IP2 - What are our options?

[Toby]

I am new to this forum and am hoping someone can give me some advice. My current situation is:

PPR value $670k, owe $405k
IP1 value $300k, owe $190k
IP2 value $750k, settlement due early 2008

IP2 is a 2 brm apartment with river views in the Perth CBD. It was purchased off the plan in early 2006 with a deposit of $50k (we used some equity from IP1 for this deposit). It was purchased for $520k.

Our situation is my wife is pregnant and will be stopping work in July 2007. Currently my income is $70k and she is on $74k. She will be returning to work after 12 months on a part time basis where her salary will then be approx $30k.

Is there any way we would be able to settle on IP2 early next year given we will only be on one income of $70k? It seems we have enough equity in our properties to do this. Would a no doc loan be an option for us, even though we are not self employed? The other option is to try and sell the IP2 prior to settlement but we are concerned the buyers finance may fall through and then we lose our deposit. Another option we have considered is selling our PPR and moving into the IP2 for a short time then sell it to avoid paying CGT. Ideally, we would love to be able to hang onto all three properties and remain in our PPR. Is this at all possible or are we dreaming??

Any advice would be greatly appreciated.

 

[Toby]

IP1 currently rents at $210 per week
IP2 should rent for $600

 

[want2bewealthy]

Youre going PPOR on an IP?

 

[The Y-man]

Would a no doc loan be an option for us, even though we are not self employed?

Any advice would be greatly appreciated.

A no doc is available to anyone - it's just that it is relatively more expensive, and you may need a lower LVR.

Talk to a good broker from this forum.

Cheers,

The Y-man

 

[BV]

Toby,
Roughly looking at your borrowings Vs income
my opinion is that you will have a cash flow problem in a market that has peaked and is likely to correct.
Additionally, it seems to me that IP2 is a problem.
I doubt that there would be many tenants who will be willing to
pay high rent, so your tenant base for IP2 will be small and at the same time
capital gains in the short term is questionable.

I would try to offload IP2 to anyone who is willing to pay as much as you
have agreed to pay or even a little less just to get out of this difficult situation.
Selling the PPOR is not a bad idea, but you need to live somewhere.
Seeing that you are young, you probably don't need that much space
so perhaps moving into IP1 is not a bad idea.
However, serviceability is an issue so you need to do something about IP2
or the PPOR, I would let IP2 go.
I wouldn't even think about no doc loans in this situation.
Good luck.

 

[Toby]

Thanks everyone for the feedback so far.

BV - Given rental vacancies in Perth are currently running at approx 1% and based on my research of rentals for similar properties in the CBD, I feel confident it would rent out easily and for $600+ per week (which is why we want to hang onto it if possible!)

Y-Man - Can you, or anyone else for that matter, recommend a good broker (preferably in Perth) who specialises in investment loans? I agree it would be good to seek some further advice from a good broker about No/Low Doc loans. We have tried 3 in the past and they have all been pretty crap.

Just to clarify, our plan is to borrow a bit extra as a buffer to cover the gap between the rent and repayments on IP2.

 

[BV]

Toby,
Are you serious?
$750K loan on IP2 is minimum $1050 per week interest alone.
If you go no doc it could be another $200 or so per week
What are you trying to achieve by holding on to it anyway?
Your market has peaked and it's due for a correction.
It is possible that you might not see any capital gains for a long time.
Is there something special with this IP?
Cheers

 

[Toby]

Toby,
Are you serious?
$750K loan on IP2 is minimum $1050 per week interest alone.
If you go no doc it could be another $200 or so per week
What are you trying to achieve by holding on to it anyway?
Your market has peaked and it's due for a correction.
It is possible that you might not see any capital gains for a long time.
Is there something special with this IP?
Cheers

Hi BV,

I think you have misread the info provided re IP2. Our purchase price on the property is $520,000. I have conservatively estimated its current value at $750,000. The link below is for an identical property in the complex which is currently on the market for $860,000.

http://www.realestate.com.au/cgi-bi...header=&c=30257733&s=wa&snf=rbs&tm=1178964952

As we have siginicant equity in this property wouldn't a low/no Doc loan be an option?

 

[Les]

G'day Toby,

Just a quick look tells me that, even AFTER you "take delivery" of IP2, your LVR is still less than 62%. Pretty healthy IMHO. So that's ONE half of the equation.

The other half is "Debt Servicability" - and that's another ballgame altogether. So THIS is the area to concentrate on. Can it work? Hmm - dunno yet - let's see:-

First off, my mate Rolf says "If you have the Equity, DSR is not a problem". So, looking at that, it seems (if your figures are accurate) that you could borrow (70% NoDoc) nearly $140k - and this is after allowing for $470k to purchase IP2.

So, now, the question is "Is that going to help?"

