Hi fellow investors,
I am looking at taking the next step with my investments and would be grateful for some of your time. I am faced with a mild conundrum and want to make the absolute most of my situation. Here is some background…
I bought 3 properties last year based on a buy and hold strategy.
Luckily I was trying to minimise the amount of negative gearing and have turned a minor profit after tax, even though I am forking out around $450pm all up before tax.
Better news is that unit prices in the area have gone up around 80% over the last 12 months.I now want to adopt a positive cashflow strategy and purchase more property in coming months. Currently I have NO savings to contribute only the potential equity in my IP.
I am faced with a 4-way choice as I see it…
1) Sell – Pay CGT but have the funds to purchase several +ve cashflow properties. Downsides of this are I don’t feel my current investments are at all bad, may bring even more capital gains quickly, and are not far off true +ve cashflow (a $20-40 increase in rents will see them in the black).
2) Refinance – Use equity to cover more purchase costs. Due to the quick rise I doubt the banks will value my property the same as what I can sell it for at the moment. Also I would have to get a return of at least 7% on my reinvested equity to make this worthwhile. On the other hand I keep the investment instead of taking the risk of ‘trading up’.
3) Wait – wait for more gains and/or for the now higher prices to stabilise so I can get the benefits of more equity or of a higher sale price. Save in the meantime.
4) Something creative – e.g. refinance to get some of the capital gains then look for a wrap client? I like this idea because I get capital and more cashflow but unfortunately the higher the capital gains for me the less likely a deal will be beneficial to a wrap client.
Would very to hear what people think would be the right move and if I am thinking along the right lines. I am new to all this at 27yo and have only learnt what I can from books so don’t have anyone experienced to bounce ideas off.
thanks!
Ben
Ben, it costs so much to sell and buy again; there are so many people with their hand out wanting a piece of your action, the ATO being just one of them. I think you should hang on to those properties for a lot longer. Remember that if you let an investment compound for 10 years, and then pay tax at the end of that period, you will end up with a lot bigger total than if you buy and sell 10 times at intervals of about 12 months (at least 12 months plus 1 day for cgt reasons) and pay tax each time, purely from a mathematical point of view. (assuming capital gain is similar for each strategy) This is not including all the buy and sell costs, which makes it much worse to trade more often.
Also you’ve got at least 5 to 7 years of substantial depreciation left to run, so you should be net positive after tax for a while yet. Hopefully your rent will increase a bit in that time. You should do a “witholding variation” with the ATO so you don’t have to fork out that $450 each month.
I’m in a similar situation with 4 IPs, and I’m now just in the process of applying for a new loan based on my increased equity. I’m going to use it for shares though.
Just a few ideas
hth
Jimsounds like if you can hold on for just a little bit longer you will be able turn the +ve. Realistically, however, is it possible the rents will increase as fast as the market value of your properties?
I do not know the full details so cant comment too much with any confidence, but I think you may be in a better position than you think, if not for the short term but definately for the long term.Thanks guys, keep the ideas coming…
G’day Ben…
The first thing I would do is to see the ATO and take advantage of 221D application…this will enhance your cashflow.
Then I would just sit tight on the properties.
I would not consider a wrap deal in the current market…you have to sleep at night, as do the wrapees.
Cheers
Billfromoz
Yeah. I wouldn’t sell-I actually did that and regret it now.
Just keep on using the equity. Approach your exisiting lender first and ask for an increase and use that money as a deposit for the next. If they don’t come to the party, refinance.
Terryw
Discover Home Loans
North Sydney
[email protected]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
Looks like everyone agrees so far!
Any more ideas?I was always led to beleive that if you sell one investment property and rolled the funds straight back into another investment property you deferred paying Capital Gains Tax. Until such time that you actually sell up and use the funds for personal use.
Forward
Not is Australia!
Terryw
Discover Home Loans
North Sydney
[email protected]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
ok, Just to confirm. So we can not roll over our CGT in Australia.
So I’ve read one to many American books, which has confused me.
So we have to hold an investment property for 12 months to receive a 50% discount in the CGT.
But if a property is our principle place of residence we are CGT free. But how long must you reside in the property as your place of residence, before you can sell and not pay CGT? I have heard as little as three months. Is this correct?
ie; If I purchase a place for $200,000 which is under valued. Move in and then sell for $280,000 3 months later, would I have to pay CGT? What is the minimum time required?
Cheers.
Hi B Diros[
]
As I understand your position is as follows,
1/ you have 3 neg geared properties.
2/ they are cashflow positive
3/ you have acheived an 80% capital gain
4/ are still in a growth area
5/ you have no savings
6/ you wish to increase your cashflowBased on this I would suggest
1/ you dont sell as you will lose too much due to capital gains tax,and miss out on future capital gains.
2/ use your equity to purhase for positive cashflow.It is quite usual to obtain a cash return of12-15% with something like a land float or a syndicated investment such as an aged care facility.
Regards
Bryce Inglis
[email protected]
http://www.ipal.com.au
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