Advice: keep or sell?

I've posted on my Cairns house before, but at the start of the year said I would give it a year and re-evaluate.

Paid 415k in 2007
Recent bank val 380 (awaiting a new one this week)
Agent appraisal mid 400s
Onthehouse 469k
Probably sell for 420-430 on comparables, at best.
400 week rent, never vacant, but no increase in rent for years, and no real capacity

Here are the figures from my 2013 tax return - essentially, it cost me $8644 to hold (before tax)
2014 figures will be worse due to repairs
The figures from 2014 will be even worse because of loads of malicious damage, repair costs and an insurance increase to $6500 for the year ($2500 from today)
Rates will go up as my land value doubled this year.
There is nearly zero depreciation as its old. I'm in the highest tax bracket, and its 100% mine.

Cons for selling:
Missed capital growth opportunity in Cairns - rising market, improving fundamentals.
Sales costs
Big block (900m2) in a premium suburb; LMR block - draft changes allowing subdivision MIGHT ONE DAY allow 2x2 duplex, not now
Good rental style house, should be low maintenance (except for a bad run this year) and broad appeal.
Means I have to accept that I failed - this is a big one, actually. This was my first ever house.

Pros:
There is no capacity for significant rental increases, at least this year.
Do better elsewhere: less risk (economy/unemployment is 9%/cyclones), less insurance, less rates, more capital growth potential, similar gross yield, better tax benefits esp. depreciation.
It's getting shabby, especially the bathroom
Any Capital Gains will be taxed at the highest marginal tax rate after discount anyway
It may limit serviceability for future purposes, at least until the financial year end, or perhaps until I can produce 2 years of BAS/records ?


Would ANYONE keep this?

 

8 years is a long time to wait for any gain - can you get planning approval now for development ?

 

looks like no point in keeping

 

What would you do with the proceeds if you did?
Judging by the amount of interest your paying, the loan would be fairly high, plus sales agent fees, CGT etc. Have you done the sums on what that leaves you with? What would you do with that?

If the answer is not much, and the holding cost is trivial (relative to your specific income) then may as well wait it out I think. Otherwise you look at stamp duty, LMI, time involvement getting into something else with those proceeds (which are already minimised from aforementioned costs), the resultant difference return might be negligible.

It's always best to buy good real estate in the first place, it's an expensive exercise to fix.

 

I could do a duplex, but I can't see its worth it.
Duplexes sell for about 600k

I imagine there will be little to zero capital gains
There is no drawable equity in the loan (@350k - last val was 380)
I don't pay LMI at 90% LVR usually (medico)
I figure Ill walk away with essentially nothing, but an improved serviceability

If that figure is the same this year, it will be $2500 improved with a new insurance policy
so... broadly $6500 gross loss. Despite my income, this is a little more than a pimple on the bum. I feel like I could drop the same money in a familiar market (Brisbane) and if not a better yield, then at least have a better chance of CG and better depreciation

 

Aren't you on an extremely high income and have good capital? If i were you id get rid of pointless middling resi properties that the majority of investors buy because that's the bracket that best enables them to start/build a portfolio.

In your situation id get rid of underperforming average properties that you don't see much short term improvement in, be more focused and buy quality. Ultimately at some stage you're going to want to cut down your crazy hours or stop altogether, properties like this won't replace a big income. Buying quality commercial IPs (assuming property is the asset class u want to focus on) is prob the best way forward.

Less ongoing hassle, puts money in your pocket instead of the other way around asset and over time can be really lucrative.

Imagine a $3m property yielding 7.5%, ie 225k. In 10/15 years you might have not only paid it off but rent could be 350k/450k whatever.

That's the sort of set and almost forget investment ideal for high earning individuals with no time to waste imo and the kind of thing that would let u sit back and make proper passive money in the future.

If you had 7 similar houses to the cairns one there's no way in hell you end up with the same scenario of sitting on your bum collecting hundreds of thousands of dollars a year in the future.

Sorry for long post! I just personally know some people in your situation and those that took the option im talking about about are really sitting pretty. The ones who didn't mighe have made some equity but they can't retire as their portfolio isnt generating remotely enough to consider stepping down from a nearby $1m income

 

I've not even done a year yet on a good income, and with a 10 year lag behind my peers and massive debts as I self-funded university, travel and training. But in time, sure. I've made some headway into debts already.

This house has been a headache, indeed, and for no gain.

How does one find a 3m property at 7.5% yield?

 

Sanj is talking about commerical property as opposed to residential.

 

Yah, but still...?
Is this a typical CIP yield?


(I've also seen resi as fairly low risk - I've poured very little money in, Cairns aside, and am starting to see some gains based on leverage (of course)) I'm sort of low-key hedging my bets with some super, salary improvements, resi... who knows what else.

 

Yields vary widely. But it is definately possible and even more so than 7.5%. Solid leases with good market review/annual increases and lengthy terms can really be money machines. But of course like all investments they also have their downsides. Like potential land tax bills, long vacancy periods if tenant leaves, difficulties in getting finance with high LVRs (not sure if there are any medico benefits here) and generally more expensive to maintain.

 

Our CIP was, on purchase, yielding roughly 8.6% net on purchase price. Existing rents were definitely under market. After some rental increases (within first year), it moved to 10.2% net.

This is the only CIP I have experience in, so not sure whether ours is "typical", or "good", or "bad". We're happy with it so far. A couple of the current rents are still a bit under market, but then it is not a new building and we'd prefer to keep existing tenants than have to find new ones.

I wonder what a "typical" CIP return is...?

Edit: Had a brain fade and typed gross instead of net. Fixed now.