Help! not sure what do with my investment property!

[Poppy0421]

Hi all,

I have got myself into a bit of a pickle and now need some hard advice.
I bought my 1925 strata maisonette back in 2006 for $250K. My parents paid half so i had a mortgage for $135K (ish). In 2008 using the equity i borrowed $80K and completely renovated the house- new bathroom, new kitchen, removed kitchen wall to make it open plan, new paint, new wooden flooring, all new plants and landscaping to front, side and backyard as well as new paint work to windows and woodwork outside. So this increased my mortgage to $235K (ish).

I loved renovating so much that when i finished i was addicted and wanted to buy a new property that i could renovate. So i put the house on the market in September 2010 for $410K to $420 (as recommended by the agent). In the mean time i found a new house, put an offer on it and it was accepted! But my house still hadn't sold, i did get an offer for $400K which i accepted but then they pulled out. By this time my bridging finance was killing me, so my parents lent me an extra $75K so i could retain both properties and rent out my first place. So this increased my mortgages to $280K for investment property and $330K for new house totaling $610K interest only mortgage (i couldnt afford to pay interest and principle).

My first house is now rented for $350 a week to a great tenant who has told me she wants to be there long term (divorced lady in her 50's living there alone).

So my total monthly mortgage repayment is $3800, i get about $1300 per month from investment property and my income is $4000 per month. So things are pretty tight.

I have been caught out before when bills for my investment property come in such as water bill, insurance and council rates and my agent pays them in one hit so some months i get no income from it! Its very stressful not knowing what i may have to live on, and its putting a great deal of pressure on me and my parents (whom i feel very guilty for pulling them into my mess).

So should i sell my investment property? even though the market is so bad? will i get any profit out of it now that i have to pay capital gains tax?? But then i can refinance my current house and actually start paying off the principle not just the interest. And i have gotten my renovating bug out of my system and want to settle in this house for many years to come with little no stress!

I just dont know what to do!!! help please (and yes i know i am very naive and have jumped into a risky venture doing what i did, but live and learn right?).

 

[jingo]

So should i sell my investment property? even though the market is so bad? will i get any profit out of it now that i have to pay capital gains tax??

Hi Poppy,

I'd suggest calculating how much it is costing you to hold both properties. The longer you go on holding two properties, the more costly it will be. You may be better off taking a lower price for the property you intend selling - this will hopefully take away some of the stress.

All the best with it.

Regards Jason.

 

[Empty Pockets]

I just feel sorry for your parents.

 

[VYBerlinaV8]

Where are your properties located?

 

[Propertunity]

If it is alright with you, I want to dissect up your post and point out the errors (as I see them) and offer some possible course of action to get out of the mess you find yourself in.

In 2008 using the equity i borrowed $80K and completely renovated the house- new bathroom, new kitchen, removed kitchen wall to make it open plan, new paint, new wooden flooring, all new plants and landscaping to front, side and backyard as well as new paint work to windows and woodwork outside.

This is typical novice renovator action and you've overcapitalised! To make a reno work you really need to stick to 10-15% of the purchase price of the property as the max. reno budget. You'd be looking for a $1.50 min - $3 max return on end value for every $1 spent on the reno.

I loved renovating so much that when i finished i was addicted and wanted to buy a new property that i could renovate.

OK, it is easy to do but emotions and investing are not a good mix (as you've discoverd). Just stick to the numbers - if they work - fine, if not, move on.

.....By this time my bridging finance was killing me,

NEVER, EVER, EVER, under any circumstances.....buy BEFORE you sell. I see so many people get into this position where they HAVE to sell, at almost any price, to get out of this situation. Of course, if I am interested in their property, they're going to get a very low offer from me.

So my total monthly mortgage repayment is $3800, i get about $1300 per month from investment property and my income is $4000 per month. So things are pretty tight.

So out of total income of $5,300 pm you have mortgage payments of $3,800 pm = 72% of your income I can see why things are tight!

So should i sell my investment property?

You need to do one or both of two things:
1. Sell a property or properties
2. Increase your income

even though the market is so bad?

