2 of my 3 investment properties just flicked over from a 3.34% fixed to a 6.69% variable rate (same as the 3rd one now), and as a result, they now combine as a negative cashflow month to month.
#1: House
Loan: $500,000
Value: $900,000
Rent: $550 pw#2: Apartment
Loan: $330,000
Value: $570,000
Rent: $475 pw#3: Townhouse
Loan: $520,000
Value: $600,000
Rent: $580 pwMy PPR has $580k left on it (worth $1.1m).
They are all great properties that go up in value decently each year and rent out very easily, and my wife and I are high income earners, so we can definitely afford the repayments still. But given interest rates are not coming down to 3-5% anytime soon, and rent can’t get increased for another 12 months, and even when it can, can’t be increased significantly due to new landlord regulations in QLD, they will most likely be cashflow negative for another 12-24 months I’m guessing.
I’m wondering if it’s better to cash out and pay off the PPR and be mortgage free and then look to get a new one that is cash flow positive? Or try and “weather the storm” and benefit from the tax offsets?
What’s generally the most recommended advice/approach in times of high interest rates and fixed rental incomes?
If you sell you will likely pay CGT and will loose future capital growth. You would also be up for agents fees and if you later buy something else more stamp duty.
Do you guestimate they will be growing more than they are costing you? if so it might be worth holding. ALso have to factor in the opportunity cost of having the money tied it, the extra non-deductible interest you are incurring as well as the negative cash flow
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi BB,
The “numbers” will likely confirm the way to go. Without knowing what you bought these for, my example below may be inaccurate, but use it to add YOUR numbers to see what works best.
Assuming your mortgages are IO, it sounds like a 3.35% increase, but the Interest paid would’ve DOUBLED, so a 100% cost increase. If P&I, it is the Interest portion that doubled, but Principal repayment would be unchanged, so not double, but a significant rise nonetheless. Good to hear that you two can handle the increase anyway, but now to your questions:-
Assumptions:
1. That if selling one property, #1 would likely be the one (largest equity available). Assuming you purchased for $600k(?) based on $500k mortgage at ~80%. Purchase and selling costs (I believe) come off the gain, but a balancing charge may well put some $$ back on too, so let’s say it is a Capital Gain (900 – 600) of $300k. Since you had a Fixed Loan, I assume you have held it over 12 months, so half the gain is added on as Income and CGT paid at your marginal rate (the highest as you are a top earner). So let’s say you’ll pay around $75k in CGT. This leaves $225k to be paid off your PPOR. You could choose to use it to pay down the IP’s mortgages to make them +ve again, but then you lose any Tax benefit that negative gearing gives, AND you continue to pay your PPOR with fully taxed dollars, so little Nett benefit (in my eyes) for paying down an IP mortgage at this time. And even little change to your PPOR payments either – but you will stop paying it some years earlier.
2. You mentioned Qld – I am in Brisbane, and I note that Bne homes median values increased by over 25% in the last year. In that case, a negative income from Interest around 6% is hardly an issue. Of course, that depends on what happens ongoing. Right now, I can’t see much light at the end of the tunnel regarding the current LACK of rentals, thus values and rents will likely continue to climb for some time (years?) to come.
Right off though using IP #1 as a test case – 3.35% extra on Interest is an extra $17k per year (near enough) while the value goes up by $90k if just a 10% increase in value per year. Worth holding on that basis? It is to me.
3. You COULD sell one to buy another more positive geared, but then you do give up the (likely ongoing) rises in value of the current one(s) – “all great properties that go up in value decently each year and rent out very easily”. And, as Terryw mentioned, you then incur more agent fees and Stamp Duties. You also then forgo the Tax benefit of the negative gearing losses (which you can easily afford anyway).
4. Or you could buy another without selling any – if your lender hasn’t already tagged you as “too rent reliant”. And if they have, a good MB can help with that anyway.
So, a few different angles there to consider, BB. For mine, I don’t see a problem holding for now. But then, as Steve often reminds us “You don’t go broke taking a profit” and if that profit can assist your situation in some better way, then why not?
Anyway, over to you – use YOUR numbers to see what they tell you.
Benny
Thanks Benny and Terryw,
Really appreciate the responses.
Benny, this is pretty much where my head was, so it’s really good to have bounced these ideas of you guys to kinda validate my thinking a bit. The fact that the market is so crazy in Brisbane right now, I have no doubt in my mind that I’ll make way more on the value increase over the next year vs the loss in cash flow (especially since it’ll be offset a bit due to the additional tax claim we can do). And yes, all investment loans are interest only. Our priority goal is to pay down the PPR as much as possible over the next few years, so any extra cash is going towards that atm.
Thanks again guys, very helpful!
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