Hi
I'm a long time reader of the forum I hope you and help in this matter.
I am 59 and my wife is 57 we both work full time and we have two investments properties in Armadale Perth. One is an old 4 x 1 b/t house we bought in 2006 for $297,000 and is rented for $310.00 per week at this point in time it is valued at around $300.000 on a good day, we have an interest only load of $228,000.
The second property is a 2008 new build 4 x 2 b/t for $375,000 and rented for $370.00 per week valved at around $400.000 we also have an interest only load of $305,792.
Keeping this all together is a Line of credit on our PPR, all income and outgoing, purchase costs for both properties go through this account, we also put our tax returns in and $ 400 per week from our pay, the L/C limit is $290,000 and we have a -$ 234,300 as at this point.
As you can see the value of the properties have not moved but the L/C has, at this rate retirement is not an option, where do we go from here any help would be much appreciate.
Hi Bind
Sorry you have slightly confused me.
Your post is entitled " Help with Finance Needed" but then you have explained your current situation and not indicated what you are after.
If you wanted to clarify what you are seeking we an certainly comment accordingly.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Sounds like you might doing things wrong with that LOC. You have structured it so that it is not tax effective. You are paying down, but are you taking money out? Do you have any non deductible debt?
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
Hi Richard
Thanks your comments, what I have is a debt on both properties and the LOC that I need to support, how can I retire with this debt?
Regards
Bindin
Hi Derek
Yes the lack of growth is a problem, One property is in Armadale and one in Seville Grove and I live in Marmion, my plan for the properties was to give me an income later on, the LOC was used for buying costs and renovations all of this is tax deductible, renting out the properties is not been a problem it's the debt if I wanted to sell out I would have debt than I started with, so would paying down the LOC be my first step?
Regards
Bindin
Hi Terryw
No the LOC is Tax effective it just that there is more costs than income and I'm not sure what to do.
Regards
Bindin
Hi Bindin,
I assume you are frustrated by the lack of growth in the two properties since date of purchase. Is this correct?
Are both of your properties in Armadale and do you live there too?
Your situation is not unlike too many other property investors who bought in the Perth boom of 2006. Hopefully you bought at before the boom was daily news and didn't follow the herd who bought through the later stages of 2006.
Your original post indicated some frustration with 'delayed retirement options' – how were the properties going to help you retire? What were your plans for the properties?
Anyone who bought a property in the intervening years and, in my opinion, for a little while longer, with a view to achieving capital growth from 'off the shelf'' properties will be disappointed. Now is the time to be looking for value adding potential if capital growth is your aim.
Armadale is a classic outer suburb and suburbs like this typically are the last to move. Added to your problem is that Armadale does suffer (rightly or wrongly) from historical perception. As a result long term capital growth tends to be constrained. Having said that there are some recent developments in Armadale which may positively impact on the growth rates of your properties.
Doing some quick maths it would appear that approximately $180K of your LOC $234K drawings was used for deposits and costs for your two properties. Is this correct?
EDIT – Should have said in 'now is the time to be looking for value adding strategies' in 5th para.
In that case you would want to pay off your debt on the main residence first prior to the LOC as this wouldn't be deductible.
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
Hi Bindin,
What sort of timeframe are you looking before you retire?
If we look at your current situation (all estimations) and in todays dollars.
Total rental income = $35K
Ongoing costs = $7K
LOC Interest @6.5% = $16K
Loan I@ 6.5% = $35K
Pre-tax shortfall (loss) = 23K
Obviously paying off the LOC would be a start but even if you managed to achieve this then you have only improved your cashflow position by ~$16K/annum. You would, in today's market, still remain a shortfall of 7K.
Sure rental increases will wipe out some of the shortfall buy a rental increase of $200/week only adds $10K to your bottom line.
I suspect the issue is that the properties you have chosen do not match your retirement plans. You may wish to consider an sell down approach but this would need some capital growth in the period between now and retirement.
The key is what timeframe are you looking at?
True – this so much.
Thank Guys
If I could retire now I would but 5 years would be fine.
My PPR is paid off only the LOC on my PPR is left.
Regards
Bindin
Derek
Back in 2006 I didn't have a retirement plan I just keep working but since then I've had two strokes and before you know it your life changes, taking things easy and having less stress is more of a priority however now I have debt.
Regards
Dindin
You have to be careful with putting money into a LOC for tax reasons.
I would sugest you change the LOC to an interest only loan, at a lower interest rate, with a 100% offset account. Pay all rent and wages into the offset. This will save more interest and you have the flexibility of paying off the loan at any time in the future.
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
Hi Bindin,
The 5 year timeframe is going to make things difficult to achieve.
Paying off your LOC of $234K (see Terry's comments above) in 5 years is going to be a hard task. I am not sure that I could manage that. The downside of this is that you only improve your cashflow by around 16K/annum at 6.5%.
Let's assume you have managed to pay off your LOC then you will still be left with a net shortfall of around $7K.
Sure some of this may be partially addressed by rental increases – an overall increase in rental income of $135/week over 5 years will bring you to a neutral position. Not having a shortfall but not having an income either.
There are a couple of options as I see if available to you.
1. Work on the LOC debt.
2. Hang onto both properties and in 5 years time reassess your position with the possibility of selling one to pay off all debts and retaining the other relatively debt free (or with significantly reduced debt) to improve net cash flow position. N.B. I am not fully across pension thresholds but I envisage you would be below them and any impact on the aged pension would be minimal.
3. Look at adding cashflow positive properties to your portfolio. This will mean borrowing more money.
4. Investigate the use of value adding strategies and regular selling down process to assist with debt reduction.
Clearly seeking specific professional advice at this time is important.
PS – Vendor finance may also be an option. Best do a google search as I am not fully conversant with this strategy.
Thanks guys your input it has been very helpfull,
Regards
Bindin
Hi Bindin,
The main thing to consider is that you are in a position to positively effect what you can do. While time has been eroded you do still have five years to take some action.
When seeking professional advice try and steer clear of a FP – they tend to try and sign y ou up for the latest and greatest managed fund on offer at the time.
PS. I read an article yesterday suggesting more and more of us will be working longer than we planned. So bumping your 5 years out to 7 may not be the end of the world.
Hi Derek
I relay appreciate your feed back,you have helped me more the you know.
Best regards
Bindin
Happy to have been of assistance.
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