Thinking of selling the negative to go positive

[Hysteria]

Some days I think of selling these neg geared properties and starting again and buying positive geared properties. Sometimes I just don’t know and sometimes I doubt what I can do. Do you ever feel you are doing things all wrong? Maybe I am doing it wrong, I’m not sure.

I have one property in a discretionary trust in Chermside Brisbane, rent is $400pw. With all my fees and insurances it is costing me 16,500 a year to hold without any tax benefits included.

The other property at Carina heights is in my own personal name. $420 pw. This is costing me $16,300 to hold per year not including any tax benefits.

PPOR has 178K owing worth 450k

I am earning 120k per annum doing subcontract work . My partner is on 80k.
I have been looking at a few cash flow positive properties lately and it has got me thinking about letting go of these negative properties and cutting my losses.
It is looking like I will be able to get finance for the next IP but sometimes doubt myself on which way I should go. I know if I do decide to purchase again I will be looking for a property that will be putting some dollars in my pocket. In the mean time I don’t know what to do with these above properties.

 

[Propertunity]

What you've provided is the cash flow position - which is needed. But the picture is incomplete without the current valuations, loans against them and CGT position if they were sold. More info please.

 

[Hysteria]

What you've provided is the cash flow position - which is needed. But the picture is incomplete without the current valuations, loans against them and CGT position if they were sold. More info please.

The chermside property loan is 447k. The bank valuation came in at 490k when purchased 2009 but going on sales in the area the moment its more likely 440k.

Carina Heights loan is 503k this includes my stamping fees and the val would be 470k.

 

[redwing]

If purchased as negative geared properties, wouldn't you be looking at the tax deductions though? I'm unsure why you are not including them in this evaluation?

Did you purchase the properties for Capital Growth and how has that gone over the time owned?

Why have you got an IP in a discretionary trust and carrying the losses forward? What was the plan here at inception?

 

[JWR]

Others are more experienced to give better advice - but I would say sell sell sell.

30k neg geared x 10 years is 300k.

you could buy 10 neutrally geared houses at 200k with 30k deposit each in 10 years with that money. And even more when you consider using the equity to buy further properties.

Bear in mind you would be starting from 0 again or even losing money by selling these 2 due to the high mortgages and low vals/selling price.

 

[Propertunity]

It goes back to your strategy at inception. You purchased in 2009 and it is now 2012, so you are just 3 years into execution. Please tell me that you planned to hold for 10 years not 3.

I can't help but think that you are trying to quit your strategy early because of short term pain.

There's no equity to be tapped for sure. But property does not grow in a linear fashion.

I'm not a fan of buying cash flow positive in the sticks. CG can be a long time coming there and you're surely not buying there for $20pw of cash flow.

 

[Hysteria]

If purchased as negative geared properties, wouldn't you be looking at the tax deductions though? I'm unsure why you are not including them in this evaluation?

Did you purchase the properties for Capital Growth and how has that gone over the time owned?

Why have you got an IP in a discretionary trust and carrying the losses forward? What was the plan here at inception?

Yes purchased for capital growth, both properties are within 10km of cbd but after the floods and the market the properties have dropped in value.

Yes the tax deductions are good and a couple of brokers have mentioned what my accoutant has done for tax reduction is excellent.

The discretionary trust was set up from advice from my accountant. This is out of my field and have just used there advice. They put some of my contracting income to offset this loss. Hope this sounds right.

 

[Hysteria]

It goes back to your strategy at inception. You purchased in 2009 and it is now 2012, so you are just 3 years into execution. Please tell me that you planned to hold for 10 years not 3.

I can't help but think that you are trying to quit your strategy early because of short term pain.

There's no equity to be tapped for sure. But property does not grow in a linear fashion.

I'm not a fan of buying cash flow positive in the sticks. CG can be a long time coming there and you're surely not buying there for $20pw of cash flow.

Yes plan on holding 10 years plus. Not looking at quiting was just having some doubts about my holding costs. Having a bit of a moment. I do have an option of drawing equity out of my PPOR for a next purchase if i decide to go that way.

 

[Aaron_C]

I agree with Prop in that the big money in property comes from capital growth. Buying a 'cashflow neutral/positive' property for $20 a week in extra income is not worth it. Usually in those areas there isn't much capital growth and it can be hard to secure a tenant if they leave, wiping out your $20 pw cashflow instantly.

 

[JWR]

I see it as you being able to buy 4 or 5 similar neg geared properties or potentially 20+ pos geared properties. Don't have to be in the sticks either.

Which will most likely get more cap growth? 20 properties or 5?

 

[Aaron_C]

I see it as you being able to buy 4 or 5 similar neg geared properties or potentially 20+ pos geared properties. Don't have to be in the sticks either.

Which will most likely get more cap growth? 20 properties or 5?

Can't really say. Although if you can get cashflow neutral with properties near metro areas then that's even better - it can certainly be done. Just need to be a bit more creative than the stock-standard buy+rent.

