We have a property that has been rented for 12 months. It was our home but we brought elsewhere and couldn’t sell it at the time. Everytime we have a valuation on the house it has dropped by about $40k!!
Do we cut our losses and sell now (before any further flattening/decline in the market) or hang onto it for the longer term?? Currently valued at $485k. There is no mortgage. Net income = $13k. Probably cost us max $200k all up to buy the land and build the house 6yrs ago. That makes the COCR = 7% & NROI = 3% (scary)!!
Pinny
Hi Pinny,
The critical questions that need answering are what did you want from this property when it became an IP and secondly what would you do with the proceeds of the sale?
I assume that the property is in a large or capital city and there the area has sustainability – in otherwords do not jump at shadows and ride out this patch of herd mentality. The property will still perform in the long run.
I would strongly consider establishing a line of credit secured against this property and use these funds for other investment purposes. Obviously this is must suit your plans and goals but it is a thought worth considering.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.Some questions to ponder:
Does your current home have a mortgage?
If you sell, what ywill you do with the money?
Do you think it will drop in value further?
Is $285,000 gain in 6 years really that scary? That’s more than doubled. Imagine if you had pruchased a cashflow positive property with no capital growth instead.Terryw
Discover Home Loans
Mortgage Broker
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
Hi Derek,
I’m not sure we had a plan for the property when it became an IP. It sort of just happened by default because we couldn’t sell it. It is in Melb in a good area.
I know property investing is long term but in Steve’s newletters he seems to be recommending that people sell underperforming assets now (ie: before further interest rate rises). Isn’t this house underperforming given the cash on cash return and return on investment?
We recently sold an IP to free up cash for further investment opportunities that we are looking into.
I think you are suggesting that it wouldn’t be such a bad thing to hang onto this house and draw on the equity for further IP’s.
Pinny
Hi Pinny,
Just because one person says that selling assets is a ‘good thing’ doesn’t make it right for everyone and for every property. While Steve has suggested that people do some ‘selling off’ there are many worldly wise property investors who prefer to invest for the long term.
Without meanign to sound rude or arrogant I would recommend reading a little more widely to see what other ‘experts’ are saying.
Without knowing your timeframe and particular circumstances and goals etc it is difficult to give definitive comment, but if you believe that in 10 years time you could repurchase this property in Melbourne for the same price as it is today – then sell. But I believe you will be sadly mistaken.
That is why I suggested that you lock in the current value of your property with a line of credit and look elsewhere – provided you stay within your means of course.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.I know property investing is long term but in Steve’s newletters he seems to be recommending that people sell underperforming assets now (ie: before further interest rate rises). Isn’t this house underperforming given the cash on cash return and return on investment?Not really. You say there is no debt associated with this property and therefore there is no presure from interest rates.
.
What would your alternative use be for the funds? Would you buy more property, shares, managed funds put it in the bank etc.
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Not sure I would sell this one at this time but that’s just my opinion.
.
Good Luck.Don Nicolussi | Mortgage Broker - Home Loan Warehouse
http://homeloanwarehouse.com.au
Email Me | Phone Me"I think of finance as a technology, a way of getting things done." Robert Shiller
Hi All,
Thanks so much for your responses.
To answer some of your questions. We sold our other IP and have used the funds to pay off our new home and put the rest aside to invest in further IP’s. We are under no pressure to sell our current IP. We just weren’t sure what the right thing was to do (in terms of maximising our returns)…
If we sold this IP we would use the funds to purchase further IP’s and maybe a managed fund.
But we have taken your comments on board and have decided to sit on this one for the longer term…. and using the equity for
Terry, you are right, $285k over 6 yrs isn’t scary. But to relatively new investors like us it can be scary watching it drop from $590 to $485 over 18 months.
Derek thanks so much for your advice. Rest assured I am also reading up on other material. There are so many different opinions that it can be hard to know what the right thing is to do. I guess as you said it will depend on what our circumstances and goals are.
Pinny
Hi Pinny
I am not sure selling is the right thing to do. If you are only going to buy more property to replace the one you have sold, then you must factor in all selling costs such as agents fees, legals, NSW exit tax, CGT etc and then when you buy again you have loan costs, stamp duty, stamp duty on mortgage, legals etc.
It seems you think your property is going to keep dropping in value. It may or may not, in the short term, but if it is in a good area, long term it should be back to good growth. But no one knows how long this will be.You also seem to be concerned about the yield. This these are low in major cities, but in the long run having a a high growth propety will make you much more money than a cashflow +ve property that does not grow in value.
If you want to buy more property, you could always keep the existing one and then borrow against it to buy more. Maybe cashflow property to balance out the low yield.
Terryw
Discover Home Loans
Mortgage Broker
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
Hi Terry,
Yes you are absolutely right. I realise now that I have been too focused on returns and not having a balanced portfolio. Keeping this house and borrowing against it including some higher yielding CF+ properties (hopefully in growth areas) is what we should be doing.
Whilst I wouldn’t be surprised if the value of our IP continues to drop in the short term I have no doubt that if we hang on to it that it will see good growth again future.
Thanks again for everyones advice. I have learnt alot from our discussions and feel now that we are making the right decision by keeping the house as an IP.
Pinny
I’m not sure we had a plan for the property when it became an IP. It sort of just happened by default because we couldn’t sell it. It is in Melb in a good area.Houses in good areas will always sell. If yours didn’t it was because your asking price was higher than the buyers were prepared to pay.
Everytime we have a valuation on the house it has dropped by about $40k!!Well, you can discount some of that due to the original overvaluation (see above). Yes, houses are selling for less now than they did a couple of years ago across most suburbs of Melbourne.
Did you get a valuation done in 2000? My prediction is that it won’t drop much further in value than that.
Who is doing the ‘valuations’? Is it your property manager / real estate agent doing a free market appraisal or an actual valuer? If the former, have a think about some of the reasons an REA might overquote the value of a house, then ‘condition’ the seller to accept a lower sale price through a series of falling valuations…
Cheers, F.[cowboy2]Hi Foundation,
No we never got an independent valuation. We had about 5 real estates give us valuations and from our own research we didn’t think they were too far off the mark. But it didn’t take long for the vendor conditioning to kick in as we were being told that the market was dropping fast and that we had to drop our prices accordingly. Although surpisingly we did have one offer but the real estate advised us not to accept as it was too, the buyers didn’t give us a chance to negotiate as they apparently stormed out of the real estate office annoyed that we didn’t accept their first offer!! Anyway thats a whole other story. I guess we have learnt from that experience and glad now that we haven’t sold up.
Pinny
glad now that we haven’t sold upWell I think you’ve answered your own question!
Cheers, F.[cowboy2]
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