Should I sell expensive house & buy outright PPOR

Some of you may have seen my earlier post that I split up with my partner and am struggling with a giant mortgage on my own.

My dream/values are telling me to do anything I can to hold this property for future gain, flexibility (can potentially get value uplift through developing/subdividing - possibly later in life having a GF available to my kids or elderly parents, second income stream), etc...

but one option I am weighing up that can't seem to shake its way from my head.

Do I sell my expensive property to unlock cash, and buy a smaller, cheaper property outright to live in - debt free?

Current property - freestanding house, 2 titles, 3km from Syd CBD - $1.6m value; $1m owing = $600k equity. Rents for $900pw.

If I sell this ^, then:

New property - $550k; small unit (strata will $), buy outright, pay stampduty etc and live mortgage free. I could even take out a loan of say $100k and pay it off very quickly (couple of years).

This then frees up my cashflow to do anything & everything; can start my own business (have a gap where I can do without my job income), not be so worried about debt...but, the future CG potential - a lot lower; meanwhile the market might move and I never be able to afford a freestanding house in this area again. The other downside is that it will be really tiny, and I may repartner and then guess I would need to rent the new property out.

Alternatively I could get the $550k place using debt and then buy numerous regional IPs (positive cashflow) and try and pay them off...

Is there some type of financial advisor I should see for this kind of stuff?

Appreciate any ideas!

 

Best not to pay cash generally as long as you can get a loan. Fully offset it until deciding to invest and then debt recycle at owner occ rates

 

I can appreciate that it would be a better outcome from a cashflow perspective - because ultimately by trading down you're living in something cheaper.

However long term - does the exercise justify the transaction costs? What is your growth projection for this vs. a strata titled unit? Is there anything else you can do to to help with cashflow in the current situation? e.g. rent out a room(s)? Have you done the numbers on holding it as an IP and renting for a few years?

Not advice of course... just ideas

PS: Curious to know what sort of property is 3km from CBD on 2 titles at $1.6m?

 

So much less upside in the unit, seems crazy to me

 

It's probably difficult right now, but try to think about where you might be in 5 years, 10 years, 15 years. Try to picture each outcome at those various points in time and where your life may take you. Use this to reflect on the outcomes of your decision and also use it to help give you goals and to plan for the future.

 

not sure if CF wise, this is possible after hold cost plus maintenance/repairs

 

(older head putting in 2c worth);
Being laden with a big mortgage and house-bound with no lifestyle or fun tickets?
SUCKS.
Been there.
Yes, the property might be a future gold mine, but you could get hit by a bus tomorrow.
You can always tap into the equity of the next place you own outright, and invest in a different gold mine later, without the hit to the pocket.

 

Equity is only $600K. Assuming you're happy in your current location, what/where would you buy? There are also hefty entry and exit costs - agent fees, stamp duty etc....money you don't HAVE to incur.

Put simply, there is NO way I'd consider selling what you have - that would be an act of absolutely last resort. I would probably try and divide the property in two and rent the other half out or just move out and rent something smaller/cheaper in a suburb of your choice.

 

This is the age old arguement
Yesterday's, todays, tomorrow's and a few more years sacrifice doesn't seem worth it
Yes it will be a struggle, like climbing Everest
But hang on for a long as you can
Because one day you will look back and regret or celebrate your choice
With low interest rates and chipping away at the debt it won't take long before you will be looking at all that equity thinking "what sort of IP will I buy"
( not advice, but I am holding for 9 more months, then reviewing the market )

 

Great advice everyone, thank you. The bad thing is I am quite stressed financially which is not going to make it easy to get a clear head for important decisions.

Well, of course I feel like money flushing down the toilet, I bought two years ago, stamp duty was $80k, I got a really good price, agent commission will be $30k and any 'profit' is eroded by these hefty entry/exit costs; a new purchase will then have ~40-50k stamp duty again.

In the area I want to live (which is the govt school catchment I deliberately bought in), I imagine unit growth will be half of freestanding house...

Yes I can improve cashflow by renting out a room, saving hard, getting a side hustle, there are a few options. Uncomfortable but in desperation like this I do have ability to roll up my sleeves and make it happen.

Converting back to IP doens't really stack up, by the time I rent somewhere else and pay all the land tax, etc its roughly the same net financial position, so may as well stay living there.

really good advice. I hope in 5 years I will be re-partnered and potentially on two incomes servicing this loan. My kids will also be in high school so will have utilised the address in catchment to get in.

10 years Sydney will be crunched by population, congestion etc and I will really enjoy being so close to the city. Kids will be teenagers and can benefit from the location/access to friends/public transport/etc quite easily.

15 years - kids will be gone (probably), I will want to be close to family etc.

Basically everything leads to me wanting to keep holding the house provided I can hold on for the ride......

I love the suburb/location/everything about it which makes it so hard. I would buy a 40-50m2 one bed apartment in the same suburb if I was to sell the house, kids would sleep in the same bedroom or living room (I have them 50/50), yes doesn't seem great/permanent but the aim would be to then save and save, and not have such a tight cashflow problem. We will need to be out most of the time in parks etc because the kids are very active.

I imagine if I sell it I will look back in 5+ years time thinking omg why did I ever do that, it's now worth $X? are you serious? If I hold it, I'll be sitting at a bar saying to my friends in 5-10 years time saying I was so lucky to have bought before the market rose again, or say that I own a house and they will be like 'wow - a house? as in freestanding?' because it will be largely out of reach for a lot of people in the future...

This is also true.

I earn good money from my job, about $150-170k a year, but then if I could lower my mortgage obligations substantially, I'd love to quit and start my own business up, which obviously would take a lot of capital/loss up front, eventually break even and hopefully go on to grow and get me higher income than my current job. Whilst having the giant mortgage, that is not an option at all - dreams have to stay on hold, probably until I re-partner and have two incomes to work with.

