this is the situation..is it a good idea to sell and buy the higher income properties?
Income
Rent 1050p.w. = 54,600
yield: 54,600/1,300,000 4.2%
comparable value property should be giving me 1300pwExpenses
mortgage 42,400p.a
service charges 10,000p.a
company 3,500
management 1,500
misc 1,500
58,900actual loss -4,300
Assumptions:
value 1,300,000
mortgage 480,000
equity 820,000
forecast rise: 5%If kept for one year then sold, 5% increase on 1,300,000 = 1,365,000
mortgage – 470,000
equity 895,000 -4300 = 890,700Recommend:
Sell property, pay back lender, reborrow 180,000 and buy 2 properties
Income
1 one bedroom flat x 400,000 = 400,000 rent at 425pw = 22,100 rent at 375pw = 18,500
1 two bedroom flat x 600,000 = 600,000 rent ar 675pw = 35,100 rent at 600pw = 31,200
57,200 49,700
Expenses
mortgage 15,264 15,264
service charges 7,000 7,000
company 3,500 3,500
management 2,000 2,000
misc 1,500 1,500
total expenses 29,264 29,264net income 27,936 20,436
if kept for one year then sold, 5% increase on 1,000,000 = 1,050,000
mortgage – 176,000
equity 874,000 + taxable rental income of 20-28kReasons for doing this:
– Less debt and risk, total debt on 3rd property is 320,000+ current 480,000= 800,000, under proposed plan, total debt is 500,000 combined
– Positive cash flow and income
– minimal effect on investment and exposure
-replacing low return property with higher return 1 and 2 bed flatsHere are my thoughts – for what they’re worth.
Firstly – I try to never sell for a couple of reasons. Every time you sell you deplete your asset base by
1. The costs of the sale (i.e. agent’s commissions, legals, etc)
2. The stamp duty to buy back into the market.
3. Any CGT or other taxes.Currently, from what I can gather, you have an asset worth $1,300,000. If you sell it and buy two more (for $400 and $600) you’ll not only lose $39K in agent’s fees (assuming 3% commission) but also $35K odd in stamp duty (depending on the state you live in. Then add whatever, if any, tax consequences there are. You might also want to add legals and establishments costs on 2 new loans.
That’s a depletion of assets by at least $75k+ because of an annual loss of $4300!!! (I’d also guess that in 10 year’s time it would probably be neutral or even positive due to rent increases.)
Then there’s the capital growth “loss”. Higher prices properties typically benefit from higher capital growth than lower ones. Remembering that property doubles every ten or so years (it has for the last 100!) then if you replaced the $1.3M one with 2 @ $400K and $600K, in ten years you’ll have assets of $2M rather than assets of $2.6M (that’s another $600K disadvantage.)
What I’d suggest is you borrow against the equity in the $1.3M and buy a cashflow +ve one to offset against the negative one – thus “neturalising” the cashflow effect.
I personally wouldn’t deplete my assets to the tune of $674K because of a $4300 annual loss. Even if you capitalise the loss annually against the loan i.e. add it to the loan balance, you’ll still be ahead by over $600K in ten years time.
I note that you say that one of your reasons is “minimal effect on investment”. I heartily disagree for the reasons above.
Anything I’ve ever heard or read from succcessful investors says “never sell” (unless, of course, there are pressing circumstances). In your circumstances, with so much equity, I would be looking to invest more not downscale.
Hope this helps!
Megan
What you’re saying makes sense, unfortunately I already tapped into the equity for 250,000 for another non property business venture, but did eventually buy another IP this year for 480,000, with 160,000 down. Projected income from that will cover the mortgage and costs and possibly a little cash in hand. At this point total mortgages combined are 800,000 with projected income under 5000. There is no leeway for significant vacancies as both properties are large, though rented. I guess I’m worried about risk. Would you recommend trying to pay back the 250,000 I took out, in order to reduce the mortgage burden?
Hi Megan,
You make some good points, however I have to disagree with your comment.