---------------------------------------------------

Fast forward - you've now purchased IP2. Your total Interest is ~$85k pa (assuming 8% IO Int) - on a single $70k Income, that doesn't look good. But the projected rent is ~$40k (you haven't allowed for costs yet - say 25% for RE fees, Insurance, etc) - so take $30k rent off the $85k Interest bill. The loss on the IP's, depreciation, etc will help - let's take a guess, and say another $5k off the bill.

So, Toby, broadbrush tells me you're heading for a $50k loss per year. With wife returning to work next year, this reduces to $20k per year.


Is this a problem? Well, I guess it depends on whether it is worth PAYING for this loss? (i.e. is the portfolio likely to increase its value to offset your cash loss - substantially, over time - and how much time?)

With $1.7m in property, 3% growth would cover that first year loss (in $$ terms) - but it doesn't cover inflation. It also doesn't replace the cash lost without more refinancing...


So, that's the news. The extra $140k (nodoc loan) would help for some years - but how many? I'll leave you to chew on that. And the Interest paid on the LOC will be growing too...

In short, how confident are you in the future market to invest your hard-earned on a weekly basis? How long can you hold if there is NO growth for 3 years? Can you hold?


Of course, if/when it DOES boom, your reward will be in the Capital Growth - but if you sell, you'll be sharing that with the ATO (don't forget).

Sorry, Toby - this situation is NOT a "one size fits all" - BV is in favour of you selling IP2 for what you can get. But what do YOU think?

The numbers (above) can sound a bit scarey and/or risky. But different people will interpret them differently. In the end, this is your choice. To me, it's not "cut and dried" as to the best way to go,

Hope it helps,

Regards,

 

[WillG]

one golden rule in investing is 'protect the downside'. You don't want to be put in a situation where you 'have to sell a property'

Upside
If you can rent the IP2 for $600+ per week you will be out of pocket about $43k per year before tax. After tax about $30k (based on your marginal rate of 30% - annual income of $70k). This means things will be tight - leaving about $20k for living expenses. This isn't really an upside !

Downside
* Get less rent, things even tighter
* Get no rent, forced to sell
* Bank won't give you a loan and you are forced to sell IP2 for much less than it is worth

Options
1. Sell IP2
2. What would IP2 rent for if furnished ?
3. Rent PPOR and move into IP1.

If you are keen on keeping all properties, I would be inclined to rent your PPOR and move into IP1 at least while your wife isn't working. This will make the large amount of your interest payment tax deductible and will give you the best chance of getting a loan to finalize the purchase of IP2

Just my thoughts

 

[BV]

Toby,

The lower mortgage changes your situation a little.
I had a look at the pictures.
Do you believe that prices for this type of housing and for the area are sustainable?
If I had a very large debt on our PPOR, I would have considered selling IP2, pay my CGT,
then put the remaining money into the PPOR and live happily for a year or 2
till the wife goes back to work.

I don't believe that prices in WA will be going through the roof anyway
but if they did move upwards, with a reduced PPOR debt you would be
in a much better position to enter the IP market again.

As an alternative you could also pull some of the equity out and use that to cover
any shortfall in your IP expenses and this will allow you to hold them all.
You will have to decide if this is the right thing for you depending on
your current and future family circumstances.
If you decide to hold them all, do your refinance early in the process
while MrsToby still has an income and try to avoid lo doc and No doc loans.

Do you have the deposit for IP2?
If you don't you could probably refinance the PPOR, get the equity out
and use that as the deposit for IP2 or for the shortfall.

Difficult case, I would probably sell IP2, it's not that there won't be any more
high rise buildings being built in the future.

cheers

 

[Toby]

Thanks Les, WillG & BV for the your balanced and well considered feedback. It has helped to consolidate my thoughts.

Knowing that life is short (although I’m only 30) I really don’t want to go backwards, hence my desire to hold all three properties. In relation to the future of the Perth property market I’m not naive enough to expect a continuation of the past 3 year growth. However, with unemployment currently at 2.7%, average incomes now higher that NSW and the fastest rate of population growth in the country I do think it’s unlikely that property prices are going to go backward in Perth. Another plus to the situation is the increase to 500k of the stamp duty free threshold for first home buyers announced this week in the state budget.

Keeping in mind that ideally we would like to hang on to this property (IP2) for the long term my gut feeling is that we should go the no doc loan to buy some time to see what happens to the Perth market. If it stagnates or go backwards slightly then we’re still way ahead of where we were in 2006 when we signed up to purchase IP2 for 520K. On the other side if the coin if it goes up another 5 – 10% over the next couple of years we’re laughing!

As I’m only a youngster and had some positive experiences in the Perth market lately maybe I’m overly confident. But it seems to me that its people that are prepared push things a little that do well?!

 

[BV]

But it seems to me that its people that are prepared push things a little that do well?!

Many people take risks but the timing has to be right.
IMO there is no point in taking risks in a flat of falling market.
Good luck.