Great apartment, crap location (Melbourne CBD) - advice needed

[jerrybee]

I know what the knee-jerk reaction is going to be the minute you read "Melbourne CBD", but please bear with me as I lay out the pros and cons of keeping it. Yes I made a mistake buying it a few years ago, but I don't want to rush into making another.

Pros of keeping it:

• It's a huge 70sqm, warehouse style, 1 bedroom apartment with 3.5m ceilings, not one of those modern dog boxes. It's a beauty. There aren't many apartments like this nowadays.
• The building has 90 apartments in it, mainly owner occupied, and it's tightly held - in the last 3 years, there has been literally 3 sales (I know one of the sellers, she just wanted a sea change), which is almost unheard of in this area!
• Yield is good, I get $420p/w on it, which is again quite rare for a 1 bedder in the CBD in this day and age. I know this will drop as more stock comes online but relative to the competition I expect it to remain above average. People just see this apartment and want it.
• It's in the CBD, not Southbank or Docklands. It's not much of a consolation but it could be worse!
• Lastly, I hit my borrowing limit when I purchased my last house a few weeks ago. This was right before all the latest APRA changes, so this means even if I were to sell this, I would not be able to redeploy the money into another investment anyway. This is possibly the main thing stopping me from really considering a sale right now.

Cons of keeping it:

• Well, I don't have to tell you all - there's a crazy supply problem that's only going to get worse.
• My I/O period ends in 2 years, which means I will likely need to throw more good money after bad when it comes time to refinance. The good thing is it's only 80% LVR so I won't be totally screwed.
• I'd be lucky if I could recover the stamp and sale costs, although this is almost trivial if the CBD apartment market collapses.
• A worse apartment in the same building sold for 20k more than I paid for mine, which really surprised me considering almost everything in the CBD is selling for a huge discount. This could be the best chance I've got to offload it so if I miss the boat I may not get another shot for a while.

What do you guys think?

 

[NPB]

If you sell you could keep the loan open and transfer it onto another property you buy using loan portability. Most lenders you don't need to qualify for the lending again the same loan remains open just a new security. You would know your exact budget to buy once you sold the current property and would have the settlements on the same day.

 

[The Y-man]

1. where is it in the CBD (which end, which street?)
2. have you got a car space
3. how much is the body corp?
4. Why do you think other developments will flood the market (*your* market of a large 1BR) - are they all building apartments like yours?


The Y-man

 

[jerrybee]

1. where is it in the CBD (which end, which street?)
2. have you got a car space
3. how much is the body corp?
4. Why do you think other developments will flood the market (*your* market of a large 1BR) - are they all building apartments like yours?


The Y-man

1. Legal district, west end, Little Collins
2. No
3. I think 3k a year, but I can't remember the exact amount. It's reasonable.
4. No mine is quite unique, but the sheer volume will offset its uniqueness.

 

[jerrybee]

If you sell you could keep the loan open and transfer it onto another property you buy using loan portability. Most lenders you don't need to qualify for the lending again the same loan remains open just a new security. You would know your exact budget to buy once you sold the current property and would have the settlements on the same day.

This one is with Homeside, do they allow this?

 

[NPB]

This one is with Homeside, do they allow this?

yep, although the interest only renewal may not be too easy in 2 years

 

[jerrybee]

Ok now that I've had time to think this through, I'm still confused but I figure I could refinance for another 5 years while my job and finances are secure, which will give me more breathing space / time to decide what I want to do.

 

[The Y-man]

Just FYI, I have a small "dogbox" 1BR (admitedly with a carpark and storage) in the CBD (north edge - it is technically in North Melbourne by about 2 buildings). As you, we have also had many new developments going up nearby, and when we tried to sell (twice), the sound of crickets permeated the night...... Anyway, it is rarely vacant, and the value has continued to go up (just got it refinanced recently).

So if your unit is quite niche - which it sounds like - I'd vote for holding it (unless the building is about to fall or something )


The Y-man

 

[jerrybee]

Interesting. All this time I've been assuming valuation would come in under, which is why I've avoided refinancing. Perhaps I should try...which bank did the val btw? Are you sure it wasn't the postcode that helped you? North Melbourne would be far more valuable on paper than Melbourne CBD I would think.

And yeah mine also has a storage cage too but it's tiny, like the width of a gym locker but pretty deep, enough to hold a queen sized mattress. Building is in great condition.

 

[DavidMc]

I would say this could do reasonably well. There are zillions of 'investor build' dogboxes, a rare 'owner occupier' warehouse style conversion with high ceilings is something else.

 

[Deltaberry]

I guess my question would be, why take an uncertain approach when there are easy picks? Monetising and putting it in better alternatives seems a better move.

The most important thing in property investing is to know when you've bought a dud. No one gets it right all the time - I've had 1-2 duds (but probably not as dud as a CBD apartment). But I think the key is to get out of a dud ASAP, because every day you hold it is another day of opportunity costs.

Eg you could've sold this 2 years ago for maybe broadly the same price and bought a Carlton terrace which would've almost doubled for example. A renovated single storey 130sqm 2-bedroom terrace in a top Carlton or North Melbourne street probably costed $650-750k even in 2014. Today they sell for $1.1-1.3m.

 

[jerrybee]

I guess my question would be, why take an uncertain approach when there are easy picks? Monetising and putting it in better alternatives seems a better move.

