My name is Anton and I am a new member of this forum. Desperately looking for an advice from the pros here please…
My wife and I have 2 properties (both yield negative cash flow).
1 property is a 1-bedroom apartment in Perth Postcode 6000 – though it has a post code of Perth CBD, it is actually not in the CBD itself but rather around 10-15 mins walk to the CBD. I purchased this during the height of mining boom in 2014 for $400k (currently priced at $280k)
1 property is a old townhouse in quite a nice suburb in Perth but the house is old and the townhouse itself is also quite old. Purchase price is $525k, now valued at around $485k.
As I said, they both yield negative cash flow after taking the rental income minus management fee minus strata fee minus maintenance minus monthly loan repayment (principal + interest).
My wages from my job is pretty decent but my wife, being a homemaker, is looking after our kids full-time. At the moment we have no difficulties paying off our bills (although we don’t save a lot of money because these 2 negative cash flow properties are really hurting us).
My fear is when I have to change jobs which won’t pay me as high as I am now that I won’t be able to pay the bills, especially the home loan repayment (very hard to find a job with my current salary at the moment, I will need to be willing to take a lower wages).
These 2 properties have become a financial burden to me but at the same time I feel very hurt if I need to sell it at current market price because I will need to swallow a huge loss (especially on the apartment).
Do you guys have advice for me in terms of what should I do with these 2 properties? Please let me know if you need more details from me.
Thanks a lot for reading it this far! Appreciate your help guys!
Hi Anton, I’m also new to this forum so not quite sure what’s allowed.
What outcome do you want- do you want to keep these properties?
We’ve just sold a mining town property at a loss of $365k, and are now going through a process to manage that, and are hoping for a favourable outcome (well, as favourable as is possible given our circumstances!).
Thanks for your reply Cathy.
That’s a good question. It seems silly but to be honest I don’t know what outcome I want.
Best possible scenario for me is to hold it until it increases in value and then sell it at break-even (I think I can afford to do the repayment for the next 2-3years). However, there is no guarantee that within that time period the properties will go up in value (especially the 1 bedroom apartment! which has abundance of supply in the market.
I ‘m curious as to what would you do if you were in my position. Thanks!
I’m sure you are not alone in having taken advantage of “good times” during the mining boom, then having it all turn bad some time later. It is good that you are here though, and I hope to perhaps turn on a light or two for you. I see you have a few options. That can be a curse or a friend – a curse when trying to make a decision with too litle knowledge, or a friend when “only one option makes sense” so you automatically take it.
First off, please note – I don’t know Perth at all, or its markets. I am also not an approved adviser of any kind (e.g. not a lawyer, accountant, broker, etc – I am just an old bloke with an opinion or two :) So be sure to get other views from those more qualified as well.
You haven’t mentioned rents, only values, so I can’t suggest too much re “which one to sell” based on week-to-week losses. But from other factors, this is what I see and would ask you to consider:-
a. If/when you sell, you LOCK IN the loss. That can be good or bad. At the moment, you are continuing on hoping for things to turn around so you can sell one or both. That doesn’t sound good to me, as you are continuing to throw money away weekly rather than investing in something that ADDS value for you and your family. But then, since I don’t know the numbers, maybe you CAN’T sell the apartment as you won’t receive enough to pay back the mortgage? Is that so? Are you “stuck” in that way? Many who bought in the mining boom have found themselves in such a situation. Advice from a relevant adviser would help in THAT situation. Or maybe if you sell the townhouse first this WILL release enough cash to allow the selling of the apartment too, and clear all debt with the bank.
b. The good part in selling at a loss comes when you find that you are now able to SAVE each week, and can even afford to purchase something that WILL make you money weekly. Also, since you have sold at a loss, this means there is no CGT (Capital Gains Tax) to pay to the ATO. Any loss can be retained and used to OFFSET any capital gains you make in the future (e.g. your next investment property might nett you $200k in profit – subtract the losses from this earlier loss-making sale to lower the CGT you owe on this new sale).
c. To quote Benjamin Franklin, “empty the coins in your purse into your mind, and your mind will fill your purse with coins” – i.e. spend some money on education that steers you toward the HOWs of investing so that your future investments will more likely all be positive ones. Enthusiasm is great, but it can lead us astray where it isn’t tempered with knowledge. Or (one quote I often use on here) “If you think education is expensive, try ignorance!”
