James
Don't want to scare you off. You have a low debt on your house so that is good so that is a definite plus. With the interest rate so low pay as much off the capital before the rates increase once inflation forces them up. Although you built the investment place rid yourself of emotional attachment and look at it as if it was a business. The unfortunate forces coming at us are unpredictable in their power but their impact will be greater if China buckles more than what we hope. You have indicated that the loss per year is $7k or $49k over 7 years. It is more than likely that the value of your investment will not be much higher than what it is today although, being positve, allow for it going up a bit. If the predicted loss instead was put into your mortgage then in 7 years it would be paid out (a dream for many). Alternatively, you could invest in blue chip stocks over the next 7 years with some of the money you're currently losing on this investment. One thing is more than likely and this is that stock market prices for blue chip will outdo housing over the next 7 years. I have always been a property investor with no regrets but I'm shifting ground for the next few years. This is certainly not advice to you to sell your investment property but rather for you to consider your position especially if the town where your property is located relies on employment in areas more subject to and at risk to the forces coming eg car industry etc. What if you couldn't rent the place? Your lowering of employment income is another factor. I don't know the reasons why your employment income is slipping but this is a time to maximise your employment potential for the future if you want to realise particular dreams you have for retirement in 15 years . You have a good start with near to owning your home so it really is up to you to make the next move. Sorry that you've already been forced to sell your other investment properties but the past is over so just move forward.
There are many people in much worse situations from the crisis (Fortescue Mining prime investor has lost $9Bn) Oh poor thing!! So go for what is driving you and accept the risks you take without whinging later I should have done this or I should have done that…. I keep saying we should not look back on our terrible decisions as they just bring us pain (unless we treat them as mistakes to learn from).
Good Luck
CarpeJames,
Do you have a good accountant?
Are you able to offset the 7K a year as negative geared deduction against your taxable income?
Although not in favor of negative gearing sometimes it does suit a purpose.There are a lot of conflicting reports about what property and interests rates will do over the next few months let alone years. One thing that has occurred over time is property prices do eventually rise and rents also rise. If property stagnates for the next 5 years I think you will find that rents will still rise. You wont get $150 / month more in rent in a short time but you will get some extra over the next year or two. Also if rates keep dropping as they currently are you should be able to refinance for less than your current repayments by probably early next year or about the time when your current loan changes.
You mentioned a 5 year outlook but you also need to take into consideration your long term 15-20 year goal towards retirement. Does anyone really think that property prices will be less in 15 years than they are now? If looking at historical studies or values you will see that over time property has risen.
I think that and I don't mean to be critical but there seems to have been a major flaw in your investment plans. Can you explain more about why you had to sell 2 other IP's? Were all your properties negative geared and thus the current interest rises and decreased income attributed to your down fall? If the answer is yes then this is where your investment plans have been flawed. Do you have a financial adviser or someone who can look over your investment plans or current finances and look for alternative solutions?
Selling now may get rid of your debt but how long would it take before you can put yourself in a position to buy again or have a property that would reap the same rewards 15 years from now?
what you should be worried about negative gearing, in particular the fact that it won't exist for much longer.
Can you still afford it then ? If you can't you obviously are in deep trouble.Scamp,
Why do you think negative gearing wont exist?
Are you under the impression the govt will stop it?
Although negative gearing is not considered a good way to build financial independence it is strongly supported by the govt. If you look at the last time a govt stopped negative gearing it quickly learned it wasn't a good idea and reinstated it to help stimulate the housing industry.C2
The loss of $7k p/a is after negative gearing. Approx. figures are;
Rent +$16k
Loan Interest -$25k
Ppty Exps -$3k
= $12k real loss p/a
Tax rebate -$5k
= $7k net loss p/aThis situation would improve with increase in rent & decrease in interest rates.
All our 3 investment properties were negatively geared each purchased @approx $340k – $350k with 100% finance + costs.
All were built to maximize depreciation (& negative gearing) claims.Total investment ppty value $1,050,000
Debt: $1,070,000
20% equity was from our PPOR ($300k with no H/L debt)
At the time my income was approx. $75k with tax $20k claimed on 221D to help servicing.
Our contribution (after negative geating was approx. $300 p/w)
Interest rates were approx. 6.8% with 2/3 fixed. Interest only repaysThe plan was to hold 7-15 years with the ppty value doubling to $2.0mill. Net equity >$1.0mill + PPOR.
Flaws were;
– Ppty values have not increased. Only approx. 10% in the Berwick area over 5yrs (all ppties in this area)
– Job changes (forced) reduced income & tax paid (we sold one ppty in 2007 to release equity to buy a business. Only broke even on this property. The second property was sold this year due to pressure on cash flow. The current economic conditions especilly in the used car market have suppressed s/emp incomes. We also broke even on the sale of this ppty)
– heavy reliance on both capital gain + negative gearing
– We purchased all inv ppties in 2004/5 just at the top of the ppty cycle.
– All ppties were purchased as H&L packages at a 'fair' market price in an area with many similar homes being built with lots of land available.As the majority of our debt was fixed interest rate changes up to now were not affecting our cashflow. However our second sale was partly due to coming off 6.4% fixed in Nov2008 to 8.5%. Increase of $7k p/a which we could not cover. Rates have since fallen so maybe we could have held the ppty…
Why do you think our investment plans were flawed?
We are still not sure whether to sell or not. I cannot see alot of benefit in holding apart from the ppty becoming closer to a neutral cashflow. Growth will be minimal over the next 5yrs or so + any gains will be subject to CGT.
If we hold it will be for the long term 10yrs+. Logic suggests some growth will occur in 10-15yrs????The stock market & superannuation appear to better investments over the next 5yrs or so.
My only concern is a 15%+ drop in values over the next 2-3 years if we cannot service the debt. This is the worst case senario but I dont think it would come to that as we would find a way to make up the shortfall. (We still have approx. $50k of other debt to service as well)
To sell we lose $8k in agents fees & to buy $17k in s/duty + costs = $25k turnaround (7% loss).
Seems time is running out … hopefully we can make some correct investment decisions over the next few years!
James,
The investment plan looks flawed from 2 aspects. 1) Your current situation; 2) Negative gearing of what appears to be multiple properties at the same time.
It appears that you over extended yourself just a little too much although your idea was good, the timing and application weren't the best. Breaking even is good and it is easy to understand your fears of values dropping but property when done on the buy and hold is a long term investment.
Do some research on how much property has decreased in the past and then how long it has taken to bounce back, recover those loses and then increase.
It is very hard to depict exactly what part of the property cycle we are currently in as some places are still showing increases whilst others are dropping slightly. I'm sure there are some out there that will only be too happy to say what part of the cycle we are in.
Rates do look as if they will still drop 1 or 2 % in the near future and if this is enough to help then you may want to reconsider selling.
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