A lesson in gambling…our spec home dilemma

I have only just joined the forum and have learnt so much already through everyone’s excellent thoughts and advice, and was hoping someone out there could help with my investment dilemma….sorry about the length of it – best to include all info.

The Situation:
My husband and I own our PPOR (worth approx $550K) due to selling two rental units and having a moderate success from a spec home on vacant land. We also own another vacant block of land to do another spec home (bought in my name as the lower income owner to reduce CGtax). The block is in a new estate in a lovely “seachange” town on the NSW South Coast – not too far from our PPOR.
However, we bought it in the peak of the property cycle – borrowing full amount & paying IO loan. But capital appreciation is just not happening which is the source of our capital gain. From the crystal ball, interest rates are going up and land value isn’t likely to increase sufficiently over the short to medium term (@4 years) to make any spec home viable until long term – but I’m not sure that this will achieve our desired investment goal (see below). We have no other debts or investment properties. In June I will be leaving work to have our first baby. After 12 months I plan to work part time.
To achieve our investment goals, however, we have a cash flow issue (especially with interest rates rising).
Like many on this forum we have a goal of investing in property to supplement our (early?) retirement. The second spec project was intended to be a leg-up (like the first one was) to achieve this end.
We have learnt our lesson and is one to all of you….(ie spec homes are ‘speculative’ especially when you buy in the peak, least of all vacant land that earns no income). We don’t intend to dwell on it and just want to get on with the best way of achieving our goal. We intended on doing this via small residential development projects (eg. cosmetic renos and dual occ/subdiv, say one every 1-2years for hold or sell) and acquiring neutral/+CF properties, and possibly a small shares portfolio. For what it’s worth I am a town planner and have the knowledge and experience re: development approvals etc which would be helpful in this strategy. However, the strategy requires some cash flow.
We have approximately $35K savings. We want to use this to put towards investment strategy.

The Options (assumption as at June 05 on hubby’s income):
1. Sell the Land and cut losses – this would free up $350 per week to move onto better performing investments. However in the current (very slow) market, this would represent a capital loss of approximately $35,000 in mostly interest (ouch!) which I understand can be offset against future capital gains. The land could take many months to sell.
2. Keep the land and wait for capital growth: costs $18,000 p.a (more when interest rates rise) land is unlikely to increase equivalent amount in the near-med future to cover costs since purchase. Will only just be able to afford this, depending on how much interest rates rise.
3. Build and sell: could only afford it if used savings to pay interest. Break even at best. Likely capital loss of approx. $20,000. Major effort for little/no gain. Risky if slow/doesn’t sell quickly (likely).
4. Build and rent out and wait for capital appreciation: could only afford it if used savings to pay interest. Few tax benefits as in my name with v. low income (cost $320 per week). My future part time work would partly fund this (plus dip into savings).
5. Build and temporarily move into and sell (ie rent out PPOR): major effort – especially moving with baby – and, although an attractive area, not ideal as further from work (greater travel cost/time with young family). Just affordable – Rent from PPOR would cover part of repayments but would be taxed on our incomes.

Other option I have considered are transferring property to my husband’s name with a view to building, renting out and holding for long term – ie depreciation/neg gearing benefits on his higher income, but seems a bit silly with stamp duty, legals etc. Haven’t done the sums.

So there it is – in summary, to do anything but sell would be a waiting game for the next 5+ years with no cash flow or ability to save and will be a severely reduced opportunity to further our investment strategy. However to sell will also start to eat into our savings and will be an overall loss of approx $35K in after tax dollars.

We are lucky I guess to be in such a financial position in the first place (largely due to previous PIs) but look for advice from like-minded? Do we just accept two “mistakes” (ie buy in peak, sell in slump) in order to move onto other goals or just sit tight (eating mince!!) and trust the crystal ball?

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