Would you accept these figures? To sell or hold??

Hi all,

Looking for peoples thoughts as I am seriously thinking about selling one or two of my properties, however I always considered that I would hold all properties until retirement (or closer to it at least).

I do not think either are necessarily a bad investment. I think that I may be able to do better off elsewhere but not sure if it is worth paying capital gains on. Thinking or either paying down current PPOR loan and sitting on the sidelines for a bit or offsetting PPOR loan and try to pick up some cheap properties in the states.

Bit of background, both in out early 30's with no kids as yet. Reasonable income of 170k and 65k. PPOR and 3x IP's.

Property 1 - Cameron Park
Purchased in 2011 for $431,000
Current estimate $~ 600,000
Loan $350,000 IO @ 4.16%
Renting for $495 per week

Property 2 - Cameron Park
Purchased in 2013 for $500,000
Current estimate early $700's
Loan $478,000 IO @ 4.16%
Renting for $595 per week

I know it all comes down to strategy and personal goals. I guess I am just after a bit of feedback if people would accept these figures or move on??

Cheers for the feedback!

Ardi

 

Do you have a long term plan around what you want to achieve? Do you have a view on how Cameron Park as an area is set to perform in the medium/long term from a capital growth perspective?

Solid 6% gross yield on purchase for both, but more like 4.3-4.4% gross yield on current market price. In essence you'd need to weigh up the relative numbers of these properties vs. other proposed options. As an example I'm assuming your outlook would be for these properties to yield (CG + rent) higher than the return you'd get in your PPOR offset account?

You rightly point out the other important thing to consider being your exit strategy & CGT. One for the accountant to see how you could minimize your liability (they might suggest sell one per FY, or if you are planning kids in future to sell down then with on maternity leave).

Without knowing the rest of your financial position (incomes look good), there is a fair amount of equity there you may be able to unlock that might enable to you make your next move without selling one or both?

 

What's motivating you to sell?

Are you being forced to deleverage in order to move forward?
How much are they costing you to hold (after tax)?

As a side note, Newcastle & Lake Macquarie region experienced 11.7% growth in 2017 for houses, way surpassing Sydney's 2.1% growth. Could there be more growth left?

 

There in cameron park so there brick , low maintenance and achieveing good rents!

Looks like good investments to me. Id be holding forever like your original plan. Only thing its seen good growth from a ripple of newcastle and may not see much more than this for a long time.

 

Personally, I think Newcastle/Lake Macquarie followed Sydney up, and is at risk of following Sydney down. The median household income for Newcastle area is on the lowish side, at approx. $70,000. That's quite a bit lower than the national average and Newcastle, though a very nice place, probably doesn't justify a median house price in the $600,000s.

In the last Demographia survey, for example, Newcastle-Maitland area had a median multiple of 6.6. (The median multiple is the most common and perhaps best bubble measure as it helps compare house prices to median household incomes, and cities tend to sit within or return to a certain range of this ratio on a long term historical basis. It's by no means the only bubble indicator but it's very useful.) Now, the median house price in the area has increased dramatically since then, and it would now be (on a rough calculation) at least 8.5. As a world-wide city comparison, that's actually ridiculous and will quite possibly place Newcastle in the top ten most expensive cities in the world by that measure (certainly the top twenty). It is priced above London, New York, Singapore etc. It also out-prices most Australian capitals.

On the back of Sydney's malaise the area has seen some very rapid interest, and I know at least a half dozen families in the last few years who've bought or talked of investing in Newcastle but they're doing it typically in the hopes of seeing investment growth. Honestly, though, it is an area affected by the same lending and affordability issues as other major areas, and I'd put it in the category of being simply too bubbly to allow for long term stability.

If Sydney sees a downturn, and that's highly likely, the economy will probably go through a recession (hopefully brief). Newcastle as a lower-income area will not be immune and may see significant effects especially in lower-priced areas. Could there be more growth left? Sure, why not. It's definitely attracting some hype. But unlike say Melbourne (the likelihood of a drop there is more debatable), Newcastle does not have the high population growth (Victoria now makes up the vast majority of population growth as of the last census, with NSW on a piddly 1.6% and well below the long term historical average). Newcastle is also unlikely to see sustained income growth. So though it's booming, that boom appears to be disconnected from the fundamentals that typically support strong growth.

