Should we sell our properties at a loss?

Hi All


We have found ourselves to be a bit stuck and would really appreciate your advice on the following matter


We currently have a growing family and the need to upgrade our family home but unfortunately our borrowing power is maxed out and something will have to give.


Current status of our loans are as follows:

• Heidelberg Property purchased in 2014: Paying interest and principal with $298,800.00 owing. ($195,000.00 in offset account). Estimated value is: $650.000.00 to $700.000.00.

• Riverview Property purchased in 2016: Interest only loan of $254,000.00. Estimated value is $240,000.00 which is what the purchase price was. Property is neutrally geared.

• Crestmead Property purchased in 2016. Interest Only loan of $334,000.00. Estimated value $318,000.00. Purchase price was $300.000 and we added value by renovating. Property is neutrally geared.

As you can figure, If we sell the Riverview property and/or the Crestmead property it will be at a loss, which is not a great outcome. However these properties are really preventing us in moving forward and we feel this may be the best solution moving forward despite the loss. The Heidelberg property is our PPOR and has performed much better than the other two. We would be inclined to keep this as a investment property and purchase something more suited to our family.


We understand that property investment is for the long haul which was also our intention. Unfortunately we didn’t think things through which we will now need to face the consequences of.


Many thanks in advance

 

Is there an option to extend your current PPOR in Heidelberg rather than upgrade (sell and buy again?)?
There are selling and re-entering costs in upgrading too, could even amount to 8%-10% in total?
And since you have the cash sitting in offsets you could easily access some of these funds, the issue would be whether then you can manage your cash-flow?

 

I'd probably sell Heidelburg for the following reasons
1. it has very little debt on it so not much interest you can claim against the income on it when if it becomes an IP
2. it's a tax free asset being your PPOR
3. it's an added complication tax wise turning a PPOR into an IP

That being said I don't know the other 2 markets and it might be worthwhile selling one of them in addition to Heidleburg if they are not going to increase in value.

 

You have to enjoy life and this is probably holding you back. You could sell, take a bit of a hit, restructure things and start investing again with add zeal, debt recycling your way ahead.

 

Have you found something to upgrade to yet ?
Its all well and good to want to upgrade, but until you have an idea of how much you may need it is all a guessing game.
If the IP's are neutral, how will your borrowing power improve by selling them (at a loss) ?
Can the growing family manage for a while longer, or is there an expectation (Smith and Jones's).
If you do need to upgrade/expand, selling Heidelberg is likely the only option....

 

THIS!

 

On the other hand, if you decide the Heidelberg has the best capital gains prospects in the years ahead, you could sell the two other IPs, pay out the debt and be left with one property worth around $675K, owe $299K and have $145K in the offset (allowing $50K overall loss on selling the IPs).

This will give you a solid base for the purchase of another PPOR.

It is up to you. Sometimes you have to take one step back to move two steps forward. Selling a better property to keep two ordinary ones may not be the best in the long run.

Always look forward, not back.

I only know Crestmead, an outer suburb of Brisbane in Logan. It is hardly a blue chip area and future capital gains should be in line with Logan averages, nothing out of the ordinary. It won’t cost you much, equally it probably won’t return you much.
Marg

 

Because neutral is based on the rate you are paying, and borrowing capacity is assessed at a higher rate.

 

Just curious, which lenders have you looked at in regards to your borrowing capacity?

 

Many thanks for all your advise, its much appreciated


MWI – Thanks for your comments. It is a great suggestion to extend rather than move. Unfortunately an extension is not an option. We did look into this and also spoke to a builder but unfortunately there is not much scope for it.


The Y-man – Many thanks for your comments. We do have profits in the Heidelberg home if we sell. I guess our hesitation with selling that property is that we feel it will perform much better than the two others as an investment in the future. We feel it may be better to sell the Brisbane properties, loose 60k but move forward with a blue chip asset being the Heidelberg home that we think will outdo the two other properties moving forward.


Westminister – Thanks for your advise. We completely agree with you and its definitely some points we will take into consideration when making our decision. Our only concern is that if we sell Heidelberg we will be selling our best performing asset which we believe will perform better than the Brisbane properties moving forward. We took a bit of a chance with purchasing the Brisbane properties and to be honest we don’t know the market there either. As a result We are thinking if we may be better off taking the loss with the Brisbane properties and move forward with something we know will do well in the future.


