200K book loss, crystalise or ride out?

Discussion in 'Investment Strategy' started by willister, 20th Nov, 2019.

Join Australia's most dynamic and respected property investment community
  1. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    Need some opinions here, what would you do? Firstly, I'll admit I've made some terrible financial decisions (due to lack of understanding and clarity) and had an expensive lesson.

    I'm 38, wife and 3 kids, living in unit on my folks block.

    IP1:
    Purchased 2013 4 bedder, 685K. South East Melbourne.
    Current Worth: 1.05mil
    Cash Flow Negative
    Rental: 450 pw

    IP2:
    Purchased Early 2017, 3 bedder (near peak but over auctioned), 810K. North East Melbourne.
    Current Worth: 640K (Neighbour sold in Oct 19).
    Cash Flow Negative
    Rental $375 pw

    Total Loan: 620K. We can service both loans (P&I). Just sadly got inheritance from grandmother (200K).

    I can hang on to them and pay them off in due course but I'm really starting to worry about IP2...we miscalculated the area's worth based on recent sales (none seem to reach anywhere near even 700K) amongst buying near peak and over purchased.

    Would you ride it out or cop losses as current?

    Thanks.
     
  2. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,260
    Location:
    Australia
    Would you buy ip2 at current market price of 640k now?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    2 questions to ask yourself
    A. Will it increase in value?
    B. What is the opportunity cost of holding on?
     
    ellejay likes this.
  4. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    In short, yes. Why? The dropped spooked me. I was expecting mid 700s not low 600s.

    The minute we won the auction, I had a sinking feeling that I already knew we had paid 30-50K too much and note, this was near peak...so definitely peak price levels. In 2018, I noticed prices going south big time but weirdly it dropped to the mid 700s...one on the street sold for $740K, only 10m2 bigger and similar house (i.e. old).

    I'm sort of lost and in two minds at the moment. The worse than expect dropped as seriously flustered me. I could hold it and pay it off in say 10 years time and accept any lost opportunity costs but again I'm not sure well no one is really of what levels it can bounce back to.

    If I had a wish, I'd happy accept 0 gain and 0 loss if I could walk away from it all right now.
     
    Last edited: 20th Nov, 2019
  5. Westie

    Westie Well-Known Member

    Joined:
    19th Jun, 2017
    Posts:
    1,136
    Location:
    Melbourne
    Tell us a bit more about IP2? What kind of property, where? The NE parts are desirable areas to live in, mostly. Without knowing much about IP2, I'd ride it out. Maybe you can add value to it? The market's hot in a number of areas, maybe you can get more than you think (after value-add)?
     
    albanga and The Y-man like this.
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Go back and look at your 2019 tax return and the rental schedule for IP2. Is it a negative ? Then remove the non-cashflow things like depreciation and capital allowances since these arent paid deductions. Then DEDUCT the difference between your loan repayments and the interest. This is a hidden cash outflow.

    Now you have you net cashflow for that property. Is it a big or small number ? Is it a net outflow or inflow ? Then if its a outflow REDUCE the loss by 33.33% of the original tax return value of net income as thats your tax refund. So now you have your net cashflow for this property. Divide by your pay periods (eg 12 monthly, 26 fortnights or 52 weeks)....Are we talking a cup of coffee or the cost of a car repayment ? If its small number - Be patient. Time fixes everything. If its a big number it will possibly burn cash like a pizza oven. Consider IO refinance for the property.to buy time.

    What will it take to make it square ?
    ie reduce the loan ? Is that feasible ? Is this a big or small number ? Can you afford to pay this for two, five or seven years before it comes good ? Could you add a GF to assist cashflow with dual income ? If you do what does it do to value ? The GF may not add dollar for dollar for its costs but find out what local REA think.

    How long before the property may bounce back ? Seek advice. If the views of local property professionals is its not going to bounce back (at all) ad the costs to hold it are high then consider sale. But make sure you realise enough to payout its loans.
     
  7. TMNT

    TMNT Well-Known Member

    Joined:
    23rd Jul, 2015
    Posts:
    5,572
    Location:
    Melbourne
    you make your money when you buy, so its very important to stick within your budgets and not get carried away, (unless its an PPOR)
    or unless you get lucky and the area booms

    ^
    none of what I say actually helps your situation! sorry:mad:
     
    WattleIdo likes this.
  8. Redom

    Redom Mortgage Broker Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    4,607
    Location:
    Sydney (Australia Wide)
    Hold it, patience here. In general, those buying property & selling within 2 years won't do all that well given the transaction costs, especially during a market correction. You're on the other end of all the credit conditions that drove the market correction now.

    Now, rates are falling & there's a concerted effort by regulators to get credit flowing. IMO if the RBA remains intent on getting the economy firing, it likely won't be too long before you can throw a dart at a map anywhere in Sydney & Melbourne and you'll likely be in front from the current position (it may not recover to what you paid for it, but you're probably better offloading it in 12-18 months than now). More sophisticated asset selection will of course mean better results, but there is a potential upside there at the moment of current values (and a much smaller downside given conditions).
     
