Forums / Property Investing / Creative Investing / What to do with a dead- in-the-water property…

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  • Profile photo of Jessica MayJessica May
    Participant
    @yeawodeva
    Join Date: 2015
    Post Count: 5

    Hi everyone,
    This is my first ever post on a property investing forum, although I have been ghosting them for a few years now, picking up very valuable information and getting inspired.

    I have a gnawing question. Six years ago we bought a dodgy little house in regional northern NSW, for $167,000. It was our first property, so we moved in and renovated it over 10 months(’twas a nightmare- I had a baby in the middle of it and the reno just went on and on…).

    It’s now tenanted for $240 per week, but its value has been stagnant. It was valued a few months ago for $170,000.
    It’s cash flow neutral, and only has about $14,000 of equity.

    I don’t really have any regrets about buying it, because I’ve learnt so much from that purchase and it was better to do something than not at all, but it does stink that all that hard work and money hasn’t shown any return at all.

    My question is, do we:

    1. sell it and get 5-10 grand out of it if we can

    2. leave it at cashflow nuetral in a location which isn’t likely to see capital gain in the next few years at least, or

    3. try something like selling on vendor’s terms(I think it’s called a ‘wrap’)?

    What would you experts do if it was your mistake, not mine?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Jessica,
    Welcome, and well done for making your first post on any property forum. Let’s see if we can help turn a spotlight onto the puzzle of “What to do next”.

    Good to hear that it is cashflow neutral – my first question(s) would be around that :-

    1. Are you paying Interest Only, or P&I?
    2. What is the amount of the mortgage and you monthly payments?
    3. Are you including Tax benefits in your “cashflow neutral” calcs? (i.e. is it neutral WITHOUT any Tax deductions?)
    4. Is the $240/week rent “about right” for the area and for what the house provides? Or is there room for a rent lift?

    A few more figures around the $14k equity would be useful. Keep in mind the costs of selling, including CGT. Also, is the house in good shape (i.e. are maintenance costs reasonably low?).

    Add a bit more to the picture, and it may become clearer, allowing a clearer answer,
    Benny

    Profile photo of Jessica MayJessica May
    Participant
    @yeawodeva
    Join Date: 2015
    Post Count: 5

    Thanks for the response.

    The mortgage is interest only, owing $156,000ish with repayments of $140 per week.
    I’m not including the tax benefits in the calcs(it is nuetral without tax deductions eg. depreciation).
    I am including rates, insurances, PM commission, and 1% of the value for maintenance($1700 pa).

    The rental amount is about right. It got a rise of $10 per week about a year ago, and its still about right.

    CGT would be negligible, considering it has actually had any CG, yeah?
    What are the costs of selling usually?

    As far as maintenance costs are concerned, it’s an old houso, so cheaply built, but we did rebuild the bathroom and fix it up nicely 6 years ago when we bought it. It will need a new kitchen in the next 5-10 years, and the windows will need replacing, which will cost a few grand. The front fence will need fixing in the next few years, but its not very long.

    Hope this helps?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Jessica,
    Thanks for that. Right off, it seems you are paying Interest Only on the Mortgage ($140 per week on $156k is just 4.6% – so I am guessing it is IO). If you were paying P&I, I would have suggested changing to IO anyway. Let’s quickly “do the numbers” re how things are right now and see what shows up:-

    $240/week Income = $12,480pa (gross return of 7.3%)

    Mortgage of $140/week = $7280pa (divided by $156k = 4.6%)

    $12480 – $7280 = $5200 – that is $100/week to pay all outgoings remaining – PM, rates, etc

    Now, what if that $240/week were held in an Offset acount until needed? Most payments are Monthly, so there $$ would be offsetting the Interest on the Mortgage for most days of a month. Then remove as needed to pay the bills (Insurance, rates, etc). For bills that are paid yearly, the total could be offsetting the mortgage Interest for a year.

    I will leave it to the financier types on here to say whether it can be done easily (recent changes might have cruelled the possibility of making the switch). Or, of course, you might already have an Offset account !!! Do you?

    If you want to read up on some of the benefits, check this out:-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973

    Now, back to the “What do I do next?” question.

    Right now, it seems you may have bought in to this property at the peak, or were led to it by a marketeer (?) Since real estate runs in cycles, it is NORMAL for prices to surge over a short period (2 to 3 years) then stay flat, or even decline, for the next several years. I think of it as going up the stairs – a long flattish period, followed by a lift, then another flat period. So, is it going to appreciate over time? Barring major economic changes, I would say Yes. How soon, and by how much? I don’t know.

    Since it costs you little/nothing to hold, it could be argued that it is worth keeping for now, in HOPES of a lift in values. Conversely though, if you had other investments that you wanted to pursue, then this one might be holding you back. Since selling it will not return you much money, I would think the latter is unlikely.

    If keeping it, look at maximising its contribution to you. A lot will depend on the location and its “numbers” – if this area only needs the kind of rental you have, there is little use in upgrading your place to something else. If $240 a week is the max rent, don’t spend any more in seeking a higher rent. Read up on Offset accounts and, if you already have one, change your use of it to maximise what it can do for you.

    Do come back with any questions, Jessica – I hope some thoughts expressed have helped to clarify your options,

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Some more questions to ask yourself

    – How much money would be released from a sale
    – could you use this money to pay off non deductible debt and invest in a higher returning investment
    – is the property affecting land tax
    – is the property hurting borrowing capacity
    – prospects for growth = what do you think the situation would be like in 10 years

    Without capital growth there is not much point in investing.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of EthanEthan
    Participant
    @user1111
    Join Date: 2015
    Post Count: 3

    Hi Jessica,

    This is also my first post here but the 3rd option you mentioned is right down my alley and noticed that nobody addressed this option so here I am :-)

    3. try something like selling on vendor’s terms(I think it’s called a ‘wrap’)?
    What would you experts do if it was your mistake, not mine?

    This option could be very lucrative for you. Just because you don’t believe in that property and location, it doesn’t mean nobody else will. You might actually do some real good to someone who can only rent now but would could really use a leg up and become a property owner.

    So, in addition to good karma and all, you can expect 2 additional benefits:

    1. Increase the cash flow from the property to positively geared.
    2. Lock-in a price that will reflect a modest growth over the next 2-5 years (usually 3-7% p/a)

    Hope this helps?

    Cheers,
    Ethan

    Ethan | Terrapodean
    http://www.terrapodean.com.au

    Make Home Happen

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