How to deal with a bad property?

Hi Folks,

I used to visit the ol' Somersoft forums for some advice and now I find myself here I hope this post is ok but even to me it seems a bit general...

What to do when you have a bad property? When do you know to get rid of it? Or ride out a downturn?

I was seduced my 'financial adviser' due to the massive positively geared nature of the Gladstone investment. Fast Forward a mere 18 months and it became a train wreck. 5 years on and it is a total disaster. I should be planning house 4 or a PPOR upgrade at this stage but Gladstone was a huge mistake.

PPOR
Malvern East, Melbourne East, House, 3BR, 800SQM
Estimated Value: 1.3M
Home Loan: 100K

1st Investment Property
Wantirna South, Melbourne Outer East, Town House, 3BR
Estimated Value: 500K
Home Loan: 328K
Positively Geared

2nd Investment Property
Gladstone, QLD. House, 4BR, 800SQM
Estimated Value: 440K
Home Loan: 550K
Negative Geared

I am at a total lose as to what to do now.

Do I take the 100K loss on Gladstone?
Do I also sell the Wantirna South property to offset the lose and to reduce the capital gain?
Do I sit tight?
Does it all depend?

Any sage advise, or pearls of wisdom would be appreciated. Maybe the best advice is to hire a proper financial adviser?

You can see from the above that I am not in a bad position but Gladstone is such a massive downer that it might be better for my well-being to see it gone and wrack it up as an expensive lesson in greed vs good investing.

Kind Regards,
James

 

How negative is gladstone? How many years of negative cashflow would it take to repay the lost capital cost/cgt/selling fees etc etc.

 

Personally I'd probably sell both IPs and offset the gains of Wantirna against the Gladstone losses then take a fresh look

I'd keep Wantirna if you think there is still some good growth to be had but it would handy to cash in those gains now

Talk to your accountant and strategise timing

 

Hi James
Do a search on Gladstone, you will find you are not the only investor who got caught, review the comments.

The good news is you purchased in Melb, well done.

I believe in getting rid of the dogs, it's not good for your health and this market will possibly take years to come back. I would sell Gladstone if you can. However the issue is whether you can sell due to the oversupply. Start by contacting local agents and work towards this.

Melb has seen great gains you could offset by selling Wantirna as you mentioned. How is this market going ? Do you still see some upside to this?

MTR

 

You need to calculate if any loss you would sustain if you decided to sell it and then compare that to the holding costs to keep it over a few different time frames - both on an after tax basis (see your accountant for this). If the holding costs are less than the loss on time frame, X, Y, Z and holding it is not going to incur an opportunity cost elsewhere (most important), then holding it would be prudent. If the reverse is true, then sell.

Of course, the risk is that for the former, the market won't recover which is why it's the opportunity cost component (including your borrowing capacity) that matters a lot.

- Andrew

 

Once you sort it all out ditch the planners, gurus and OTP companies et al forever and start self educating. You'll become unstoppable.

 

So long as you take the capital loss first, you can carry this loss forward till you have capital gains to offset it. So it is not now or never.

I agree to sell Gladstone. One way to look at it is to put the house in one hand and $420K nett in the other. Which would you choose?

Only sell the Melbourne IP if you need it to pay out the excess loan given the shortfall on Gladstone. Or if you feel it has limited prospects of future capital gains, unlikely as Melbourne is doing well. Otherwise take the Gladstone loss and declare it in your tax for future gain reduction.
Marg

 

A note concerning Wantirna South - my townhouse is just on the boundary of a massive rezoning to higher density around the whole Knox shopping centre complex. The basic rules of supply and demand would indicate that there is little upside left in the capital gains to be had for a townhouse in the area. Rents may even be impacted.

I'm leaning towards selling both, the stars seem to be aligning, but I will do some more maths.

I've learnt some basic property investing rules but the newest one would be to target capital gains. Obvious I know, but the whole $1000 a week rent situation in Gladstone clouded my judgement. Sigh.

