Sell or hold?

[tarah]

Hi all,

I thought I had made my decision after doing the sums but now I'm not sure! So thought I would ask you all! The IP is in Urangan, Hervey Bay QLD. I have had this IP for 3yrs now and have only been able to increase the rent by $10/wk. The agents I have spoken to seem to think I will probably only get what I paid for it - $295,000. It is currently fixed @ 8.25% for another 2.5yrs and the break costs today were $15,000. The loan is $286,140 and my spreadsheet shows that I have lost $15,000 in the 09-10 yr.

From holding other IPs long term I understand that PI is long term but I feel as if I'm wasting money holding this IP, as the CG OR CF is no good! Either I pay $15,000, break the fixed rate, sell if I can or keep it and lose another $15,000 over the next yr and hope I get some CG? I would prefer not to give the bank the money and have looked into portability but have just bought another IP so not all that much equity that I'm willing to use atm.

I would love to know what people have done in the past in a similar IP situation, as I don't like to regret? Thanks

 

[Player]

Hi Tarah,

First of all, congratulations on your courage to post something like this here. Not many would share their losers. Hopefully plenty will learn from this thread and the other responses you have.

I know nothing of Hervey Bay investment market, however it is unlikely in the medium term that your cashflow losses are going to be hedged by capital growth. You are correct that PI is long term, however sometimes mistakes are made and it's time to cut the losers before they bleed you. Copping this one on the chin will enhance your servicibility to take advantages of other opportunities that may present in our sideways tracking markets over the next two or three years.

This isn't advice, merely my thoughts on what I would do in your situation given the information you've supplied.

Again well done on your candid sharing of what appears to be a sour investing experience.

Good luck with your decision.

 

[Propertunity]

I thought I had made my decision after doing the sums but now I'm not sure! So thought I would ask you all! The IP is in Urangan, Hervey Bay QLD. I have had this IP for 3yrs now

Hi tarah,
OK so you purchased in 2007. According to RP Data:
in 2007 you would have had a portion of the 8.6% CG for the whole year
in 2008 you would have had 3.7% CG
in 2009 you would have had -4.4% CG
in 2010 you would have had 5.0% CG, if you had purchased a median priced property which it seems you did. Overall that does not look too bad.

...and have only been able to increase the rent by $10/wk.

That will be a function of the area you bought into. Lots of retirees and single parent families there......and rents go to affordability.

The agents I have spoken to seem to think I will probably only get what I paid for it - $295,000.

REA's are probably right.

It is currently fixed @ 8.25% for another 2.5yrs ...

OK - but just because you (and others) got the fixing part wrong, does not make the house a bad investment. It just means that the finance was wrong (in hindsight).

The loan is $286,140 and my spreadsheet shows that I have lost $15,000 in the 09-10 yr.

When you did your initial numbers before you purchased, you must have also seen that you were losing $15K per annum also, I'd assume? So at the time of purchase you were OK with that, but now you aren't? Did you have some overly optimistic views on CG for the area or rents perhaps?

From holding other IPs long term I understand that PI is long term

I'd suggest 7 - 10 years minimum. Over that time you'll get ups and downs. You are now into it for 3 years and have not seen much. How do you think the people who invested into Sydney in 2003 felt in 2008 - some 5 years later in pretty much your same situation? But if they held through all that, how do you think they feel in 2010 with some 10-12% CG in 2009 and another 10% in 2010? ....a little better perhaps? Sure, and holding out for some more too, no doubt.

Either I pay $15,000, break the fixed rate,

Yep, I feel for you. I hate break fees - but that was a risk you accepted on purchase.

OK looking at the numbers really quickly. You are losing $15K pa. (after tax I presume??) = $288pw.
How much over a 10 year period is CG going to be? (assume 7% pa average say on $300K) = $403pw
You would be, on average, $115pw holding over the long term.

Are there better investments to be made? Probably? But have you identified them? Do you have a plan to reinvest or retreat and lick your wounds? (perfectly understandable).

