Hi Guys,
Hoping to get people's thoughts and advice on my current situation. My brother & I own 2 investment properties and want to buy a place to renovate and sell for a profit. Hopefully with success we will look to repeat this process again to build up some cash. We are unsure of the best way to buy the reno project, as in should we sell one of our current IP to fund it?
Property 1
One bed unit purchased 7 years ago close to Hobart CBD & uni.
Loan: $100,000
Value: $190,000 – $195,000
Rent: $220 per weekAfter all expenses this property cost us around $900 last year to hold so almost cash flow neutral. Although this is almost paying for itself this is the property with all the equity.
Property 2
Two bedroom villa we built which is 12 months old, located in West Moonah (northern suburbs of Hobart).Loan: $221,000
Value: $275,000
Rent: $290 per weekThis one cost around $10,000 to hold last year.
We both earn $45,000 a year so our borrowing capacity isnt great given our current debts. After speaking with a broker our borrowing capacity is around $300,000 which is ok but we dont have any cash for deposit, closing, holding & reno costs.
Our thinking is to sell Property 1 to release the $90,000 so we have cash to pay deposit, closing, reno & holding costs – do you think this is our best move? I know it wouldn't really make sense to sell a neutral property that has equity but the only other option is too refinance that property to 80% LVR which would give us around $50,000 to get into a reno project which is really enough plus then we would no longer be cash flow neutral which is at the end of the day what we are trying to achieve. Complete several reno/build projects over the next few years to allow us to build a cash kitty to then use to build a property portfolio.
Any thoughts and advice welcome
hi Macca,
Firstly, not sure if you were thinking of buying in Canada based on that post after yours??
Seriously though, it is good to avoid selling an asset that is performing well unless you have to.
You have plenty of borrowing capacity, and of course rental (or proposed rental) you get from the new or proposed property is used as income when assessing your borrowing capacity.
Without running any figures, assuming you are looking at doing something similar to your second property, or a basic buy and hold like your first one, you will not have to sell your first place.
Either via 'releasing equity' via a separate loan (such as a line of credit) or using the collatoral equity in the place with your current lender to allow you to fund the deposit and purchase costs and buy the place you will maximize your tax deductions as well as making the next step for number 3. (Called cross securitisation or cross collatorisation) Selling is almost as expensive as buying, so avoid unless you have to or need to, or want to 'lock in' some profit.Out of interest, what was the purchase price on your Hobart unit 7 years ago?
You have plenty of options, and I am inclined to think borrowing against this place via a line of credit will give you the best flexibility to move forward.
All the best.Cheers
OK you say you want to build a property portfolio yet you want to buy and sell. I see your point in building up equity but why not buy reno hold? That way you have built in equity and a portfolio and you don't lose money by selling (you lose stamp duty, loan break costs, sell costs with each one.
Unless of course areas close to you are no good for buy reno hold.
When looking at selling the first IP look at future earnings. Is there CG on the horizon? If so I would not be selling. Factor in rent rises and that's a nice little earner.
People that buy reno sell big time have cash to do so. Banks won't like it if you keep breaking loans after a few months. Maybe there is a short loan available. I don't know but I know I pay no set up fees but I wouldn't have that luxury if I kept cancelling loans.Buy reno hold lets to increase equity AND rent usually making the property CF neutral at worst. You can then reval and borrow again to do the next one.
Canada….no thanks!!!
Hobart unit was purchased for $100,000 7 years ago. We re-financed to buy the house that we build the unit out the back of (Property 2 as detailed above).
Since posting yesterday I feel like an idiot after spending the last 24 hours thinking about it…….why the hell would we sell a property that virtually pays for itself and is located in a great area. We would be best to sell Property 2 that costs us $10,000 a year to hold and free up that $50,000 equity to have cash for a reno project, whether thats a reno to sell or reno to hold proeprty.
From what I have read lately I understand the need to try and make properties CF positive or as you say Catalyst worst case neutral particuarly given mine & my brothers crappy incomes otherwise we will hit our serviceability ceiling very quickly.
Thanks for your thoughts
Hi Macca
I just replied to your email before reading this thread – looks like I share the same train of thought as the two posters above.
In regards to the IP that's costing $10k p.a to hold. Is there anyway you can improve the yield? Any cosmetic renos that will enable your to up the rent? Perhaps allow pets – that can add a fair bit to the asking rent.
Are you claiming depreciation on that property? It's relatively new – so the depreciation should be pretty good. Looking at those numbers – it's hard to see how it could be CF- by $10k p.a.
I'm a firm believer in buy and hold – and you have enough equity in IP1 to help you purchase your next (but that's me – ultimately it's your decision).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
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