We own one 4 bed investment property located in Berwick VIC.
We built the property in 2004 at an approx. total cost of $345k
We believe it to be valued at approx. $375k today.
Rent is currently $320pw but market rent is closer to $360pw. We intend to increase the rent Mar09 to $360p/w.Just over a year ago I resigned from my job & became self-employed by purchasing a small franchise servicing the automotive industry. Income has been less than expected mainly due to the deteriorating economic conditions particularly in the car industry. Our combined taxable income is approx. $50k and expected to fall further….
The debt on the property is currently $360k (we borrowed extra for other inv purposes). @$2000- p/mth I/O.
Once rent has been increased to $360p/w I estimate the holding cost of the property is $120-p/w ($6k p/a) after tax rebates, costs etc.
Over the past 4 years the property has only increased in value by $7.5k p/a on average.
As we bought the property solely for capital growth the experience has been very disappointing as I sure in real terms we have lost money.
Although we can still afford to make repayments at present I am concerned about;
1. Our income reducing to a point we cannot make repayments (this may be in 6-12 months if trends continue).
2. Property prices in the Berwick area falling. (Even a 5% drop would be significant if we needed to sell. More would be a disaster)
3. Is it worth holding the property for capital gain (and continuing to lose money) when property values are expected to stay flat for the next 5 to 10 years?We are very confused as whether we should struggle on to hold the property or to play it safe and sell now before it is too late.
"To Sell or Not to Sell" any comments would be greatly appreciated.
Thanks
James
Are you claiming building write down depreciation for the new property as for an example $345,000 building costs * 2.5% = $165 a week depreciation benefit plus depreciation for fittings in the house. A good quantity surveyor would work this out for you. The building write off will increase the capital gains tax in the future but it might help you get over the cash flow problems you are forecasting to have in the future.
Property doesn't grow in value in a nice linear fashion so you may be experiencing a flat growthrate at the moment 3-5 years worth and sometime on the future the property market fires up and in a three year period it may grow at 12% to 24% per year . What you will find is over a long period of time 10 year – 15 years the averaged growth figure will come out at approximately 7% p/a .If you sell you will have a harder time getting finance in the future as you are self employed and the lenders are tightening the lending criteria on low doc loans.
I can't advise you to sell or to keep the property but I had the situation where for the past 7 years I have been unemployed and 3 of those years was university so I managed to keep a property that was short falling at $50 a week but when no one would employ me out of university I was forced to sell due to my future impending shortfall cash flow. I have only recently started my own business and I will have trouble getting finance to buy another property even though I own a $240,000 investment property without debt ,my low cash flow is restricting my possible lending amount.
Thanks duckster,
Yes we are claiming a building writedown since the property was established however this is reducing each year.
Because our income has reduced by $25k p/a (going from PAYG to S/emp) + we are now income splitting the tax rebates have greatly reduced as well.All our surplus income is going to hold the property now so we dont seem to be getting ahead.
With all the negative press about property prices now & in the foreseeable future it appears the downside is much much worse than the upside.We did sell our 2nd investment property approx. 2 months ago purely due to cash flow worries. The property was built in 2004 as well cost $345k. Sale price was $360k less selling costs $10k we just managed to break even after 4 years….very disappointing.
It appears inner city suburbs are currently incurring significant losses in some areas & outer suburbs are holding values… Will these price drops eventually flow into the outer suburbs?
If so how long will they take to recover & start to post 10% capital gains again?James62 wrote:It appears inner city suburbs are currently incurring significant losses in some areas & outer suburbs are holding values… Will these price drops eventually flow into the outer suburbs?One hopes…
Maybe you can look at working a second par time job to work on the cashflow shortage. In my experience it is worth holding onto the property and really look at your budget. Once you sell you lose all the future capital growth and income increases. But when you want to get back in the stamp duty and other prices have gone up again slightly so you are back to square one.
I am currently holding a property which went down also lost about $80k in capital growth due the downturn also, but now rates are coming down i can keep it and within 12months will be cashflow neutral. I have tighented my belt a lot don't spend more than i earn and what every cent i spend. Hang on and hold unless you are really needing to sell and the banks are knockin on your door.
James62 wrote:The debt on the property is currently $360k (we borrowed extra for other inv purposes). @$2000- p/mth I/O.
Once rent has been increased to $360p/w I estimate the holding cost of the property is $120-p/w ($6k p/a) after tax rebates, costs etc.
So with another 1.75% rate cut you'd be in front ?
