What can I do to improve my cashflow, AND keep my properties?
Own – PPoR (2 bed flat in cap city) worth 550K, owe 200K on it, would rent for $450 if I didn't live in it.
Own – IP (3 bed house in regional city) worth 700K, owe 400K, rents for $400/wHorrible negative cashflow!
Situation: 3 small kids, no space in the flat any more. Could move to the house (which had been the plan) but looking at a 1.5 hour commute as have not found work nearby to it. Not good with small kids. We would also like to have an improved cash flow that would enable us to spend more time enjoying the kids and less time working/commuting/stressing about finances.
Both partner and I very attached to our first home together (the flat) but also to the 'dream home' we always planned to live in once we had kids.
I know, I know, shouldn't get attached to 'investment property' but there it is.
What are some creative ideas for how we can manage things better?
1 – review the values of the two properties, either your expectations of value are too high (you've paid too much and nothing is ever going to fix that) or the rents are drammatically understated.
2 – why is your regional property not +ve geared, is the rent too low, house in poor condition, undercapitalised/subdivisible etc?
3 – consider renting something which isn't 1 1/2 hours away and leasing out the unit at a much more realistic rent
4 – cut your losses on the regional property, you can always offset any capital loss against future capital gains.
Hi Scott
1. The current values of the properties are from real estate agents in the last 2 months and if anything may be a little on the low side, and the rent is actual/recent estimate from agent. So figures are all pretty up to date if not inspiring.
We bought these properties 8 and 9 years ago for:
Flat in cap city – 290,000
House in regional – 475,000On the positive side capital growth has been good though not amazing, and we have had zero vacancy.
2. I cannot work out why the regional place is not worth more in rent – the climb has been extremely slow, but compared to other places in the area it seems set at market value. The house is old with an outside bathroom, and is on a large parcel of land, so maybe that is why rent doesn't seem to stack up against value.
Undercapitalised? I would say definitely yes. We did a lot of reno when we bought, did the work ourselves and it took months and burnt us out. We haven't done further renovations due in part to this but also due to zero vacancy, lack of cashflow and lack of time (3 little kids and not great incomes).
3. We could rent further from here and thereby afford something bigger, (but still closer than 1.5 hours away) as you suggest, the only issue there is the lifestyle consideration of moving then moving again (if we still pursue the 'dream' of living in the regional place, which I should add is where other family members also live).
4. We would stand to pay CGT as there has been a 300k increase in cap value. But still, as an 'investment' it is getting harder and harder to justify!
I know there is an answer out there and really appreciate your thought starters and input to help us find it.
Could you afford to buy somthing else if you rented out the flat?
Could you sell one to buy in a better area that suits your needs?
Seems like there is a bit of equity there which alot could be done with also pending your income.
Unit should be almost paying for itself… could you refinance it, use the difference to offset the amount you're paying on the other house, and rent somewhere closer?
I know that would mean a number of sacrifices to lifestyle (moving) and your investment (paying off the unit over a longer period, and therefore more interest)…. but what are you really willing to trade off???
Hi Grimnar
Yes the flat would pay itself off with a little left over if we moved out and rented it out. But the other property is heavily negatively geared. If we didn't have future plans to live there we would be better off investing elsewhere from a cashflow perspective.
When you ask about re-financing the flat to offset the amount paying on the house, do you mean it is possible to re-finance the flat and use the equity to pay down the loan on the house? I mean, effectively move the equity from the flat to the house? I have a feeling the ATO would not allow that. Please correct me if there is a way without having to sell the flat though, because that would be ideal!
Of course if I was to do that then it would only be beneficial if I was to live in the house as if I was to rent elsewhere it would not create any advantage as the two properties offset each other anyway (ie. the positive gearing of one helps a little toward the negative gearing of the other).
Hi dreamteam,
Apologies for the brief response before, was just on my way out from work ; )
What I took from your first post is that you are seeking a solution that increases your cashflow, gets you into some place bigger but still close to work, and allows you to keep both of your existing properties.
So maybe if you could refinance the unit over 25 years again for the same amount as you currently owe on it, then the outgoings on the mortgage wouldn't be quite as high. That is assuming you are still making repayments on the 290k you bought it for???
