Sell and take the hit.. or hold

I'm considering selling my IPs at a big loss but wavering .. here's the situation
It's Perth.. property prices have fallen significantly in the last 5 years and there is not much chance of improvement in the next 5-10 years (probably more like 10-15) due to the strategies that intentionally are pushing prices lower on the eastern seaboard and moderate economic growth in WA. There are very few investors in the market but there are some - not for my type of property though. Once they go away when changes to negative gearing impact happen in 2020 there will be even less competition and so drive prices down. i.e. not much hope of an upswing any time soon.

I'm 57, in a reasonably paying job (apprx 160-170k pa) and have income protection insurance

I've got 3 IPs plus PPOR.
The IPs I built as a triplex development, build strata, finished in 2015.

IPs are currently likely to sell for around 80K each less than what they owed for the build, plus selling costs of around 12K each.

• Development total cost 1.1M = 367K each
• Current market likely to sell is around 285-295K average days to sell around 30-60 days (so add in another 3K of lost rent when on market)
• Total selling 290 x 3 = 870 K less 3 x 12 = 36 K selling costs = 834K
• Total loans on IPs = 814K (P&I)
• Plus loan for the development against PPOR 325K (P&I)
• 135K in offset
• PPOR no debt, value is around 550K which is about what I paid for it 8 years ago.

Rents are $310-$320 per week
If I sell, my capital loss will total around 260K - 270K. I have no hope of making that again before I retire.
Given the poor market I would also need to stage the sell off so I'm not in competition with myself, so likely to be over an 18 month period (and as tenant leases come to an end).

Not a pretty scenario

I considered cutting my losses earlier, but I've held on for a couple of years, hoping the "green shoots" that were emerging in Perth would grow, but recent lending and now political changes have killed those better than a bucket of Round-up and it's got worse. Every time you think the market is at bottom it falls. And predictions is further falls for reasons stated above.

My original intention when I built was to hold the properties until around 2025 / 64 years age and sell with capital growth adding to retirement nest egg.. and retire at 65.

I'm trying to decide which is the better way to go.
Assume little or even negative capital growth over next 10 years

If I hold I will have to keep working to at least 65 full time just to cover the cost of holding the properties with maybe another $30K a year to invest elsewhere. The properties will be older and need money spent on them to sell. There is the prospect that in 10 years the market will not have moved much, I will have paid off some of the debt, but I will still take a big capital loss.

If I sell, I take a big capital loss now which I can't recover, but I have the opportunity to invest and grow that money.
I'm finding it really difficult to work out the pro's and con's. I've talked to 2 different financial planners - one being Melbourne-based who really didn't get it when it comes to a RE market that is negative; and the other just wants me to de-risk by selling and paying down debt, and I'm finding it hard to get to crunch the numbers with them.

Rule of thumb is never sell at the bottom of the market, but what is the rule when the bottom keeps dropping .. now at least 2 years since they said we were at the bottom, and with very likely prospect of more downturn. And retirement looming...

Looking for insight and opinions from anyone who's made it through this post (and thank you for reading )

 

Hi mate,

Sounds like a tough situation you are in and I can emphasis with you.

In regards to the Perth market and the potential for future growth I think you are being a bit pessimistic in forecasting no growth over the next ten years. I know we have had a couple of false dawns here but I do believe things will improve in the next couple of years and within 10 years I’m certain you will see some growth.

Vacancy rates are falling fast and rents are starting to rise so your holding costs should begin to fall.

New builds are at an all time low and there is slight population growth occurring.

The economy seems to be improving and the job market tightening plus there are some reasonable mining investments back in play albeit nothing like the boom days.

No one knows for sure if the changes to negative gearing will be made or if they will be sustainable and it looks like a lot of FHB are now in the market which should at least hold things level in the short term if not push them up.

I’m not sure where you IPs are and to be honest there is lot of areas saturated with the triplex developments so you may have lots of competition anyway when it comes to resale.

Be interesting to see what others think but if I were in your situation I would sit it out a while longer and see if the recovery does begin.

Good luck

 

how much is it costing you to hold the 3 properties per year?

 

For you to do the development you would of seen potential, what was it exactly?

As above what are your holding costs and do you have depreciation reports?

 

Are the loans cross collateralized?
How much cash are you likely to extract by just selling one?
What's your borrowing capacity at? Maxed out?
Holding costs per unit?
Depreciation schedules?

 

Firstly, if you sell now you'll also need to take into account GST as the stock is less than 5yrs old. That may make the sums even worse.

I'd look at a few situations dependant on the suburb it's in.

1. hold as per original plan. I do think we will see growth before you predict. It's quite possibly that you would see 5% growth by 2022 (again depends on the suburb). Is it Balga?
2. sell 1, keep 2 and hold
3. sell 2, keep 1 and hold

 

I say hold, I have spoken to a few recruitment consultants, I also have a project manager on a mining site as a tenant. They are all saying they just cant find the staff to fill all the positions available. So I think the market will turn sooner rather than later.

 

So sorry to hear this, I don't like anyone losing money, but at the end of the day its about survival, and logic must come into play for your scenario

The other major issue you may have is your interest only loans reverting to Interest and principal?? that will mean tack on an additional 40% to each loan in repayments . How will this scenario impact on you?

You may be able to service extension of your interest only loans, however under current policy banks will require a full valuation and this is where you will come unstuck

If you are drowning in debt you need to deleverage because its not only the debt but its your mental health that will suffer

MTR

 

I say hold. Have you tried negotiating a lower interest rate? I increased rent on one of my properties by $10/wk at the start of the year. I feel the worst is over with vacancy rates and falling rents. I would keep re-assessing. I feel FHB grants in WA need to be increased for established properties due to the low access to credit over impacting on WA.

 

You cant increase rent when there is an oversupply, you can hope and prey rents don't fall further back and with some luck they wont. Don't mean to be facetious but its Perth

You can also live on hope but that wont pay the debt today, that is the issue. Its gets uglier, if those loans revert to interest and principal you could be royally screwed.

 

You wont see 5% growth if its Balga, it could be further falls, there is so much oversupply of the same product?? Just my opinion from what I am seeing.

 

Agreed, which is why I asked where it was. If it's Balga, Baldivis, Armadale or any of a number of other suburbs then their outlook is very different to if that triplex is in Scarborough/Bayswater/Maylands

 

True! It’s hard to give advice without knowing the suburb. In my case the properties advertised for rent near my properties are advertised at around the same as mine is being rented for for one property and being advertised for about $20/wk more for another property.

Everyone’s situation is different.

Have you calculated how much depreciation you need to pay back with above calculations? Would you consider living in one?