Sell underperforming 1 bed IP & Opportunity cost ?

PPOR purchased 2008 for $255 k (loan $177 K) - Valued at approx $320 - $350 k in 2014

IP purchased 2009 for $210 k (loan $199 K) - Would get approx $230 - $240 k if sold today

IP is a 41 sqm 1 bed in Dianella
Also still negatively geared even after holding for 4 years.

Properties are (approx) conservatively worth $230 k + $ 320 K = $550 K
I havent had them valued.

Currently my LVR is 376/550 = 68 % LVR

If I sold my IP my LVR would be 177/320 = 55% LVR


I always thought over the past couple of years that seeing as it wont take long for it to become neutral I may as well hang on to it and over the years it would become positve cash flow and cg will happen but now I'm looking at the opportunity cost.

I could sell off this dead dog and put my cash into something that will perform better. I'd buy in a rising market and something like a villa this time in the outer suburbs but not too far out so it wont be too ng. Something MTR said to me the other day really struck a chord with me.

Would you cut your losses and sell even though you might be lucky to only make $20 k from the ip or even just break even.

Or shall I keep my LVR at 68 % and buy another ip this year, then wait for a couple of years until Perth hits the top of the cycle and then sell this underperforming asset then. I have no idea how much CG i'll get if i sell it in 2 years.

I think my gut is telling me to get rid of it and pull the cash out to buy something with more potential. If i buy right this year I might even be able to invest again next year as I'll have equity from the new ip which im hoping will have risen in value and my lvr would start out at 55%

If I did sell it, it has put me back a few years but I think its all been a good learning experience for me in not to buy at the top of the cycle and to buy a better property, something owner occupiers will want to live in as well as tenants. Also not just to look at the yield.

Also I have come out of this really well. i'll have saved $50 k in another 1 and a half years staying here at my parents. Also they gave me a large deposit for my ppor because at the time I could only afford a loan of $177 k and the property was worth $255, so that meant I had instant equity. Financially i'm in a good position. I'm still only young at 40 and will be investing for a good 20 years.

Hoping for some guidance.

thanks :)
 
When the Perth market hits top, the potential properties you could now buy would have hit the top as well. Actually a better performing property would have gained even more.

Each have their own perceptions and ways of doing things. For me a 41sqm property is a risky investment. I prefer more land component. We sold a duplex last year because it is a duplex and didn't have much backyard. But by using the sales, we are about to settle two more properties.

This is good time to buy and sell as well. If I am in OP's position, I will buy an IP, sell IP1 and buy yet another one. At 5% interest rates the IPs should be neutrally geared. And 80% LVR is fine. I would but properties the owner occupiers would buy as well. Those sort of properties will do well. And the properties should have additional potential as well. One needing a cosmetic Reno, one which can be added with new bedrooms/bathroom, subdivision potential, suitable to add granny flat etc would be good.
 
Interesting dilemma.

I think I would sell it and then try and buy something else. But only put it at the price you want, if it doesn't sell for a good price then hold out a bit longer.

At what year does your PPOR lose its PPOR status? When is it 6 years since you've been living in it?

You could do some interesting financial modelling where you sell both. No CGT on PPOR, minor CGT on IP. You might end up with $150k and you can use that to buy 3 properties with $50k deposits.

I'm not saying this is the answer but you need to examine all possibilities to make the most of any strategy. Your PPOR has seen most growth and you can sell it CGT free.
 
I know that you are concern about SANF a lot but I would buy more and wait a least a couple more years before considering selling. 68% LVR with 2 properties isn't risky at all.

Perhaps you should take a look at how your cashflow is at the moment with your 2 properties and decide how much you are willing to fork out each week for 3 properties.
 
I've been too busy to reply back :( thanks for all the responses. It's given some things to think about! I'm having a day off on Wednesday so I'll come online & reply then. :). Cya
 
Hi Alex - I'm in this situation myself.

The way to tackle it is to get Excel and forward project each scenario 20 years. Guestimate your CG rates for the likely 'best case' vs 'average case' vs 'worse case'. i.e. 7% growth, 5% growth, 3% growth (and don't forget 3% rental growth) and take into account maintenece (if one property is much older than the others, like in my case).

Measure your equity and cashflow under each of your three scenarios. See where you are better off after 20 years, average case.

I find when you look at the numbers like this you get a clearer picture.
 
I know that you are concern about SANF a lot but I would buy more and wait a least a couple more years before considering selling. 68% LVR with 2 properties isn't risky at all.

Perhaps you should take a look at how your cashflow is at the moment with your 2 properties and decide how much you are willing to fork out each week for 3 properties.

Its not only the risk that needs to be considered. As an active investor it is a good idea to review your properties/performance and do the sums, if its costing money to hold with no growth you are actually going backwards.

The killer is the lost opportunities, today is a perfect example, markets are moving good time to sell and reinvest into another market that is rising. Generally speaking you will make money if you get the timing right.

