What to do about an under performing IP

In short.
Have had a IP in Qld for the past 9yrs which has not had any growth and has actually gone way down in value.
Purchased for $428k
Loan is IO and due to change to PI in 12 months
IP value is around $325k
Have $185k offset account against ip
Rented for $360 per week
Interest rate 5.26%


Own my PPR with a value of $400k $30k used equity for IP expenses (running cost)
No other debt

I was thinking about paying down the IP by first paying $100k of the principal and then chipping away at the rest with the help of the rent.
I figure if I don't start paying it down I am going to be so deep that I will not be able to get out of it.
Because of new stock coming through and for around $320k I have been told not to expect the value to rise for many years to come.
So is this a smart move ?
Also going to see the bank about the loan structure and ask there advice.Is this a good idea.

Your thoughts always appreciated

 

Hi @fossill

Where in QLD is your IP? If in Brisbane, then you may have bought around the last peak in 2008/2009. Sounds like there is a lot of upcoming supply where your IP is based.

In terms of seeing the 'bank' about the loan structure - the bank will only be able to advise on their products, and likely not investment and big picture focussed. Best to see an investment savvy mortgage broker, who can assist you in getting the structure right, and also assist with clarifying your next steps in line with your goals.

 

5.25% interest is crazy. I think your rental income is not bad, just change the bank because many banks are offering 4.1-4.3%.

 

Thanks Twins
The reason I am thinking of paying it down would be to bring into line or under what the current market value is.
At the moment the difference between the purchase amount and the value doesn't look good for any future purchases,and maybe wont for some time,and into future.
I will still have the same debt and no room to go forward if I sit and prey things will change.

 

Thanks this is one of the things,that I will be seeing them about.

 

Where is the IP?

 

Fraser Coast

 

Rather than go back to your bank and ask for a reduction, maybe talk to a broker and see what is the best rate you can get. Plenty of good brokers in this forum.

 

You need to take a long hard look at this investment.

If it is costing you money to hold, and if outlook for capital gain is poor, you are simply chucking good money after bad.

No advantage really between paying down the loan or keeping the money in the offset.

Maybe time to consider selling?
Marg

 

Think of the opportunity cost.

It is tying up capital which could be used elsewhere. It is using up borrowing power. It sounds like it is actually costing you money each week too.

So it is worth considering whether to cut your losses or not.

But you don't want to sell just before it booms so

 

Who told you value will not increase for many years? and why do you think this might be true?

 

If it were me, I'd take the money out of the Fraser Coast and buy in Brisbane, Perth or Adelaide - three major cities with self sustaining, diverse economies (as opposed to say very, very tourism dependent). These three cities are good examples of areas that just aren't very bubbly right now (note I'm not including Darwin because personally I think it's too bit remote, maybe it's just my impression though). Sydney and Melbourne right now are very bubbly and in any correction will likely lose investment. However, other less bubbly cities could potentially gain from this e.g. Perth is already dropping, Brisbane has been in the doldrums for years. At worst, they're already 'halfway down the cliff' so to speak.

I think Fraser Coast as a regional area has many limitations. Try not to think of loss in terms of "it was worth x and is now worth just xy", and also try not to think in terms of future gains. Think in terms of having a certain amount of capital, and putting it to the best possible use. For all the bubble talk, a few of our major cities right now haven't attracted as much attention, and this gives them potential (in my opinion anyway).

 

Rge The think was to get it low enough so as the rent starts paying.For me just to sell that means I lose the the difference and lose worse than just reducing the debt.

 

Its was the agent who used to handle the rental for us years ago.
I'am taking what he said with a grain of salt.
Are speaking to him a few weeks back,he's now ringing to see if he can advertise it for us along with some others he has for the same price.

 

Its a double edge sword.
To sell I lose,the loss difference has to come from somewhere so that to limits what future purchases I can make,
I like the last word though "Boom" I wish

 

Its a real shame but I have seen many threats like this. Its not only mining towns where property has gone backwards.

 

I'd get out of it now. Take the loss and move on. It's the opportunity loss that will cost you more. Invested in the right place could see that loss gained within 12 months if done right.

We sold one a month ago that was going nowhere. Broke even but had no growth for 8 years. Now that I have the funds an opportunity has come up and all going to plan I'll make an extra 1k in growth per week on this new buy with a reno and growing suburb.

p.s. that interest rate is ridiculous, get it sorted asap with a good broker if you can't bring yourself to sell. That's 1000's a year wasted paying 5.26%

 

It also sounds from your post that your PPOR is crossed with your IP. I would get the whole lot looked at by an investment savvy broker - do not go to your bank, as they have no idea how to structure for YOUR benefit, they only think of their own best interests.

If you want to keep the IP, and depending on your age maybe look at refinancing to a 30 year term P&I, to get a lower rate and also lower contracted payments than paying it off over 20 years, and paying as much into offset as possible - that way you have cash and options. If you pay your cash into the loan itself it can be quite limiting.

It just depends on your longer term plan, but I agree that if you want to hold it for whatever reason, best to get it paying for itself asap.

 

What's your loan amount ATM?

And what percentage is that in relation to the currently loan?

 

Thanks Jess,I think a broker is the go also( i know one just don't trust him ,I spoke to my accountant about the situation today to find out were I would be if I keep or sold,said the same thing about keeping it in the offset.
And yes you are correct it is crossed