Where to now?

[ket]

Well, the decision has been made, our first and only IP in WA has to go. It was originally purchased neg geared due to circumstances at the time. Those circumstances have changed (boy have they changed) and it is now costing us too much ($100+ per week?). We bought at $142K (inc costs) and will sell around $270K (not bad in 3.5 years eh)! This will leave us in a good position to start again as we will have paid out the LOC on our home (PPOR) and have some $100K left over before CGT, etc. (we will probably only partially discharge the IP mortgage - both loans will be secured by our PPOR, leaving the $142K IO loan open and ready for the next purchase).
So where to now? We want to jump back on the wagon as soon as possible and get the ball rolling on at least 2 IPs this year. I am reading everything I can get my hands on for advice, etc, but must admit a lot goes over my head and a lot more just confuses the hell out of me! Eventually we would like to get into some small developments (sub-divide big blocks and build on the 2nd half - that sort of thing), but for now we want 1 or 2 positive income properties!
At the moment we are a) confused as to were to buy, b) confused as to the best way to finance the future IPs, c) confused as to the best structure (trusts, etc), d) confused as to how to work out if a property will be positive income or not. And that is just the start!
If there are any experienced investors in the Southern Highlands, NSW who would be willing to share their knowledge and experience I am more than willing to buy coffee and even lunch! I guess we are looking for mentors!
Ta Keith

 

[Ross]

Ket
Some good books to read in these circumstances:

For Positive Cash Flow reading
Margaret Lomas
Steve McKnight

For structuring
Dale Gatherum-Goss' Trust Magic

 

[ket]

Good reading

Ross, many thanks.
I already have a couple of Margaret's books. I have also heard her speak and had a chat with her. Very inspirational lady, and I find her ideas fit with my feelings about property and investmenent.
I have also read some of Steve's books but don't have any in my library at the moment.
I must order Dale's book on trusts as well. I was in touch with him a couple of years back in these forums and he was extremely helpful and knowledgable.
I guess right now it is all about education, then move onto the next step. Although our property in Cooloongup has outperformed all expectations that was more due to luck as we were very niaive back then!
I would also like to recommend Patrick Bright to others out there. His presentations are very useful. Havn't read his book yet.
Keith

 

[Todd]

Are you saying your property in Coolongup is costing you too much?!

 

[ket]

Cooloongup

Todd, Yep!
It was bought 3 years back, negatively geared, when I was employed in the city and earning a disgusting amount of money. Now I have my own company and only just earn enough to put a roof over our heads and feed the kids (much like a large part of the Aussie population)!
It has performed very well ($142K to $270K in 3 years or so) so will give us enough to start again and structure it better this time!
Keith

 

[Todd]

In Coolongup, at that purchase price, it should be nuetral/positive. What are you getting in rent? I'm guessing its a 3x1? Should be up near $180 - $200 wk rental if its not a total dump, and $142K IO loan is about $180 wk.

 

[ket]

Cooloongup

4x1, $180pw rent (was $160 till Dec 05), $818pm int (IO). We borrowed 106% to cover all costs, no deposit.
Maintenance has been fairly high, property has reached that age when things are starting to wear out (bit like me). Also, no building dep, just F&F so on-paper deductions aren't high.
We have looked at options and don't see a great deal of capital gains in Cooloongup over the next few years (although the railway station could make a difference). We would love to hold on but can't see how we can do so in a way that will let us move forward. We need to get some positive income properties under our belt (they are still out there), to increase our cash flow.
If you have any ideas on how we can hold on to it, pay off some debts, have a holiday and buy more property, please let us know!
Keith

 

[Todd]

Personally I cant see why you would want to sell this...Its not costing you anything (well, nearly nothing) and the prices are still climbing rapidly in this area. You've got a ton of equity in it that you should be able to do lots with, and still hang onto this for a bit longer and milk some more growth off it. Have you got a LOC set up against this property? What about PPOR?

You could look at using the equity to get you a cashbond/annuity to further increase your borrowings and your asset base, if you cant obtain the finance due to servicability problems.

What about a bit of work on this place to freshen it up, then up the rent and get it more positive?

There's lots of options, these are just my thoughts!

 

[Don and Liz]

dont get to hung up on magic numbers - try reading as much peter spann as you can as it seems like early days for you there is a excellent thread currently about peters work.

 

[skater]

What about a bit of work on this place to freshen it up, then up the rent and get it more positive?

I'm with Todd. Maintenance on IP always costs a lot if it is tired. Fix it! Give it a reno. This will help in two ways.

1) If you still want to sell, you will get more $ for it, just don't overcapitalise.

2) If you keep it you will get more rent for it.

If you have any skills in this area then put them to work. It's amazing what a difference a coat of paint makes. AND it's cheap. It will cost less than $500 to paint the whole house. If you spend $10k all up & are able to get an extra $20-30 pw, isn't that worth it?

Good luck.

 

[ket]

sell or hold?

