unpleasant".

Now two tenants are becoming very difficult, and one of our parents is critically ill with life expectancy of a few months. Combining these makes us question our priorities and how we spend our time.

Basically, we want to sell all of the investment properties and live debt free (plus some) in our primary residence, which had been rented out for years before we moved back. The thought of this freedom is tantalising more and more frequently.

My fear is that this is an over-reaction and that we'll regret it in time.

Has anyone faced this or similar, and have views?

Thank you.
E

 

[Coconutwheels]

Property wise, it sounds like you're in a great position. What's your cash flow like?

I'm not a fan of selling off to pay down all debt. My father has done this and every time we talk about property he kicks himself about some of the properties he sold off.

Could you hand over the management to a property manager again, to reduce stress, time etc?

 

[Truly Exotic]

13 properties in just over 13 years!!!!

Awesome effort!

dont worry about what others have or dont have!!

 

[Ski-bum]

Sorry to hear that one of your parents is critically ill, and it is likely a very emotional and stressful time for you and your family.

As suggested, if cashflow is not an issue, why not outsource your portfolio management again so that you can use this time to spend with the family?

You've done such a great job building up a portfolio and equity, it would be a shame to make any hasty decisions. Let it tick over in the background, then reassess when you are ready.

good luck!

 

[ellers]

Thanks for the supportive comments.

The cashflow has been mixed. Of the out-of-state properties, which are all units, cashflow was all slightly negative for some years before we sold them, in the range of -$1000 to -$4000. Strata in that area was high, and another part is that none of the properties were new, so there was always maintenance to be done. Also, the fact that those properties were all units limits both the income and capital gain potential.

The decision to buy units is one I lament. I look back and wish I'd followed advice to buy houses, but at the time I found this a hard expense to get over. Hindsight is 20/20 and all that.

The properties closer to home are different. All were positive in small amounts ($500-$4000) except one. As an example, one of the "just positive" units had income of $17k and bank interest of $11k, and other expenses (rates, strata etc) that meant it was net positive by $1,148. The other property is a nicer house in a good area and has seen excellent capital gain but (relatively) poor rent, so it lost thousands. We've been ok with that because the overall folio picture of tax losses plus capital gains plus steady-ish debt is acceptable.

The short version is that the whole folio is "ok" but there is certainly no early retirement in sight. The debt slowly increases while the capital gains increase faster.

I guess part of me starts to wonder at what point having the folio will become more of a benefit than a drag. Not to be unthankful, as I'm glad we invested when we did, but at the same time, in recent years it's begun to weigh on my mind more and more.

Comments welcome.

 

[westminster]

I'm a little confused so I'll need more information.

You had 13 properties, sold 6 so presumably now have 7? That 7 is worth $4.5m and only has a $1.5m debt? That is a 3m equity.

You should be in a VERY good position if that is the case.

If you wanted to reduce hassles you could
1. Sell everything and convert to new houses which have no strata, little maintenance and added bonus of good depreciation
2. Sell a couple, pay off any PPOR debt and keep debt on IPs for tax reasons
3. Use a Property Manager again to reduce your stress.

I think you need to take a very good look at each property in the portfolio and see if that is costing you a better opportunity.

 

[Aaron_C]

I don't see the problem if the rental should more than cover the debt repayments. Over time the rental will pay off the loans anyway so you'd be a bit crazy to sell unless you needed the cash out for some other reason.

 

[JacM]

It's easier to first define the outcome you want, and then select actions that lead towards that outcome.

So if the outcome is "pay off debt" and selling the IPs down will achieve that, then great.

However a big caution is to remember why you started investing in the first place. With no IPs at all, you will be back to the situation of having zero income unless you attend a job to get it, and this will always be so (unless you have other income streams). With IPs, if you crunch your numbers, you should be able to see when they are sufficiently cashflow positive to support you in at least a semi-retirement. The properties don't have to be paid off in full to have a cashflow surplus that helps support your living costs.

 

[thatbum]

You have 3 million in net assets but not significantly cashflow positive? What was your original exit strategy?

My own strategy calls for around $2 million net assets at 5% net yield to retire.

 

[Colin Rice]

My fear is that this is an over-reaction and that we'll regret it in time.

