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Would selling this IP hurt my serviceability?

Discussion in 'Property Finance' started by drg86, 8th Jul, 2016.

  1. drg86

    drg86 Well-Known Member

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    Bit of a question for the brokers and those who understand lending calculators.

    So, I plan to sell one of my IP's mainly to gain funds for my new PPOR build next year along with other things such as the high cost and no growth in 7 years. Seems straight forward but I want to run it by you guys to see if it will have any affect on serviceability as my rental income will drop once it's sold off.

    Some numbers:
    Loan on property 86k @4.48% P&I
    Property value 270-300k
    Rent $290/week self managed
    Costs loan repayments $115/w + Strata/rates/ins/mait/water $108/w = $223
    So $67/w positive before depreciation

    Assuming I can clear 270k after sale costs, then pay out loan, leaves me with about 184k to put into build.

    My income reduces 15k/year (BAD), and my debt reduces 86k (GOOD), does serviceability go up or down after this? This is the bit I get confused with:confused:

    If sold I can borrow 184k less for the new build saving me 203/w or 10,556/year @4%
    Build cost will be about 350k so will be needing about 170k construction loan on top of my own funds.
    Also, much better to have less debt on the PPOR, use that equity later for more IP's.

    Thanks
     
  2. tomlemke

    tomlemke Well-Known Member

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    Was this the one at Forster ? If so I be defiantly put my money else where if you see a better opportunity.
     
  3. drg86

    drg86 Well-Known Member

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    Yeah mate it is. Can/will definitely put the funds to better use now.
     
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  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It would reduce your borrowing capacity a little - bu unless your servicing is already really tight it shouldn't be a huge difference.
     
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  5. drg86

    drg86 Well-Known Member

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    So an update for others who are interested in this.

    I was able to have a quick chat to a lending manager friend this morning and he ran the numbers though for me.

    As it turns out I can borrow more if I keep the IP, however, the difference was only 20k in my situation. I'm much better off selling as the difference in what I would actually need to borrow between both scenarios is way more than 20k...

    Don't sell, need all 350k lend for build
    Do sell, need only 170k lend for build

    If I was buying another IP it might have been worth keeping as I would have a higher borrowing capacity and use equity etc, but since it's a dud IP and I'm building a PPOR, sell is the winner here.
     
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  6. Dean Collins

    Dean Collins Well-Known Member

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    Why would you go through the cost of stamp duty/legal fees/ brokerage fees for selling the current IP etc again etc, if this is paying for itself then why not hang on to it?

    How much capital growth have you made in Forster over the past few years?

    What percentage of vacancy have you had? / any issues with finding tenants or pretty much a good earner the entire time you've owned it?
     
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  7. drg86

    drg86 Well-Known Member

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    A few reasons:
    1. The opportunity cost of keeping it is the big one. I will make more equity next year on the new build than this IP will make over 15 years.
    2. If I don't sell it I can't afford to build = block of land sitting there with holding costs for years and no income from it. Also can't turn current PPOR into IP for income.
    3. There is a lot of cash tied up in this place, yes it is equity, but equity can only draw 80% if I sell I can take 100%
    4. It was originally a PPOR so I paid 2/3 of the loan off. Not good now from a tax point of view that it's an IP. Rather have a smaller loan on PPOR and large 105% loans on my IP's. Good debt vs bad debt. I was a young 22 year old and didn't set things up the way I would now.
    5. There is no growth for 1 bed apartments. At purchase in 2009 it was valued at 315k, I bought it for 270k, bargain well below market val and then... Combination of market/GFC the following year and some mortgagee sales in the building going for 180k significantly hurt the value. I will be lucky to get out of it for what I paid 7 years ago, will likely be a loss so no CGT upon sale.
    6. Very small stamp duty on new purchase. As it is land it is already reduced amount (compared to existing house), then with the new home build grant taking another 5k off stamp duty we end up paying about $600 in the end.
    7. Rent has gone up $20 over 7 years. Not even keeping up with inflation.
    8. High cost of strata. The cheapest property in my portfolio but the highest cost.
    9. Yes the cash flow is positive/pays for itself but that's only because loan amount is so low.
    10. Building getting older, was just hit another $400 on top of quarterly body corp fees to replenish sinking fund.

    There's more but that will do.

    How much capital growth have I made in Forster? Big fat ZERO. Houses in the area have had a good jump but a 1,1,1 apartment doesn't get the same treatment.

    Majority of time it has been tenanted. Did have a 4 month vacancy once and a few weeks here and there. Current tenant just signed a 12 month and has been good. I've flipped it between permanent and holiday rental as it is fully furnished.

    At the end of the day if I keep it I can't afford to build.
     
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  8. Dean Collins

    Dean Collins Well-Known Member

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    thanks for the list, sounds like you've thought it all through.

    I know the Forster area as have relatives there and very surprised no capital growth as seems to be a lot of development happening/great area to live every time I visit.
     
  9. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    But lots of development means existing is harder to sell....
    A 1/1/1 in that location does not have wide appeal as it might in an inner city capital. Wrong product for the location.
     
  10. drg86

    drg86 Well-Known Member

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    Yeah nice area and all but it is really a retirement town and the demand is for houses and villas. The council and older residents of the town have held it back from the growth it could of had, good for the town in a way but not for the investor.
     
  11. See Change

    See Change Timing Lord Premium Member

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    We have a place Sl further down the coast . I know prices in Great Lakes have gone up . If the wave hasn't hit Forster , I would have expected some movement soon.

    We've had around 40 % increase in north arm cove since we bought close to four years ago and most of that would be in the last 18 months .

    Lots of people cash up in Sydney and move north .

    Cliff
     
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  12. drg86

    drg86 Well-Known Member

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    The wave has hit the area, but only for houses/villas. Would agree it has been the last 12-18 months. There is lots of cashed up people from Sydney hitting the area for a see change;)

    The problem was some 1-2 bed apartments experienced a 50% loss after GFC so anyone who bought before that needs to see more than a 50% rise just to be back in front.