It's a hard call to make. In 2.5 years you come out of 8.25% fixed rate into something else. Will it be lower or higher or the same? Will you come out into 7% IRs? Will CG av. 7% or higher, or lower? How much can you increase rents by?

tarah, it's all about the numbers. It hurts right now. If you hold it will continue to hurt for some foreseeable years to come IMO.

So it is short term pain for long term gain or cut your losses and run? Only you can decide. Like Player said - all the best with the decision.

 

[Delilah]

If you hang onto it at your fixed rate (for the next 2.5 yrs), you will pay possibly more than 15K in interest (than if it were at a lower interest rate), so if you decide to hang onto it, wear the break fee now and get a lower variable rate.

If you wore the break fee and got a lower variable rate, can you do your sums and see how it fairs then? Anyway to increase the rent? Yes you already have a loss and yes you will be paying for that loss for a few years. I would project quite a few years into the future and factor in capital growth. Get an average CG %, see how long it will be before it starts working for you. Then consider if you are willing to wait for it to work or cut your losses and sell now.

 

[csc2]

cut your losses...not a quality investment in my opinion....market will remain flat to down for some time yet in my opinion in that area.

difficulty however will be trying to find a buyer unless the price is red hot...

dont be deterred from investing, most of us should own up to some ordinary decisions sometimes...i've sure had a few in my day...dont look back, look ahead but learn from it..

best of luck

 

[Philip Thomas]

Sell or Hold

As usual Propertyunity has posted some great points here. The 3 year time period that you’ve held this property is very short in my view. Real estate is not a get rich quick vehicle. For property you need to look at 5 to 10 year time horizons.

Many of the smart property investors never sell because of initial upfront purchase costs (stamp duty) & final disposal costs (CGT & for some GST) & the benefits of accumulating many Net Worth building / income producing assets.

To have realised a major capital gain in property over the past 3 years during the GFC is not common in Australia. This period has been one of excellent purchasing opportunities. A time to build portfolios for the long term.

I understand Harvey Bay is still on the radar as a growth centre, though the time horizon may be longer than many have expected. So it’s unlikely that there is anything wrong with the area. And if you’ve done your homework & chosen well then I’m sure you’ve nailed the location.

You may want to look at how you could add value to this property to increase the rents. If you do this make sure you cost your value adds before you do them. Have a look what other properties around where your investment are fetching. Have a look at the high rental & see what they’ve got that you haven’t.

As others have said only you can make the decision to hold or sell. And that decision needs to be in line with your long term goals & objectives. What other would do seldom has any bearing on what you need to do. After all they don't know where you are at or where you are going. I’m sure you’ll make an excellent decision.

Best wishes.

Philip

 

[tarah]

Thanks Player. I have also been thinking that the CG will not make up for the CF losses over the next couple of yrs (it would have to be a very large CG). I feel that it may hold me back for the next 2-3yrs as you said. With no CG for the next 2-3yrs it's basically just draining my CF.

Thanks again!

 

[tarah]

Thanks for the good points Propertunity! There was supposed to be an extension of the marina built in Hervey Bay so this was supposedly going to increase employment in the area etc which in turn may have created growth in the area. As we all know, we cannot predict CG just do our research. I guess I've been lucky to have steady growth over the years with my other IPs and I haven't experienced a completely flat market before so find it frustrating. I'm trying to make a smart investment decision and cut my losses? rather than allow it to drain my CF. But there is always the chance that it will grow in the next yr - I guess it's the risk you take sometimes! Thanks again

 

[tarah]

Thanks Delilah, I have done the sums but not worth the risk to pay the break costs and risk the interest rates rising anyway. The shortfall savings over the year are only about $4,500/yr if I break the fixed costs.

The losses over 3yrs would be about $45,000 and I can’t see it giving me that CG anytime soon. If it did give me this growth then I would only break even. So as others have said it would be a very long term hold to actually make any money and I’m not sure the CF would get much better over the long term, as it is a popular retiree area.

Thanks csc2, I agree with you about the market being flat for a while yet so meanwhile CF is drained and could have my money tied up in another IP in the next 2-3yrs. Definitely not put off PI I love it! I’m happy with other properties that I have bought so I guess one has to cut their losses sometimes to move ahead! Learnt from my mistake with fixing int rates (should have listened to my MB). She told me not to fix so that I had flexibility if I ever wanted to sell. Oh no, I’m never going to sell ha! Silly me didn’t listen to her!