I think with the property in question - from what I have read, it was wrong timing and wrong property to purchase, double whammy.

MTR:)
 
Its not only the risk that needs to be considered. As an active investor it is a good idea to review your properties/performance and do the sums, if its costing money to hold with no growth you are actually going backwards.
MTR:)

I agree.

Alex - A good way to view your properties is from a portfolio perspective. A good model to use is the BCG Growth Matrix (http://www.valuebasedmanagement.net/methods_bcgmatrix.html)

Categorise your properties in terms of growth and market share (i.e. cash generation). They will fall into one of four categories:
1. Stars (high growth and high cash generation)
2. Cash Cows (low growth and high cash generation)
3. Dogs (low growth, low cash generation)
4. Question Marks (high growth, low cash generation)

Sounds like your IP is low growth and still negatively geared (i.e. a "Dog" - divest it).
 
Its not only the risk that needs to be considered. As an active investor it is a good idea to review your properties/performance and do the sums, if its costing money to hold with no growth you are actually going backwards.

The killer is the lost opportunities, today is a perfect example, markets are moving good time to sell and reinvest into another market that is rising. Generally speaking you will make money if you get the timing right.

I think with the property in question - from what I have read, it was wrong timing and wrong property to purchase, double whammy.

MTR:)
I agree also! Sell it now while there is a bit of activity in Perth and purchase a better performing property.
 
+1 for selling. Underperforming in both cash flow and growth.

You can buy in area's with both better cash flow and growth.


I would also consider the option as mentioned selling PPOR if you can if you think it's out of growth.
 
Hold on everyone, 'past performance is no indicator of future performance' works both ways.

I'm sure the OP is finding this decision hard as if they've held through many years of below average growth - as long as it's a regular Australian suburb, shouldn't that should be bringing them closer to some above average growth?

I think to answer this one you need to look at the intrinsic and extrinsic growth drivers, i.e. does the area have reasons to grow in the future.
 
Ultimately as mentioned before it is a case of opportunity cost.

Alex - i apologise if this is untrue but in the past it appears that you have been trying not to lose with your investments instead of focusing on trying to win.

You have the chance here to sell a PPOR CGT free and a bit of a dog of an IP and put the combined equity into a better performing asset, maybe even something with value add potential. You have mentioned in the past that your income isnt very high, imo that is all the more reason to buy something with value add potential because at least that way you will be responsible for it instead of purely relying on the market.

As an extreme example, a lot of people with retain and subdivide properties have seen up to 30% growth in the last 15 months or so. that is not something you are going to see with your IP in dianella imo.
 
Hold on everyone, 'past performance is no indicator of future performance' works both ways.

I'm sure the OP is finding this decision hard as if they've held through many years of below average growth - as long as it's a regular Australian suburb, shouldn't that should be bringing them closer to some above average growth?

I think to answer this one you need to look at the intrinsic and extrinsic growth drivers, i.e. does the area have reasons to grow in the future.



We are talking the Perth market here, anyone who jumped in over the last 2 years buying the right type of property has realised on average 30% growth, while Alex is waiting.... waiting.... paying .... paying. No logic in this.

If she sold the poor performer 2 years ago and purchased the right property she would be sitting on a chunk of equity ready to go again.

If one wants to do better than average they need to be a proactive investor and that means keeping it real and monitoring markets and monitoring your assets.
 
We are talking the Perth market here, anyone who jumped in over the last 2 years buying the right type of property has realised on average 30% growth, while Alex is waiting.... waiting.... paying .... paying. No logic in this.

If she sold the poor performer 2 years ago and purchased the right property she would be sitting on a chunk of equity ready to go again.

If one wants to do better than average they need to be a proactive investor and that means keeping it real and monitoring markets and monitoring your assets.

Absolutely, that would have been good idea, but I think the question is what to do today.

I'm finding this thread interesting as I have a very similar property. In my case I feel I overpaid for it in the first place and this could explain what happened here. It does however tick all the boxes (which is why the auction was so fierce).

If the property was overpaid for in the first place, but has good underlying characteristics (as mine does), perhaps it will now revert to at least the average level of growth for the area and with transaction costs it may be better to hold onto?

Alex -

1. Have you identifyed why this property has not grown? Did you overpay? Have other nearby properties (i.e. same/nearby streets) grown?
2. What is the future outlook for this area and this property type?
 
Out of genuine curiosity, what has Dianella got to offer (schools, local attraction etc.?) and hence prediction for future growth? I always thought it was far from the city public transport wise. But then again people working in the city are even building in Ellenbrook so you can take my opinion with a grain of salt.

I think I will have to agree with bez23 as I would not be optimistic on the growth of a relatively small unit in Daniella due to demand? But of course, this is my opinion and nothing is certain. Would love to hear others thoughts in this.
 
