All Topics / Help Needed! / Method to introduce cash flow into properties or neutralise my current position

Viewing 10 posts - 1 through 10 (of 10 total)
  • Profile photo of RaastaRaasta
    Participant
    @raasta
    Join Date: 2013
    Post Count: 16

    I am based in WA and have my own home (Loan $430k, Value $500k).
    I have 2 investment properties in Perth, WA. The strategy I used so far was buying old properties with large land content for capital growth.
    Property A – rezoned from R20 to R40 in April 2016 (Loan $510k, Value $600k, Rent $420 p.w, 680 sq.m).
    Property B – possible rezoning from R20 to R40 in 3 to 4 years (Loan $495k, Value $520k, Rent $270 p.w, 780 sq.m).
    Net Cash Outlay for both investment properties before tax = $26k
    Net Cash Outlay for both investment properties after tax = $13k

    Can anyone experience provide some ideas or suggestions how I can move forward in my property wealth journey as the properties are currently draining cash making me dependent to my job. It is a poor time to sell properties right now as it is currently a buyers’ market in Perth.

    Options I have considered is to construct a granny flat in same lot as Property B (this is allowable) – this will provide a mild net increase in cash flow by $4k before tax. However, this is tiny and I am trying to make a bigger difference.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Raasta,
    Wow, you appear to be very highly geared. Is this because of a downturn in values that I believe hit Perth over the last few years? Or was it a recent, deliberate move on your part?

    At a quick look, and without getting out a calculator, it seems property B is the biggest part of the problem. You would have the actual numbers that would tell you.

    My thinking is that we can comfortably accept spending $30k or more on a renovation that might create a chunk of equity but only provide an extra $100 a week in rent. Would it make sense in your case to spend that $30k on Selling costs and quit property B? What would be the “rent return” in that case? Seems to me it might be making a $300 a week difference or more (and don’t forget, I still haven’t pulled out a calculator, so my numbers might be off the mark).

    You tell me – just how much immediate relief would be gained by selling B? And, of course, it seems you might have a quite decent wage taht allows you to hold these anyway, and you also might be willing to invest further (perhaps positive geared?) anyway.

    As Steve says look for a deal that “Makes the most money, in the shortest time, with the lowest risk, and the least aggravation”.
    Food for thought !!!

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    You have basically got 3 options
    1. decrease expenses
    2. increase income
    3. Do both

    Sounds obvious!
    Check that your rate on the loan is as low as possible.
    Are yo claiming all deductions?
    Depreciation schedule in place? Travel? Borrowing costs
    Debt recycling strategy in place?
    Borrowing to pay costs?
    Is capitalising interest or borrowing to pay interest an option (get tax advice)
    How can you increase your wages
    Increase rents?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://Terryw.com.au/

    Profile photo of RaastaRaasta
    Participant
    @raasta
    Join Date: 2013
    Post Count: 16

    Hi Benny and Terryw, thanks for your thoughts.

    Benny – True, I am indeed in a highly geared position at the moment and Property B is the main culprit. In this market, spending $30k or more on a renovation for Property B will not increase the amount of desired equity and will also provide negligible amount of increased rent.

    Terryw – Expenses are at the least they can truly be. I am claiming all deductions, depreciation schedule is already in place, there is no travel involved, all borrowing costs are being claimed. Capitalising interest or borrowing to pay interest is an option however it won’t change the situation much – will only buy limited time.

    Possible strategies to explore ahead:
    -Review all loans to see if lowered borrowing costs are achievable
    -Increase wages
    -Increase rents

    If I had $100,000 extra cash at the moment, with the above scenario in place, what could be changed to make my position more neutral?

    I am aiming to get towards positive gearing based on advice seen given by Steve McKnight and Simon Buckingham (Results Mentoring).

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Raasta,
    I think you might’ve got lost in my words. I mentioned that we often think of spending $30k on a reno to gain cashflow and equity but not the other option – see here:-

    Would it make sense in your case to spend that $30k on Selling costs and quit property B? What would be the “rent return” in that case?

    You would need to satisfy yourself that this would make a meaningful difference of course. I know Steve talks of “multiplication by division” – and in a nutshell it is this :-
    Sell a non-performing property to gain back the cashflow it is costing (thus the servicability) and instead parlay it into TWO better performing properties. Now, THAT option may not have the desired result in your case, simply because you have almost NO equity in property B. But hey, it would SAVE you $300 a week wouldn’t it? Or more? That’s where YOU need to tell me what the actual numbers might be, but they are HUGE imho.

    So, if you have a chance of selling B and instead buying a positive geared property, also with a chance of future equity gains, why would you NOT sell B and replace it with a better IP?

    Once again – food for thought…… ;)
    Benny

    Profile photo of RaastaRaasta
    Participant
    @raasta
    Join Date: 2013
    Post Count: 16

    Hi Benny,

    I was away on work and just got back. Thanks for getting back to me. I understand now what you are trying to convey.

    As Property B is the one which is clearly non-performing on a larger scale, i will consider on its sale. There may not be much received from selling Property B as the market value is very close to the loan payout (plus factor in selling costs & settlement fees, etc).

    Raasta

    Profile photo of TheNewGuyTheNewGuy
    Participant
    @thenewguy
    Join Date: 2014
    Post Count: 151

    There is no point holding a negatively geared property that has little to no chance of making a return on the short term. While it might hurt to think you’re losing money by selling it’ll hurt more by holding it longer.

    Why is the rent so low? Especially property B? $270/week for a $500K house is an absolute steal. Are the tenants on a lease because it might be hard to sell with that sort of return.

    Profile photo of RaastaRaasta
    Participant
    @raasta
    Join Date: 2013
    Post Count: 16

    Hi TheNewGuy,

    I agree with your view as it would bleed more cash out now, for the thought of making more gain on the value of the property which is questionable at this stage. The rent is very low due to the current market conditions in Perth. The tenants are on a lease just to cover the outgoings (i.e. property held for capital growth purposes).

    Raasta

    Profile photo of fxdaemonfxdaemon
    Participant
    @fxdaemon
    Join Date: 2013
    Post Count: 114

    I had a similar situation as your IP B before and after allowing it with 5 years to prove itself in terms of rental yield & growth,
    both have shown interior and disappointing performance so I decided to get rid of it with a break-even exit overall.

    I think you need to have a realistic time horizon and draw that line deep in the sand. The asset is either performing or not and let it
    guide your decision moving forward.

    Rgds,
    FXD

    Profile photo of RaastaRaasta
    Participant
    @raasta
    Join Date: 2013
    Post Count: 16

    Thanks FXD, break-even exit is much better suited than taking in a loss.

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