My plan has been dealt a body blow

Newbie question from a long time lurker - I'm not sure how to proceed from here and would love your input

Current position:
Have 1x IP - value about 730k, loan balance 415k, cash flow nearly neutral.
Savings/offset balance 120k
No PPOR - housing provided by my work

I was just about to take the plunge and start creating a "portfolio". My original plan was to release my equity and aim to buy 2x IP over the next 12 months at around 500k each if I could. I was hoping not to touch the money in my offset if possible. Was actually pretty stoked that I was potentially going to have 3x IP within 12-18 months.

HOWEVER, I've just found out my current IP has significant structural problems that will only worsen over time, and will cost too much to repair (>100k). Recommendation from the builder is to sell as a total rebuild is likely required down the track. I'm very disappointed as it is a really well located 2BR townhouse in inner Melbourne that was nearly paying for itself.
Tenant has just signed another 12 month lease too. So I was thinking of holding it until the lease is up, repainting and fixing up cracks etc and selling.

How would you proceed from here?
Still do equity release, buy another IP, then deal with the townhouse in 12 months when the lease is up?
Start saving hard and wait 12 months until I sell, then consider upgrading to a bigger or better quality property in same/similar area? For some reason I feel stuck on trying to maintain an inner city property now that I'm "in", but I'm worried about not being able to afford to buy back into inner Melbourne if I acquire further IPs.

Any guidance is muchly appreciated. Hope the above all makes sense!

 

Interested in why the issues are so fatal with the townhouse. What are they? (photos would be great). How old is it?

 

Melbourne is booming so it could be a good time to cash in on the growth and rid yourself of something that is going to eat into your profits - if it is indeed going to be as bad as your builder thinks.

But definitely get a second opinion.

 

Perhaps I have it wrong but structure damage/townhouse, does strata insurance cover this?

 

Some of your numbers dont really make sense to me.
$750k val. $415k loan -$120k in offset. and it is only just cashflow neutral. Its generating a 1.7% rental return?

Anyway, if its $100k expense with no value add it might be worth while selling it. Realising cash of $450k or so and starting again. Gives you the opportunity to structure things very effectively.

Blacky

 

I don't have photos sorry, I am interstate. But the builder thinks the slab has cracked, some time ago. He can't see it himself but says "the signs are there". The floor is on a lean, the walls are not plumb and doors either self close due to the lean or need to be re-hung periodically due to shifting. The cracks in walls/exterior are slowly enlarging with time, and to top it off, waterproofing of the shower upstairs and upstairs balcony is inadequate so there is leaking into the ceiling. I used to live in the place originally and agree with all he has said.
He said to assess the extent +/- repair would require ripping up floor and walls, rebuilding balcony and obviously re-doing the shower. Pretty expensive sounding!!!

Body corp manager says something about the plan of subdivision not having "depth limitations" so the responsibility of the slab is my own. Seems a little odd to me I must say but maybe that's true?
The townhouses (4 of them) were built in 2003 or 2004 I think so I do t think I have any recourse with the original builders. I know next door has similar issues.

Sounds like lots of cost for no capital gain to me!

 

You could sell, and buy a replacement property - gear up while at it.

 

Did you get a building inspection when you purchased it?

How long ago did you buy it?

 

And someone else inherits the problem, I know that is life but am I wrong to feel bad for the future buyer?

This is major structural damage, I would always get more than one opinion. There may be alternative cheaper option. We had major structural damage on a property and options/quotes went from 5k to 80k, we picked 5k and it worked

Also this has been disclosed to body corp?
is it documented? Don't know throwing it out there

 

Run a dribbling hose next to the slab (at the risk of a fine during a Sydney drought), the old clay will soak it up and lift back.
A bit like Pantene, it won't happen overnight but it will happen.
You will be surprised how things can realign themselves.

 

The price paid by the purchaser would reflect the value - in theory.

 

Only if disclosed or building inspection completed

Besides the point, but I think many would not do this for units and townhouses as they would presume strata has insurance and covers this etc

 

Without know details of subdivision -

Option 1

Building would be cover thru insurance. you can start with insurance company.


Option 2

Sounds like you need underpinning - cost may be $5k -$20k

Not $100k

Option 3

As others said - swap asset!


Before you do anything - confirm with body corporate in writing and get them to send you copy of insurance policy!

 

Standard Building insurance will not cover structural defects.
Marg

 

Agreed - if it has moved due to a burst pipe under the slab changing the soil conditions it might be covered? If it is just earth movement with no insurable cause, then that won't be covered. You should actually read the policy wording to understand what is and is not covered.

Also you should research the exact type of strata plan that you have. In QLD there are two main types, and this would be fully covered by the body corporate in one type, but not the other. The subdivision plan format is crucial information here.

Matt

 

Talk to some local agents. Consider off market sale to test waters. If you can get a quick sale at the right price move forward in another direction. If not, deal with the issues.

Either way a second (or even third) opinion sounds like a good move.

 

....and most importantly focus on mindset to ensure this does not stop you achieving your goals. Most investors have struggled with setbacks and challenges. It's par for the course.

There is always a solution.

 

Were it me (and this is assuming you can do so) I'd sell now and buy something else. As others have pointed out, Melbourne is currently booming - in fact it's the market doing the best by far (according to the ABS's median price data anyway, which has Melbourne on almost 7% annually, despite a widespread slowdown in price growth nationally. See here: 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Sep 2016)

Melbourne still suffers from the oversupply issues facing much of the country, which isn't necessarily a problem in a growing market, but it could very, very quickly become a problem if prices do stall. Apartments and units make up the majority of the oversupply. I don't want to turn you off Melbourne by any means - it is offering some great gains right now. However, it sounds like your current property is going to become a liability, and that further growth you might see could likely be swallowed up by costs anyway.

 

Thankyou all for the advice.
I have obtained a copy of the insurance policy and briefly looked at it - it specifically says it doesn't cover structural issues. In fact, it seems it doesn't cover a whole lot to be honest!
I have had 2 building opinions and both confirm that it is a big job to fix things.

I think I need to sell, its just a matter of when and how.
Do I sell immediately and restart? I'm thinking this is the most sensible as I will know how much cash I have to play with to reinvest. I just feel a little rushed I think, and guilty that the tenant literally just signed for another 12 months (I know I shouldn't but I do)
Do I wait 6-12 months and buy another IP in the meantime with my savings rather than equity release?
Or proceed with releasing equity and purchasing a 2nd IP anyway - seems riskiest option

Lots of thinking and sums to do I think!