Young couple over our heads!

[Carlyy_82]

Hi,
I would really appreciate some advice from you guys...
Background Info
PPOR worth $360,000 Owe $92000
Investment 1: Worth $320,000 owe $153,000 Rent $245/week
Investment 2:Worth $310,000 owe $312,000 Rent $300/week

We have a one year old and a two year old
Income Husband $1400 f/n take home
Me (three days/f/n) $900 f/n take home

Thinking of selling inv 1 (unit @ Glenelg east for those who know Adelaide) to pay of PPOR and give us a few years of stress free living while the kids are little.

OR: I work more (will have to to keep up especially if interest rates keep going up)

My other concern is what happens if house prices fall and we lose money?
(The only reason we have even got this far is that my Dad died last year and left us investment 1, I feel a great deal of pressure to do the right thing by him and make the most of his money.)

We are only in our mid twenties and are a bit lost at the moment!
Thanks Guys.

 

[Propertunity]

My other concern is what happens if house prices fall and we lose money?

First off, you will only lose money IF house prices fall AND IF you then sell.

Secondly, only you can decide between yourselves what is worth working for and what is worth sacrificing for - in the short, medium & long term.

You are to be congratulated for what you've done so far. I only can dream of where I would be now if I had started earlier.

 

[craigb]

Carly , i know things get stressfull when it comes to money matters , and i get the gist that you and your partner don't see eye to eye on this subject,

the ip number one valueed at 320 should be perhaps getting you 330 wk any way.
as for the other , the choices are sell at a loss, or hope to ride the wave a bit and hope for more gains,
another way would be to switch your PPOR and even the IP's to Interest only loans, at least untill your babies are at school,

I do know that every home i have sold i kick myself once a month at least for selling them back then. but thats just my opinion, your entiteled to your own,

 

[Luv2Travel]

I think you're actually in a very good position for your age.

Absolutely do not put money above your family, if you want to spend time with your children rather than work long hours, then do it. You are young and have many years ahead of you for investing, but you only get one chance to watch your children grow up.

Having said, you have $557,000 of debt, and $990,000 of assets, so an LVR of 56% which I am sure most people would agree is a pretty good position to be in. Are your loans interest only? If not, that's the first thing I would be changing to free up some of your cashflow. If you go back to full time work when your children are in school, then you can look at paying off principal if you wish, but for now I'd be looking at doing all you can to hold onto the properties without stretching yourselves too far if it's possible.

If you pay, let's say 8% interest to allow for another 1% rate rise, which is starting to get to a potentially bad case scenario, then on $557,000 that's repayments of $856 per week. You say your combined incomes currently are $1150 per week plus rent income of $545 / week so a total income of $1,695 less repayments of $856 = $839 per week for living plus bills. Although if you don't have a cash reserve, I'd be trying to put a little bit away so you don't get hit unprepared with any big bills especially for the IP's e.g. new HWS or if one is vacant for a period of time.

Do you think you can live on $839 per week (which also includes IP expenses)? If so, my opinion would be to hang on to them.

Other financial guru's may have other thoughts though.

 

[Carlyy_82]

Thanks so much for your replies
Both investment loans are already IO
I thought we would be wise to hold on to both but I guess was looking to the easy way out...We can definitely manage espeacially if I work more ( nurse doing shift work so can work one day a fortnight more for about $350 month more). I just needed to convince us both that its worth the stress and money to keep them both.

 

[jaycee]

Hi Carly,

How much do you feel you have to contribute each week/fortnight towards your IP expenses ?

I work out roughly $200/wk - is that about right. You can use a LOC to pay your interest bill, pay your expenses from the rent and the rest of the rent, tip it into the LOC (or an offest against the same LOC).

Obviously this is not advice, but jsut discussuing options avaialbe, you ahve to look into them to see if they're really good for your situation or not.

 

[Bigtone]

Hi Carly,

Would be a real shame to give up any property. Regret is a very common theme among people who have sold property " if only i held on to that property"

You have such a low lvr =56%.

