We have recently purchased an older style house and are at present right in the middle of upgrading. I have read plenty of articles on the power of equity and the for and against debates of holding for capital gains or selling and taking the $$$.
Most of these articals vote heavily against selling and one recently published in a popular magazine looked at people that had been doing renos and selling. Pointing out that those the people that had been doing this still only owned 1 house and had really lost out in the long term. Try as we may, we cannot get this property into the positive territory if we rent it out , however after improvements.
"New kitchen, totally gut bathroom replace floor, some wall studs and all wall sheeting tile bathroom floor to ceiling, put down 50+m2 floor tiles through house, new carpet in lounge and bedrooms, 8 new windows to make all the windows uniform, replace most doors on the place and weedmat and mary river rock the gardens" all for a budget of $15K which we went slightly over by $2K mainly due to the motor in the car frying itself while traveling the 100km each way each day. Anyway, back to the point. Expected Equity gained after reno $35K. The DOWNSIDE hare is that the equity is usless to us when we cant comfortably borrow anymore $$$ unless we find something that is Cashflow +
We are wondering weather it would be best to hold this property NOT PPR and keep paying out it on for the next few years "lets say 3 years" Around $16K outgoing at current rent prices over 3 years, or sell now pay real estate comission and CGT which would probably only leave around $16K profit at the end of the day. Then take that profit which would give us more borrowing power and put it into another property investment that would have possibly greater yeild. I am not looking for an answer, just hoping that someone out there may have been in this position b4 and can offer some advice.
Cheers.
Hi there,
Although I haven't been in your position, I can offer my opinion.
I am a believer of the buy and hold strategy. If you buy the best located property you can afford, and hold it long enough (though more than 3 years you outlined) it will become cf+. You said that the outgoings are $16K. At a yield of 3% (the best locations have low yields) , the property would have to increase in value by approx $500k to cover that $16k outgoing. Now $500k might seem like a lot of money to some of you, but well located property in Australia's capitals doubles every 7-10 years. So if you buy such a property for $500k, it will be worth $1M after 7-10 years.
Some people resist this idea, but it has been happening for ages. And it will continue. You need to have an abundance mentality to believe this and unfortunately a lot of people don't have this, but it is essential to becoming truly wealthy.
Of course, if you have bought in an area that doesn't have excellent long term capital growth, you should sell. Then next time you buy, make sure it is in an area where you would be happy to own that place for ever.
Good luck
AdrianHI Brad
Adrian has the numbers right – and a good philosophy – one that I've also supported however, at the end of the day, it all depends on your circumstances.
I've always founds the big "achilles heel" in the buy and hold strategy is the cashflow issue. The more you buy and hold the more cashflow drain there is – unless, of course, you find all cf+ properties – easier said than done and oftentimes not in the greatest of areas.
Personally, I'm still a big believer in buy and hold IF you can afford to. If not, don't sweat it, sell, take the cash and re-invest. Remember, it's all part of the bigger picture and while Adrian's number might well be right, you also may be able to leverage your smaller profit over the next few years to get a bigger gain.
We are in the middle of a development at present that I would LOVE to keep because of the potential capital gains (which are huge) but the cashflow drain would just be too great – and way to stressful to manage on a month by month basis. My philopsophy is just to cash in, take what I make (which is great money anyway) and reinvest in another site to leverage the money.
As you say, there's no one answer – hope you've got some food for thought!
Regards
Thanks Adrian and Megan.
Guess the only thing to do is put the numbers down on a spreadsheet and make a decision from there. But even then the decision is not an easy one.
As Adrian said, property typically doubles every 7 to 10 years so but hold is always good if you can.But as Megan pointed out, personal circumstances and cash flow drain might make selling and re-investing the better way to get to the holding point.
Unfortunatly when you sell you do lose money no-matter how you look at it. But holding can have the same effect due to the cashflow drain while waiting for the investment to mature.Cheers and thanks for your thoughts.