d. Anton, you are certainly not alone in “having a go” a wee bit too early, or unadvisedly. That’s OK – learn from it, and turn the current situation into a better one for you and yours. In my early years of investing, a quote I loved was “You can’t change direction in a parked car” – and I used that quote to gee myself into action in making that first purchase (the first one is hard, have you noticed?). You are already past that first hard one, but now it is time for you to move on. Spend bit more time finding out the BEST path for yourself by reading on, checking with advisers, educating yourself (if that’s in property, that’s great – but it might be shares or something else – up to you, but we need to be investing, yeah?)
Come back with more info, or questions – it’s all good, and welcome !! :)
Welcome to you too. And Ouch!! Sorry to hear of your loss, but good to hear you are moving on – I’m sure that couldn’t have been an easy decision.
Hopefully some of the thoughts I shared with Anton will be useful to you too. But then, maybe you are already a full bottle on all of those anyway. Perhaps you can share with Anton how things panned out for you – and how you came to decide to sell when the outcome sounds so awful !! Making a loss is never good, but sometimes it is the only way out eh? How much do you want to share? I’m sure we can all learn from these things – even if it is a warning for our own futures.
Thanks for your comments Benny.
We too tried to “ride it out” and wait until either capital growth occurred, or rents rose significantly. We were putting our lives on hold, and having to be creative (we took in Homestay students) to make ends meet.
I would just caution against your second point – about losses being retained.
If you short sell a property that has a mortgage on it – the bank will want the short amount – it can’t just be carried forward to be offset against any future successful property.
If you sell and the loss is crystallised – as in our case – here’s what generally happens:
1. If you paid LMI to purchase the property in the first place, the bank will approach the LMI company to pay out the loss. Then the bank is happy, as the mortgage is paid out. Then… the LMI company will seek you out for that amount. The LMI you paid was on the bank’s behalf, not your own.
2. If you didn’t pay LMI, the bank will just come after you for the shortfall. If you own any other properties that are cross-collateralised with that property, they can force their sale – this can include your PPR . Even if you have other properties that are not cross-collateralised (i.e. they are with other lending institutions), you may be forced to sell them (and possibly in a fire sale to get the funds quickly) and sell for less than you are hoping for. If you can’t come up with the short-fall at the end of the day, bankruptcy looms.
Before you panic about bankruptcy – it should be your LAST RESORT.
Here’s what we did.
We engaged an insolvency firm, after doing due diligence around this. If it’s okay, I will post their name here, otherwise you can PM me.
We kept paying the mortgage, “business as usual” from our end. We are therefore driving this and have control.
We sold the property, but not as a fire sale (we sold it, not the bank – it was not “mortgagee in possession) (as I said, $365,000 capital loss). The bank had to give approval for the sale because it was being short-sold. Letters were exchanged to have us acknowledge that we’d be responsible for the shortfall.
We are now in the process of waiting for the LMI to be paid out. In the meantime, because we now don’t have the rental income from this property, we can go onto “Hardship” which means we don’t have to pay the mortgage each month, or we can negotiate what we will pay each month.
Once the LMI is paid out, LMI will come after us. This is where the insolvency firm does their job – they get details of our financial picture (any other properties we own, debt on them, income, everything) and negotiate with the LMI company what we will pay back of the shortfall. From other people who have engaged this firm, that negotiated debt has typically been “cents in the dollar” – we know people who’ve paid 9c in the dollar, others who’ve paid 16c in the dollar. I understand it’s a little higher these days. As an example, if your shortfall was $100,000, and the negotiation was to pay back 15c in the dollar, you would need to pay back $15k. Then, debt resolved. It does not go on your credit record. And you have not gone bankrupt. Yes – you need to come up with that shortfall, but usually there are a few ways to do that too.
In one case, I know of someone who had a 1 million dollar shortfall after short-selling 2 mining town properties, he had to pay back a bit over $100,000, and he got to keep his 8 other investment properties (the 2 rogue properties were not cross-collateralised with any of the others).