Out of genuine curiosity, what has Dianella got to offer

There are good parts and bad parts but some of it is just reputation. People have a perception that Dianella is "good" and partly that pushes up prices. Of course, being 7km from the CBD helps. The properties closer to the city are more expensive. There are lots of parks and good access to shops. Depending on where you are, it's pretty easy to get into the city. I don't know about the schools but I do know there is pretty strong demand.
 
thanks for all the replies! :)

1. I was going to wait to see mortgage broker in my holidays in a couple of weeks time but i've decided to make an appointmen next week now as I dont want to wait any longer. I think I just need to take along my pay slips and bank account statements for the initial consult dont I?

2. I dont think I'll make much more money selling my 41 sq in 1 - 2 years time so i've decided to sell it now. I'd be happy to walk away with at least $20 k if I sell it.

If it sells for $240 k and I have a $200 loan on it, how much money approximately will I make (im not taking into account all the negative gearing over the years btw, just how much cash in hand i'll have). Agents fees are what about 2 %, advertising fees, what other costs ?

3. I'm waiting to see how much this property sells for in the same complex before putting it on the market. Originally it was listed at $249 with kitchen renovated but they dropped their asking price to $239 as its been online now for a couple of months. Its just gone under offer in the last few days.

One unit sold for $249 k in the past 6 months. One unrenovated sold for $205 k. I think this is definitely the right thing to do as I just cant see it performing short term or long term and I can do so much better with the equity elsewhere.

4. I've come out of this situation not too bad and its a good start. Since 2008 after I sell the ip i'll have around $70 k saved. Its the start of things to come. It will be good to have a bit of money behind me this time around ! I'll have a very small mortage on my ppor (non deductable debt will be very small see point 5 paragraph below.) So it hasnt been a total waste of 5 years. Most people would waste $ 5 grand easily on material things, I put my $5 k pa into negative gearing so at least even though I wouldn't have made any money after taking into account the negative gearing over the years I'd rather have wasted the money on that than spent on doodads.

I've also learnt a tremendous amount in the process. I still have 20 ? 25 years to invest. I'm doing a lot better than my friends and a lot of people I know with the amount of savings i'll have when I go back to live in my ppor. Also 5 years ago after buying my ppor I had just $10 K in my bank and now ppor has gone up $80 k.

5. I'm keeping my PPOR I have a small mortgage on it to begin with and when I sell my 41 sqm unit I'll have $70 k sitting in my offset against my $177 k mortgage which is great. I dont think i'll ever sell the highgate as its a performer CG & will be a great little money earner leasing it out in the future! My LVR will be around 55 % after selling ip.

6. This time i'll either buy a 2 ? 3 bed villa or house. I think i'd rather buy something already renovated or new/near new as I really dont want the hassle of buying unrenovated and then having to renovate it. Strategy is to employ a Brisbane buyers agent and invest in a rising Brisbane market.

If I were to renovate would I be able to employ a project manager to oversee and organise the renovating for me? This could be an option but I think i'd like something that doesnt need renovating. It will increase in value as Brisbane rises anyhow. Also if I get something brand new or renovated i'll have depreciation benefits.

7. Now I'm thinking to buy something no more than 25 km from Brisbane cbd. Oh and also the villa or house is a good idea because I realise now I need to buy something that owner occupiers want to live in.

8. I'm thinking living here at mum and dads i'll be able to get a loan for $350 k - $450 k, which means i'll be able to get something decent that will grow. It will be neagatively geared but i'll have my $70 k savings in my bank which will see me through the first few years of negative gearing! Then I'll buy something again in another market as soon as my ip is close to or neutral cash flow.

9. I will need to upgrade my car in the next few years too, so I dont plan to buy another ip again after this one for a good few years as i'll have a $20 k car loan. I plan to buy a 3 year old hyundai sportswagon with less than 60,000 km on it priced less than $18,000. I want to pay it off in a period of 3 years.

10. What do you think of my plan? Just remember I'm not as gung ho as others. I'm a bit more conservative investor than others here, plus I need to be a bit conservative in the next 5 years as I have to replace my car. Once I have bought my car I can then invest a bit faster.

edited to say: I just noticed the 41 sqm unit in my complex that was asking $239 is under offer now. I'll wait a couple of weeks then find out what it sold for.
 
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Is it too late to invest in Perth in 6 months time ?

Mum is not keen on my investing in Brisbane and I know I shouldn't listen to her but if there are still good gains to be made in the Perth market then I'll buy in Perth. I just dont want to risk buying at the top of the Perth market like last time and having to wait years and years for growth.

By the time my dianella unit sells im thinking i'll be in the position to buy in 6 months time. Too late to invest in Perth in 6 months time?

Anyway what I do is my decision, she doesnt have control over me. I'll be doing whats best for me financially and investing where I believe is the best place to invest.
 
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