    BunnyXiao, WattleIdo, Shazi and 3 others like this.
  9. Shogun

    Shogun Well-Known Member

    Joined:
    26th May, 2018
    Posts:
    2,866
    Location:
    Perth
    You spent 1.5 million on property that is now worth 1.6 million?

    If both had grown only a small amount how would you feel?
     
  10. Rugrat

    Rugrat Well-Known Member

    Joined:
    16th Jul, 2015
    Posts:
    376
    Location:
    Australia
    Personally, if you can afford to hold, then I would hold. Value only matters if you are selling or if it is holding you back from another homeloan. Hold it long enough it 'should' hopefully regain its value at somepoint. Sp long as it hasn't cost you over 200k to hold it in that timesframe, then you haven't 'lost'.

    If you do sell at 200k less, how long is it going to take you to get back that 200k? Longer then if you had just held?

    Obviously you don't have a crystal ball to say exactly when it will regain its value, but hopefully it will at some point. Unless you believe it will never regain that value??
     
    Shazi and John_BridgeToBricks like this.
  11. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    3rd Jun, 2015
    Posts:
    11,331
    Location:
    Perth
    I'm surprised at such low rent for IP1. Is it quite an old rundown place? Perhaps doing a renovation to increase rent would help in the long term to hold both properties?
     
    Shazi likes this.
  12. TMNT

    TMNT Well-Known Member

    Joined:
    23rd Jul, 2015
    Posts:
    5,572
    Location:
    Melbourne
    You have $200k equity, youd prefer to start off with zero?

    sounds like there is another issue at hand
     
  13. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,260
    Location:
    Australia
    The idea is that whatever you paid for it is a sunk cost. If you would buy it for 640k now, it means it might be worth holding.

    Other factors are crystalising the capital loss (might make sense if you have current year gains to offset it) but will cost 3-5% to sell, and if you sell will you buy something that has better prospects than ip2 at the current market price? Buying will cost you another 3-5%. So your 6-10% behind by selling and buying.
     
    Last edited: 20th Nov, 2019
    significance likes this.
  14. The Y-man

    The Y-man Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,443
    Location:
    Melbourne
    Is it because of the NE Link project? Will there be a tunnel under it or tollway next to it etc?
    Terrible news if that is the case.

    The Y-man
     
  15. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    Fortunately no. Bit closer to the CBD...Heidi West. Took a punt at the time. Hindsight regrettable. Closer to Bellfield side though.

    Gentrification is slower than I initially thought.
     
  16. The Y-man

    The Y-man Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,443
    Location:
    Melbourne
    Heidi West? We are talking 10km from CBD - I vote HOLD. Unless you were looking to do a flip, B&H is a +10 year game (sure you get lucky sometimes and get out early, but it's not the norm).

    The Y-man
     
    Last edited: 20th Nov, 2019
    Shazi likes this.
  17. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    At the time I was basically gambling so to speak on four areas:

    1. Rezza
    2. Heidei West and Heights
    3. St. Albans.
    4. Springvale

    Basically North or West, by that stage my thinking was basically these were the few areas that weren't yet 1mil suburbs yet and I saw huge potential, at least the two Heidis and St. Albans. Strangely enough St. Albans was my old haunt which I had a chance to buy into Walmer Street at the time, 700m2 block, better house and 1km to station for 10k less than what I got in HW, yet I baulked. Today it is worth about 915K (based on a similar comparable house) down the road same sized block.

    Sometimes you back the wrong horse.
     
    Westie likes this.
  18. kaibo

    kaibo Well-Known Member

    Joined:
    30th Jul, 2017
    Posts:
    624
    Location:
    Melbourne
    my mate fell for the same trap of looking at cheapest suburbs within 10km of CBD (seemed like a logical decision) and the invested in Heidelberg West over 6 years ago and still no growth (crap house on a good size block)
     
  19. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    If he bough the HW in 2013, he would have made quite a bit, even with a correction, at least 100-200K.
     
    Perthguy and TheRayTracer like this.
  20. willister

    willister Well-Known Member

    Joined:
    1st Sep, 2015
    Posts:
    760
    Location:
    Melbourne
    Would this be feasible? Hold onto it for 8-10 years, barring any catastrophic - by then I would have had a good grasp of what the market had fluctated and have a better idea of when to cut loose from it.

    Pessimistic me says at the current rate of things even in a good run so to speak, it would take me about 7 years to regain what I go it for. Assuming $28K average growth a year based on old statistics in leaner but stable times. So $810K Less $640K = current loss of $170 plus stamp duty about $40K = $210K odd? Average rise $28K = 210/28 = 7.5 years.

    Honestly, the neighbour (well, 2 houses away) from me but identical house and land, gave us a rude shock i.e. at least 100K lower than what we thought the damage was.
     

PFI can assist you with your investment strategies for your SMSF, Life Cover for your members and assistance with compliance. We provide the research to ensure your investment selections achieve the goals. This is the value of advice