I think this will be the case ^^^^^

Handball to some PMs to manage. Ask on here for recommendations?

Set up some LOCs or SVR equity loans assuming you are still working?

Take some time off to smell the roses and work out your priorities before selling up.

If you are uncertain about anything and time permits chill out until you get the inner peace to proceed.

 

[Dazz]

Post sales, the folio is worth around A$4.5m with debt around A$1.5m.

Basically, we want to sell all of the investment properties and live debt free (plus some) in our primary residence, which had been rented out for years before we moved back. The thought of this freedom is tantalising more and more frequently.

Has anyone faced this or similar, and have views?

You have nice choices. Well done on your risk taking, cash injection and property management skills to get you to this stage. It obviously hasn't been luck, but hard grind.

Like one of those old Saturn V rockets that used to launch astronauts into space, perhaps your first stage booster rockets, whilst getting you to this height, aren't giving you the boost you require any more.

You've grown to the point it's time to jettison that first stage, and fire up the second stage booster rockets.....don't be scared or fearful.....embrace the exhilaration of having made it to that level.

To maximise cashflow and maximise flexibility, and this is just me, I'd sell the lot, rent somewhere and maybe buy something outright like this, giving you a clear $ 5,360 per week to live off.

http://www.realcommercial.com.au/property-industrial+warehouse-qld-yandina-5424961


.....or, you could gear it up a bit, take on a bit of debt, giving you a clear $ 10,000 per week to live off, and pay off the interest (it'll still be waaaay positive).

http://www.realcommercial.com.au/property-industrial+warehouse-qld-salisbury-501032155



.....or, you could gear it up a bit, something on a big long 10 year lease to a national company, giving you a clear $ 10,767 per week to live off, and pay off the interest (it'll still be waaaay positive).

http://www.realcommercial.com.au/property-industrial+warehouse-qld--500856831


Up to you of course, but gotta be better than trudging along with those spent empty first stage booster canisters, with all of the costs and headaches that come with them.


Good luck with your choices. Respect !!

 

[Deltaberry]

Unfortunately residential property and laws around it are heavily skewed in favour of renters, partly because the people who set the law (ie MPs) and the people who enforce the laws (ie bureaucrats) are usually quite poor, making them perpetrators of tall poppy syndrome and they HATE real estate investors more than they hate the political party on the other side.

Therefore, the savvy thing to do is to liquidate the portfolio and seek higher ground.

 

[Terry_w]

Hi,

I'm not sure if this will be the right place to air this, but I'm not sure where else to start.

My wife and I have built a folio of 13 properties since 1998 (when we were just out of uni and girlfriend/boyfriend). I know this is a small folio by some standards but by others, it's a good achievement.

We worked overseas for a number of years and management companies looked after the properties adequately, though as you know, management companies rarely push hard at rent so although our head was above water, it wasn't by much. We accumulated useful tax losses that we haven't used up yet.

On return we sold the 6 properties in another state. This reduced debt and overhead somewhat - certainly, it's nice to feel a little less encumbered.

Capital gains have been good. Post sales, the folio is worth around A$4.5m with debt around A$1.5m.

Since returning, we've taken over management of the properties (as they're all in the same city as us) and this experience has been either "quite ok" or "quite unpleasant".

Now two tenants are becoming very difficult, and one of our parents is critically ill with life expectancy of a few months. Combining these makes us question our priorities and how we spend our time.

Basically, we want to sell all of the investment properties and live debt free (plus some) in our primary residence, which had been rented out for years before we moved back. The thought of this freedom is tantalising more and more frequently.

My fear is that this is an over-reaction and that we'll regret it in time.

Has anyone faced this or similar, and have views?

Thank you.
E

I haven't read any replies so apologies if this has been mentioned already.

I suggest you quickly appoint an agent. At this time you wouldn't want to worry about silly tenants. Let the agent manage things.

And why sell? Perhaps you were thinking of because of the hassle. If you sell you are killing to geese that lay magic eggs...

Perhaps consider selling the worst property and using the proceeds to park in a offset account to reduce the interest payable and give you some comfort knowing you have funds available when needed.

 

[alexlee]

There are a number of questions you want to ask yourselves:

1) Objectively, does the portfolio require any more management now than when you were overseas and using PMs? Is it harder just because you're doing it yourself? If it's just a management issue, get a property manager and reassess after a few months.

