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?? On whether to sell rental.

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  • ?? On whether to sell rental.

    Hi, just wanted some opinions on the following: We have a rental property - if we sold it we would come out with $50k, if we put this on our mortgage, and then also topped out mortgage up with an extra $100 pw, (that we are currently topping the rental with), then our mortgage would reduce to just over 5yrs before it is payed off, and then I thought once mortgage free, we could then buy another property. What are your thoughts. I have been thinking as house prices are probably not going to go up for a few years yet, that maybe we would be better off doing this.
    Last edited by K37; 05-09-2008, 04:37 PM.

  • #2
    am I suffering from paramnesia

    or have you already asked this question on Trademe RE message board?


    • #3
      NOthing wrong with getting more than one opinion 67910241 I think,

      no one has a crystal ball at the end of the day k37, I would pick though that in 5 years time both properties will have had a rise in value again from where they are today, (even if it is not significant) I think at present we may get a bit of interest in properties with spring upon us and another small interest rate drop expected later this month and once the rain stops!!! Probably just some activity though rather than a rise in price, but sales will increase, one thing to think of is with your rental are you sure you would get $50k profit from it, (is it taxable< do you have to pay depreciation recovered) I dont know know where you are but most properties are worth less at present (assuming you are committed to sell) than we think they are. so that is something to think of to start with. It is currently a buyers market rather than a sellers, I dont know what equity you have in your own home but I suspect it is good by your coments on paying it off in just over 5 years. Dare I suggest buying a posative cash flow property assuming you can get finance may be a smarter choice. Giving you 3 houses you own including your own home.

      Still you know your situation and if you feel best with your loan paid off so you can say you have a freehold house well go for it I guess, rents are predicted to rise over the next few years though if that is any help so your $100 you are putting in may reduce unless of course you choose to keep it up but pay the balance off your own home loan,

      if it were me I would probably keep both houses and see if I can squeeze more out of my wages and start paying some off my own home loan each week too so you are increasing your equity there.

      good luck


      • #4
        Yes, you are right 67910241

        I have also posted this question on the TM message boards, I'm just trying to get as many opinions as possible.


        • #5
          It was not a trick question

          For a second I genuinely thought I had a case of deja vu.

          I think NZGEMS is quite right; in the long run, inflation pushes up the rental amount, so it would not be impossible to envisage a scenario where even though your property isn't worth much more in 5 years time, the rents have increased so much the property is more than able to be cashflow positive by then.

          So, the things are complicated. You have to take into account all those different scenarios: increasing rents, stagnating rents, rents at first decreasing (as some are suggesting they currently are), then moving back up again. The same thing goes for the house prices, although they may be even harder to predict and even more volatile. 5 years is distant future.

          I'd guess that in 5 years time they'll be a bit higher than they're now. However if you are not confident you'll be able to maintain your ability to keep topping up until then, I'd seriously consider the other, risk minimising option.


          • #6
            Thanks, we have no problems topping

            the rental up, but it gives me a few things to think about.


            • #7
              Hi K37

              You will have noticed from the good advice you have received from gems and 679 that there is a lot more to this question than meets the eye.

              Without knowing a lot more about your situation it is difficult to give advice because each persons situation is different including things such as the location of your current properties, your income, the structure you have set up for your investment and this list goes on.

              An argument can be made either way to sell or to hold and it really is very dependent on your situation, your goals and your risk profile.

              One additional question from me here is this. The rental is being topped up by $100 per week. Now many experienced investors here would have just assumed that you are paying Interest Only, claiming depreciation and have submitted your tax variation so that you receive your tax benefits in your wages.

              Can you confirm that this is your situation as if it is not then we will probably all suggest you do that an you will no longer need to pay $100 per week to the rental.

              If you are then cool. Well done.


              • #8
                Hi, thanks for the advice,

                no we are not paying interest only. We top up $100 because the rent falls short of the mortgage by about $40, and the other $60 to cover insurances and rates. So would we be better of paying interest only?


                • #9

                  How long have you had the property?

                  The reason I ask is that presumably the financial facts are not new - the house has been costing you $100pw for a while, and it has always been the case that if you sold it and paid down existing debt, then you would be able to channel more moeny into your own mortgage.

                  So what has changed? Are you getting a bit jaded as an investor? Is all of the doom and gloom news about the market getting to you? If so, try to remember why you bought the property in the first place.



                  • #10
                    Hi K37

                    yes indeed. you have non deductible debt on your home so you should put extra cash off that mortgage.

                    This is a really lame explanation but it is used over and over, you have goo debt (used to purchase income producing assets which potentially increase in value over time and is tax deductible) and bad debt (which is non deductible)

                    (i know that the home is an appreciating asset but for this example lets keep it simple)

                    So bad debt.....get rid of it as quickly as possible.

                    Good debt..... never pay any of it off while you have bad debt.

                    When you have only good debt and no bad debt......... check out what investment options you have and if there is nothing about that returns better than the equivalent saving of paying off the good debt then start paying off the good debt.

                    Are you claiming depreciation?
                    Have you sent in your IR 23?


                    • #11
                      Hi, we have

                      had the property for just about 2 years. Yes you are right, you can sell anytime and pay off the mortgage, not getting jaded about it really, I think I was just thinking really, if properties were dropping or stabilising for a few years, if financially it would be better to sell and then rebuy after our own mortgage was paid off, especially if house prices weren't going up - but I suppose no one really knows what will happen in the future.


                      • #12
                        Hi Tpr2,

                        thanks. Yes we are claiming depreciation.


                        • #13
                          Yes, definitely pay down personal debt first (if you have any). Then start hitting the rental. You can refinance it later on if you wish to purchase the next investment property.

                          Selling it was a good option last year but it can be difficult to sell now without discounting it significantly, in which case you might as well keep it, if the negative gearing isn't taking you under.



                          • #14
                            So, did you take into account in your $50k that you will (probably) have to pay depreciation back to IRD. Plus the costs of selling and buying again later - commission and legal fees etc. (Yes I know the vendor pays the commission when you are buying but it is built into the sale price.)

                            A couple more questions:

                            Do you have good, stable tenants?

                            Are they paying market rent?

                            Is there a way to increase the rent a bit? A small increase will not usually be enough to get the tenants looking around, other things being equal.

                            Is there a way to increase the rent by adding improvements with a short payback time. A carport is often mentioned as one of these.

                            Can you switch to interest only and plug the principal component into your personal mortgage?


                            • #15
                              I would be even more aggressive in paying off Personal property loan by in effect transferring home loan to rental property as soon as possible. Need to talk to an accountant but in effect rather than inputing $100 of your own cash into your investment I would borrow the $100 for the investment rental and pay off $100 of the personal property loan if possible.