You should NEVER sell!.....or should I??

C

ChasingSugar

Hi all,

I am currently reviewing my portfolio and am considering a partial sell down. I don’t have many fellow investors to talk to, so though I might open it up to the forum for some input/advice.

I am from the school of NEVER SELL….. but gee it seems tempting to help me remove non-deductible debt quickly!

My situation is I have 7 Investment properties, and then my PPOR (8 in total):

My PPOR has $437K owing on it, Value $570K

My Investments have $1.36 Mill owing on them, Value $1.8Mill.

Overall my LVR is 76%.

I’ve run some numbers and have worked out that if I sell 4 of my Investments, after tax and fees I would be able to greatly reduce my non-deductible debt. The 5 properties would then look like:

My PPOR would have $100K owing on it, Value $570K

My 4 remaining Investments would have $650K owing on them, Value $720K

Overall my new LVR would be 58%

From there my increased cashflow on my PPOR would enable me to pay down the PPOR inside 3 years, but also allow me access up to 95% of the portfolio value, or $470K for further investment (not including 95% on an additional property – so net capability perhaps closer to $1 Mill or so depending on what the bank allows me to do) to be able to go and buy more property and get back up to the original investment value of $1.8 Mill.

Now I do forgo capital gains on the 4 properties to be sold, but this seems to be offset by immediately going and purchasing another $1 Mill of property. IE: Exiting the market and re-entering after some debt shuffling immediately in the same cycle. I am thinking I am selling average priced houses collectively (the 4 to be sold) and hopeful of finding a ‘deal’ in the $1 Mill bracket.

I would welcome some advice from people who might have done this or from the industry that might be able to identify any gotchas!

Thanks heaps!

JD.
 
We sold down enought to pay off all our loans (PPOR and IP's), leaving behind (just) enough IP's to generate rent we can live off.

The biggest cost impact it CGT - have you taken this into account? It can eat into your net profit a fair bit....

The Y-man
 
I think you'll find that you have trouble accessing 95% of your portfolio value for further investment. You might get 90% of the value but I'd be doing my projections on 80%.

Also if you're going to borrow further to invest again your cashflow will likely reduce again, so there's little net gain there.

Assuming you'll invest in the future in a similar manner to what you've done in the past, the main benefit of this plan is you'll pay down your PPOR debt faster and thus only have tax deductable debt.

The negative side is you'll incur selling costs, capital gains tax and purchase costs when you re-invest. Based on the info provided, you're unlikely to actually be ahead with this strategy.

I'd be looking to put together a more comprehensive investment plan. Selling some properties can be part of it, but I'd want a bit better reason to do this than to simply get rid of a non deductable mortgage. There are also ways of doing this without selling your other properties.
 
Thanks all for the prompt replies.

I have taken into account the CGT etc. One of our IP's with the biggest capital gain was our PPOR 3 years ago. I'd be looking at selling that under PPOR rules, given I moved out inside 6 years.

The big win would be non-deductable debt would be removed.

I take the point on the - not 95%, probably 90, factor 80%. I'll budget based on the 80% for sure. Thanks.

Y-Man - I see you have done something similar. Any regrets?
 
ChasingSugar said:
Y-Man - I see you have done something similar. Any regrets?
Click to expand...

Not at all. We wanted to "reset" to a "no-loan" status with employment income as an option, and this has enabled it.

It also let us offload the potential "troublemaker" properties - the ones that were starting to show signs of excess wear and tear (like serious rising damp, building damage from foundation shifting etc).

The Y-man
 
ChasingSugar said:
Thanks all for the prompt replies.

I have taken into account the CGT etc. One of our IP's with the biggest capital gain was our PPOR 3 years ago. I'd be looking at selling that under PPOR rules, given I moved out inside 6 years.
Click to expand...

I think you've got this confused.

The rule is that you can move out for up to 6 years. But as you have another PPOR you can't claim the CGT exemption. You'll get 3 years of GT free but will have to pay it from the time you bought the new PPOR.
 
There should be no absolutes ...............