Skater
Many thanks for your comments. We are currently fixing it up to sell; internal doors needed painting and the bathroom vanity needs replacing (desperately). I understand that improvements can increase the rent and that is part of the work we are doing. In Dec it became vacant (rent was $160). I had a call from an old tenant who wanted to move back in (one of those tenants you hate loosing) and she agreed to $180pw, couldn't go any higher so we settled on this. So the rent can't go up any higher right now. If I hold I wouldn't want to price her out as she really looks after it, the gardens were better when she left than when she arrived last time, and she painted some interior walls for me (I paid for the paint). If I sell, the new owner gets a great tenant!
I would love to hold but we just can't do it at the moment as we are having to pay out money each month to hold it (I know at the end of the year we can claim it back but we need it now).
Keith

 

[Twitch]

How about getting a LOC against the house (say $50k) and use it to fund the holding costs. Given it is only costing $5k per year pre tax that LOC will last a long time, and the CG in the meantime will well and truely make up for LOC balance.

I'm strongly of the belief that selling is never a good thing, especially selling a quality asset (as yours is) to trade it for a likely poor quality asset (as CF+ properties sometime are).

 

[Puppeteer]

Why don't you put in a tax variation. That will let you claim back your deductions with each pay, or reduce the income tax that you pay.

This can be seriously helpful in managing cashflow, and will only take about 2 weeks to start taking effect.

 

[ket]

cash flow

A tax variation will not make that much difference on the salary our business is currently paying us (although every little bit helps).
The fundamental problem is that our personal expenses currently far outweigh our income (something to do with 2 kids learning 2 instruments each at the Con, plus private school fees)!
We have been living off our LOC which has reached its current limit (which is only at about 45% LVR). Yes, I know we can raise this to tide us over, and we are considering it, but we have always been averse to pushing the LOC on our PPOR too high. Maybe we just need to readjust our thinking?
We have a number of options. One is selling our IP and using the funds to knock our LOC down and to fund another purchase or two. Another is to increase our LOC to access equity in our PPOR to cover our short term personal debts and to fund another purchase. Another is to look at leveraging the equity in the current IP to buy another IP or two. Thats the problem, too many options. Which is our best option taking into account we must have access to some funds very soon to pay off a couple of small debts and our family desperately needs a holiday?
Keith

 

[Dazz]

The fundamental problem is that our personal expenses currently far outweigh our income (something to do with 2 kids learning 2 instruments each at the Con, plus private school fees)!

Keith,

1. Everyone so far has given you fantastic advice to help your 'situation'.
2. You've identified what your fundamental problem is.
3. If you aren't willing to compromise the personal expenses for the benefit of the financials...(i.e. cut the coat to fit the cloth)....
4. Do what you've got to do.

 

[geoffw]

ket

Why are the only options Property options? Many would say property is not going to go up again for at least a few years- especially people in regional NSW.

You've invested in WA, which is probably the only place left in Oz to go up- but by selling and buying, it's going to cost a lot (especially CGT).

 

[alexlee]

If you have any ideas on how we can hold on to it, pay off some debts, have a holiday and buy more property, please let us know!
Keith

Hi, Keith,
Personally, I think Cooloongup still has some way to go. I also have a 3x1 house there (bought for $165k in 2004, probably at least $220k by now). I think with the train station and central Perth going nuts, Cooloongup still has some growth left. People getting forced out of Perth by the high prices will move south.

If you sell, you would be giving up an asset that has the potential for great tax-free (until you sell it) leveraged gains. If property goes the historical average of 7.2% (just as an example) you're giving up on $19k of capital gains next year, and in 10 years you would have given up around $270k in equity.

Forgive me if this is too personal, but if you were making a high income before and you're now living off your LOC (by that I'm assuming you don't have other savings), it may indicate that you need to focus more on managing your day to day finances. I'm sure a lot of forum members have managed to raise kids and build property portfolios at the same time.

If you sell the IP to start over, you run the risk of overspending on the proceeds. As you said you have other debts you have to pay off and your family needs a holiday. Fair enough, but you run the risk of ending up losing the future capital gains and have nothing to show for it but a great family holiday. Photos of the holiday won't help when your kids get older and have to go to uni or get married or whatever.

Of course, that's a personal choice. Just realise that you might be sacrificing future financial security for current consumption, and your future wealth is going to be affected accordingly. Have you done a budget, for example, and see if you can cut some expenses? As the others have said $100pw isn't that much. If you can, say, save an extra $50 a week (kids can do some part time work to make their allowance, for example) and you can make up the rest with the LOC ($2,500 per year). Rents will go up maybe $10 or $20 a year, so your cashflow will be neutral in 3 years or so.

While the money going out now may seem painful, building wealth is a long term thing and by 'saving' the $5k a year loss now you might be giving up hundreds of k in future profits. You may not be able to have everything now, but certain choices may mean you can have everything in the future.
Alex