Terry-W – You are correct. We feel the Brisbane properties are a liability to us despite being neutrally geared. On top of that we had a bad luck with tenants resulting in a fair share of stress. Could you please advise what Add zeal is? Also when you say debt recycling, are you referring to being able to offset the loss for future capital gains?


Stoffo: Thanks for your advise. We haven’t found a new home yet. We have however spoken to a broker and our accountant and we know that its not the cashflow that is an issue but our borrowing power. Basically we have been advised that we have two options if we want to purchase a larger family home. 1 being sell our current home in Heidelberg or 2 being sell the two Brisbane properties. We are currently in a small two bedroom home with one 2 year old and another on the way. We have outgrown our home a while ago but didn’t really want to face this situation hence have been putting it off.


Skater: Thanks your comment. Its been taken on board!

 

Marg – Thank for your comments. You are taking the words out of my mouth as this is exactly my thoughts. I rather cut my loss with the Brisbane properties and move forward with a property that has and will most likely perform better in the future. Its hard to take the loss initially but we have to do so in order to move forward.


Lindsay_W – We haven’t approached any lenders at this stage but just ran the figures with our broker.

 

this might be worth a read

Strategy: Sell a property - 10 reasons to consider selling Strategy: Sell a property - 10 reasons to consider selling

 

Sorry, I didn't mean which lenders had you approached rather which lenders had you/your broker checked serviceability with> but that's ok, if you're using a broker I'm 99% sure they've tried Pepper, Liberty etc and deemed that you do not pass with any of those second tiers.

 

I didn’t comment on the Riverview property as I was not sure which state it was in.

If it is Qld, near Ipswich, then my comments regarding Crestmead apply. Riverview is a fringe suburb of Ipswich, formerly mainly housing commission, again, far from blue chip.

Both Crestmead and Riverview are fairly low socio-economic areas and it is hard to see them being stand-out performers in the future.

If Heidelberg is in a good area of Melbourne (I don’t know Melbourne we’ll apart from around where my son lives), it sounds like a much better long term hold.
Marg

 

Terry-W - Thanks for sharing, definitely a great read. I don't see any reference to debt recycling though and I am curious to know how we could benefit from this. If you care to elaborate it would be much appreciated.

Also, I am curious to know seeing that you are a tax lawyer, would you sell the Heidelberg home as well as the Brisbane properties or just sell The Brisbane Properties, take the hit and move on? Your advice is much appreciated


Wylie – Many thanks for your input. I think we definitely would not mind waiting it out for a few years if we believed the Brisbane properties would have potential for growth. Unfortunately judging by our conversations with a few property managers and sales agents in the area it sounds like the market is very flat with no predictions of any movement within the next few years. We are not local so to be honest we wouldn’t have a clue knowing if this is true or not, but we feel that waiting for the market to move may very well be a bit of a gamble as it could also drop leaving us even worse of. Kudos to you and your family for sticking it out in a two bedroom with 3 children I love to say I could do the same but think there is a better chance we would kill each other by then lol.


Lindsay_W – No Worries thanks for your comments. I will make sure our broker checked serviceability with the lenders you mentioned.

 

Marg – You are right – One of the properties is located in Riverview, Ipswich which is very low socio-economic area while Heidelberg is a nice solid performing suburb about 12 km from Melbourne CBD.

I have no doubt that the Heidelberg property will perform well in future, I just regret that we ventured out and bought interstate rather than stick to areas we know well. I guess you live and learn.

Many thanks for your inputs

 

This is debt recycling though I didn't label it as such:

e) Use proceeds to pay down non-deductible debt

Selling can allow for great debt recycling by using the funds released to pay off the non-deductible debt and then reborrowing for a new property. See

Tax Tip 28: Selling an IP to pay down non deductible debt Tax Tip 28: Selling an IP to pay down non deductible debt

 

I don't know enough to make a suggestion and don't advise clients to buy or sell. Just the consequences, and leave it up to them