Thanks Philip Thomas, I’m getting the maximum market rent atm and the IP is fairly new still so there isn’t really much more I can do to improve the IP. Hoping to make a smart decision by ?selling and putting the money into another IP (in the next yr) in capital city rather than a retiree area. I was always a ‘never sell’ person but sold my first IP held for 9yrs and just recently bought an IP in a great coastal area in Adelaide so feel that this has been a good decision so far.

Thanks everyone for the great responses!

 

[Propertunity]

There was supposed to be an extension of the marina built in Hervey Bay so this was supposedly going to increase employment in the area etc which in turn may have created growth in the area.

Ahh I see - so you were partly 'speculating' ....not just 'investing'. Thems the breaks.

 

[tarah]

Pretty much, I really don't know what I was thinking at the time! If I admit it, it was a rushed purchase. I had just bought another IP in Adelaide and was thinking of ways to save on land tax by buying in another state. Now I just have to find the best way to get out of/improve this situation Thanks for everyone's help, it has cleared a few things in my head

 

[Dazz]

I have had this IP for 3yrs now and have only been able to increase the rent by $10/wk

That will be a function of the area you bought into. Lots of retirees and single parent families there......and rents go to affordability.​

Hi Tarah,


This is the obvious root cause of your cashflow problem. You have selected an asset that isn't able to attract someone with alot of available money to do business with.


In future - try and do business with people who have alot of money.....they tend to not mind giving you some of it.


If you continue to choose to do business via a vehicle that attracts people who don't have enough money, then you will continue to have these cashflow concerns.


As Alan pointed out, it is also a function of poor finance selection - but you have acknowledged that already.


So - in conclusion, out of the two biggest decisions an investor needs to make before proceeding, finance selection and asset selection, you pretty much got 0 out of 2.


My suggestion is to stop playing that game and and start getting 2 out of 2.

 

[Ausprop]

I am still agonising over my mandurah units. with all the property i have flipped and traded I dont know why these are so difficult for me to let go. anyway I opened up the rates last night - $1200 each! so now I have to fork out $5k in rates, or $25pw in simple terms. would be better to have a property whereby the tenant paid the rates!

 

[wobbycarly]

So - in conclusion, out of the two biggest decisions an investor needs to make before proceeding, finance selection and asset selection, you pretty much got 0 out of 2.


My suggestion is to stop playing that game and and start getting 2 out of 2.

Ouch! Tough love.

 

[tarah]

Thanks Dazz, I realised this IP wasn't going to do all that much for me after about 2yrs and have been agonising over whether to sell it. Everybody hates to lose money but if I cut my losses now I will be better off and have learnt from it. I guess I was trying to diversify as well so that all of my IPs weren't in a capital city

Hi Ausprop, $5,000 in rates isn't so bad if your units are giving you good CG but yes commercial property would be better so the tenants kindly pay it for you!

 

[tarah]

I like Dazzs tough love he says it how it is!

 

[Ed Barton]

I thought I had made my decision after doing the sums but now I'm not sure!

what was the decision you thought you had made? are you looking for validation of your decision or an alternative view?

I have had this IP for 3yrs now and have only been able to increase the rent by $10/wk. The agents I have spoken to seem to think I will probably only get what I paid for it - $295,000.

do the agents really think that, or are they just nodding when you say you can sell for 295k? an independent valuation might be money well spent.

imo capital gains and rent increases will be close to zero in the medium term in HB. how many other investors like you are trying to get out? if it's lots it will take a long time for demand to exceed supply.

 

[tarah]

Hi Ed,

Was looking for both I guess. The agent I have signed up with suggests marketing it at low $300s but as you said, there are a lot of people trying to get out. Will be waiting until mid October to list it due to the new tenancy rights in QLD, where a tenant can leave without penalty if they are 2mths or less into their lease.

Thanks for all of your responses. It has helped me clear my mind!