If you were my little sister I would say capitalize the interest repayments that you are struggling with. (i.e pay the max you can and are comfortable with and borrow (capitalize) the rest. This might be $500pm.

Once kids older and you are back at work you can start paying full amount again.

You need to go and see a good broker and they could set you up properly and show you how you can hold all your properties for a number of years with basically no risk or damage to lifestyle.

You need to clearly understand this concept and how it works before you commit to it, the need discipline for it to work.

Cost of capitalizing a small amount per month is likely to be far less than the growth achieved on that extra property long term.

Just my opinion !

 

[Bigtone]

Jaycee you beat me to it!

Shouldn't have stopped half way through post for a snack!

 

[jaycee]

I'm just glad I wasn't

mmmm snack.......

 

[weg]

I agree with craigb that you may be able to up the rent on IP 1 - $245 sounds very low for a 320K property.

Also is it possible for your husband to increase his income, either by trying to get a promotion/gaining a higher level, or by looking for another job? I wouldn't push him to work more hours though, as this time with the children should be for him too.

If you do decide to do the extra shift that still only makes it 2 days a week, and gives you plenty of time with the little ones.

If you've managed well doing the 3 p/fn, you'll probably find doing 4 not that much different, especially as they're getting older and a little easier to manage (my experience anyway).

Personally I think you're in a good position to hold.

 

[mja]

Why do you think you're in over your heads?

 

[pennyk]

I agree with others that you seem to be in a fairly manageable position at the moment.... and that the rent on IP1 should be increased.
I wouldn't sell if I were you.
And I would do as someone suggested and put some money aside to pay for bigger bills like car rego etc, so that you don't have too many big hits at once.
Are the properties in joint names? Has your hubby completed an Income Tax Withdrawal Variation form, to reduce the tax taken out each fortnight to cover costs of the IP's... are they newer buildings, where you can claim depreciation on your tax. If so, an ITWV form would definitely be worthwhile.

Pen

 

[The Y-man]

Carlyy,

What are your living expenses?

From what can estimate given your figures, your interest payments all up about $39k per year?
Your combined worked income after tax (is that allowing for tax benefits?) $60k per year
Your rental income $28k per year.

So would it be fair to say your current "amount left to spend/invest" = $48k (less running costs for properties)
Any extra can go into an offset account against your ppor.

The Y-man

 

[PI141]

Can I make you feel better and tell you - there are many people on this forum that are in the toilet - you have not even reached the bathroom! Gosh I know it feels bad now but you are doing great and in a few years you will be very happy you held on - as its probably the worst you will feel about owing a few properties. I really do understand how desperate you feel now - can you refinance property 2 to give you a bit of give for a few years till no 3 is pos cash flow - it wont take long - hang in there.

 

[Gools]

My other concern is what happens if house prices fall and we lose money?

People have been worrying about this same thing for decades. If any of them had held onto their properties then they would be fine. The only drama is if you can't afford higher interest rates but with an LVR < 60% and your family income I'd be comfortable.

Don't stress and just let time do its thing.

 

[HandyAndy888]

Hi,
I would really appreciate some advice from you guys...
Background Info
PPOR worth $360,000 Owe $92000
Investment 1: Worth $320,000 owe $153,000 Rent $245/week
Investment 2:Worth $310,000 owe $312,000 Rent $300/week

We have a one year old and a two year old
Income Husband $1400 f/n take home
Me (three days/f/n) $900 f/n take home

Thinking of selling inv 1 (unit @ Glenelg east for those who know Adelaide) to pay of PPOR and give us a few years of stress free living while the kids are little.

OR: I work more (will have to to keep up especially if interest rates keep going up)

My other concern is what happens if house prices fall and we lose money?
(The only reason we have even got this far is that my Dad died last year and left us investment 1, I feel a great deal of pressure to do the right thing by him and make the most of his money.)

We are only in our mid twenties and are a bit lost at the moment!
Thanks Guys.