To us, this sounded too good to be true. There is also the risk that none of this will work, and you will go bankrupt (this insolvency company has never had that happen, and I don’t believe they’ve lost a PPR yet), but your contract with them will acknowledge that this is a possibility – they list every outcome and make no guarantees (because, they can’t!). It took us 9 months to decide to go ahead, and now we’re wishing we had done it earlier. I cannot tell you how it feels to not have this property anymore.
If you want more details or have any questions, I am more than happy to share anything – some things I’d rather not go on the forum though as our process is not over.
- This reply was modified 4 months, 1 week ago by CMS.
Thanks for your VERY informative post. I do take your point re “be cautious about retaining a loss”, and I admit my thoughts at the time of posting didn’t cover “How do you get to finalise a loan where a sale doesn’t cover the full mortgage” – I was simply assuming Anton WAS able to settle things with the lender, and that losses recorded on the ATO side of things could later be beneficial for him in offsetting future gains. Of course, if we don’t fully pay out a mortgage, we CAN’T claim a Capital Loss with the ATO if we didn’t complete the mortgage payout in full.
Your points are well made, CMS, and could prove to be super-beneficial for others out there, so I thank you for taking the time to educate us all re that situation you were in. It seems the insolvency company has been a big help for you through this. Though it is not yet “over”, I wish you the best outcome possible and hope things get back to a less trouble-some “normal” some time soon.
Re “can you name the insolvency company on forum”, I will come back to you on that in the next day or two.
Thank you all for taking the time and effort to help!! I really appreciate it!
@benny thanks for your encouragement, this is definitely a lesson that I have learnt, to do my research before buying anything (an expensive lesson indeed!). Currently the 1 bedroom apartment is renting for $360/week. And the townhouse (3 bedrooms) is renting for $400/week.
I calculated all the costs and my total negative cash flow for these 2 properties for the year is $23k (net of all property-related expenses).
Because I have offset account which reduces the interest charged on these 2 properties, I saw that total repayment made towards the principal for these 2 properties are $26k. So I can rationalise spending the $23k per year as a ‘forced saving’ towards these 2x properties.
My worry is that the property market in Perth won’t recover and I am throwing bad monies after another…
Honestly my stomach can’t handle to swallow $150k+ losses and that’s why I admire Cathy and her husband by making that decision!
@cms I just wanted to let you know that you and your husband are really brave and I’m so inspired by your story.
We are lucky that, in our case, the proceeds from the home will likely cover the outstanding debt to the bank. We might just fork out from our own pocket the selling agency commissions.
Any other advise or type of consultant that I can see to help me is greatly appreciated! Have a great weekend y’all!
AntonPetercrompParticipant@petercrompJoin Date: 2020Post Count: 2
I have permission to share the name of the insolvency company we are using.
They are De Jonge Read, and have offices in QLD and Victoria. We are in SA and have never met them – everything is done over the phone / email.
I have no affiliations with this company and get no rewards for advertising them! They charge a fee for their service (which I will be claiming at tax time!)and even that can be paid in installments (they won’t start work though until it is half paid). People have commented on the fee they charge, asking if we’re not throwing good money after bad with no guarantees. Like I said, we did due diligence on this firm, and after doing this, recognized that we would be in the same position in 20 years (not bankrupt, but not having moved forward). This is not something we could be solving on our own.
We are currently waiting for LMI to be paid out. This is interesting because our bank says we never paid it (keep records people!! We have proof!!). They now agree we did (it was paid to a different company years ago, and now the bank self-insures – we got lost in the mix). So I have been checking daily since November to see if it had been paid out, when actually it was never going to be because the bank didn’t realize they could claim it. They would have eventually just come after us.
The LMI process takes…. forever, it seems. Once it’s paid out, De Jonge Read will start negotiating the remaining debt for us. This is what we have paid them for.
I will keep you posted…..
Lets us know what you decide, Anton. I seem to have hijacked your post!
Thanks Cathy. I may not be eligible to go down that path (short-selling) as my property value is still within range of the loan amount. But the information you have provided is so invaluable!! I didn’t know that kind of arrangement exists!
AntonMrElmoParticipant@mrelmoJoin Date: 2010Post Count: 30
Hello you can sell it on as rent to buy. lots of people looking for these sort of propertiesRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,024
Rent to Buy and Vendor Finance now banned in several States in Australia so ensure you are operatng legally.
Yours in Finance