Hey guys,
would very much appreciate any advice that you can give on our dilemma.
My boyfriend owns a property in a very nice suburb though it is negatively geared. At the moment he is thinking of selling because it is costing him so much to keep, though he has worked so hard to keep it we are after your opinions!
It was bought 4 years ago for $250000 and would probably sell for about $350000 now. He gets $1000 a month in rent but mortgage repayments are $1500.
Should he keep this for capital gains or sell and buy some positively geared?????
Any opinions?
And does anyone know anything about capital gains tax?
Thank you so much in advance for advice
TinkWhatever his decision you need to factor in the selling costs. I imagine these will be about10K for a sale plus any CGT he might owe.
You also need to factor in the buying costs of the first property he buys to replace it….Stamp Duty is quite expensive…
This may well put a different light on the figures.
All the best with your plans,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985NODOC Loan – 65% Loan – No questions asked!
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Thanks, but is it better to make no money on a sale, or to continue losing money in keeping it?
Tinkerbell it isn’t as simple as that. The great unknown is growth.
By all means buy pos cashflow properties, I am really reluctant (as I think any responsible forum member would be) to advise you on whether to sell a major asset that has greatly added to your overall position in the last few years.
I gave you some things to consider – end of the day it is your call.
I hope it goes well for you,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985NODOC Loan – 65% Loan – No questions asked!
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi,
If you can hang on to the property then do so because the cost/hassle of selling and buying another one will be too much than the extra $500 that you have to folk out monthly. End of the day you are the best person to judge your financial situation. Good luck with your decision.Hi Tinkerbell,
I also subscribe to the belief that you need to make the decision that is right for you. When you do analyse your situation do not forget that you are $100K in front of where you were four years ago.
To assist with the ‘cashflow’ issues have you explored such options as interest only loans, quantity surveyors report, PAYG tax variation applications, is the rent consistent with market rates of the area, is your loan and account structure set up to minimise outgoings and so on.
The right solution may need a little more digging before it is found.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
OK sell sell sell this is a black hole property which only sucks $500/mth plus mgmt fee plus maintainance plus rates. So dont be under the illusion that this is a good one.
Interest rates will rise with no regard to who wins the election. Most areas are flattening out if not retracting and if he can sell it with what appears to be a 4% approximate return good on him.
If he put in 20 % he has $150k back out of this deal his initial 50K + 100k profit. He pays capital gains tax on the 100k. However, if he has owned the property for greater than 12 months[biggrin][biggrin][biggrin]then he only pays cap gains on 50% of the profit, which is the 100k less agents commision less solicitors fees less etc. This is determined by his marginal rate of income tax of which I know nothing and am very happy not to know personal details of people.
However, if he buys a positive cashflow prop with the proceeds he should allow for the tax first. So given that the maximum tax rate is 49% he could safely put 50k as his 20% deposit on anything. or 2 x 20k deposits with 10k for legals and costs.
DD
Don’t sweat the small stuff,and it’s all small stuff!!
Refinance and use the money to pay the negative cash flow.
Example:
Negative: $500 per month x 12 months = $6000
Refinance: $250,000 (paid) – $350,000 (current value) = $100,000
$100,000 x 80% (loan) = $80,000Now this will make the property more negative, but you can use an interest offset loan to only draw down as you need. So you should be able to float the negative cash flow for the next 10 years or so.
And if the property doubles in value in 10 years time you are up $350,000.
Also keeping in mind rent should increase so the negative cash flow will reduce over time.
I refinance to float the negative cash flow all the time.
In this example if the property is losing $6000 per year and is worth $350,000 at the moment, it only needs to increase in value by 1.7% per year to be break even. $350,000 x 1.7% = $5950.
If the property value increases by a very mild 4% per year your property value will be going up $14,000 per year compared to your $6,000 in negative cash flow.
Although some people freak out at the idea of refinancing to pay negative cash flow, I find when you really do the numbers it often works out well.