Supply is also an issue. There has been a lot of building in the area, attracting mainly investors. Which brings me to the fringe suburb problem. In a downturn, the most at-risk areas are fringe suburbs, especially those being built or built very recently as during a boom they attract lower-income buyers, who cannot afford more desirable areas, and who have high mortgages and thus cannot tolerate negative equity. These areas tend to be poorly established, with less infrastructure, they have few residents paid up on mortgages (as older suburbs do) so far more motivated sellers in a pinch, and they often have large slabs of land owned by builders who as a downturn happens sharply discount to offload blocks. In a downturn, the brunt is always borne by these regions.

You are firmly in a fringe suburb region, and these suburbs can lose popularity very, very fast in a falling market. Your suburb is surrounded by similar properties (so you are competing with multiple similar assets that are by no means in short supply), and most will be heavily financed. If prices do drop, you will be competing with people in a potentially more vulnerable position than those owning in say a long established suburb where owners will just hold on if prices go south. Builders in particular are a risk because you will be competing with them for growth.

There is a reason these areas turned into ghost estates in USA and Ireland. I know that sounds extreme but in Ireland I watched it unfold: fringe suburbs, new estates, were a bloodbath. On a long term basis, these areas also barely if ever recovered, in comparison to established areas that saw a brief "panic drop" and then returned to normal. Many of these estates became so worthless they were simply bulldozed. There was a whole government department more or less dedicated to knocking down abandoned properties in new development zones. So they are far riskier investments than established suburbia. If a lot of vendors in these regions start to sell, you are not only competing with an already high supply of assets (often half-built) but with builders, and if vendors unwilling to deal with negative equity and builders able to cut their losses offer discounts, you will be competing with even more supply.

Now, I am absolutely not saying the area is going to tank, but it does share many similarities with the parts of Western Sydney now performing poorly, and it is easy to understand why Western Sydney is in for (at best) a stagnation. The fact the area has grown so rapidly of late is a bad sign, not a good sign. It means a lot of people have tried to jump on the bandwagon, and the last thing you should look at is past growth stats to determine where or whether that bandwagon will go now.

Something else to consider is you have your eggs in one basket. Your situation is very individual, and macro trends may not be your best starting point. I think it might be a good idea to consider some diversification, including perhaps out of property and into shares. At the very least perhaps think about selling one IP and purchasing in another area. Look for established, popular suburbs, and cash flow rather than relying on capital growth.

 

You are a great poster^^

 

hi @Ardi, you are in good equity and income position.

what are you planning to do next? expanding your portfolio, or wait and see?

transaction costs are high

 

I have been in this situation and if you have properties that are not performing you are better taking the hit now and selling them as you are missing out on properties that are growing in value. I sold 2 poor performing properties and bought one high growth property, best thing i ever did. Looking at your properties though they are making money and renting well so i i fail to see an issue here.

 

I should add, if you sell up you risk not being able to buy again with the current lending landscape. This is a big risk at the moment.

 

Cheers for the comment Morgs. Long term plan is to retire or at least reduce work time by using property income. I think that is the driver for me to either start paying down debts or move into an investment with higher yields.

Thanks for the comment Jack. Not being forced to deleverage, but think we are nearing our borrowing capacity. As per above, more so just thinking of the best way to make passive income from property to substitute income and if the current plan needs to change to get there quicker...

With holding costs property 1 was about $3500 positive last year before tax and property 2 was pretty well spot on neutral.

Have another one in Dubbo that was negative $3300 before tax last year, this will be on the market soon.

 

Greatly appreciate your time and efforts with this reply! Have given me some further food for thought. Thanks!

 

Very valid point that I had not considered. From memory we still have around 8 years IO on both IP's.

 

Rather than selling have you considered harvesting the equity to invest in higher-income producing assets?

Have a poke over at the Other Asset Classes subforum. Quite a few people on the forum have successfully pivoted from property and into shares to derive a retirement/passive income stream.

Here's a couple of blog posts to get you started (Credit to @Snowball):
Dividend Investing - A Perfect Fit For Aussie Early Retirees? - Strong Money Australia
Retirement Income Strategies - Which One Is Right For You? - Strong Money Australia

 

Thanks very much Jack! To be honest I have not looked into it as I have very little knowledge of the stock exchange or investing in it. Also thought that I would need a lot more than the current equity that I have to make it worthwhile.

Time to sit back and have a read over these threads and gather some knowledge.