Thanks for the advice so far, some numbers to crunch and calls to make.

Kind Regards,
James

 

Melb been booming since 2013, not a bad idea to cash in the chips and you can offset it with the dud.

It could be worse..... read this thread I started on mining towns, once again lured by the great cash flow, but its all about timing the market, if you jumped in early then your fine but close to peak another story.

Real Pain - Australian Mining Towns

All the best

MTR

 

Using the market value what is the net yield of each property ?
Then calculate the best guesimate of future capital gain ....
Add one to each other. ..this will give you a guide to future holding

 

Well for starters, Gladstone is worse than I thought - maybe sell for $350,000 but Wantirna South might be closer to 600K - talk about swings and roundabouts...

 

It seems like selling both ips will benefit you if what you say about future supply is a concern. (I dont know Wantirna at all). If the TH in Melbourne sells first and you are not able to offset its capital gain by the loss on Gladstone, next time you sell a high-gain property the tax on that one will be offset by the loss on Gladstone. There is one bit of good news from Gladstone.

I do not know about whether it matters which one you sell first - as far as I know if they are both in the one financial year they would balance each other out as far as CGT is concerned. You must clarify with your accountant.

Should you decide to keep Wantirna, you can access a loan against your PPOR for the shortfall when you need to settle and pay out the mortgage on Gladstone. Have you spoken to an investment-savvy broker about your financing options to cover the shortfall.

PS this is not financial advice***

 

Personally, I'd sell the Gladstone property. Keep the Wantirna IP.
Like the sharemarket, don't anchor on your buy in price and hang on hoping that it'll let you break even to get out. The opportunity cost is far too great.

Alternatively, you can be like Margaret Lomas and hold it in your portfolio to serve as a reminder...

 

James,

Some extra things to consider/add in to the calculations

Are you claiming depreciation on both Gladstone and Wantirna. It's a must!!
Did you build either of them? If Gladstone was a H&L and is less than 5yrs of age you might have to pay some GST on the sale
Ask your accountant if there is any upside to prepaying your interest before selling to reduce any gains/increase losses.

You mention the idea of getting another financial advisor and personally I don't think you need one. You got caught out by greed but really as an ex-Somersofter you've had hundreds of brains at your disposal and you are in a much better position than some that were lured to Gladstone. I'm actually surprised that there is only a $100k loss!!

Going forward I would consult with a good accountant. Make sure you are set up for appropriate structures, talk to a good broker and see what you can now buy in this more conservative lending market.

 

Thanks Westminster,

"Buyer regret" googling a property purchase is something no one wants to do

So yes the loss will be significantly more than 100K possibly into the 200's but at least we have a depreciation schedule and the house is over 5 y/o now. If you forced me to guess, I would think we would be back to our purchase price in 5-10 years. Factor in another 5-10 years to actually get into profit making territory, and a 20 year hold is on the cards.

My old boss used to say, the best time to plant a tree was 10 years ago, the 2nd best time is now. It appears that it is now the time, to actually cut the tree down.

So action plan:
1. Ring Gladstone Agent
2. Ring Accountant - Does anyone know if I can claim interest repayments on the shortfall between the loan and sale price?
3. Ring Broker and have him start paperwork on maxing out the Wantirna South loan with balance against the PPOR.

A big thank you to all responders so far, you've really helped get this moving. Appreciate it very much.

Cheers,
James

 

Hi Angel
curious, how difficult was it to sell your Gladstone property?

 

thats an envious position to be in!!! hold a dud property for kicks and remind yourself!!

 

youre still ahead on both your other properties! so I wouldnt get too far down on yoursituation.

I know acouple that bought a ppor for like $300k-$400k, its now worth $1.2m,
they then bought an IP for about $250k, 8 years later, its worth $250-$300k, and they act like theyve lost a million dollars!

 

Hi Dave,

The expected capital lose is $260K. This equates to about 13 years at the current negative cash flow.

Are you saying it is better to spread that lose out over 13 years?

Regards,
James