Quote:2. Property prices in the Berwick area falling. (Even a 5% drop would be significant if we needed to sell. More would be a disaster)
In the current market with everyone sitting on the fence if you do put it on the market now you'll probably get tire kickers and bargain hunters offering 20% below market value. Not sure what the agents charge in your parts but at a guess I'd say expect at least 2%-3% in fees.
On the other hand if you do get some decent offers its probably because the market has started to move upwards again. You'd be selling at the bottom after struggling to keep it and pay it off for 4-5 years for ZERO gain. By the time settlement has occurred the buyer would most likely end up with a positively geared property and possibly even some capital gain.Quote:3. Is it worth holding the property for capital gain (and continuing to lose money) when property values are expected to stay flat for the next 5 to 10 years?
Maybe, its hard to predict the market 5 to 10 months ahead let alone 5 to 10 years. Perfect example was 4-5 months ago, economists were predicting rates to go up at least twice more before X-mas and to push them into double digits. Now you get some joker predicting rates going down to 0%
Quote:We are very confused as whether we should struggle on to hold the property or to play it safe and sell now before it is too late.
"To Sell or Not to Sell" any comments would be greatly appreciated.
Only you can decide if selling or not selling is the right choice for you. If I was in this situation I'd hold on and if the business wasn't doing to well I'd get another job to supplement my income until the rates came down a bit more.
Not only are the rates falling and will continue to do so for a while but I think they will stay low for a very very long time. By pumping all that billions into the market and guaranteeing bank deposits to calm nervous investors all they did was set the market for an oversupply of cash in the future. Bad news for cash returns and good news for shares and property. By X-mas 2009 I believe that based on today prices we could easily see gains of 25%-30% on shares and 15%-20% on property prices and the RBA rate down to around 2.5%
In the end its your decision whichever way you want to go but before you decide ,
1. have a good look at all this doom and gloom and see how much of it is real and how much is media hype.
2. take a short holiday or at least a weekend away somewhere quiet before making a calm and rational decision. (somewhere without TV news, newspapers or mobile phones preferably )
3. decide
cheers & good luck
IMHO, if I were you.
I would sell while house is worth more than your debt (hopefully you can still sell it for over 360k !).
I rather have nothing than IP like this.
At least you can sleep in peace.Sell and move on – if you think it's the best solution. Work your no's.
harb wrote:James62 wrote:The debt on the property is currently $360k (we borrowed extra for other inv purposes). @$2000- p/mth I/O.
Once rent has been increased to $360p/w I estimate the holding cost of the property is $120-p/w ($6k p/a) after tax rebates, costs etc.
So with another 1.75% rate cut you'd be in front ?
We locked in a 5yr fixed rate of 6.85% in 2004 so rate changes have not been a concern.
The worry is income dropping to a point where loan payments cannont be made combined with a 10% or more drop in property prices.
JamesHow things can change. 3 years ago I had a serious illness so much so I had to discontinue my career. I was also a property invester with 5 properties but the debt on 2 was so high relative to my cash flow I was forced to sell 2 of them 2 years ago. They went for relatively bargain prices but I still made significant capital gains to reduce the debt on one other. I've done very well overall as my debt ratio to the properties I own is very low at around 15%. Taking such action was painful at the time (good properties that I liked a lot) but it immediately eliminated the stress of trying to service a debt through an illness and I'm so glad I did it. I know there is much information out there that the housing prices will stabalise soon but I don't agree. To be sure Australia does not have an oversupply of houses like the US (so much so that you can now buy houses there for $0) but Australia like the US, Spain and Britain has a very high house price to income ratio. House prices in Australia at the moment are 7 times the income that you earn . It is only a few years ago when the ratio was at 4 times the income you earned. Seriously it was less than 5 years ago I bought a house in the inner suburbs of Canberra for $280k and up to the credit crunch it had a value of $650k ( so 7 times the income of $90k). A postion paying 90k today was probably earning only 60k so you can see how the prices have escalated beyond buyers reach unless they are prepared to go into risky high debt and continue to speculate that prices will keep climbing. It will be some time before prices will take off again as notwithstanding the demand exceeding supply, unemployment rising and shrinking migration will impact. I still think there are gains to be made on property. However, you have to weigh up the plusses and minuses of your position:
1. Poor cash flow (unless you're prepared to take on extra jobs and diminish the joy of general living without overworking/stress)
2. Risk of employment income dropping (very stressful)
3. Very high debt ratio (seriously, if your total debt divided by the total value of your properties is higher than 50% you are in high risk mode)……it would be horrible to struggle for 5 years and not much gain made.