Work out what works for you and then CHOOSE AND MOVE.

Hindsight will possibly show that

1. You made the right decision
2. You made the wrong decision
3. You made the right decision with the available data at the time.

Being pro active in your affairs is a GOOD THING.

Many in your scenario would rely on HOPE, well that usually dont work so well as a strategy

ta
rolf
 
Do whatever works for you. I always think you shouldn't sell unless a) you have to, or b) if there's a much better deal out there and you need to sell a property to get it.
 
What's your cashflow situation? -ve geared? Secure employment? Decent wage? Rental income? If you can comfortably hold on then why not? Where are your properties located? Sorry for all the q's but it can help others provide more relevant advice.:)
 
Thanks all. Cashflow is pretty much Neutral after tax (excluding of course the PPOR). Yes - fully secure employment, and the neutral is achieved with the rental income. There is no real need to move, other than, 'wouldn't it be great to pretty much get rid of the PPOR mortgage ASAP. I have 3 properties in Berwick, VIC (Including PPOR), 2 each in Ballarat and Churchill, VIC and a Holiday Rental in Seaspray, VIC.

I have resisted the sell off previously, due to the fact that even with minor capital gains (and remember the plan was long term hold) I could see significant gains through natural growth compared to savings off paying off the mortgage now.

Consensus seems to be, stick to the big picture - never sell?
 
ChasingSugar said:
Thanks all. Cashflow is pretty much Neutral after tax (excluding of course the PPOR). Yes - fully secure employment, and the neutral is achieved with the rental income. There is no real need to move, other than, 'wouldn't it be great to pretty much get rid of the PPOR mortgage ASAP. I have 3 properties in Berwick, VIC (Including PPOR), 2 each in Ballarat and Churchill, VIC and a Holiday Rental in Seaspray, VIC.

I have resisted the sell off previously, due to the fact that even with minor capital gains (and remember the plan was long term hold) I could see significant gains through natural growth compared to savings off paying off the mortgage now.

Consensus seems to be, stick to the big picture - never sell?
Click to expand...

Do you have enough equity in your portfolio to recycle your debt? ie use your rental income to pay down your PPOR. This can be done over time.

Regards Jason.
 
ChasingSugar said:
Consensus seems to be, stick to the big picture - never sell?
Click to expand...

Well it's your decision but considering the info you have given I would agree - though never say never (flexibility can be a handy tool at times) ;). If you are not struggling with cashflow at present and have secure income then it would be throwing away $ in selling costs, CGT, future CG, etc. Having said that, keep your finger on the pulse and continue to monitor the sales and rental markets where your IP's are located.
 
I'm also in the "don't sell" unless you have no other choice.

If you pay off all these IP's, using P & I mortgages, you will have plenty of rent to retire on..if that's your goal.

Selling off and paying CG, rebpurchasing and paying stamp duty and other closing costs, seems like a waste, to me.
 
Somethings to consider:

- if selling try spreading the sales over different tax years to reduce CGT.
- if properties are in Vic then it may be possible to sell half of a property to your spouse without stamp duty (on investments too). Spouse could borrow to buy and this would increase deductible debt and free up cash for the PPOR loan.
- sell just one now and see how things go.
- speak to an accountant about capitalising interest - as long as the main purpose is not to pay down your PPOR loan sooner it may still be possible.
 
Terry - really good advice thanks.

One thing I hadn't factored in, was Interest Payable on non-deductible debt if I let the loan run with standard P+I payments over the loan term.

Reducing the PPOR debt down to 100, hence paying a lump sum of $340K or so, would save me over that time $450K odd of interest. (This takes current rate as the rate over a 30 year period - assumptions aplenty, but you need to start somewhere).

So - my bet to make is would I recieve well in excess of $450K+ capital gain over the loan period for the properties looking at being sold, which total approx $1.1Mill. (again I know assumptions).

If I don't think so, then sell down now is a no brainer. But ONLY if I can't access debt recycling/capitalising interest, in which case that would be the best method to attain the same result, without sale of existing properties.
 
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