What's the alternative? Continue to bleed cash?
You have to take a hit so that you can live to fight another day.

will i get any profit out of it now that i have to pay capital gains tax??

Yeah, well that scenario is the downside of selling. No sale = no CGT.

But then i can refinance my current house and actually start paying off the principle not just the interest.

I am not a huge fan of paying off principal, especially if you want cash to invest. But you need to invest more wisely.

And i have gotten my renovating bug out of my system and want to settle in this house for many years to come with little no stress!

That's just the financial pain you are feeling right now talking. The renovating bug, when allowed to operate within a budget, can actually make you a lot of money.....but unrestrained, can bring you down.

... but live and learn right?).

Some people do. Others are destined to repeat the same thing over and over whilst expecting a different result.

Where you came undone (apart from the overcap. renovations and bridging finance) was that you changed strategy mid-execution. You were supposed to sell property #1 to fund property #2, but you kept both without considering the holding costs.

Now you need to sell one or increase your income immediately.

 

[Tillie]

A few questions to consider...

1. Do you live in the property number 2? If not, can you rent it out increasing your income? Can you rent out spare bedroom for someone?

2. You only pay CGT if you sell something with the profit

3. Consider if it is better to sell property number 1 or number 2

 

[pennyk]

i agree with the other's comments that you need to sell one of the properties ASAP. You may suffer a loss, but at the moment, you are over your head in debt, and you will sink unless you can change something.

 

[Ed Barton]

I just feel sorry for your parents.

the second payment was a loan from your parents, was the first?

you really need to include you parents in any discussion about what you do.

do you know what the first place would sell for today?

 

[Poppy0421]

hi all,

Thank you so much for the responses. You are all fabulous.

My parents are amazing and are fortunate to be able to help me so much, but i know things are tight for them at the moment too which is why i feel like i need to repay them the $75K they lent me to get property number 2 ASAP. Dad wont tell me how he was able to finance me the original $125K and he also lent my sister the same amount so she could buy her property (I suspect he re-mortgaged his house which was paid out many years ago).

Property number 1 which is in Broadview SA about 6 Kms from the city, i cant go back too. I had a terrible relationship with my neighbour which was another reason why i wanted to sell it. Also when i first started renovating it I had no intention to sell it, i loved that little house with all my heart and just wanted to improve my standard of living. But going through the courts with my *bleep* neighbours over strata disputes has completely removed any love I have for that property anymore. So i just want it gone. But am weary as to do it now and cut my losses, OR try and keep it for say 2 more years when the market is better (hopefully) and sell it then?

I realise i am incredibly stupid for what i have done, and havent made the best decisions, but i am trying to make things right now. Just need to be put on the right path. The ironic thing is that i cant even afford to go to a financial advisor to find out what is the best thing to do! and my parents, bless them, will just do anything to help me, not give me the hard advice i need- hence why i am here on this forum!!

In regards to my income, believe it or not, i am actually very good at my job and have had a $12K pay rise in the past year, but i am getting a bit of a reputation at work as being money hungry (which i am!!). However, i dont expect another pay rise until mid next year and that would probably only be around 3K. I currently earn $68K p/a.

My current property i am living in is in Queenstown SA, an 'up and coming' suburb about 12K from the city, its a 1920's 2 bedroom (or 3 including dining room) wooden clad cottage on 670 sqm2 of land. Its beautiful with all original architecture and fixtures and in fantastic condition- with lots of potential to expand. I paid 415K a year ago. I would expect it would only be worth about the same amount. And i have been renting out the spare room in Queenstown for $150 per week, but she is moving out in 2 weeks time, and i just cant stand the thought of getting another stranger in. I am not good at house sharing when its my house!

My Broadview house was valued at $400K by the bank a year ago, and the realtor said i could get $410-420. But now, i am not sure what it would be worth, hopefully 380-400K?.

If i sold Broadview for $390K how much would i pay in CGT? considering i paid 250K and my mortgage for that property is $280K (although when i refinanced my broker flipped my mortgages and put the higher one as broadview and lower mortgage as the Queenstown house but when it came to tax time my tax agent didnt like that as the paper work on the loan doesn't distinguish what loan is for what property....)