I am confused as tohow you're "over your heads".... Seems like a pretty stable position to me...

 

[Fudge]

Same as others Carly.

You are in a better position than some here.

I also think that how you want to 'do the right thing' with your fathers inheritence is noble, and shows a general willingness to get ahead in life.

The posts offer good advice, and to help you crunch some numbers, take note of all this info, but if you haven't already got one, go and get a good accountant, mortgage broker etc. (even though you say you are on IO, you may be able to cut your % rate of your loans??)

Also, if you are interested in earning extra income, but with the little ones well.....sooo little.....why not try and come up with a little business on the side (while working from home). A little internet business? That way, you can earn extra money doing something that you like and you are there with the toddlers all the time. (I know it is easy saying this....or typing this.......but I haven't yet come up with my 'innovative widget' or 'you beaut' internet business.

Good luck with your 'roll dice' and let us know what you decide

Maybe you think you are 'over your heads' with the extra 'stress' involved with raising little kiddies??

Cheers,

F

 

[jingo]

Carlyy,

What are your living expenses?

From what can estimate given your figures, your interest payments all up about $39k per year?
Your combined worked income after tax (is that allowing for tax benefits?) $60k per year
Your rental income $28k per year.

So would it be fair to say your current "amount left to spend/invest" = $48k (less running costs for properties)
Any extra can go into an offset account against your ppor.

The Y-man

I think Y-man has worked out your cashflow very concisely.

There are some other strategies to increase your cashflow (some of which have been mentioned by others).

1) Set up a line of credit and put any property related expenses (rates, water, repairs, etc) on here. Pay the line of credit down when you receive your tax return.

2) Both you and your partner could apply for income tax variation. Basically you pay less tax each fortnight on your wage (fast track your tax return). This would give you some extra cash flow to pay for the property expenses. (An accountant can help you to apply for this).

3) Put any excess cash in an offset account against your home loan. (As the interest on your home loan isn't tax deductible). Overtime this money will act as a buffer that you can use for living expenses, emergencies, etc.

4) More advanced method - and you need to seek advice for this. Set up a Line of Credit and pay your loan interest from this. (Capitalise interest). Put the rent money you receive into an offset account set up against your home loan. This will help to reduce the non deductible interest on your home loan at a faster rate.

Depending on servicability, based on your equity position ($557,000 of debt, and portfolio worth $990,000) it may be possible to establish a line of credit up to an amount of $235,000. (ie. portfolio value $990,000 * 80%= $792,000 minus existing loans of $557,000 = $235,000). This would make you feel a lot more secure as you would have a buffer in place. (Please note that you may not be eligible for this - it depends on your ability to service the loan - perhaps a broker could help with this?)

As many have said - you are in a very good position. Your LVR is low, and, depending on your living expenses, you seem to have a surplus cashflow? I'd try to keep what you have. It will get easier over time as your rents rise and it would help if you were able to reduce your home loan by paying cash into an offset account.

Regards Jason.

 

[joanmc]

I agree with what everyone else here is saying. You are in quite a good position and you may regret it if you sell. YOu have said that the 2 investment loans are IO but what about your PPOR, you can have that IO too if you ask the bank, Also with your PPOR, if your original loan amount was much higher then your payments may be based on that figure if they are P&I so going IO could make a huge difference.
I would consider getting the extra LOC to capitalise expenses to take some pressure off and give you a safety net. I know it sounds wierd that more debt is a safety net but it can be.

 

[skater]

I think you are in a good position too. Like others have said, the first things I would be looking at are:

1) Maximise rents - Are the rents at market rates. If not, then rental increases are necessary. Don't let rents fall behind.

2) Get the ITWV forms into the tax department ASAP.

3) Are you claiming depreciation on the properties? If not, why not?

4) Pay down PPOR ASAP as this is non deductable debt. I know it's been mentioned, but recycle some of the debt. It won't be long and all the debt will then be deductable.

5) If required, work that extra day. If not required, and you feel you should, then do it, but direct the income into the PPOR (or offset attached to it).