4. If you have a home mortgage this is the one we shouldn't have. Always a joy to see it eliminated.
5. high uncertainty about capital gain on this high debt investment property.If it was me I would be focusing on reducing your debt but this is not advice to you on what you should do. It is your decision and I wish you well on what you decide.
Cheers Carpe
James62 wrote:We locked in a 5yr fixed rate of 6.85% in 2004 so rate changes have not been a concern.
The worry is income dropping to a point where loan payments cannont be made combined with a 10% or more drop in property prices.So really its the income drop that is causing your problems then since the house more or less pays for itself. Forget about any price drops for a moment since they are irrelevant if you decide to hold on to it. At $120 p/w you could just about stay on the dole and work 6 hrs p/w to continue paying it off.
I'd be having a good look at that franchise business of yours and see if its worth keeping it. Not sure what you've got but if its anything like the mobile touch-up paint vans and or the mobile car detailing franchises I'd cut my losses and get a job. They haven't done that well even during the good times.
Another thing you could try before you decide is to ask 2-3 RE agents over for a free quote and try to find out how much would they think it would realistically sell for, what is their cut ,what other fees & taxes would you have to pay. Also check with your bank about the early discharge fees,any penalty fees, etc. Once you have all that you can work out how much profit or loss you end up with. You may find that at the end of the day you could have no IP but still own the bank some money and have repayments much higher then the $120 p/w you pay now.
As I said before, only you can make the right decision for you.cheers
carpe_diem wrote:To be sure Australia does not have an oversupply of houses like the US (so much so that you can now buy houses there for $0) but Australia like the US, Spain and Britain has a very high house price to income ratio. House prices in Australia at the moment are 7 times the income that you earn . It is only a few years ago when the ratio was at 4 times the income you earned. Seriously it was less than 5 years ago I bought a house in the inner suburbs of Canberra for $280k and up to the credit crunch it had a value of $650k ( so 7 times the income of $90k). A postion paying 90k today was probably earning only 60k so you can see how the prices have escalated beyond buyers reach unless they are prepared to go into risky high debt and continue to speculate that prices will keep climbing. It will be some time before prices will take off again as notwithstanding the demand exceeding supply, unemployment rising and shrinking migration will impact. I still think there are gains to be made on property.
Cheers CarpeAlthough the current economic conditions are not great I am optomistic we can contiune to make the loan repayments in the short to medium term unless the ecomomy takes a dive.
I am still asking myself why I should be trying to make the payments.
Over the past 4 years we would have been better off if we had put our loan payments in the bank (negative gearing contributions).
Looking ahead through the gloom & doom I struggle to see how (outer suburbs) property prices will increase more than say 2-3% p/a over the next 5-10 years especially with high debt/servicing ratios we currently have.We will only be ahead holding on to the property if a capital gain of 3%p/a (on average) is maintained.
Also it is more likely property prices will drop before they start to rise again.
Why continue to struggle?
Indeed why struggle …..we only have one life and each day should be precious so make it as stress free as possible. This doesn't mean giving up on life's challenges and risks but I'd rather be happy in one home I own with family/friends than being burdened with seemingly unrelenting debt….especially given a definite mood prevailing of poor capital gains for a number of years. The good days of housing investment are no longer with us. You might struggle to pay the mortgage over the next 5 years but the high capital gains and respectable cash flows will not persist. We have to take risks in order to advance but there are good risks and bad risks. If you still have a mortgage on your house of abode then this might be a better place to put your money.
All the best James…….whatever you decide to do don't look back ever.
Carpecarpe_diem wrote:….whatever you decide to do don't look back ever.
Carpegood advise – no regrets and dont EVER look back
Unless your walking along a nudie beach
James,
What was your main goal when you started investing?
Were you looking for quick returns and quick profit or more of the buy and hold for a few years.
If you don't sell you do not lose any money on the actual situation.
If you keep then it may take a few years before the light shines but it will shine.You mentioned you have an IP but what about the house you live in now?
Would it rent out for more than your IP? What other options do you have for alternative incomes?It appears your mainly worrying about prices dropping but that wont affect you if you don't sell.
Investing is not easy and sometimes it can look as if you are going nowhere fast. Many investors felt this way in the late 80's when rates were up around 18% and again in the 90's when property moved slowly but most of those who managed to hold on have benefited by doing so.
You are doing the right thing as an investor and thinking about your situation over the next 6-12 months but are you giving yourself unnecessary worry? No property is worth sleepless nights and stress and if the only way for you to feel comfortable is to sell then go with that option.