I’m a strong believer in never sell, although I do sell on occasion.
Slum Lord
Wow Slumlord – that’s an interesting way to do things. Wouldn’t that reduce your serviceability however? More loan with same income?
Does it actually work for you?I would imagine that would make it even HARDER to purchase property in the future.
I only ask because this is in effect what I did. I borrowed extra against a (nearly) neutral cashflow property 12K. This extra money, I then used $3K to build a fence, 3K on Air Conditioning (sweat sweat)
2.5K to deposit on another nearly pos geared property (which I also borrowed a bit extra against)
I then ended up with 8K extra. This money was eaten up within a year of the second purchase by all the negative gearing ($400 per month + existing margin lending of $450 per month) lets say between 700 – 800 per month.This = 8.5K
1 year later and I am now in the position where I have to sell one or all three assets to stop the bleeding. I am kicking myself.
If I had not borrowed the extra, the neg gearing would have only been 450 margin loan (which reduced to $200 interest only this month)
+ a little bit of neg gearing from both properties: maybe $100 per month.I would have been able to service this and keep the lot instead!
I would not recommend borrowing – however Steve Navra seems to on the somersoft site – but his idea is ONLY to purchase more and should ONLY be used in asset building phase – not to control bleeding.
I would describe it as follows:
It’s like getting an IV to control chronic bleeding without pinching the artery off!my thoughts. from personal experience.
On the other hand – I will have made 50 – 70K capital gain which I can plunge into my own mortgage once sold up, and start again with a positive CF mindset!
Why sell a good property to purchase inferior one(s)?
This property costs about $6000 pa. This is before taking into account the tax decutions.
In 4 years it has increase in value by about $25,000 per year. This is tax free if you do not sell.
If he does sell and releases money, he could buy a few cashflow positive property. But often these sorts of properties have low or no growth potential. if he buys say 10 properties earning $40 per week he might be making $20,800 pa. But he would have to pay tax on this money, and the growth of these properties would probably be poor.
What about keeping the existing and buying additional property -cashflow positive which could then offset the negative on this one.
And as SL said above, the rents will gradually increase and this one will become positive in a few years anyway.
Terryw
Discover Home Loans
North Sydney
[email protected]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
alwayscurious,
I couldn’t possibly service all my loans without refinance. I do have a number of cash + properties, nearly all of which I have now made cash – by refinancing. But I just keep going and going. I have such a huge equity buffer now it doesn’t much matter, at any time I can sell a handful or properties and turn the cash flow around.
Just something to think about (fictitious numbers):
$50,000 of negative cash flow (sounds big)
On a portfolio of $5,000,000 in property
You only need 1% growth per year to refinance and be break even!
If you get 5% growth you have $250,000 in growth – $50,000 (negative cash flow) = $200,000 up.
Of course the banks don’t like this concept so you need to be somewhat creative in your loan applications.
Slumlord
Hi Slumlord,
Do you put the 80K in an offset account of the property you borrowed from? Also the interest on the 80K you did borrow wouldn’t be tax deductible would it? The purpose of use was to pay of debt not create investment. Could you help clear this up for me or am I off track
Thanks
Luke
ChangingPlaces Real Estate.
Save up to 65% on Real Estate commissions.
Email: [email protected] Web: http://www.changingplaces.com.auYah I put it in an offset account.
The refinance money spent on loan payments is still deductible. The purpose of the money is not to pay off debt, as its all interest only for me. It’s simply a cost of supporting the rental property.
Slumlord
Hi Tinkerbell,
Dont know whether this will help u much but..
I also have a -ve geared property, which is costing myself and my lover money, but we perceive it to be a good growth asset in the long run.
If it is not hurting your hipocket too much and you can cope with the repayments keep it, otherwise if you need to slave 10 hours a day and it is ruining your life, ce la vie!
Wish u luck, and every success!
Trisha[
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