If you can do that (someone like richard or terry should be able to advise further), then you may find yourself in a position where you are making a decent amount of income from the property each week 'on-top' of the lower mortgage… That should help the burden of the negative geared regional property a bit, and you will have cash flow equal to the mortgage repayments you were previously making on the unit to put toward another place (rent or buy depending on your situation).So really this doesn't even touch the equity you hold in either property, or try to balance it elsewhere. Just extends the time you're taking to pay the unit off, in an attempt to retain both.
I would definately recommend seeking professional assistance with your situation though… I am not even sure if a bank would go for something like that… I don't see why not though, more cash in their hands from your interest payments over the long term.
Dreamteam,
I don't know your income details, asset protection setup or what your investment strategy is, but if it were me I would look at borrowing up to 80% on both properties and using the equity to better advance yourself – i.e.
Total value 1.25 x 80% = 1m
1m – 600k (total existing mortgage) = 400kThis leaves approx 400k to either purchase another property that is positively geared to offset the other 2 or purchase a house to live in, rent an purchase a couple more investments and leave 100k in a working account etc etc etc the list goes on…
AGAIN everyone's situation is different and all the facts are not clearly presented, this is only an example!
Hi grimnar – thanks I see what you mean. A very simple little thing that at least frees up some cash flow.
Hi Trent – yes, I have been wondering about that too. I have this feeling that we could do things waaaay better than we are.
Eg. We are only geared to just under 50% at present with 600K+ in equity. I crunched the numbers a bit differently to you as follows: Keeping our incomes out of it for now, (so this is only hypothetical), if we have 600K equity then we can have total borrowings of 3M right as 600K is 20% of 3M? Less the 600K we already have on loan, that leaves 2.4M we could theoretically borrow. Security would be provided by the portfolio of properties we buy for the 2.4M (obviously plus the 600K equity). Serviceability would come from those properties being positively geared.
Is there a flaw in my thinking/numbers?
dreamteam wrote:What can I do to improve my cashflow, AND keep my properties?
Own – PPoR (2 bed flat in cap city) worth 550K, owe 200K on it, would rent for $450 if I didn't live in it.
Own – IP (3 bed house in regional city) worth 700K, owe 400K, rents for $400/wAre both loans P&I or is either loan interest only? My suggestion would be refinance the 700K IP with an 80% interest only loan ($560K). Use the "spare" $160K you have created to whack a large chunk off your current PPOR loan and only owe $40K on it. Then more interest becomes tax deductible as it is against your IP. (though have to double check this with accountant). If the IP loan is interest-only then your monthly repayments will drop a lot (because you are not paying back principle , just the interest component). Meanwhile hook into your remaining $40K till you fully own your PPOR and buy time to think in the meantime.
If you meanwhile find a job and move to the IP, then sell the unit, use the proceeds to pay off loan.
Whole aim is to get rid of non-taxdeductible debt and only have tax deductible debt. In your situation maybe even no debt.
woops, missed the bit about keeping both!
I all gets complicated if and when you move to the 700K IP because if it ends up being the one with the big loan then it suddenly stops being tax deductible and if the current PPOR is paid off then you get all this rental income without any interest to deduct against it.
I suppose you are also aware of the CGT implications on your current PPOR if you move and start calling somewhere else your PPOR?
I think I would advise seeing expert with specifics.
Seek professional tax advise on this strategy:
Set up a LOC on your home loan on the spare equity. Borrow from this LOC to pay the shortfall on hte investment property and possibly the whole interest on this loan. Use the cash that you would have paid for the investment by placing it in a 100% offset account against your home loan. Put all wages and rents into the PPOR offset. Change both loans to IO too.
This will rapidly increase your tax deductions and free up cash.
seek tax advice as you need to set it up correctly for it to work.
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, thanks house call, this is all good advice and I'll investigate the options. I knew there was a lot more we could be doing. I'm also thinking that with the equity sitting there and only 50% geared we could purchase some +tive geared IP's to offset the costs on these 2. Sounds good anyway.
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