Times are tight at the moment and have you checked other alternatives to raising some extra cash. It could be as easy as down sizing your car or cutting your spending budget by 10-15%.
Also if you are locked in on your loan what penalties apply if you break and sell now rather than waiting?
If you do decide to sell then set a price that sees you at least break even and hold for that.
Thanks for your comments C2.
We decided to invest in property in 2003 to try and create some $$$ for our retirement in the next 15 to 20yrs (we are currently in our mid-late 40's).
The plan was a long term one.
The mistake we made was to put our faith in a property investment company which sells H&L packages in the Berwick area. Although we felt the properties were good value at the time in hindsight they were not a good 'investment'. We could have bought better with more research and better timing (2003-4 was the peak of the property boom).
Changes to my employment situation have (unintentionally) put a little more strain on our cash flow than planned which resulted in the sale of 2 of our 3 investment properties over the last 15 months.
We want to hold onto the last investment property for our future retirement & I think we can unless the economy goes into free fall in the next couple of years.
My main concern at present is will property prices continue to rise (in the outer S/E suburbs) over the next 5 years at a rate greater than the holding cost of the property ($5k – $6k p/a) ? If not we are paying out these $$$ each year for nothing!
What do other investors think?
James62 wrote:What do other investors think?what I think ? I think you should have taken my advice 6 months ago when you could still have sold your house for 360K. Houseprices will fall 50% overall. Some might drop only 30% , some will drop 90% or even a 100% ( you will be able to buy it for 1 AUD$ ).
Yes, that's what I think. Read my 6-month old posts if you want to know what is coming in the next year. Also it gives you some advice on what you could do with your money now.
Good luck trying to sell, you and 1 million others are all trying to sell your houses and there are no buyers with money. ( except me, but I won't buy your house for anything more than 200.000AUD$ which is still a good price, considering your house is only worth 50% of 360K ).
If scamp is right. I would buy as many of these one dollar houses (that will soon appear) as you need to have there rent suppliment your negative equity from your existing Property. A couple of one dollar houses renting at $50 to $100 dollars a week should do it. Too easy
Hey….in the US…you can buy them for $0 US. Seriously they won't go that low in Australia as we don't have an oversupply of houses…yet. Once the financial crisis tsunami hits Australia you will see prices start to fall much more than they are doing at present as employment and migration drops (depends on China recovering). This is particularly going to be so in low demand for housing areas which you seem to be in. If you still have a mortgage on your home sell your investment and pay off anything you make off that loan or put it into the bank/good stock. If you own your own home then seeing you're so keen about keeping this investment house then keep it……the only condition is that you have to wait a number of years (perhaps 15) before it starts to make capital gains again and perhaps during the period become overly stressed. I doubt whether it will gain much even over that time period. The big question is can you continue to support this property and live with it in peace and calm? People have to realise that even before the credit crisis housing prices in Australia were overpriced….7.5 times your income to buy a place (it used to be 2.5 times) so on top of that we have the credit crisis which has yet to hit. Your problem is that your debt is far too high which personally I think you have to get rid of to prepare for what's ahead. Especially as you seem to have employment problems. Housing is not the only way to invest….the prices on the stock market for good stock is very low and to be sure this is the best place to invest if you're prepared to put what you can into it and just wait for 15 years and you'll be fine.
All of the above is on the assumption that you do have your own home (you keep failing to tell us) and the debt is paid off . If you still have a debt on it then forget the stock market and put everything into reducing the mortgage as nothing is better than seeing your home mortgage eliminated ……and there is no better investment.
Carpecarpe_diem wrote:If you own your own home then seeing you're so keen about keeping this investment house then keep it……the only condition is that you have to wait a number of years (perhaps 15) before it starts to make capital gains again and perhaps during the period become overly stressed. I doubt whether it will gain much even over that time period.Do you really think that property prices in the outer suburbs will stay flat for the next 15 years?
I have been monitoring selling prices around Berwick & they are still relatively stable, even showing a slight increase over last month or so. Probably due to the new FHOG.Increasing unemployment combined with high debt levels this seems to be the biggest risk at present.
http://www.livenews.com.au/Articles/2008/11/14/Australian_Housing_Safe_As
We own our own home (val. $330k) but still have a small debt of $50k owing.
Although I dont believe house prices in the outer suburbs will fall more than 10-15% (falls in the inner suburbs may be more) I can see no substantial growth (if any) over the next 5 years at least.Sounds like I better sell up now before its too late!
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