Hi, my wife and I are trying to make some plans for the future and given the current economic crisis, are trying to make some tough decisions, and I would appreciate your thoughts.
We have just returned to one income and have a small amount of consumer debt, which will be cleared completely by February next year.
Currently we have 3x 1 bedroom apartments in St Kilda, Richmond and East Melbourne (all in Victoria). The St Kilda and East Melbourne are both fully furnished and cashflow positive (before tax), while Richmond is unfurnished and cashflow positive after tax.
All 3 properties are at approximately 90% geared and overall we are about $400/month ahead before tax. Obviously we expect that to improve after tax return time, and only St Kilda is funded interest only.
I am really concerned about the current crisis and given that we will be on only one income for some time, I am not wanting to strain the finances over the next 5 years or so.
So I see our options as
a) sell Richmond by the end of September to capitalise on the FHOG and fix interest rates on the other 2
b) fix interest rates on all 3 and bunker down for the storm
c) liquidate all 3 (again, by September) and look at re-entering the market when the property market has stabilised!I realise c) is a bit more drastic, but it does increase the “sleep at night” factor.
My wife is leaning towards a), while I am somewhere between b) and c).
I am happy to take risk (I trade options as well), but would appreciate your comments as my wife tells me I have read too many “doom n gloom” newspaper articles, which may have clouded my judgement.
Thanks for reading this and I look forward to your comments
Wide Mouth Frog
Can you make all properties interest only repayments?
Richmond, not for a few years, East Melbourne will go IO in September, but at the end of the day, that is not really the issue, as overall we are ahead by about $400 a month. I agree that will increase the buffer, but I am more concerned with the gearing levels, and future of property. In Steves Budget video, he talks about the end of the FHOG and some of the ramifications. My question is more about how to manage my risk now to maximise the effects of a possible property downturn
I look forward to your comments
Thanks
Wide Mouth Frog
Hi Wide
Where are you living now? Do you have a mortgage on that property? And I see you have some consumer debt.
Why not change all your loans to IO immediately. You should divert the extra money you are paying on your deductible loans to the consumer debt. The faster you finish this the more interest you will save – interest which you cannot claim.
Also set up a 100% offset account on one of your loans and place all spare cash in this (after the consumer debt is paid). This will save you interest on your loans the same as if you had paid into the loan. If you still have a loan on your own home, then set up the 100% offset on this loan as you will save non-deductible interest.
If prices drop in the near future, don't worry too much. It may not matter too much if you are gettting rents, especially positive cashflow. Just hope that prices will rise again!
If you do decide to sell factor in CGT. You may find selling one house will result in less tax. If you sell all in one financial year, you could be slugged with heaps more tax.
Also if you spouse is not working it may be wise to sell during this time (if in her name) as this may mean less CGT.
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 for that Terry,
I am not sure why, but I think the point is being missed….. anyway – to answer your questions
We cant convert to IO now – we are awaiting fixed rates to expire
We currently rent
We are not even close to factoring in things like CGT
My questions are about whether to hold three properties (which are doing ok) through the remainder of this financial crisis, which I see deepening after the FHOG disappears, or to liquidate now. I understand that things like CGT and many other factors will cloud any decision we make.
What I am trying to establish is 3 properties, highly geared in strong capital growth areas (but still anticipating negative growth over the next few years) and currently c/f +ve.
Given the high gearing, and the chance to get out before the FHOG expires, do I seriously look at that, or do I grit my teeth and wait out the financial crisis.
I see our options as
a) sell Richmond by the end of September to capitalise on the FHOG and fix interest rates on the other 2
b) fix interest rates on all 3 and bunker down for the storm
c) liquidate all 3 (again, by September) and look at re-entering the market when the property market has stabilised!I guess I really want people to say which of these people think would be wise and why!
Thanks
Wide Mouth Frog
Hi,
I think you're crazy if you sold any of the mentioned properties, given their location and the fact that they are +cashflow and supporting themselves whilst putting a few dollars in your pocket.
I find it challenging to comprehend that these properties are 90% geared and still +postive cashflow. How long have you had these properties for? Have they been re-valued since purchasing them?
Given that these are positive cashflow properties whats driving you to sell? Do you think rents and demand will decrease in the forseeable future?
Yes, i am thining why sell too. If you think there will be capital growth in the future and they are cashflow positive too.
But I would change over to IO as soon as possible. And, have you ever lived in one? If no, maybe consider it, depending on your circumstances though. You can move out and then count the place as your main residence and then rent it for 6 years and still keep the CGT exemption. This would be ideal before the next boom – making all those gains without any tax.
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
The point of asking the questions is the sleep at night factor. After the FHOG ends at the end of September/December, I am anticipating a drop in the market, and am concerned how this may affect me.
I am 90% geared (and yes the valuations are current!) and the reason that we are c/f +ve is because the properties are tenanted furnished – it costs about $4-6K to furnish the properities nicely and it brings in a truckload more $
I have got the move to IO under control, but cant do that yet with out penalty until later this year.
My question centres around if it is better, given the gearing and anticipated drop in prices, is it ok to hang on, or better to look at reducing the gearing?
As for living in them, I lived in st kilda for 6 months and then my wife lived in hers for 6 months (before we got married)
Currently we live in rural vic due to work so cant live in any of them
Thanks
Hi WMF
Having lived in 2 previously is ideal, you could rent one out for up to 6 years without CGT implications. You can even chose which one to count (only get one main residence per couple) – chose the one with the biggest gain!
