Sell house or use equity?

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From: Alex Keaton


Hi all,

This is probably a slight twist on a lot of questions you get here.

I have a $120K house which I (stupidly) borrowed $60K on line of credit which is almost gone - doodads! Thanks to Kiyosaki, Burley et al I'm doing a lot better with how I spend my money now ;)

My house was constructed in '76 which cost $25.5K. I want to start real estate investment and am just sort of doing the numbers now.

I have a job which earns me 40K and I have the potential to earn a lot more (only 22) and I have no debt (other than the LOC).

To get myself out of financial mess I am tempted to sell the house, pay back the $60K and pocket $60K change. Then start renting with my employment income and use the $60K to invest in properties.

Is this the best way to go?

I have also considered refinancing the 60K debt on the house to an IO loan, and then renting the property. The house is older though, so I am inclined to think that the costs of repair etc as time goes on will make this not as attractive as extracting the remaining 60K and moving on.

Alternatively (tell me if this sounds dumb), I could sell the house to my parents for 100K (which they borrow on IO), pay off the LOC and pocket the 40K for real estate investing, then have them do a wrap on the property and pocket the difference between their interest payments on 100K and the wrap payments on the 125K house. I've never dealt with wraps (I'm in WA) and I don't want to break Consumer Credit Code so I'd be going to a solicitor to write up a wrap contract.

Or...I could refinance into an IO loan and do the wrap myself, or a lease option.

So many alternatives..yet this is a unique situation since I own the house but I have debt that I would really like to get ride of.

Does anyone have any ideas?

AK
 
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Reply: 1
From: Duncan M



>Does anyone have any ideas?


1. Buckle down, pay the doodad debt off. Keep the house.

2. Learn how to budget, know your personal cashflow

3. Work towards maximising your income,

4. Get to know your market back to front

5. Do some simple transactions before trying to pull something exotic off..

6. Dont get into any more consumer debt (no new cars!)

7. Dont involve your parents

Sorry my advice is so boring and staid :)


Regards,


Duncan.
 
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Reply: 2
From: Michael G


Hi there,

If you havent been told it, you can't ask for advice (especially financial or investment advice) on public forums, ASIC would skin the speaker alive!, but you can bounce ideas off people and ask for views or opinions with which to make your own decisions.

Selling a house will cost you at minimum 3-4% in agents fees ($100k house = $3500) plus solicitor/conveyancing fees ($500-$1500), plus possible capital gains tax if it is an invesment property, we'll assume it isnt.

So selling your house could possibly cost you up to $5000.

As a percentage $5000 on $60000 = 8.3%

"I have also considered refinancing the 60K debt on the house to an IO loan, and then renting the property."

If I assume you rent the house out and rent elsewhere, assume rent in both cases is $150/wk and interest is 7%, then your cashflow would be

RENT income - Interest ($60k) - RENT expense

$200 -$80 -$200 = $80/wk shortfall

Whereas if you were to stay in house and pay debt off you'd only be up for the cost of the $60k debt.

"Alternatively (tell me if this sounds dumb), I could sell the house to my parents for 100K (which they borrow on IO), pay off the LOC and pocket the 40K for real estate investing, then have them do a wrap on the property and pocket the difference between their interest payments on 100K and the wrap payments on the 125K house. I've never dealt with wraps (I'm in WA) and I don't want to break Consumer Credit Code so I'd be going to a solicitor to write up a wrap contract."

Wraps in W.A. is messy, the Credit Code there charges extra fees to lend, and wraps are not really worth doing as a one off, too much setup. And it doesnt get rid of the problem, as your installments would be used to make incremental payments anyway.

"Or...I could refinance into an IO loan and do the wrap myself, or a lease option."

You may be able to l/o the house to an interested buyer if the house is worth buying at the price you wish.

"So many alternatives..yet this is a unique situation since I own the house but I have debt that I would really like to get ride of."

Why not keep the house - if its in a good growth area, then the land will have intrinsic value, and its a good a place as any to stay?, just think of the $60k debt (regardless of its source) as a $60k mortgage and just pay it off normally. If you house is worth $120k, an 80% LOC will give you $36,000 of equity to play with. Now if your disciplined you can use this to invest with and your the income from the investments to accelerate the payments of the $60k debt/mortgage?

In this scenario, you aren't hit with extra agent and legal fees, you have ready access to equity without reapply for finance and are in a position many here would envy, that is one with equity to jump start their investment portfolio.

The trick is not to blow the rest of the equity, and to reduce the non-income producing debt as quickly as possible.

Remember, reduce your expenses and increase your income!, selling may ad extra expenses. That $5k you spend of selling fees could be used elsewhere.

Or... you could sell because you're at the top of your market, cashout, go rent, wait for the market to drop and get back in again with cash (as long as you dont spend that payout in the meantime).

Just some thoughts...

Michael G.

p.s. this was not advice !
 
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Reply: 2.1
From: Alex Keaton


Thanks very much for that, I appreciate your advice. Perhaps I should clarify a few more things.

For personal/occupational reasons, I need to move from the area that I'm living in currently - about 25kms away. The rents there are about 220pw, but I will save considerable amounts of money through reduced travel, car, and other expenses. So this is a fixed expense I will have to incur in my situation.

