All Topics / Help Needed! / A lesson in gambling…our spec home dilemma
I have only just joined the forum and have learnt so much already through everyone’s excellent thoughts and advice, and was hoping someone out there could help with my investment dilemma….sorry about the length of it – best to include all info.
The Situation:
My husband and I own our PPOR (worth approx $550K) due to selling two rental units and having a moderate success from a spec home on vacant land. We also own another vacant block of land to do another spec home (bought in my name as the lower income owner to reduce CGtax). The block is in a new estate in a lovely “seachange†town on the NSW South Coast – not too far from our PPOR.
However, we bought it in the peak of the property cycle – borrowing full amount & paying IO loan. But capital appreciation is just not happening which is the source of our capital gain. From the crystal ball, interest rates are going up and land value isn’t likely to increase sufficiently over the short to medium term (@4 years) to make any spec home viable until long term – but I’m not sure that this will achieve our desired investment goal (see below). We have no other debts or investment properties. In June I will be leaving work to have our first baby. After 12 months I plan to work part time.
To achieve our investment goals, however, we have a cash flow issue (especially with interest rates rising).
Like many on this forum we have a goal of investing in property to supplement our (early?) retirement. The second spec project was intended to be a leg-up (like the first one was) to achieve this end.
We have learnt our lesson and is one to all of you….(ie spec homes are ‘speculative’ especially when you buy in the peak, least of all vacant land that earns no income). We don’t intend to dwell on it and just want to get on with the best way of achieving our goal. We intended on doing this via small residential development projects (eg. cosmetic renos and dual occ/subdiv, say one every 1-2years for hold or sell) and acquiring neutral/+CF properties, and possibly a small shares portfolio. For what it’s worth I am a town planner and have the knowledge and experience re: development approvals etc which would be helpful in this strategy. However, the strategy requires some cash flow.
We have approximately $35K savings. We want to use this to put towards investment strategy.The Options (assumption as at June 05 on hubby’s income):
1. Sell the Land and cut losses – this would free up $350 per week to move onto better performing investments. However in the current (very slow) market, this would represent a capital loss of approximately $35,000 in mostly interest (ouch!) which I understand can be offset against future capital gains. The land could take many months to sell.
2. Keep the land and wait for capital growth: costs $18,000 p.a (more when interest rates rise) land is unlikely to increase equivalent amount in the near-med future to cover costs since purchase. Will only just be able to afford this, depending on how much interest rates rise.
3. Build and sell: could only afford it if used savings to pay interest. Break even at best. Likely capital loss of approx. $20,000. Major effort for little/no gain. Risky if slow/doesn’t sell quickly (likely).
4. Build and rent out and wait for capital appreciation: could only afford it if used savings to pay interest. Few tax benefits as in my name with v. low income (cost $320 per week). My future part time work would partly fund this (plus dip into savings).
5. Build and temporarily move into and sell (ie rent out PPOR): major effort – especially moving with baby – and, although an attractive area, not ideal as further from work (greater travel cost/time with young family). Just affordable – Rent from PPOR would cover part of repayments but would be taxed on our incomes.Other option I have considered are transferring property to my husband’s name with a view to building, renting out and holding for long term – ie depreciation/neg gearing benefits on his higher income, but seems a bit silly with stamp duty, legals etc. Haven’t done the sums.
So there it is – in summary, to do anything but sell would be a waiting game for the next 5+ years with no cash flow or ability to save and will be a severely reduced opportunity to further our investment strategy. However to sell will also start to eat into our savings and will be an overall loss of approx $35K in after tax dollars.
We are lucky I guess to be in such a financial position in the first place (largely due to previous PIs) but look for advice from like-minded? Do we just accept two “mistakes†(ie buy in peak, sell in slump) in order to move onto other goals or just sit tight (eating mince!!) and trust the crystal ball?
Pagey[confused2]
Lots to read and interesting situation.
I do have some questions, then some ideas.
1. How big is the land?
2. When did interest become a capital loss?
3. Ever considered not building and selling?Probably silly questions I know but had to ask.
I think you could even consider the following:
1. Subdividing the land you have if permitted. If permitted then either sell the smaller blocks to gear down or build on each, or sell house and land packages, read below.
2. Instead of building, finding a project builder and selling the land with a house and land package. Allowing the purchaser to build what you got approved and personalising it for themselves. This will save them stamp duty as they only pay it on the land, and then they pay the builder as he builds. This also will not be capital intensive as you only really pay for plans etc with council.
3. Some states allow property ownership transfers between married couples and not consider it a new purchase. So may avoid stamp duty, don’t quote me on this, it is something my solicitor is trying to do for me now.
4. I would also consider borrowing more to buy some cash flow positive homes to help reduce the burden of the land interest costs.Can you also confirm that interest is not a capital expense buy a trading expense and can only be used in the year you incurred it. If you don’t have a business, then you can’t carry forward your losses. Again, this may need an accountant too clarify, I am not thinking too straight this morning.
Byronent
Adelaide SAGiven your cash flow situation, I would take option 1 that you proposed…sell the land and cut losses.
