Sell now then buy back in later?

[homerjsimpson]

Just looking for a bit of advice from the learned following at Property Talk NZ....

I have a rental property in Mt Wellington North in Auckland and am considering selling while the market is high, then getting back in when things cool off. This is the only rental we have, so based on some rough estimates this will enable us to pay off a big chunk of the mortgage on our primary residence as well. Then spend some time getting savings up and get ready to buy again later.

Current figures are:

Primary residence: value roughly $1M, mortgage $380k
Rental: value roughly $550k, mortgage $420k, rented at $410/week (yield is pretty low, hence the thinking to sell while the going's good). Approx loss is $600/month

So selling rental should realise approx $520k (after costs), which means the mortgage on our primary residence could drop to $280k - monthly payments could drop approx $800-900 / month.

Overall increase in cashflow approx $1500/month and this could increase if the sale price is better - I think I'm being conservative at $550k. It's a 2 bed concrete block unit, 70m2, fully fenced yard front and back, down a decent drive, good privacy etc. Always been very easy to rent out (we've owned since 2005).

So questions are:

1) Anything about the overall strategy that sets off alarm bells? I know it's a risk to get out now as values could just continue to rise, but I get the feeling that the sentiment is the bubble will burst soon (or at least stop inflating!) ?
2) What are current rules on buying investment property with regards to deposits? We'll have good LVR when we come to buy again later but will struggle to get to 20% deposit. I've been out of the game for a bit so not sure where the current limits are, if any.
3) Any other thoughts appreciated!

Many thanks in advance.

[OneStepCloser]

Hi,

May I ask what price you paid for the rental back in 2005? A mortgage of $420k seems high to me as a 2 bedroom unit in Mt wellington should be a lot cheaper back then? Is it really still making a loss of $600/month? If you have own it for 10 years and you are still making a such a big loss, then I would think it is probably good to think about selling. But if the loss is not real (e.g. you have cleverly structure your loan for tax purpose), then it would be a different story.

[homerjsimpson]

Hi,

May I ask what price you paid for the rental back in 2005? A mortgage of $420k seems high to me as a 2 bedroom unit in Mt wellington should be a lot cheaper back then? Is it really still making a loss of $600/month? If you have own it for 10 years and you are still making a such a big loss, then I would think it is probably good to think about selling. But if the loss is not real (e.g. you have cleverly structure your loan for tax purpose), then it would be a different story.

We restructured the mortgages when we renovated our primary residence 18 months ago. The idea was to increase the losses for tax purposes. You're right, I just checked the numbers; gross loss is $600 / month, but net would be more like approx $350 / month. Purchase price in 2005 was $275k.

[Rosco]

Hi,

I would work out your basic situation in say 5 years, just on the rental

Option 1 - Keep
- work out your loss after tax
- Do you have an opportunity to fix at lower rates that will make this better?
- can you put the rent up, as seems quite low?
- So you need to think this through and work out full figures, but could be something like
a) cost $4,200 per year *5 =21,000
b) 5% growth per year (you need to put your figure as mine is just a figure I have stuck in) = 137,500
c) So gain 115,000 approx over the 5 years

Obviously not set in stone, so is a gamble that the gain in value will be more than the cost. So you need to think hard about the likely gains in Auckland next 5 years, and also your risk level

Option 2 - sell and put cash to personal mortgage
$550k less $420k = $130k less
Less legal, commission, possible lost rent, advertising etc Maybe just over $100k left?
- watch break fees on rental, and paying off some personal debt - Might cost $5k??
- Interest saving is $5k per year in simple terms, so $25k over 5 years
- Less break fee $5k
- So maybe up $20k over the 5 years

At this stage if properties go up well in value, you will find it hard to buy back in the market at reasonable cashflow. Your savings would have went to repaying your personal home loan, so won't improve the cashflow on a rental

Which do you want? Your figures in option 1 or option 2? How much are you prepared to risk and gamble to get this?

NOTE - you are talking about improving cashflow. Interest rates have obviously decreased hugely, so surely this is helping in this regard and you could easily now be or shortly paying $8,000 to $16,000 less per year in interest overall. Obviously watch for interest rate rises and have a strategy around this, but your cashflow should be much better than 7-8 years ago!

Ross

[Rosco]

Many would pick Auckland to go 10% per year, so option 1 could be way better
Many will pick Auckland to tank, so option 2 would be way better

There isn't a perfect answer as no one has a crystal ball, but if you looked longer term say 10-20 years, do you see this as a good rental in a good location that will go up well in value? The population of Auckland is expected to grow by 1 million over the next 30 years I think, so what do you expect this to do to property values, rents etc?

Overall it comes down to are you looked for a long term gain in equity and have a strategy, or are you just after a quick gain/speculation (i know you have owned this for years)?


Ross

[PTILoveYou]

As an Auckland property investor myself, I would think the risk outweighs the reward.

Selling now, and hope prices will drop below current value in AUCKLAND CENTRAL is pretty damn risky in my experience!

