Advice to my friend: selling IP with the loss or PPOR and move to IP?

Now I (or actually my friends) need everyone's help. They are in the financial mess and I'll try to find the way out of it by minimising losses. All help from experienced investors here are more than welcome. The story begins...

In 2015 they bought OTP apartment in the suburb of Ivanhoe in Victoria. The apartment has 2 bedroom, 2 bathrooms, 2 car parks in 6 story largish apartment building and in really fantastic location. Their strategy was that they eventually will move in it when they retire (10-15 years away). They also own PPOR, house in Greensborough in Victoria. IP is negatively geared and they still have mortgage in their PPOR.

Now their financial circumstances have changed dramatically. Due to the various medical issues she is not going to be able to work ever again and he just lost his job of 20 years and they do not have a significant financial buffer. They are planning to claim financial hardship and get some money from his super for now. They asked my advice, what to do with their IP.

Due to their current and future financizl situation my mind they really have 2 choices:
1. Sell PPOR and move to IP
2. Sell IP and stay in PPOR

The problem is that there are so many apartments for sale in Ivanhoe (2 almost identical ones in the same building) that they will need to sell it with a certain loss, especially if they have to fire sale it. The apartments in their building have been for sale a long time and currently advertised below the original purchase price.

Also the problem is that getting the best price in their PPOR and being able to pay off IP mortgage, they need to spend $30 - $50k for PPOR renovation that they currently do not have. Also for sentimental reasons, sounds like they are not ready to move our of their family home yet.

How would you advice them? All good ideas are highly regarded.

 

Selling the IP for a loss vs. selling it with an underwater mortgage are two very different things - that is the first determinant.

Renovations in the current PPoR are unnecessary usually so that's not really a factor at this stage.

If they're happy with their current location and have an established life where they are then it's probably better to sell the IP, write off the loss again possible future gains elsewhere and stay where they are.

Not really enough information here to make fully informed decisions but based on some general assumptions, I'd probably get rid of the IP.

- Andrew

 

Thanks Andrew for your quick response.

My estimate is that the selling IP the loss could be as high as $80k -$100k. I am not really familiar with Ivanhoe market, but looks like there are a lot of new apartments for sale (including newer ones) and for thd quick sale they need to drop price really low.

 

I'm not sure how relevant this fact even is to their decision imo. Compared to say, the current value of the property?

Isn't more important to look at their equity and cashflow positions on each property? And the opportunity cost of selling or keeping?

Sounds like they might not be able to pass any credit assessments either.

 

Is the IP rented? If so, how much?

Have they considered renting their PPOR (and rent somewhere smaller/cheaper)?

This would most likely improve their cashflow and their after-tax position.

They have many options.

We don’t have enough to provide a practical opinion.

 

what are some rough figures - values and loans?

 

If I understand this correctly
They have two property loans, so high outgoings
They have also gone from two incomes to no income (other than rent from IP)
Should he gain another job could they afford both repayments ?

It was stated that she is suffering health concerns, so she may feel more comfortable in the old family home, but may be unable to assist in maintaining a larger home.

No one is going to be able to make such a decision for them.

So long as they have enough cash reserves to meet the current repayments they have time to make a decision.

Though it looks like downsizing may be the only option, or risk losing everything.

 

Here comes more details:

IP purchase price $740k, mortgage against it 80%, interest only, however 20% of purchase price is borrowed against PPOR, P&I. If IP sold now they are lucky to get $650k (just my estimate based on others on the market. I am not really familiar with Ivanhoe area)

PPOR mortgage $340k, P&I, in addition on IP mortgage. I am not sure about potential selling price, but they estimated $800k if renovated. The house is 3 bedroom, 2 bathroom house with 800 sqm block.

He is really depressed at the moment and he is thinking that he need to take significant pay cut to get the other job. Trying to get him to go counselling (mental health one first)

 

Forgot to say IP is rented out $550,- per week. He does not remember any outgoings!

 

At first glance selling the IP, paying out the loan secured to it will result is some net cash. They might be able to keep claiming the interest on the 20% and will be left with smaller amount of debt compared to selling the main residence

 

Rent for PPOR?

 

How old are they and do they have any assets outside super?

 

Thanks for everyone for the quick replies.
I met them last night and as you can guess they are really emotional and depressed and not in the mindset even to consider any options. However we agreed that they will contact their lender today and ask to switch p&I loans temporarily to interest only, so they will get more time and breathing space to make decisions. They just called and confirmed that their bank has agreed and now they gather all financial documents, bank account and super details and we catch up on the weekend to consider some options.

 

Your friend may have income protection insurance, probably within her Super, that pays her a percentage of her salary while she is unwell. Best wishes

 

Would they consider moving in to the IP now with everything that's going on and maybe sell the PPOR without reno to pay down some of the IP debt?