In effect, I will need to either sell or rent the house, or use an l/o.

The interest payments on the LOC are about 200pw - to me this works out as pretty damn expensive and I didn't think it was that much before (probably because I hadn't spent it all before)...this is about 17%pa right? I had a guy come to my house to sell me the LOC product which uses a Visa..and now I know it's when they come out to your house that you're paying the highest commissions for their product.

The house would probably rent for 140pw based on market rentals (not sure what the numbers would be in a l/o situation). This would put me in a -60pw situation (not incl. other expenses) on the house if I don't re-finance the loan. Might it be worth refinancing? This is why I thought getting rid of the debt might be the best way.

I really do appreciate everyone's comments and opinions. If anyone has any further thoughts please feel free to share them.

AK
 
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Reply: 2.1.1
From: Terry Avery


Based on the new information you have provided I am shocked that your
interest is 17% p.a. What product is this? Personally I would run, not walk,
run and find out if I could get out of the LOC. An IO loan on $60,000 at 6%
would cost you $69.23 a week in interest. A big saving on the $200 p.w. you
are paying now. You must be paying the LOC at credit card rates and not bank
interest rates.

That still leaves you the debt to clear and it is not tax deductible. If you
took a P&I loan at 6% over 20 years your repayments would be $429.86 p.m. If
you could rent for $175 p.w. ($9,100 p.a. or $758.33 p.m.) and refinance
your loan that would give you about $328 a month extra cash flow to pay
rates, repairs, insurance et al. You would also have to pay tax on the extra
rent income above the extra expenses but not including the home loan
interest.

As you have pointed out you could sell and start all over again or you could
refinance and pay off the house by getting someone else paying rent to pay
it off leaving your salary free for other investments. You could also borrow
against the equity you have to purchase another property. From what you said
you may have about $60,000 equity so you could use that to borrow against
for another IP. The interest and costs for that one would be fully
deductible.

These are just some ideas. You will need to work through the numbers
yourself and perhaps seek advice from an accountant.

Cheers

Terry
 
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Reply: 2.1.1.1
From: Alex Keaton


I suppose the only other consideration is the fact that this is my current principle place of residence. If I'm going to go and live somewhere else (which I need to), then wouldn't I be better selling the house now while I get the income as tax-free? Of course I'm only going to get half the money for it in my pocket.

If I re-finance the loan, and then rent the house out, my interest payments will be lower (and tax-deductible) and I will still benefit from the 50% capital gains deduction should I sell eventually..right?

There's a couple of things to consider too..just thinking aloud here. Thank you everyone for your continued thoughts and comments.

AK
 
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Reply: 2.1.1.1.1
From: Terry Avery


Hi Alex,

Selling or not is a decision you will have to make and you will get half the
money in your pocket less sales expenses. Assume you sell for $120K, repay
the $60k and have $5k in expenses leaving $55k. You can invest that in many
ways or buy an IP. For a $200k IP you would need say $20k for a deposit on
an LVR of 90% so you could probably get two $200k properties and use the
remaining $15k for purchase costs. You would then have $40k in equity versus
your current $60k.

You could refinance your current LOC to another product at say 7% and
increase it to 80% of $120k or $96k. This would be split into two accounts,
one of $60k (non-deductible debt) and one of $36k (deductible debt if used
for investments). $36k would get you one $200k IP so you would now have two
IPs with only one set of purchase costs. The aim would be to pay down the
$60k account as quickly as possible by directing all spare cashflow into it.
When it is paid off you can then access it to buy two more IPs.

These are just some more options to consider. Ultimately it is your decision
but you should also exercise patience and think through all possibilities.
Read the archives and get your structure right first. More importantly
develop a plan and get a good property savvy accountant.

Cheers

Terry
 
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Reply: 2.1.1.1.1.1
From: Alex Keaton


Thanks again.

I've spent many hours this week reviewing the tax and cashflow implications of each, and had come to something pretty similar to what you had mentioned.

I was looking at using my current house as an IP, but was not sure whether to rent it out or use an l/o. Renting seems to mean I could get hit with doing a lot of minor fixups (the house is nearly 30 y/o). I read the l/o handbook and figure I could pass on a lot of the maintenance to the "option holder" using an l/o.

I posted another thread but thought I would carry the comments through here. Has anyone had any experience using l/o's in Western Australia, or knows a good property lawyer here?

I am looking to get an l/o contract done up but was wondering how much that will set me back, and whether I will need to write up any separate contracts to a potential buyer other than the l/o contract.

Cheers

AK
 
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Reply: 2.1.1.1.1.1.1
From: R S


Hi Terry!

If you will do some renovations in your property and get it revalued, I bet you'll get out more than $120K. Might as well stay in your current house, refinance and use your equity to buy 1,2 or more "Positively" not "NEgatively" geared investment properties and perhaps even shares.
At least if its positively geared, the rest of the money you will get from your rent, put into savings/other investments, debts, and for future renovations.

cheers
R.S
 
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Reply: 2.1.1.1.1.1.1.1
From: Terry Avery


Hi RS,

You seem confused. I was replying to Alex who owns the house in question.

Cheers

Terry
 
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