 

[Propertunity]

Which will most likely get more cap growth? 20 properties or 5?

Possibly 5 well located ones than 20 in sub-optimal locations with tenants to match.

 

[Hysteria]

Others are more experienced to give better advice - but I would say sell sell sell.

30k neg geared x 10 years is 300k.

you could buy 10 neutrally geared houses at 200k with 30k deposit each in 10 years with that money. And even more when you consider using the equity to buy further properties.

Bear in mind you would be starting from 0 again or even losing money by selling these 2 due to the high mortgages and low vals/selling price.

Thats of concern, starting from 0 and losing. The 30k neg gear, i have not included tax deductions so do have to take that into consideration and the rent increase over the years.

 

[jingo]

Hi Hysteria,

I've done a brief table below of the info on your properties. What is the current interest rate on the loans?

Have you got a spread sheet that details your income, expenses, rental income, property costs and tax? Often putting the info into a spreadsheet is helpful as you will be able to see the costs in front of you. You can then project these costs/expenses, rental over say a 5 yr period and see where this takes you.

I use one based on an example from the book called 'The Property Puzzle' by Stuart Wemyss. It really helps me to see which direction my portfolio is headed in.

In his book, Stuart Wemyss does models with investors paying down loans over time with cashflow (salary, and property income) that is left over after all expenses. (The money is actually put into offset accounts) I like this as it helps you to build up a buffer and reduce interest paid, thereby strengthening the cashflow of the portfolio.

Would it be possible to offload one of your IP's to improve your cashflow?

I think you may need some professional advise as well. If the properties are causing you stress, I'd get rid of them and start again. But that is just me.

Chermside Property

Value: $440,000 Loan: $447,000 Rent: $400 p/w

Carina Heights

Value: $470,000 Loan: $503,000 Rent: $420 p/w

PPOR:

Value: $450,000 Loan: $178,000


Regards Jason.

 

[Marty McDonald]

If the rent demand is good and rents likely to increase with CPI I would hold x 2.

 

[JWR]

I'm pretty sure the positive geared ones I buy will be almost if not just as good growth as ones in a city - but time will tell. Its a lot of hard work to find the positive ones I look for though.

You can make money both ways obviously.

Also from a personal point of view it may be stressful for you in case you lose your job etc...

Maybe 20 + geared properties in crap areas won't grow as much as 5 guns in the city but I think if I could find 20 + geared properties they would outperform even 10 city properties.

 

[Hysteria]

Hi Hysteria,

I've done a brief table below of the info on your properties. What is the current interest rate on the loans?

Have you got a spread sheet that details your income, expenses, rental income, property costs and tax? Often putting the info into a spreadsheet is helpful as you will be able to see the costs in front of you. You can then project these costs/expenses, rental over say a 5 yr period and see where this takes you.

I use one based on an example from the book called 'The Property Puzzle' by Stuart Wemyss. It really helps me to see which direction my portfolio is headed in.

In his book, Stuart Wemyss does models with investors paying down loans over time with cashflow (salary, and property income) that is left over after all expenses. (The money is actually put into offset accounts) I like this as it helps you to build up a buffer and reduce interest paid, thereby strengthening the cashflow of the portfolio.

Would it be possible to offload one of your IP's to improve your cashflow?

I think you may need some professional advise as well. If the properties are causing you stress, I'd get rid of them and start again. But that is just me.

Chermside Property

Value: $440,000 Loan: $447,000 Rent: $400 p/w

Carina Heights

Value: $470,000 Loan: $503,000 Rent: $420 p/w

PPOR:

Value: $450,000 Loan: $178,000


Regards Jason.

Thanks Jason, The interest is 6.7% . There is a line of credit attached to each property. Nothing is crossed coll.

The chermside property used the line of credit for deposit and stamp duty etc and quick reno.

Had that revalued and had another line of credit set up. These funds were used for deposit costs for IP number 2 (carina)

Not to sure at this stage to offset one property or to look at the next purchase with a stronger yield.

 

[Propertunity]

.....Not to sure at this stage to offset one property or to look at the next purchase with a stronger yield.

With property there are high transaction costs getting both into and out of the investment. That's why I'm not a fan of selling if you have already purchased, unless you have purchased a dog. Carina & Chermside are not dog suburbs.

You have a reasonably good income, but if it were me, on your next purchase, I'd be looking for something more cash flow neutral to positive but still in a good suburb. It has already been mentioned, but what about a house & granny flat producing 2 lots of rent and in a good suburb next time?

 

[The Y-man]

Hysteria,

We should let you know that there is a Universal Law whereby should you decide to offload a property, it will jump 30% in value the following year.

The Y-man

 

[Ergophobia]

More debt is probably the last thing on your mind right now, but perhaps consider using the equity in your PPOR to buy some cf+ ips to offset your cf- ones