Well actually 4.5km to Sydney GPO as the crow flies...I'm a bit optimistic with my 3km quote. The second title is literally a 'slither' of land...its only 50m2 and 2.5m wide....so development of a dwelling on it is 'challenging' to put it mildly.... when I bought it there were giant trees on it and I had to lobby council to finally achieve approval to remove them (they were damaging the houses), which has hopefully unlocked value in this second block of land.

 

On an income of $150-170k a year, that's $110K after tax.. the interest on your $1Mil mortgage should be about $31K... that leaves $79K change to cover living expenses. Do you have very large living expenses that leave you financially struggling ? Have you tried switching from PI to IO to help keep up with repayments if needed ? Park any spare savings in offset to save on interest bill while deciding what to do ... ?

I'm not sure about relying on finding a romantic partner to help pay off the debt ..... it could turn out back firing and you could potentially having to split/loose the home too down the track if a separation occurs ...

 

Have you considered renting out the house and then renting out a much smaller unit for yourself?

Will increase your cashflow immediately and you don't lose out on capital gains potential, you could always try it out for a year and test your options without making any long term commitments.

I think if you really don't have to sell it, then don't. Your future self might regret it.

 

The argument for selling is that you can re-set and ultimately get a much larger INCOME . Buy a cheaper, smaller PPOR outright. Enjoy being PPOR mortgage free . Build an INV property portfolio using the equity in the unencumbered PPOR. Set it all at P&I and pay it off. Live a very comfy retirement with handsome income streams. The sum total of the growth across the entire portfolio and the income it produces will probably far outweigh the sum total of the growth on one property - even a very good one

The argument against selling is that you are wasting all that capital growth potential. But not selling means that you have to stay in the current home with the large mortgage, hope you can hold on and service it . You will pay it off eventually, and you will have to hope it makes you a mint in equity/growth. And you know, it may grow a lot. It may make you a motza in growth. But you certainly won't be building an INV portfolio because holding that amount of debt will kneecap your borrowing capacity. So you might end up with a great, unencumbered home, but your income for retirement is going to come from where? Super? Pension? Selling the PPOR ?

It's a common conundrum... but only you can decide whether a lot of non income producing equity in a PPOR asset is more important to you than a lot of income producing assets . if you have other sources of income to fund retirement , holding onto the current PPOR may be more appealing. It allows you to hedge both ways without worrying about how you'll pay for retirement. But if you think your super isnt going to cut it , selling up and building a much better retirement position for yourself might be more appealing . It allows you to put a plan in place to ensure you arent equity rich and cash flow poor in retirement . Also a very common conundrum.

#choiceschoices

 

Net per week I earn $1600 / week (after child support)..so after mortgage (-$1100/wk) and -$500 a week on expenses (groceries, bills, car, transport, house running costs/rates insurance etc) there is =$0 left

Yeah, doesn't stack up due to land tax eroding most of the returns on the house...

Really interesting considerations. I am 35 y/o, have $150k in super and my super grows about 20k a year from its earnings + my employment income at the moment. At current rate assuming my income/contributions are at roughly their ceiling (hopefully not!) but I'd hope to have $1.5-2m by 65 years old in super based on this existing trend. Which probably needs some attention as well !

 

It sounds as though super is tracking nicely enough. And remember, your capacity to accelerate it will probably improve as you get older, because it's reasonable to expect that wage increases will come over time, kids move out, mortgage gets paid off etc.... although that's going to be 15-20 years away at least so you will only have @ 10 years or so to have a red hot crack at your super.

What I was trying to point out is that it's important to look at the end goal./end prize of what you want from life - now and later - when you look at these sorts of decisions.

My personal view is that too many people have ended up asset rich and cash flow poor as a result of failing to build income streams. Just take a look around at today's generation of retirees - well, take a look at any generation actually. But especially people retiring now, or recently retired. They have ridden 30 years of the greatest capital growth in human history, yet often they are forced to have disappointingly "tight" retirements where money isnt as available as they'd like, because other than a house ( and it may well be a lovely house, a 1,2 or 3 million dollar house) they have little else.... Just something worth considering when you think about you want out of life - now and later

 

If things get really "tight" have a chat to your loan institute, or just skip a couple of payments
Then take the nasty letter to your super fund and claim hardship
It could make enough difference to save your home

 

I would actually love to do that, of course not great for my retirement but i'd take a punt on being able to get my super back and use the money on the house... but, I looked it up and apparently you can only access a maximum of $10k in a year? Early access to your super

 

but then you'll have less super remaining in retirement years and won't be able to live on equity from your own home unless you downsize...which doesn't sound like something you'd want to do according to your posts.

 

That's alot of child support .... how many children do you have ? If they are close to 18 then perhaps you could buckle down for a few short years and endure having some housemates or Air BnB letting to help pay the mortgage as the others have suggested. Once child support is gone then there would be more surplus funds to pay off the mortgage if you are very determined to keep the house.

Can you get a side hustle or pay rise to help cover the mortgage cost and maybe switch to IO if things are tight? Can always stash surplus funds in offset to save on interest and keep as emergency cash etc ...

 

I looked at mine years ago, and also my health fund costs.
So I cancelled my health fund at 21yo and put all those funds into paying off my ppor mortgage, that after 6 years (with smashing it with other funds also) built up a bucket of equity, allowing me to buy an investment property, then a second.....
By 10 years I now have my ppor paid off, with more than enough investment equity to A, look at retiring 10 years early, or B pay for serveral heart by pass surgeries and multie other possible health issues and still retire early.
Basic superanuation is for people who can't save or have low incomes !