I am so over my head here!!

 

[Ed Barton]

hi all,

Thank you so much for the responses. You are all fabulous.

My parents are amazing and are fortunate to be able to help me so much, but i know things are tight for them at the moment too which is why i feel like i need to repay them the $75K they lent me to get property number 2 ASAP. Dad wont tell me how he was able to finance me the original $125K and he also lent my sister the same amount so she could buy her property (I suspect he re-mortgaged his house which was paid out many years ago).

Property number 1 which is in Broadview SA about 6 Kms from the city, i cant go back too. I had a terrible relationship with my neighbour which was another reason why i wanted to sell it. Also when i first started renovating it I had no intention to sell it, i loved that little house with all my heart and just wanted to improve my standard of living. But going through the courts with my *bleep* neighbours over strata disputes has completely removed any love I have for that property anymore. So i just want it gone. But am weary as to do it now and cut my losses, OR try and keep it for say 2 more years when the market is better (hopefully) and sell it then?

I realise i am incredibly stupid for what i have done, and havent made the best decisions, but i am trying to make things right now. Just need to be put on the right path. The ironic thing is that i cant even afford to go to a financial advisor to find out what is the best thing to do! and my parents, bless them, will just do anything to help me, not give me the hard advice i need- hence why i am here on this forum!!

In regards to my income, believe it or not, i am actually very good at my job and have had a $12K pay rise in the past year, but i am getting a bit of a reputation at work as being money hungry (which i am!!). However, i dont expect another pay rise until mid next year and that would probably only be around 3K. I currently earn $68K p/a.

My current property i am living in is in Queenstown SA, an 'up and coming' suburb about 12K from the city, its a 1920's 2 bedroom (or 3 including dining room) wooden clad cottage on 670 sqm2 of land. Its beautiful with all original architecture and fixtures and in fantastic condition- with lots of potential to expand. I paid 415K a year ago. I would expect it would only be worth about the same amount. And i have been renting out the spare room in Queenstown for $150 per week, but she is moving out in 2 weeks time, and i just cant stand the thought of getting another stranger in. I am not good at house sharing when its my house!

My Broadview house was valued at $400K by the bank a year ago, and the realtor said i could get $410-420. But now, i am not sure what it would be worth, hopefully 380-400K?.

If i sold Broadview for $390K how much would i pay in CGT? considering i paid 250K and my mortgage for that property is $280K (although when i refinanced my broker flipped my mortgages and put the higher one as broadview and lower mortgage as the Queenstown house but when it came to tax time my tax agent didnt like that as the paper work on the loan doesn't distinguish what loan is for what property....)

I am so over my head here!!

i only read the first few lines of your post. love and beautiful do not mix when it comes to investing in property. get rid of one property and if you can treat non ppor as an investment in the future then return to property investing.

come to think of it, maybe you should get rid of both.

 

[ali]

rent out both and move in with the parents for a year while paying down the principle?

 

[marg4000]

You must take action.

Hoping the property market will improve in 2 years is all very well, but what if it doesn't? And what are your holding costs in the meantime?

Read Propertunity's advice.

Read it again.

Sell property 1. Since you say you can't live in it, it must be the one to go.
Marg

 

[The Y-man]

Yeah, well that scenario is the downside of selling. No sale = no CGT.
.

HeyProp - considering the first property I assume was a PPOR for 4 years (until 2010) and the other one is a ppor (even if it was sold for a profit) - there would be reduced/no CGT

The Y-man

 

[The Y-man]

So my total monthly mortgage repayment is $3800, i get about $1300 per month from investment property and my income is $4000 per month. So things are pretty tight.
.

Is that $4000 after tax or before?



The Y-man

 

[The Y-man]

.... i had a mortgage for $135K (ish). In 2008 using the equity i borrowed $80K and completely renovated the house... So this increased my mortgage to $235K (ish).

This don't add up.....