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 think many people not seeing financial markets as viable due to GFC may be looking at property.
The jump back and forth between the two supposedly happens alot, like a see saw.
Im not familiar with your specific area and the market conditions there but anyway:
If i were you i wouldnt even think of considering options A) or C) thats why i think most people are saying so.
sell? why? market values go up and down all the time but it doesnt really make any change to an existing loan.
Doesnt it only really matter if you are actually refinancing, buying or selling at the time of any down/upswing?If it is cash flow positive, rental demand barely changes, the balance sheet on such a property is only going to get better….
(let alone this housing crisis which has seen rents remain high through property market downturns) plus you'll be up for max CGT cos you havent lived in any of them?I wouldnt want to sell anywhere near a property market downturn and would only really want to sell in the end curve of an upswing and even then i wouldnt really want to sell at all unless maybe i was trying to level out a portfolio or put it into posative or something…. or if i wanted the money for something else.
Ok anyway… if i was you, i would do whats been recommended. Put the investment properties onto IO soon as possible, pay down the expensive debt faster with the re-couped money if possible.
Sure i mean if the market is up and you sell and then if the market goes down you could then buy again and get in front.
I dont think it really works if you dont buy again in better conditions or get a better performing investment.However your money isnt going to be performing while you wait for this 'downturn' and there is fees and all the like when both selling and buying.
A market downturn is supposed to be the best time to buy.
Why not keep what you have got, do your best to imporve the margins on everything as best you can and then if there is a market downturn you will be in a good position to aqcuire something at a good price?
As soon as the consumer debt is handled, you could try and get cash from your existing equity, for the upfront costs of buying again. That would get you in a position to buy sooner, perhaps within this downturn you are foreseeing?
Wide Mouth Frog,
What's your current situation? I'd be interested in an update and finding out how you are surviving..and what steps you have taken between the last post (May) and today…!
Adrian
widemouthfrog wrote:All 3 properties are at approximately 90% geared and overall we are about $400/month ahead before tax. Obviously we expect that to improve after tax return time,Why wait till tax return time to get your money when you can improve your cash flow each week
see
https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4328826
https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4328785p.s.
Watch out for alligators that eat Wide mouthed FrogsI sold a property in a similar situation except that the second property was costing me $200 a month in short fall that I didn't have due to no job and staying at home with two children. I regret having to sell it because it is worth another $70,000 in capital gain from when I sold it compared to todays market value. Kids are now five.
Hi Martoa
After much discussion we have decided to not sell any of the three properties. Since then two of them have become vacant, which given they are fully furnished is not surprising!
We have yet to find a tenant for the first (six weeks so far) and are beginning to lean on the agent
The second only came up 2 days ago – fingers crossed there! One of them needs to get a tenant quick!I reckon it is probably to late to make the decision to sell as the FHOG ends soon – now we are in it for the ride!
As for getting our tax back early – we are well aware of that – but really enjoy the $10-15k bonus every year!
Cheers
Wide Mouth Frog
I do believe you will NOT regret your decision to keep them all. Good on you!
Agree with KiwiPropertyGuy. I believe you will NOT regret too.
If you have enough income to cover another 2% hike in interest, there's no reason to sell.
There's a small chance prices will drop after FHOG ends, but the way I see it, there's a bigger chance of them rising in the near future (my personal view is entry level prices will drop just a fraction and upgraders market (650k+) will rise disproportionately more in comparison – that's Sydney tho).
The current interest rate is an emergency setting. The market sentiment is that the rate will rise soon, and potentially quickly. At present some econmists are poised at 2% extra by the end of 2010.
If sleep-at-night factor is crucial to your decision (why gear all of them so much to start with I might ask – but that's another discussion), I'd do a detail cashflow analysis of your current situation, with interest rate being 2% higher than today's. If that outlook makes you sweat, I'd sell the one house that has the least potential of capital gains, or the cheapest one in the entry level market. I know people advocate "never sell", but if you're constantly worrying about day-to-day cashflow, it's not very healthy (especially if you're expecting a new member in the family). I'd rather invest less slowly (you still have 2 houses), and be able to enjoy my time with the people I love most in life. (unless both of you have immense appetite for risk which doesn't seem to be the case)
There's no free lunch. If you want something, you've got to pay for it. Sleep-at-night and miss out on potential hike in prices, or cut back on living expenses if you can and ride out the storm (which could be many years).
But I guess you already know all this.
p.s. I think FHOG only get scaled back at the end of Sept, it doesn't end there. The original FHOG will always be in place. I feel that you're over estimating the impact (of prices collapsing) of the imminent 30/9 scale-back event.
Just my personal view.
I agree with what others have said, and that is, you would be crazy to sell any of the properties you mention…
Rental return is only going to increase, if you are concerned about it at all then yes definatley go option B fix the mortgages and bunker down…
Is your income ok that you could supplement the loans if need be??
I can’t imagine that the properties would ever end up costing you much though.. I mean, we are talking 30-70 people turning up for OFI for rentals in the areas you mention!!
Take a chill pill my friend
Also I want to mention that I think with FHOG finishing up rental return and demand are only going to go up even further…
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