The property in question is a dual occupancy in Rockhampton (two houses, one block) and has been a good rental for some years now. The issue is that the IO period on my mortgage finished and my payments have risen, and I am at least $1000 per month out of pocket, not including maintenance, vacancies, etc.
Rockhampton is at the very bottom of the market and the amount of investment and infrastructure going into the area, combined with a very tight rental market and historic cycles do indicate the market will rise, but when and by how much is an unknown.
The options I see are:
Do nothing. My personal cashflow takes a hit on a monthly basis doing this. I do get a small monthly income from another investment property (about $200), which will subsidize it a bit but I would have to keep this up until the market rises.
Refinance and keep. The bank valuation for refinance purposes came it at $13k less than the current mortgage balance, therefore I will have tip in about $50k for the refinance to occur. I do have the cash to do this and it would bring it back to cashflow neutral on a P&I basis (Never again will I use an interest only loan) but will tie this cash up until I sell.
Sell as is now. Being a dual occupancy, there is limited demand for this the market and I would be tapping a limited pool of buyers at the bottom of the market. The prospects of selling it for enough to pay everything out are slim, and I will make a capital loss. In my mind, the question becomes how much I knock the price down to offload now.
Renovate and sell. The properties are in better than average condition, but after 10+ years as rentals do require a cosmetic spruce up (nothing structural required) and would have better sale prospects. Obviously, the costs and logistics of the reno need to be considered.
Separate the titles or strata and do an alternative strategy to sell. I have had some thoughts around maybe offering each house on vendor terms, rent to buy or something similar. The downside is the cost and logistics splitting or stata, and the negativity around vendor finance and lease options. I would also have to refinance to make this viable meaning I am in the hole for the refinance, plus the splitting costs, with no guarantee of making this back, and the headaches of these strategies I left behind years ago.
My current thoughts are to take a loss and just sell now, for the following reasons:
· Every other property deal I have done has made money, and this will be the first loss. I can live with that.
· This property is from an era where my investing philosophy and mindset was somewhat different to now and getting rid of them will draw a line in the sand.
· Given the mistake I made not keeping an eye on the expiration of the interest only period, there is a negative mindset piece which is creeping in and is taking focus off what I am currently doing (opportunity cost).
Thoughts/input would be appreciated, especially if there is another option that I am not seeing.
Hi bb,
>>> “I will have tip in about $50k for the refinance to occur. I do have the cash to do this and it would bring it back to cashflow neutral on a P&I basis (Never again will I use an interest only loan) but will tie this cash up until I sell.”One other option would be to put the $50k you have available in an Offset account against that mortgage. You’ve said that paying down that amount would bring the P&I cost back to “neutral” so the Offset would work similarly. (i.e. you would be paying Interest on $50k less than the amount actually owed).
The advantage of that (as against paying down the loan) is that any monies in the Offset are yours to use whenever needed. i.e. to take advantage of any screaming deals. Of course, as money in the Offset reduces, your interest payments rise again, but at least you haven’t given it back to a bank, so you remain in control of it.
In essence then, the Offset allows you to “pay down” the loan without actually paying it down. That could help you to hold on until better times come, or until you complete renos, or whatever else might work for you.
With Interest rates as low as they are today, the P part of P&I is a lot larger amount of the total repayment than it used to be – that can take you by surprise! Check this link to see what I mean –
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/3/#post-5048811
…. and then, having read the post there to get context, follow on to the link within that post to get the full story.BB, I hope these thoughts are of some use. :)
Benny
Hi Benny,
I have money in offset against this, so the interest I am paying is already comparatively low. The issue is that when the interest only period finished, the payments kicked up to paying the principal back in 2/3 of the time. Lesson learnt.
The way my current lender handle offset accounts on P&I loans is that the repayment does not reduce, just the ratio of the payment allocated to principle vs interest. As a result, even through the monthly payment is high, I am paying the principle down at a rapid rate.
What about negotiating with current lender for extension of IO or extension of loan repayment timeframe? Or negotiate with them for a P and I rate reduction, any of which could reduce the monthly out of pocket to a more acceptable level without major changes. Gives you time to ride the cycle and perhaps sell into a better market in the future. You may have already considered, just making sure all avenues are checked.
BuyersAgent | Precium
http://www.precium.com.au
Email Me | Phone MeSouth Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au
Hi Bbinvest,
Generally, when your loan switches from IO to P&I the lender will give you a standard rate, so make sure you negotiate as hard as you can with your current lender to get the P&I rate as low as possible, might help with increasing your cashflow slightly until you decide what to do with the property…..
NickP | Right Financial Pty Ltd
http://rightfinancial.com.au
Email Me | Phone MeFind the right mortgage expert at Right Financial
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