Hi all,
As stated i am a new member and have enjoyed reading and learning from this site over the last day or so. I am after a bit of advice and have this week been to see a not very helpful financial planner so i thought i would do some more research myself before going down that path again. I understand that it is hard to give advice without knowing the full ins and outs of our situation but i will give a quick summary of our “predicament” and we will see how we go. I apologise for the length of this post and thanks in advance for any replies.
Ok so we are a “newly” married couple in our mid forties with a 1 year old (welcome surprise!!) daughter.
My wife isnt planning on going back to work at least for now anyway.
I earned a bit over $80k last year and we live on the Sth Gold coast.
Due to our situation changing over the last couple of years we now have ended up with 4 properties all within 20 mins of where we live:
1. 3 Bed Townhouse Paid $305k early 2012 rents out for $350 pw…..owe 240k paying i/o.
2. 3 Bed House Nth NSW paid $405k late 2012 rents out for $450 pw….owe 304k paying i/o
3. 4 Bed House paid $480k 2010 was our residence but now rents out for $500 pw…only owe 190k paying i/o.
4. 5 Bed house paid $650k mid 2013 where we now live.Owe 350k paying p/i.So we are thinking of getting out of some of our debt and selling our old house- property 3 above. It isnt worth much more than we paid in 2010. Might get 500k now. This seems the logical one to sell to reduce our current mortgage down to about 50k or so. This would enable us to pay this place off within a year or two and be “bad debt” free.
I have been doing some sums based on the 2013-2014 tax return and before taking in to account depreciation and capital works deductions on the properties we end up more or less neutral. Basically the profit from property 3 gets eaten up mostly by strata fees from the townhouse and agents fees etc.
So i am not sure if i have explained this very well and thank you for reading this far! SO what do you guys think from a purely Financial point of view would you sell property 3 to pay off our bad debt or what other options do we have?
THanks again for any replies…Paul
Do you think there will be growth in the old property? Will this possibly exceed the extra interest you could save on the property 4 if you sold it?
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 Terry,
We paid 10k interest in last financial year.The original plan was to keep the property for a few years and then sell during more of a peak in prices. Original thinking was holding out and see what happens with prices leading up to the Comm Games in 2018 but i was always sceptical whether this will make any difference at all. IMO it might go up 20 or 30k so after CGT etc it hardly makes it worth it? What do you think? ANyone got any opinions on the Sth GC house market as well?
Thanks for reading…Paul
Hi Paul,
Assuming the interest rate for your properties are around 4.6% – 4.8%, Your portfolio should be cashflow positive or at least neutral.
Just wondering when you said selling property to paying off “bad debt”, what do you mean by “bad debt” ? and what sort of interest rate are you paying for the “bad debt” ? also how much do you owe for the “bad debt” ?
Hi Paul,
Assuming the interest rate for your properties are around 4.6% – 4.8%, Your portfolio should be cashflow positive or at least neutral.
Just wondering when you said selling property to paying off “bad debt”, what do you mean by “bad debt” ? and what sort of interest rate are you paying for the “bad debt” ? also how much do you owe for the “bad debt” ?
Hi Taylor,
Thanks for the reply.To answer your questions- the int. rates are between 4.8 and 5%.I have been doing some sums and in the fy 2013-2014:
Property 1 lost $2763 (including capital works and depreciation this figure blows out to $6114)
Property 2 lost $940 (including capital works and depreciation this goes to $6403)
Property 3 was positive $1826 (including capital works and depreciation this goes to a profit of $4481). This is due to this being our previous PPOR and only owing 190k on it while renting it out for 500 PW.
Property 4 is now our PPOR and we owe 350k on it. The interest on this 350k is what i have described as my “bad debt”.So when you guys talk about cash flow positive do you mean positive after depreciation and capital works or before?
Also worth noting from my figures above we spent a bit of money on the properties in that year to get rid of some of the recurring issues with dishwashers playing up and stuff like that so this years figures shouldnt be as negative.
Hope all this makes sense.
Cheers…Paul
Hi Paul,
Put it simply, positive cashflow is a concept which mean more money coming in than the money going out.
Tax (depreciation and capital works) is just paper lost which can help cashflow be more positive.From the above number, say without counting property 4(PPOR), you are about -1,877pa or -36.10pw. After depreciation and capital works, your number is +16,998pa or +326.88pw. Positive Cashflow.
PPOR with 350,000 on 5% interest is about 336.53pw interest payable .
The portfolio( property 1,2,3) bring in (+326.88pw) and PPOR out ( -336.10pw), overall, is just say -10 pw which is negligible.
Your PPOR is not a “bad debt”, is just not an income producing debt at this stage.To me you are in a good cashflow position, there is no need to sell.
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This reply was modified 9 years, 9 months ago by
TaylorChang.
Hi Taylor,
I think you must have mis read my figures.(my fault for not being clear.) When i said:
“Property 1 lost $2763 (including capital works and depreciation this figure blows out to $6114)” The $6114 is a negative number.In other words on Tax return- Rent received= $18100….Expenses (including depreciation and capital works)= $24214
So $18100-$24214= -$6114.
Same for property 2…. Gross rent $22050-$28453 (expenses)= -$6402 loss
Property 3 Rent $23292-$25118= -$1826 loss.
So couple all that with $350k x 5% interest from property 4= -$336pw
So am i looking at depreciation and capital works wrong or what? Should i ignore these and if so it works out at about $20 pw loss all up which i suppose is ok given that this year wont be as negative?
Sorry if i have just made it even more confusing!!
Paul
Hi Paul,
Sorry to say, I think you took the depreciation and capital works incorrectly.
Let’s put all the tax, depreciation and capital work aside.
Just look at the simply figures rental income, interest and loan amount for now
say interest rate is @ 5% for all 4 properties.Given that you said from the first post.
P1) Rent 350 * 52 = 18,200 ; owe 240,000 * 5% = 12,000 ; So net is 18,200 – 12,000 = 6,200
P2) Rent 450 * 52 = 23,400 ; owe 304,000 * 5% = 15,200 ; So net is 23,400 – 15,200 = 8,200
P3) Rent 500 * 52 = 26,000 ; owe 190,000 * 5% = 9,500 ; So net is 26,000 – 9,500 = 16,500
P4) Rent 0 * 52 = 0 ; owe 350,000 * 5% = 17,500 ; So net is 0 – 17,500 = -17,5003 properties
6,200 + 8,200 + 16,500 = 30,900PPOR
-17,500Hence, 30,900 – 17,500 = 13,400
Overall, your portfolio is still positive.If take the maintenance fee, management fee, a few weeks of vacancy… I would expect your portfolio are still in a positive or at least neutral position.
If you take tax, depreciation, capital work into account, then your portfolio will be stayed in a positive cashflow position.
If you confused about the concept of tax, depreciation, capital work, I would suggest DON’T look at it at all.
Do your number on interest charge on loan from your bank statement, and the rental income from your rental statement.
All them up for all the properties for the past year, then you should be able to see for your cashflow.I hope this help :)
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This reply was modified 9 years, 9 months ago by
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