Absolutely, I understand this line of thinking, definitely. But this is my reason:

Lastly, I hit my borrowing limit when I purchased my last house a few weeks ago. This was right before all the latest APRA changes, so this means even if I were to sell this, I would not be able to redeploy the money into another investment anyway. This is possibly the main thing stopping me from really considering a sale right now.

But as NPB said, there may be alternatives for me to consider...

Because of how tight things are, if it turns out that I really couldn't redeploy this money elsewhere, I would have to choose between either keeping it, or having nothing at all. The latter is preferable if the market absolute collapses. So the question is, how likely is this?

 

[Deltaberry]

That's a tough call, personally I'd sell and get rid of some debt/pay down debt. Good time to monetise and just see what happens to the market.

Don't forget risk management is the other equation to growing a portfolio. It's hard to grow a good $10m portfolio. But easy if you do it recklessly. The latter comes crumbling down pretty quickly though when things turn the othe way.

 

[jerrybee]

That's a tough call

Yup these APRA have really thrown a spanner in many people's plans

The other thing is I have a pretty substantial LOC, enough to last me many years. So I don't really need another buffer. It's just so hard to decide what to do..!

 

[JDP1]

Wot would you do with proceeds if you sold it? I assume you are after cg. Is it costing you to hold Amd can you afford it?

I like owner occupiers whorehouse conversions and would hold it as long as you can. the demand for such products in the future will be good. also see how it compliments.your portfolin the other hand if you feel that its long term prospects are not good and it's a dog, then sell it and crywtallise your losses and move on.

 

[jerrybee]

Wot would you do with proceeds if you sold it? I assume you are after cg. Is it costing you to hold Amd can you afford it?

I wouldn't do anything with it, as I said I can't "redeploy" the money, so I'd only get back my ~80k deposit. And since I'm pretty secure financially, I don't really need that 80k so it would just sit there in my offset I guess. Maybe I'd buy shares, not sure. But nothing earth shattering.

It's cash flow positive BTW since the rental yield is so high, so it would only start causing me irritation if it were to get stuck on P&I.

I like owner occupiers whorehouse conversions and would hold it as long as you can. the demand for such products in the future will be good. also see how it compliments.your portfolin the other hand if you feel that its long term prospects are not good and it's a dog, then sell it and crywtallise your losses and move on.

Short to medium term prospects are terrible I think. It's unique, sure, but it'll be offset by the sheer volume of stock in the CBD.

So it would be a long term hold. I have no doubt it'll be worth something in the long term.

HOWEVER, my main concern is that if the market collapses (e.g. crisis in Asia, which causes all the OTP buyers to sell down), then it would be difficult to refinance, which may restrict me in the short to medium term. Say 3 years from now a great opportunity comes up and I can't get any more money from the bank because this is stuck on P&I which reflects poorly on my cashflow. So strategically, long term is OK I think. It's the tactical short to medium term where I'm exposed if the apartment market collapses.

 

[JDP1]

I wouldn't do anything with it, as I said I can't "redeploy" the money, so I'd only get back my ~80k deposit. And since I'm pretty secure financially, I don't really need that 80k so it would just sit there in my offset I guess. Maybe I'd buy shares, not sure. But nothing earth shattering.

It's cash flow positive BTW since the rental yield is so high, so it would only start causing me irritation if it were to get stuck on P&I.




Short to medium term prospects are terrible I think. It's unique, sure, but it'll be offset by the sheer volume of stock in the CBD.

So it would be a long term hold. I have no doubt it'll be worth something in the long term.

HOWEVER, my main concern is that if the market collapses (e.g. crisis in Asia, which causes all the OTP buyers to sell down), then it would be difficult to refinance, which may restrict me in the short to medium term. Say 3 years from now a great opportunity comes up and I can't get any more money from the bank because this is stuck on P&I which reflects poorly on my cashflow. So strategically, long term is OK I think. It's the tactical short to medium term where I'm exposed if the apartment market collapses.

Hold onto it.

You have no plans to do anything with pproceeds, not significant amounts even if you sold it, and you have job stability.
Those conversions are also gonna he in more demand than run of the mill apartments being built in Melbourne, they are more unique and serves as a point of difference. and it's unlikely that the Melbourne economy will crash..they have too much firepower in terms of jobs for that to happen, barring black Swan tytype events.

 

[jerrybee]

Thanks everyone. It was really useful to be able to get some other opinions on this. It can be hard juggling all the pros and cons in your own head and it's good to be able to lay it all out like this. I think I'll keep it and try to extend my IO loan in a few months while the going is good instead of waiting till the end of the term 2 years from now. If I can get 5 another years, then surely most of the surplus in the CBD should have been absorbed by then. Or at the very least the worst of it should be over.

 

[Deltaberry]

Yup these APRA have really thrown a spanner in many people's plans

The other thing is I have a pretty substantial LOC, enough to last me many years. So I don't really need another buffer. It's just so hard to decide what to do..!

But your LOC is just a buffer for cashflow.

Do you have a buffer for rising interest rates on your existing debt? Or you're debt free?

Or just rent it out for a bit and maybe save up the $80k over 5 years through rent?

 

[jerrybee]

But your LOC is just a buffer for cashflow.

Do you have a buffer for rising interest rates on your existing debt? Or you're debt free?

Or just rent it out for a bit and maybe save up the $80k over 5 years through rent?

Yeah my buffer is big enough to withstand P&I at an increased interest rate across all my loans for several years. My total LVR is only like 60-70% once I factor in cash, shares and my LOC.