Hi all,
I have a dilemma. After 4 years of renting and employing the cashflow +ve investment strategy, I agreed to buy a PPoR to keep my wife happy. I ensured this was in a high capital growth suburb (historically 14% p.a. over last 10 years) with an x factor (we have sensational city views). My issue is now we have a large non-deductible debt on our PPoR and a small debt on our investment property (debt on PPoR of $600k). We currently own a highly +ve cashflow block of flats returning $19k p.a. (after interest, holding costs, maintenance, etc). We have received an offer of $750k and after paying down the debt owing, agents fees, CGT, etc, we can pull out approx $310k in equity. This would make the debt on our PPoR a comfortable $290k – equivalent to what we currently pay in rent.
I have looked at scenarios where:
1. we hold the current investment and use the cashflow to help pay the mortgage on the PPoR, in which case we are $250 per week worse off than if we sold the investment;
2. cash in on our profit now while the market is strong to pay off non-dedecutible debt; and
3. sell the investment and look for another deal by drawing down equity in the PPoR as a deposit. The deposit would be tax effective and I would source a cashflow neutral or +ve deal to service the new debt (hard to find now I know!).I don't forsee the asset being an easy asset to sell in a weak market owing to its position on a main road. We could afford to pay the mortgage on the PPoR with our current salary (committment is approx 36% of our net salary after tax), but it would take us a long time to pay down $600k of debt! We are also concerned at the level of committment in the unlikley scenario the entire block of flats became vacant and we have to fund the repayments. In any event, if we held the asset I think it probably prevent us from using the equity in the investment to purchase another property for fear of tenancy vacancies and debt levels.
Has anyone faced a similar situation or have any words of wisdom? I am struggling to figure out the best way to analyse which scearnio will be better for us.
Thanks in advance!
Hello jayco
Have you looked at the possibility of strata titeling the flats and selling some off after a facelift maybe?
Just another option?
Elka
This is the big dilemma for everyone; think with the head or the heart?
The head says keep the cashcow block of flats and never sell them, and use the excess cashflow to pay down the debt on the PPoR. Have 2 properties gaining in value instead of one.
The heart says "own your own home", be debt free.Because I am not personally involved and have no emotional attachment I can say this:
The block of flats will continue to make you rich. It is providing $19k of passive income that is softening the blow of paying your mortgage on your PPoR, which is also an investment of sorts.
If you can comfortably handle the repayments as you say, then do not sell the flats; keep pouring every available cent into the PPoR loan, decrease that debt (and increase equity as you do it).
The chances of the entire block of flats being vacant at the same time is effectively zero, and even if they were, it would not be for very long if they are half decent, and on top of that they are very positively geared, so you could afford to let them sit vacant for a little while and it won't hurt you financially too much at all.
Perfect response from LA Aussie. Don't sell. I would actually be pulling equitly out of the black of flats and buying more property. Pull out extra to cover repayments and not effect your current cash flow.
Look to the furture my friend.
Hi guys,
Thank you all for your comments. I was always a believer of holding assets for the long term, but am now a believer in taking a profit after reading Steve's latest book. I have made significant equity on this investment since acquiring it in Aug 05, and am doubtful whether there is any further value add opportunity. I have assessed the strata title unit scenario, but the asset is worth more selling it as a high yielding investment. I am thinking if I hold it I will have to rely on capital growth to further increase equity, and I think there is more equity to be made in the market employing other value add strategies.
Essentially I have looked at the best return on the $310k equity I can release. If this $310k equity sits in my home loan it saves me 7% interest p.a. ($21,700). I would effectively have to earn 14% on this $310k equity pre-tax to equal the scenario of having the $310k in my PPoR mortgage. The $19k p.a. cash flow I receive by leaving the $310k equity in the investment is only a 6% return pre tax. This analysis obviously doesn't account for any capital growth in the asset, but I am now doubting any future capital growth as it is essentially a secondary location (positioned on a busy main road).
I also looked at the scenario of pulling out equity to fund another asset, but the next deal I want to do will be on a larger scale. By sticking to an LVR of 80%, I worked out I will have more money for a deposit by selling the current investment than if I redraw some equity. Accordingly, I think I will take the offer of $750k and pay down some debt on my PPoR. That way I am cashed up to look for another value add opportunity to create more equity. I think you reach a point where you have to back yourself to be able to find another opportunity.
Thanks again everyone for your input. It certainly has made me rethink my strategy for the next 5 years.
Cheers,
Jayco
You must be logged in to reply to this topic. If you don't have an account, you can register here.
