Just a quick note to say I have just joined this website after reading Steve’s latest book which has reinspired me to get back into property investing. PS. If you read this Steve, THANK YOU.
My wife and I have been investing in property since 1998. We have built up a portfolio of 3 properties (1 negatively geared and 2 break even) in the Sydney area. (Yes I should have looked for positively geared properties from the get go but hindsight is a beautiful thing!)
Our end goal is not unlike Steve’s, passive income of around $150k per annum gross. Fortunately or unfortunately I have always been a believer of buy and hold forever!!! (or until you want some cash to splurge, or pay off some debt to increase cashflow position). I think this came from my early focus on Jan Somers methods.
My question is, given my current debt position on my existing family home loan (not included in the portfolio numbers), approx $800k value – $440k debt, would I be better off:
1. Selling all our investment properties and paying off the family home (lifestyle choice I know but we are definately not moving) – Then starting investing from scratch again.
2. Minimising all payments on the home loan and investing any additional funds into new investment properties (remembering we will be paying a huge amount in interest over x years – unless we make a motzza in property)
3. Selling the investment properties and using that equity/cash to reinvest in more profitable cashflow positive properties, or quick projects for instant cash returns – but still carrying the home loan.
Summary of the current balance sheet on the 3 investments is:
* Net Cashflow position of -$3,400 per annum
* Debt position of 57%
* Rough Net Profit based on CG at 2% is $16,000 (given the current Sydney market conditions)
* Yield on purchase price 6.07%
* Yield on CMV 4.14% (given current market conditions this may come back in upcoming months)My general feeling is to sell off all and start again from a “personal” debt free position. While investment property is debt, I consider this less painful than your own home debt.
Appreciate any comments or suggestions from people who have been in this position before.
GBL
You definetly want to eliminate any ‘personal’ interest on your home loan.
I do not know if you have to sell off your investment properties to achieve that (you did not give the value and loans on those).
There may be other ways to achieve that. How long would it take to pay off your home loan if you refinanced and had all income paying off your homeloan, while the interest on the IP gets accumulated.
I presume that the only reason that two properties are cf= is the CG over the last years.
In general I think that your idea to move on is correct. I just would not rush it. Perhaps get rid of the cf- one first. Then you can use the equity in your home to purchase new, better yielding properties.
My first actions would be to do Steve’s financial tests:
Gross Rental Return
Return on Investment
Cash on Cash Return
Growth on Equity Return
Net Profit Percentage
3 second solution NPP> 3xInterest Rate
Profit ? 2x Interest paid
Danger Money Multiplier: Profit > 5x Risk Free ReturnI suspect that your current property would fail most test.
Next I would consult a good accountant and MB and discuss the different options with them.
Then go out and locate deals that suit you better.
Hope this helps
Good Luck
Hi
I dont know your exact position at the moment but my feeling is that you should consider selling the the negative geared property and putting any capital gains into the the other properties. It may be possible to put enough capital into the break even properties so they are giving a positive return. Whatever is left over could be put in to your own mortgage reducing your non-tax deductible debt. You then have the opportunity to look around for another positively geared property which you could purchase using the equity in your own property or the other properties as security for the new loan. You will have to do the sums or get a financial advisor to do them for you. Depending on the result you may be better off selling the investment properties and being debt free, then use the equity as security on new investments.
Hi
Why do you say you should have looked for postive cashflow property instead when you have done well from what you have done?
Selling investment property means you will have to pay CGT and there will be costs with agent’s fees and legals etc.
If you then use the funds released to pay off the home loan you will be saving interest (which is not deductible).
So you should do some calcs and see how much you will have to pay and how much you will be saving.
Once you have sold these and paid down the home loan you will also probably want to buy some new properties and this will mean more stamp duty and costs etc again.
I don’t think it is a good idea to sell one and pay down the loan on the remaining investment property, even if this will mean the property becomes cashflow positive. As this will mean your tax deductions will decrease while your non deductible debt remains high.
Terryw
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Hi Terry,
you got some good points there. But you seem to be strongly in the “never sell” corner. While this can certainly work, I think in the current property market you can often do better by selling off underperforming assets and look for better deals.
All this said, there is no advantage to sell a marginal property to replace with a slightly better one. The costs will kill you.
Steve put several financial benchmarks into his latest book. I believe it is at least as important to have a clear exit strategy.
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