I know it sucks, but I think getting (and staying) wealthy is as much about keeping your losses small as it is about making good investments that return big $$$.
And $35K (whether it is capital loss or lost interest repayments) is not that much in the big scheme of things. eg, it is only about 6% of the $550K your PPOR is worth.
Try to think of it this way:
what will your net worth be when you retire?
let’s say it was $1,000,000.
Would it matter if you had $1,035,000 as opposed to $965,000?Don’t lose faith now!
For goodness sakes property goes up, on average, 10% a year!
Don’t lose your nerve. If you sell for a loss then others will be encouraged to do the same. Then there really will be a crash.
Air goes in and out. Blood goes round and round. Any variation is a bad thing
Thanks for your interest and advice guys….food for thought.
byronet – answers: 1) small and not subdividable unfortunately; 2) since the purchase costs and interest repayments outweighed the likely sale price; 3) as per my option 1. Thanks for the other info – will look into it.
Torachan – I know…. I have no doubt that the land value will increase….but we have done some sums along the lines of your quoted increases per year, and if we held on to it for another, say 4 years, (40% increase) – even then it would cost us approx $90K in after tax $$ in interest repayments (and no income as vacant land). If we to build then and sell, with the crystal ball factor with likely construction cost increases, we would make approx $38K profit (gross). Hardly an attractive prospect now for the effort, let alone comparative value in 2008-2009 dollars!
If you were forking out $90K in interest rates would $38K profit sound attractive? As mentioned previously, the problem for us is knowing that we may be making 2 mistakes – ie buying in peak and selling in slump – and if not, then shelling out bucket-loads of interest. Bummer!!!
Thanks again. Pagey
Why not offer a vendor finance deal or something creative?
I am sure there must be other ways.
I notice above you say your costs are 18k a year so 4 years would be $72k of after tax dollars $90k is more like five years. 10% increases as tochran advised is compounding, so I do think unless your interest rate is over 10% you would in fact make a profit. Saying that, your tax concessions would greatly reduce the $72k over 4years so I am not sure whether my numbers are wrong or we don’t have the entire picture but I personally wouldn’t sell at a loss.
YOu could even try the neighbour to see if they wanted a bigger back yard. (just a thought)
Byronent
Adelaide SAPagey
This is a difficlut question to answer. I generally feel it is a shame to sell since prices will rise and then you will have to buy back into the market again when you decide to invest. However if cashflow is hurting, selling and taking a small loss maybe a wise option.
Byronent is correct about transferring between spouses. In NSW this can be done without stamp duty (and without the need for divorce). One of my clients did this last year. If you transfer to your husband, then this may help alleviate some of the interest costs by him claiming it against his other income. CGT didn’t be an issue as it hasn’t increased.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | 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
Why not cut somebody in for half of the property (or whatever percentage) and share the cashflow loss for now.
Set it up like a wrap with a property solicitor drawn up contracts and have a suitable partner place a caveat over title ………. then just split All costs to whatever percentage……………………..
………….friends, family, associates may jump at the opportunity to have a piece of seachange property…
Good Luck :0)
Live, Learn and GrowLifexperience
Pagey, if you decide to transfer the land to your husband perhaps you should consider hybrid discretionary trust. Check the Legal&Finance board. It might suit you better. I don’t have one myself but thinking about it (just found out myself).
I certainly wouldn’t recommend you to get another property CF+ or not. You’ll be busy enough with your baby without having to stress out about money.Good luck.
Hi Pagey,
Let me answer this from a different perspective.
If you keep the land or build and keep it, your “sleep at night” factor will diminish.
You have a little family on the way to worry about already. Mince on toast – yuk…
If you sell now or soon and take your loss, you will get rid of the bad taste, in fact almost as soon as you get on to another investment. You will remember the lesson though.
Too many fleas to live with.
Nice to see I am not the only one who has ever made a mistake!
regards
Giddo[cap]You seem to have thought the problem through well.
Tough decisions are sometimes hard to make but you will feel bigger having made them. I tend to agree with those that support your option 1 as an exit strategy.
I believe you are correct that if you sell at a loss you can retain the capital loss and claim it against future capital gains so there is a future benefit. But Ask your accountant.
Strugglin for cash to live on is no fun, with a young baby to look after I would do what was necessary to avoid it.
You have been sucessful, and will be again.
I can assure you not every decision you make will be a winner. Bad decisions unfortunatley are part of the learning experience.
Good luck
Hi Pagey,
Imagine you have a five sided dice. Each number, 1 to 5, represents one of your options.
Now toss your dice into the air, its spinning……What option number are you hoping that it lands on?
This is the option you are hoping for and are more comfortable with.
Technical way to make decisions, I know!
I read this in a book somewhere about tossing a coin, when you toss a coin you usually have a preference for what it will land on.
Cheers,
Sue [cap]P.s. For what its worth, I’d pick option one.
“Be careful not to step on the flowers when you’re reaching for the stars”
This is Ezy[buz2]
just an idea…contact a builder who may be interested in building a spec home …your land his building..when the package is sold take out your AGREED costs share the profit.
ezy does it remember to get the agreement on paper with a solicitor.[buz2]
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