You should do more research and see what unit prices were in 2006, and compare to the prices in 2009.

Did the bubble really burst in 2009? in Auckland Central?

Also, to speculate like this, what if you get it wrong? There are plenty of people holding up their crystal balls atm.

What if unit prices in Mt Wellington go up another 100k in the next 2-3 years, then drop 10% say 5 years time? I bet it's still higher than now.

But I only got a dozen properties in Auckland, so don't take my word for it.

[artemis]

We restructured the mortgages when we renovated our primary residence 18 months ago. The idea was to increase the losses for tax purposes. You're right, I just checked the numbers; gross loss is $600 / month, but net would be more like approx $350 / month. Purchase price in 2005 was $275k.

That sounds to me like you borrowed to renovate your own home but secured the loan against the rental. Then claimed the increased interest against the rental income. If so, that is not legal.

[Rosco]

That sounds to me like you borrowed to renovate your own home but secured the loan against the rental. Then claimed the increased interest against the rental income. If so, that is not legal.

If done correctly, it is.

Ross

[homerjsimpson]

Thanks for the words of wisdom all. Exactly what I was after.

Good idea to look at it over a fixed future time period Rosco. My strategy has always been for long term gain, and I guess recently I have been blinded a little bit by some of the large sell prices I've seen lately. I think what I'm really after is some improvement to cashflow over the short-medium term, so perhaps I need to be thinking more about what I can do to increase the rental yield. I still think I'm in a good position long term and don't want to jeopardise that with short-sighted greed. It's a good property in a good location, and as I said always been easy to rent - hasn't had more than a weeks vacancy at any one time since we've owned it.

Note that mortgages are all fixed and not due to come off until 2017 at various times. Think I need to be better at staggering things next time they come up. Break fees have been quoted at $9k for rental loan, and the primary residence loan is split in two with one set at $5.7k and the other at $1.8k.

[OneStepCloser]

Hi homerjsimpson,

From what you have said, it sounds like it is wise to hold. I would hold good properties in good locations in Auckland. Especially that you have already survived the 10 years of negative cash flow, and I think you should be getting cash neutral or positive soon if not now (I would consider the re-financing that you have put onto the rental separately as that is really your own spending, in fact, the rental is 'helping' you to reduce your home mortgage by through tax refund. It is easy to let that bias you towards selling a good investment).

BTW, I am a novice investor so just my 2 cents worth.

[Frezzinghot]

Just looking for a bit of advice from the learned following at Property Talk NZ....

I have a rental property in Mt Wellington North in Auckland and am considering selling while the market is high, then getting back in when things cool off. This is the only rental we have, so based on some rough estimates this will enable us to pay off a big chunk of the mortgage on our primary residence as well. Then spend some time getting savings up and get ready to buy again later.

Current figures are:

Primary residence: value roughly $1M, mortgage $380k
Rental: value roughly $550k, mortgage $420k, rented at $410/week (yield is pretty low, hence the thinking to sell while the going's good). Approx loss is $600/month

So selling rental should realise approx $520k (after costs), which means the mortgage on our primary residence could drop to $280k - monthly payments could drop approx $800-900 / month.

Overall increase in cashflow approx $1500/month and this could increase if the sale price is better - I think I'm being conservative at $550k. It's a 2 bed concrete block unit, 70m2, fully fenced yard front and back, down a decent drive, good privacy etc. Always been very easy to rent out (we've owned since 2005).

So questions are:

1) Anything about the overall strategy that sets off alarm bells? I know it's a risk to get out now as values could just continue to rise, but I get the feeling that the sentiment is the bubble will burst soon (or at least stop inflating!) ?
2) What are current rules on buying investment property with regards to deposits? We'll have good LVR when we come to buy again later but will struggle to get to 20% deposit. I've been out of the game for a bit so not sure where the current limits are, if any.
3) Any other thoughts appreciated!

Many thanks in advance.

My advice is don't sell unless you have too, you will regret it!

FH

[Bob Kane]

I have a rental property in Mt Wellington North in Auckland and am considering selling while the market is high, then getting back in when things cool off.

This requires Auckland house prices to drop which, frankly, won't happen.

[cube]

Back when we started, we were introduced to PI by some friends who, after the 2006 prices rises, sold up (10 or so properties) to wait for the market to fall. Then followed the Peak in 2007 and the GFC.

Value of 3-bed box in West Auckland (purchase price $145K, estimated value re-set by RVs and CVs along the way)

[Dood]

Good graph

Back when we started, we were introduced to PI by some friends who, after the 2006 prices rises, sold up (10 or so properties) to wait for the market to fall. Then followed the Peak in 2007 and the GFC.

Value of 3-bed box in West Auckland (purchase price $145K, estimated value re-set by RVs and CVs along the way)

Proof yet again that Auckland prices double every ten years.

[elguapo]

Proof yet again that Auckland prices double every ten years.

They don't.