We have an investment property worth $680 000 with $538 000 owing. It costs us $4000 a month in repayments and brings in $1600 a month rent. There is a large shortfall of $600 a week which is quite a burden although we do get some back at the end of the year.
Th property is in 45km from Perth CBD in a new area where capital growth has stalled and I would anticiapte will stay that way for the forseeable future. We are not subject to CGT as this has been our ppor and is still classed as this.
We are thinking we could use the equity to purchase a couple of other properties in areas of Australia which are experiencing growth and get a better rent return and are less of a burden on our finances.
There is some question as to the extent of the negative gearing we can claim on this property as we used equity in the past for lifestyle expenses when the property was a ppor as we never anticipated renting it out.
There is also an emotional attachemnt to the property making the renting out process far more stressful.
What do you think??
You will incur selling costs and then more costs on purchasing the replacement properties – as well as not being able to claim the main residence exemption on the new ones.
But if there is not going to be much growth, then it may be costing you money just to hold on.
So what you probably should do is work out the costs of selling and buying and estimate growth for this area and the other areas you are looking at and see what the figures show. Which will be better off in 1 year, 3 years 5 years etc
Terryw | 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
I have looked at the figures as they stand the capital growth for 2007 was around 3.5% if that continues and we are able to claim all out interest then we will break even taking capital growth into account. I would think it would be about 3 years until growth returned to 5% or more in this outer suburb.
We are also considering the option of selling the property into trust to ensure we can claim the full interest deductions in my husbands name. We are looking at the Chan and Naylor property trust.
Any feedback is greatly appreciated.
natbest to check that selling to trust won't incur stamp duty, it varie state to state. also be careful renting and claiming ppor, the ato have many and varied ways to catch you out like electricity, phone gas bills electoral roll, d/lic,etc.
If the weekly burden is getting to you , you may benefit from claiming a Taxation variation authority. These enable your employer to tax you less and spread the benefit over the financial year instead of waiting for your return. Ask your accountant or download forms fro ato website, they used to be called 221d. This may be enough to make it easier to hold. If you do rent it out and end your ppor status get a high valuation or a few optimistic appraisals from agents. This will minimise cgt when the time comes. Depreciation schedule will help along with refinancing on an interest only loan if you get another P&I on your next home. If you do shop around to buy elsewhere,Townsville is still getting good growth and very low vacancies, not a bad yield.Hi Jeff
s118-145 of the ITAA allows people to be absent from their homes and still class it as their main residence for up to 6 years, and keep it CGT free.
Terryw | 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
thanks terry, I know that people sometimes do it on more than one which is russian roulette in my opinion
Hi Jeff,
Thanks for your comments. It is my understanding that as we lived in the property for 5 years prior to it becoming an IP then we can continue to claim it as our PPOR for a further 6 years and not be subject to CGT. As for the stampy duty for selling into trust that is probably what I am trying to weigh up at the moment it will be around $30 000 but will allow for unhindered claiming of the interest and by being in the trust the asset is protected ( we are in a high risk group for litigation) So I am trying to weigh up do I sell outright which would incurr further selling costs as well as stamp duty on new IP but one that is performing better growth and rentwise. Do I sell into trust and make an immediate loss in terms of stamp duty which will lead to gains later on as this property wil be negatively geared for a long time, or do I just sit and hold and ride it out.
My gut and my crude attempts with the figures tell me the property is costing me money but I am attached to it emotionally which means my judgement is clouded. I know if I wait long enough it will make money but I can't decide if it is worth the lost opportunities in the meantime.
NatHello Nat,
That emotional attachment associated with renting out a home which has personal memories in it has caused many people heartache. Will any tenant ever have the same respect for the place as you? Try and picture five years down the track, will you regret selling and investing elsewhere or appreciate keeping it and renting. Emotions are ok with people and pets but properties are just properties. I used to have a house (home)which we swore we would never sell. We have sold it , bought better and no regrets.
it needs to be about the numbers unless there are long family ties , in my opinion.
The rent seems low is that the norm over there? Here they pay 300-350 p/w rent for homes bought for 280-350k
all the bestHI Jeff,
The house is one of the most expensive in the suburb about $50 a week over the average. But it is valued about $200 000 over the average as well which will make selling more dificult I guess. Being an outer suburb probably not the best scenario for an investment as the value is largely in the building (which a tenant can damage) and not the land. I am particularly jittery about it at the moment as our tenants are moving out and I am not sure if we will be able to get new tenants at the same price and then the issue of how well they look after the property is looming.
We designed and built the house to be our perfect home and planned to stay there forever but of course life had other things in store for us which is great we have started on new journey but letting go of this house is difficult. I can rationalise based on what I have read and learned about property investing why not to sell ie "Never Sell" "The bigger the asset the better" etc but I am not sure how much of the rationalisation is skewed by emotion. Then I can also see good reason to cut losses and move onto something else ie financial burden and better yields elsewhere.
Unfortunately some properties are not just bricks and mortar.
Nat
Hi Nat
I don't think that selling is such a cardinal sin. I sell properties all the time. It is all mathematical. If, taking into account selling and buying costs, I can get a better return elsewhere, I don't have any problem at all selling and putting my money somewhere else.
There are all kinds of investing strategies. Buying and holding is just one strategy, albeit the most popular one.
Cheers
K
I personally would hold on to the property as selling it and buying somewhere else may make the situation worse. For a start, the selling costs such as commission, legal fees and bank fees may amount to $15000 plus which means that you going to be left with a maximum of $125,000 (or even less) for future investment. What are you going to do next? Buy into Melbourne, Sydney or Brisbane where the markets have softened and your returns may be even less? The latest Residex figures showed that nearly all captial cities had a decline in property prices for the month of February.
My advice is hang on to the property. Sooner or later, there will be an upswing and you'll be able to use the increased equity for future investing.
Hi Macnatt
This may sound harsh is is not meant to be.So a few questions for you
If there is an emotional attachment is this costing you money?
Either this is an IP or PPOR?, you decide and then treat it appropriately.
Is it really worth transferring this one to a trust?
How long are you going to continue to pay all that cash out for a property you ONCE had an emotional attachment too?
This is bricks ad mortar, whatever HOME you had when you lived in it you TAKE with you when you go.
Wht are your goals in terms of investing?
Does this property fit that criteria? If not get rid of it. There is no such thing as a "Cardinal sin" in terms of selling. EVERYTHING is availabel for sale at a price, you just have to determine what price you will let it go for (make it reasonable).
If you are in the BUSINESS of investing in property, then treat it as a BUSINESS otherwise it is just an expensive hobby.
And lastly I strongly suggest you see your accountant and ask the question about whether he/she thinks this property will build you wealth in the longer term – assuming that is what you are ultimately trying to do.
Warm Regards
sueMIT | Owen Real Estate
Email MeThanks everyone for your comments. We have an appointment with an accountant hopefully they can shed some light on whether this property is a viable one. I think it really all depends on how slow the Perth market is going to be now that the boom is over and for how long. Anyone know where to buy a good quality "Crystal Ball".
Nat
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