“Anything I’ve ever heard or read from succcessful investors says “never sell” (unless, of course, there are pressing circumstances).”
This is the Jan Somers method and has been very successful for a lot of people. However, there are also many people who have been successful and do sell properties. Steve McKnight is one of them.
I would go further and say that most of those at the top of the tree in terms of property investors often sell. You only ever have a finite amount of capital and the optimum use for it is to place it where it earns the greatest returns. It takes skill to make choices about where the greatest returns are and this is why some investors rise above the pack.
Landgrabber, from the detail of your post, you seem to know what you’re on about. Make the decision, are you going to get a better return on your money by selling, taking into account the costs involved. If you are, sell, if not don’t.
Regards
AlistairHi,
Have you looked at non-direct property investment? With that level of equity you could pick up a diversified portfolio of income bearing investments that return about 9% with risk not too dissimilar to what you’ve got currently. You should be able to pick up a loan for less than 9% right? So the excess can be used to offset the small loss. I estimate you’d need about $220k in assets at this rate assuming a loan interst cost of 7%.Langrabber,
For a prop worth $ 1.3MM, I’d be seeking an income of ~ 130K p.a. nett, not 54 K p.a. gross.
This deficiency of 76K plus all of your outgoing costs every year is what is killing it for you.
Maybe selling is the way to go. I can guarantee that your opportunity cost is far greater than 4.3 K p.a.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Hi All,
A minor issue to assist with cash flow could be depreciation, how much depreciation could you find on a$1.3M proprty? Mostlikely a heap more that #4,300 per year.
hrm
Originally posted by gafama:Remembering that property doubles every ten or so years (it has for the last 100!) then if you replaced the $1.3M one with 2 @ $400K and $600K, in ten years you’ll have assets of $2M rather than assets of $2.6M (that’s another $600K disadvantage.)
You’re obviously new around here…
Try a forum search on “double”+”ten”+”years”. You’ll save me a lot of effort.
F.[cowboy2]What is the company charge of $3,500 that keeps popping up every year on these properties you are talking about?
TMA
http://www.email4money.info
Investor Links
First Home Buyer Websitegafama- just a note on what you’ve said about never selling, a la:
“Firstly – I try to never sell for a couple of reasons. Every time you sell you deplete your asset base by
1. The costs of the sale (i.e. agent’s commissions, legals, etc)
2. The stamp duty to buy back into the market.
3. Any CGT or other taxes.”
________________I think one neds to look at a bigger picture, and the sums. For example, I sold a place in November 2003, bought a place for the same price in a different location that had a much greater yield, in better condition, and the market in the place I sold in has now reduced by about 10%-20% if selling today. I think “buy in gloom and sell in boom” still has merit (although prices probably peaked in about may 2003).
After paying CGT, selling costs, new purchasing costs etc, I was still way ahead, and I see my new investment that replaced the older investment as a much better choice.
It’s a furphy to think that all sales will deplete ones wealth. In fact, if you buy at the right time and sell at hte right time, you can very much increase your net wealth.
kay henry
Sorry Kay, I don’t agree with you.
If you sell a property (esp. one for around $1.3M) you lose whatever it costs you dispose of it as unrecoverable expenses i.e. money down the drain.
Even though you might replace it with another well-yielding property, the $$ it cost to sell you is money gone – whichever way you look at it -as it the stamp duty on the new one.
As well, a higher price property will appreciate more (in most cases) than two lower valued ones esp. if the lower valued ones high good yields. Remember yield is usually a trade off of capital growth. You rarely get both high yield and high capital growth (I know it does happen occasionally but is as rare as hen’s teeth).
Megan
Megan, I totally disagree that higher value properties grow quicker than lower value properties. There is more demand at the lower end!
TMA
http://www.email4money.info
Investor Links
First Home Buyer WebsiteI’m confused with this post, is this a real case senerio or a hypothectical.
resiwealth[blush2]
the company charge is the administration fee for the trust that owns these properties
Why is there one for every property? You are being ripped off!
TMA
http://www.email4money.info
Investor Links
First Home Buyer Website
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