Parramatta CBD apartments

[zenq]

My wife owns 2 parramatta CBD apartments with her sister. With our PPOR and other investments, the neg gear cashflow is frustrating us. We hope to start a family soon, but are flat out covering expenses now. We would like to sell 1 or 2 of the apartments to reduce our expenses, and reduce our exposure.
Sister in law wants to keep them, but we are determined to sell. We know now is not the best time (we had wanted to sell 2 years ago but acceded to sisters demands to stay in). Can't really see things improving for years to come.
What are peoples thoughts...?
Note warning in this story about business with family without clear (pref written) partnership agreement.

 

[alexlee]

Written agreements only work if you're willing to enforce them. Are you really going to sue your family? If not, the written agreement is useless. Better not to mix family and money in the first place.

See my post on this thread:

http://www.somersoft.com/forums/showthread.php?t=25577

Basically, as much as the negative cashflow might be hurting, will you be better in the long run if you keep the apartments? If you sell now, will you buy back later on, or will your expenses just go up to fill the freed-up cashflow? Very personal thing, but something to think about.
Alex

 

[michaelg]

Hi,

How is your sister's cashflow position? Could she buy you out?

Here's just 1 thought. You wrap her your half of the unit. Basically...

1) Determine an agreed market value
2) Determine the value of your share
3) Determine the payment plan (repayments, frequency, term, loan amount etc)
4) Draw up an instalment contract
5) Execute and manage

2 things then...

1) Your cashflow increases
2) Your sister builds in equity
3) Your sister gets a bigger tax deduction (paying more interest)

You do 1 property, if that works well then you do the 2nd.

You might baloon the loan after 5-10 years, the theory being the property goes up in value and she can refinance and cash you out.

You can use the cashflow towards a more managable property.

Risks...

- default

What happens if your sister can no longer make payments. May you terminate the loan and readjust the ownership percentage based on the amount of principal paid off (that should be easy to calculate).

Regards
Michael

 

[FatBoy]

For reasons such as the above example i no longer have any interest in entering partnerships with family or friends...

The last one cost me almost 100k...

 

[zenq]

thanks for replies

Thanks for the comments. Good idea about wrapping. However, the sister does not want to/cannot buy us out.
While I agree we are going backwards by selling, (given costs of buying and selling etc) we are disatisfied with the performance of the property: we feel we could invest the money better elsewhere. Primarily, though its a question of priorities and values. We are both in our mid 30s and choose to have children soon. We don't want to miss out on life because of an investment property. Property investing is a priority for us, and we have that well covered elsewhere, where we have full control, and getting much better returns than this property will expect.
Lack of control over this asset has made it inconvenient. Also, lenders view the total debt against each partner, but only half the rent when calculating servicability for a new loan, which limits my wife from borrowing further should she wish to.

While I take your point about not suing your family, I would suggest anyone entering this sort of arrangement make clear plans for holding strategy and exiting. Should one wish to get out, the other should buy them out at market rate or the property sold. Lack of up front plans have caused lots of headaches for us.

Other people have advised us simply to not do business with family. I suppose some people are happy to bludge of family and they are too nice to enforce payment. (That is not what is happening here but I have heard this sort of story from friends). Keeping such deals as commercial arrangements (interest and fixed repayments etc) can, I believe minimise problems.

My main query is "what do people think of selling this sort of property now": I see flat growth for years with possible oversupply issues. TO get out now would be cut our losses, rather than paying interest and rates for years before the upside comes.

PS 2br 2 bath, 2 yo apartment on corner of Pitt and Macquarie St overlooking park.

 

[grossreal]

hi zeng
there is always people that will give you hind sight advice and it all depends on the lost at the moment and the possible gain else where.
with regards to getting funding if your wife wises to invest else where that is alot easier question and there are lots of ways of doing that.
parramatta is not a bad place to have units and the value I see as being there.
I like to hold so I am comming at this from a little bias view as I see you lose more then you gain by selling I am one that the only loss should be time to evaluate a project or property and leverage off what you have got.
in hind sight you should look at using unit trusts in future and you still have problems with family members but it is limited to a share issue and you don't have as many of these problems as you can leverage off the trust or company if thats the structure you have used.
with a loss of the gst, sellers margin, plus costs and then on top of that selling into a corrected market is a relatively big hit
and will you get the same profit in another investment just to cover the loss.
hard call
and not one for me to call

 

[peteb]

since they own two properties between them is there any chance of taking one property each (after valuation of each property) and then each doing as they please, free from the other parties involvement ....
this would take a bit of paperwork and accounting but it may work and be the cheapest option ....

 

[grossreal]

hi pete
depends the how the were purchased if they were staraight joint names no as the finance company don't like to take people off as security unless the are sold ( they like as much security as possible) if it was a unit trust that would be possible. again depends how the structure was set up.
if in own names and join then its very hard
and if they are sold to either party it will trigger a cg for one party and stamp duty.

 

[zenq]

limited equity

We have sat down and done some sums on the amount of equity, and even with an optimistic sale price, each sister would share only about 10% of the sale price. So really, while they might improve their cashflow somewhat, they would basically be giving the units away, and as you say, it would be much harder to buy again. Had they sold @ the peak of the boom (which we were keen to do) they would have had 50k each extra: well worth the exercise.
I be encouraging them to stick with it and find another way to improve cashflow.
Thanks for your comments