Hello people,
I'm in a slight dilemma on whether I should sell my current 3x2x2 cottage home investment, which is about evenly geared at the moment. Last year i recently borrowed the equity I earned on this house and put down a deposit on an apartment worth 345k.
I figure if I can sell for about 400k, and accounting for selling costs of 4%, would leave me with $384k (I wouldn't have to pay capital gains as I have already lived in this property and it's only 2 years old). Once I paid off all my loans it would probably leave me with a 30k profit, which I would put towards my new investment apartment, which would mean a loan of about 270-290k, therefore I have calculated it to be slightly positive gearing once it's built (about 4k income a year). If I choose not to sell I run the risk of interest rates rising in the coming years and both properties being negatively geared (even if only slightly).
the cottage home is in a new suburb which is not fully developed as there is more house and land packages to be sold and also a shopping centre which wont be completed until another one or two years. So logic is telling me not to sell, because in a few years time it might be worth a lot more once the suburb is fully developed.
the problem is if I sell now, I'll have a cash flow positive apartment, but I wont necessarily get the most capital gains from it. If I don't sell, both properties will probably be negatively geared in about three years, thus giving me less cash flow.
I'm leaning towards selling now….
hope that's not too hard to understand,
thanks in advance
ryan.
Hi CS,
Your post is a little light on information, but it sounds like your cottage is not costing you much to hold. With Interest Rates remaining quite low, maybe Fixing the Interest Rates would buy you the peace of mind re costs over the next few years.
Is the cottage your present home, and are you considering renting it if you don't sell it? If so, what are your plans for "housing yourself" (rent, or buy another PPOR)?
You don't mention other income but do you have sufficient "free-board" to handle an up-tick in Rates? Do you believe you are secure in your job? Are both house and apartment in this same "likely to rise in value" area?
If values for both ARE likely to rise, why not consider ways to boost income while you wait – e.g. check out the Tax deductions available should you rent the cottage, maybe do a reno to lift likely rents…. It is possible that even if negatively geared, your cottage could return a positive cashflow – and if there is a strong likelihood of a lift in value, it could be worth holding for now.
Maybe chat with an adviser, where you can lay out your full situation and take a look at things from their eyes,
Benny
Hi thanks for the reply,
Ive been renting the cottage home for about 1.5 years, and currently ive fixed the interest rate until june 2015… Ive recently increased the rent by 20$ a week after putting in two air conditioners.
At the moment im renting a place in the cbd of perth, and i really like it there so have no plans to move. My job is very stable, and i believe the cottage home has got most potential for capital growth, the apartment costed 345k$ off the plan which is just out of the CBD, so i think thats pretty good value, once its finished at the end of the year id be guessing it would be about 360K.
Ryan
What are the costs for selling while the apartment is under a fixed loan? Or are you planning on selling around June 2015?
I would probably not sell, unless I had to, especially if it's near positively geared and looking at possibly capital gains in the future.
I'm assuming it's an Interest Only loan? If not, you could drop the principle repayments to give you cash instead. Don't forget depreciation on the cottage, including those air conditioners you put in.
Hi Ryan,
I just noticed this bit at the end of your first post :-
Quote:If I don't sell, both properties will probably be negatively geared in about three years, thus giving me less cash flow.I'm leaning towards selling now….
This is good that you are thinking it through. If your preference is to sell, because of risk tolerance, that's fine. Financially speaking though, you have now added further information re a Fixed Rate loan. Have you considered any cost of "breaking" that loan?
Break costs can be massive, depending on how much lower variable rates are at the time. And "time left to run on the Fixed Loan" plays a part too. Do check with your Bank re the likely break cost to get an idea. It could be many thousands of dollars, depending….
But wait, there's more…. there could be another way to have your cake, then eat it !!
Rather than selling, look at Break Costs of the Fixed Rate, and consider what current Fixed Rates are right now. Run the numbers on taking out a fresh Fixed Rate loan now for (say) 4 or 5 years. See, if "Breaking" into a higher Interest rate loan, the break costs could be minimal. (Break costs hurt most when the banks LOSE money that was assured – e.g. you had a Fixed Loan at 6%, and they can now lend that money released at only 5.5% today). Conversely, if the Fixed Rate today for a 5 year loan is 6.5% or higher, they may welcome the opportunity and allow the breaking of the first loan with minimal cost to you.
Compare that scenario against your current plan of selling. Any break cost should be way below the Selling Costs ($16k ?) – AND you get to retain the cottage and any future growth for another 4 or 5 years. If a slightly higher fixed rate now has you sleeping well at night, it could be a goer, couldn't it?
Benny
cheers ill have to look into the break costs of the loan. I think say if interest rates rise by a 1% this time next year, i think even if only slightly negatively geared i wont mind as much if the capital appreciation goes up. Maybe ill wait for another 3 years, so fix the loan again next year for about 2-3 more years then sell at the end of that period.
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