2) How much of this is just it's harder for you to handle the fairly normal day to day issues of property investment because of your family concerns? Is it affecting your ability to think about this objectively? If it is, do you really want to make rash decisions?

2) Is the portfolio not performing? If so, is it that it doesn't appreciate (lean towards selling), or doesn't produce enough cashflow (consider other investments)?

3) What's your work situation? How much cashflow do you need / want from the portfolio? ('I want as much cashflow as possible' isn't an answer as you want to consider the tradeoff between capital gains and cashflow against your needs).

4) Say you sell everything. How will you generate an income? The generic 'buy a commercial property, shares and/or bonds' doesn't cut it. Have you owned whatever you're planning to buy to generate cashflow?

5) Will that income last you a lifetime taking into account inflation, repairs, etc? You're only in your 30s. You might live for another 50, 60 years. Will taking a significant period of time off damage your ability to get jobs in, say, 10-15 years if you need to?

6) There are interim plans, such as selling some of the portfolio, bank a couple hundred k, don't work and take care of family, but with the objective of restarting work and investing in the short / medium term.

"it's nice to feel a little less encumbered", "The thought of this freedom is tantalising more and more frequently", "My fear is that this is an over-reaction and that we'll regret it in time". These are all emotional thoughts, with no objective analysis behind it.

I wouldn't do anything drastic until you work it out: i.e. why is being encumbered with debt (when you have appreciating assets on the other side) so bad? Freedom is great, but does selling everything really create long term freedom, or are you at risk of running out in 15-20 years when you can't get a job anymore? Whether it's an over-reaction should be backed up by plans and numbers.

 

[redwing]

The folio is worth around A$4.5m with debt around A$1.5m.

Great work Ellers, 13 IP's is no small achievement according to the ABS

Assuming a yield of 4% on a $4.5M Portfolio, that's around $180k per annum (4% is only a very rough guide and allows for some expenses).

Repayments on $1.5M would be around $105k per annum at 5% and a loan term of 25 years

If you sell you will be up for CGT and you'll also lose the future Capital Growth of your assets. Assuming 7-10% growth that's around $315-$450k per annum (averaged).

Income currently more than covers expenses?

Do you feel your IP's are well-located and likely to achieve reasonable to good capital growth in the future?

Assuming the value of your IP's double in 10-12 years where would you be positioned then?

I agree with the others re: engaging Property Managers, your job then is just to manage the managers, they will deal with the daily issues

If you do sell, where will you park your funds (Bank, Stock Market, Mattress)?

Regardless of what you decide, all the best and congratulations on your achievements

 

[FelixL]

Congrats on having 13 properties, thats awesome achievement!

Here is my 2 cents

• Use PMs always, have a separation from tenant for a small fee well worth the money
• If you are after cashflow, may be think about share index funds? dividend will provide regular income while having good capital growth
• Units without huge strata aren't that bad compare to houses. Its got decent capital gain and much better cash flow than house

 

[marg4000]

It does not have to be all or nothing.

If you are uncomfortable with the number of IPs, consider selling some of the poorer performing ones.

And get a good PM even if you have to monitor things more closely until you are sure.
Marg

 

[wylie]

Are you holding 13 IPs now, or 7 (you mention you sold off six IPs).

I'm just wondering because with a value of $4.5M if it is seven you now hold, they are worth a bit.

Well done either way. That's very impressive.

I would hand them back to be managed, free up your time, especially with a family illness to cope with and look at it again once you are emotionally better placed.

 

[DavidMc]

My take is that there are two main things that will cause you to be unhappy with your portfolio:

1. Tenant hassle
2. Not enough cash flow

Everybody has already suggested an answer to 1 - take the time to find a GREAT PM. It will make all the difference.

For number 2, Dazz's post is great! One day I plan to add a bit of commercial into the mix. I would however buy a share in a commercial property syndicate, say 1/6th or 1/10th into a petrol station or warehouse just to learn the ropes first. 9-10% yields seem pretty achievable and will give a nice boost.

 

[Deltaberry]

Sometimes it's better to have 1-2 properties (where the tenant pays rent on time, hopefully) and keep arms-length distance.