The Y-man

 

[Propertunity]

HeyProp - considering the first property I assume was a PPOR for 4 years (until 2010) and the other one is a ppor (even if it was sold for a profit) - there would be reduced/no CGT
The Y-man

Quite right!......and similar advice I've given to others too

I really wasn't really focussed on, or seeking to answer the CGT question, moreso the rest of the situation.

 

[weg]

i only read the first few lines of your post. love and beautiful do not mix when it comes to investing in property. get rid of one property and if you can treat non ppor as an investment in the future then return to property investing.

come to think of it, maybe you should get rid of both.

Agree, except poppy NEEDS to learn some of the basics of property investing and how the market works before leaping back in.

Poppy, just curious whether you had a depreciation schedule done. If not get one done asap, on the property with the renovations.

In the mean time get extra boarders in so you don't default on the bank loans. Your parents are a priority too - if you keep both how do you repay them (who are struggling because of all this)?

Sell the Broadview property (prices have held up well there and if you are realistic should not have problems selling it). You have very likely over capatialized but looking at your figures I'd say you probably won't pay much, if at all in CGT, because at the end of the day you haven't made that much out of the investment.

 

[HandyAndy888]

Hi all,

I have got myself into a bit of a pickle and now need some hard advice.
I bought my 1925 strata maisonette back in 2006 for $250K. My parents paid half so i had a mortgage for $135K (ish). In 2008 using the equity i borrowed $80K and completely renovated the house- new bathroom, new kitchen, removed kitchen wall to make it open plan, new paint, new wooden flooring, all new plants and landscaping to front, side and backyard as well as new paint work to windows and woodwork outside. So this increased my mortgage to $235K (ish).

I loved renovating so much that when i finished i was addicted and wanted to buy a new property that i could renovate. So i put the house on the market in September 2010 for $410K to $420 (as recommended by the agent). In the mean time i found a new house, put an offer on it and it was accepted! But my house still hadn't sold, i did get an offer for $400K which i accepted but then they pulled out. By this time my bridging finance was killing me, so my parents lent me an extra $75K so i could retain both properties and rent out my first place. So this increased my mortgages to $280K for investment property and $330K for new house totaling $610K interest only mortgage (i couldnt afford to pay interest and principle).

My first house is now rented for $350 a week to a great tenant who has told me she wants to be there long term (divorced lady in her 50's living there alone).

So my total monthly mortgage repayment is $3800, i get about $1300 per month from investment property and my income is $4000 per month. So things are pretty tight.

I have been caught out before when bills for my investment property come in such as water bill, insurance and council rates and my agent pays them in one hit so some months i get no income from it! Its very stressful not knowing what i may have to live on, and its putting a great deal of pressure on me and my parents (whom i feel very guilty for pulling them into my mess).

So should i sell my investment property? even though the market is so bad? will i get any profit out of it now that i have to pay capital gains tax?? But then i can refinance my current house and actually start paying off the principle not just the interest. And i have gotten my renovating bug out of my system and want to settle in this house for many years to come with little no stress!

I just dont know what to do!!! help please (and yes i know i am very naive and have jumped into a risky venture doing what i did, but live and learn right?).

Pickle indeed.....sorry, a bit too complex for me.

 

[Poppy0421]

My income is $4000 net per month. My car loan is squashed into my mortgages so i dont have any other outgoings except for daily living expenses (and i dont pay for petrol my parents still do.....spoilt brat i am i know!!)

Based on everyone's advice i am going to talk to a realtor and get a new appraisal of Broadview and put it on the market. If i can sell it now and pay minimal to no CGT then i think that's the best thing, rather than wait a few yrs and get a higher selling price but pay more CGT.

I spoke to my dad about everything and I said i will sell Broadview and pay him back at least $75K but he said he wont accept it! he wants me to just reduce my whole total mortgage by what ever i sell Broadview for. He is such an amazing dad, but i am determined to pay him back every penny!

To tell you all the truth, the thought of selling Broadview, feels great, like a huge weight has already been lifted. I dont think the property game is any i should be playing with, and will just stick with my one property which is a 'home' to me and not a cash cow.

 

[The Y-man]

My car loan is squashed into my mortgages....

Ok, now were getting more info....

The Y-man