BradIm a professional renovator, and I wish it was as easy as "should I hold or sell"
Most people dont know this, but when you renovate a property and have it revalued, you have to use some of the gained equity to cover the LVR. If your property goes up by $100k, and you have a 20% deposit (ie 80% LVR) then $20k of the $100k gained equity is withheld by the bank. That means you have access to only $80k, and if you spent $50k on the reno that can be a real problem. You need enough money to cover the deposit on a new house, plus reno costs, plus legals & stamp duty etc……..
for us, we found it impossible to keep any of our reno properties so far. also, there seems to be no such thing as bridging finance for LO DOC loans.
so despite the fact we have now $200k equity, we cant keep a property. maybe on reno #3 that will change. re realise this means we lose $15k in agents fees etc each time we sell. but its better to lose $15k so you can make $80k on the next project……..
Hi Crashy
I cant say that i 100% understand what you are saying ?
Lets say that you buy a property worth $175K add agent fees, stamp duty, solicitors fees and so on spend $15K up-grading that works out to be $200K with 80% LVR thats about $40K of your own $$$ as deposit..
Now property is finished and re-valued @ $240K giving $40K equity. Now u decide to sell, take out tax mans $$$, agent fees, legals leaving "NOT MUCH" around $17K ish, now with your initial $40K deposit you will have about $57K
Is the bank going to want to keep $3,400 of the $17K profit ?
I dont understand how they can keep anything above the loan pay out figure ?Cheers Brad
Hi Brad1m,
If you sell you will have cap gains based on the following;
The amount of tax you pay is determined by
a) your marginal tax rate on your personal income
b) whether you sell in less than 12 months (taxed on 100% of gain), or after 12 months of holding the property (taxed on 50% of gain).If so; the rough formula is:
Sell price: $240k
-buy price: $175k
-buying and selling costs, legals etc. (say; $20k for sake of example)Total gain = $45k.
NOTE: there can also be depreciation to be considered as well, but let's assume you sell quickly and do not depreciate anything.
If you have held the property for over 12 months, you pay tax on 50% of the gain = $22,500
Tax payable is at your marginal tax rate (say; 30%):- 30% x $22,500 = $6,750
Total Nett Gain:- $38,250
you may not end up paying the above amount of tax as the amount is factored into your personal income and tax position, then a new tax is calculated.
Buying and selling for a profit will give you short-term cashflow if done well, but long term you won't build real wealth as it's the compounding effect of buying, holding, using equity to acquire more that magnifies your wealth. Every time you sell you lose the opportunity of the future cap growth on that property.
Adding value through renos really only works in a booming market you'll find. Quite often the extra value of the house is only equivalent to the cost of the renos, which effectively means you have wasted your time.
You need to be very careful about the location and timing of the market for this strategy to work.
The situation in right now is a tough call; should you sell and free up the cash to put into another possible better return investment? or should you hold for the long term, and wait for cap growth to offset the neg gearing?
Keep in mind you will have some good "on paper" deductions through the renos which will soften the neg gearing position a fair bit. If you know the area will do well growth wise I would try to hold it and access the equity as it improves.
Brad
you either revalue OR sell. not both. its only if you revalue to use the EQUITY that the bank will withhold some. If you sell and the loan is paid out (transfer of security is far cheaper) then you get all of it.
Hi all,
I and my partner are on the business of renovating and re-selling. We agree with all that LA aussie says.
We are lucky that we already have the leverage of two full paid properties (rented out, so also giving an income)
The way we work is by saving as much money of the profits we make with each property sold, after taxes, etc., When we have enough money saved, about 20% of the value of another property we we use it as deposit for another lo doc to buy it.
We only buy units, say two bedroom ones. Never houses. Units are cheaper to refurbish and quicker to sell, in particular if you can get them cheap and in a good area.We average about one renovation/sale every four month and don´t complain.
Our aim is to increase the quantity of properties to renovate/sale each year and at the same time to progressively keep one or other to be rented out for increased capital gains/equity/compounding.
We don´t mind paying lots of taxes for it means that we also make good money.
Cheers,
Tera
Hi Tera
Do u do this as a fulltime business?
I have just bought a 2 bed villa unit in Melbourne and will be renovating, then renting.
I was wondering where u operate and the sort of buy, renow. costs, profit margins etc u look at.
Kind Regards
Peter
My general rule of thumb: If you can afford it, keep it…..if you need money…..sell it.
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