Selling to minimise capital loss

Hi,

My parents own a freehold property, 4 bedroom house on a decent plot of land with granny flat in Sydney, within walking distance to one of the major transport hubs and shops etc.

The property is probably worth about ~$3m and currently geared such that the interest component on their mortgage is ~$1k per month.

They are in their 60's and looking to retire soon and concerned that with the current market conditions, should prices fall further, their equity in retirement will erode.

Given this, they want to sell, on the logic that they can pay off the mortgage and therefore no longer pay interest. With the remainder of the proceeds they intend to buy a smaller house down the street.

I am trying to convince them this is a bad idea as:

1) Stamp duty on the new house will be ~$120k which alone is ~120 months of just sitting there and paying interest on the current mortgage. i.e. 10 years.
2) If they are convinced their property will continue to decline over the next 5 years, then buying into a new, smaller property also doesn't make sense assuming the same market forces apply to this property. Their current property is fine, well-maintained, in a good location and likely to be linked to the broader property prices in the area.

Absent a lifestyle decision, i advised that based purely on trying to avoid further loss, their strategy doesn't make sense. If continued property price contraction was the driver, their best strategy would be to sell the current property and invest the net proceeds into another asset class and rent instead.

They do not want to rent and like the current house they live in anyway.

The only caveat to my analysis i can think of is that a lower value property will decline by less $ amount assuming the same % decline.

In the worst case scenario, if property prices continue to decline in Sydney over next 5 years and they sell (they would like to retire then and sell to pay off the mortgage and down-size), any loss in market value could potentially be mitigated if they sold the property to me at that time.

I could buy the property for the lower market price at that time and my parents would take a haircut but my logic was at least in that scenario, the gain/loss is absorbed within the family. I hold a more bullish view over the long-term and have the investment horizon to hold on but understand the need for my older parents to liquidate in the near-term.

Does the above make sense or am i giving bad advice to my parents?

 

not sure if my calculations are right. This tell me that have a mortgage of $300k approx.

and they plan to buy property worth $2.4m after selling existing PPOR ?

 

Its their money. If your bullish buy your own place.

Downsizing to take some money off the table isnt a bad idea especially when cgt free.

 

Its not preCGT property is it?

 

The parents really need to consider a few matters

1. CGT ?
2. What is the realised sum after paying off the debt and the tax ?
3. What may the do with it ? eg $600K downsizer contribution to super etc

I would seek personal tax advice and also basic financial advice on some ideas. Then also consider Centrelink assets / income test advice. Its probable they arent going to get a pension and this may identify some issues that could impact later with aged care and centrelink.

Then make decisions about keep / sell.

Your views seem quite conflicted with their best interests. Step aside and allow them to make the best decision for themselves not you.

How generous.

 

Why don't you "gift" $500k for your parents to repay the mortgage.
You live in the Granny flat so save the $120k stamp duty swapping the house and still keep the "family home"

 

Or make a $500k interest free loan?

 

Not sure how big the mortgage is.

Yes they would buy what they can afford with the net.

 

Sure but their reasons for down-sizing were financial, not lifestyle driven (yet) and thought they were saving money.

 

Financial is a legitimate reason. Are you so sure you are right about the market? If it drops another 10% and stays flat for a few years, and in 5 years they really do sell for lifestyle reasons......

 

Your story is missing some key bits of information to be able to give any decent advice.

Can you answer the following:
Is this there PPOR or an IP? (I’m assuming PPOR)

Who lives in the Granny Flat? OR is it liveable?

When are they planning to retire?

When they do retire how will they continue to make repayments? In other words do they have any other passive investments?

In retirement how will they fund living? In other words do they have any savings or assets to sell down?

Can I assume they love the area and don’t want to move far away. Just into something smaller and cheaper?

Is their motive for selling purely concerns with the current market and they actually don’t want to move?

That granny flat could be key to all this. If it’s self contained and liveable and given its location could surely fetch enough rental income to cover the interest on the loan.