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  1. #1
    Join Date
    Jul 2005
    Location
    Waitakere, Auckland
    Posts
    78

    Default Rent or Sell? Advice needed!

    Hi there!

    My partner and I are a young couple and are totally new to IP. Less than four years ago we were renting ourselves but, as rents were on the rise, figured that buying was a better choice. We managed to scrape together a 10% deposit and bought a 3brm house in West Harbour, AKL for $145K.

    Our family has grown and the house is no longer suitable for our personal needs. Recent valuations by local real estate agents put the current market value at $250K - $255K. Our mortgage is currently $127K. Our family income is $56K pa. The capital gain on our property would give us quite a bit of equity to work with when shopping for a new home but, given our income, we don't think we can afford a giant mortgage on a new home - would need to borrow over $200K and the monthly combined cost of mortgage repayments, insurance and rates would be quite high.

    We have discussed several scenarios but our lack of experience makes it hard to know what the "smart" decision is or even where to go for advice. We could:

    - Sell our home and buy another to live in. We definitely want to live in this area.

    - Sell our home and invest the capital gain elsewhere.

    - Use our home as an IP and rent another house ourselves until we can save equity for a new home. (Are you always better off owning the house you live in?)

    We are good at budgeting etc. but otherwise pretty financially clueless. They say it's better to ask a dumb question than make a dumb mistake though. So far we have spoken to a mortgage broker, real estate agents, our bank etc. It would be great to get financial advice from people who have no financial interest in our decisions though. We do have an appointment coming up with an accountant who we hope can advise us on IPs and tax etc. What questions should we be asking? Any advice would be greatly appreciated.

    Thank you.

  2. #2
    Join Date
    Nov 2004
    Location
    Christchurch
    Posts
    163

    Default

    Have a look at this discussion currently going on:

    http://www.propertytalk.co.nz/postt3497.html

    A few questions: What rent could you get for your place?
    Are you to manage the property or have a property manager?
    How much are you willing to spend?
    How much are you comfortable putting towards a mortgage every week?
    Is renovating/ extending your existing house an option?

    I'm in a similar position - I have put tennants into my house - am currently house sitting while looking to purchase.

    By my rough calculations you could refinance your existing home for about 73k, which will be sufficient for a 360K purchase at 80% lending. The thing that will hinder this amount is your total income (for serviceability). As a general rule banks consider 70% of the rent as income. Please confirm this with the bank though.

    regards,

    chemill

  3. #3
    Join Date
    Jul 2005
    Location
    Waitakere, Auckland
    Posts
    78

    Default

    Thanks for the advice and link.

    [What rent could you get for your place?]

    I spoke to a property manager yesterday and, after giving her a description of the house/property, she seemed to think we could get $300 - $320pw. IMO we should be able to get a very least $290pw.

    [Are you to manage the property or have a property manager?]

    We still want to live in the area and I only work p/t so we could manage the property ourselves. As we are totally new to IP do you think it would be better to use a property manager?

    [How much are you willing to spend?]

    Good question. We are still in the process of figuring out what we can afford. We have three children and our current income allows us to live fairly comfortably and save for emergencies etc. We do not have a large amount of disposable cash though.

    [How much are you comfortable putting towards a mortgage every week?]

    If we are living in the house probably around $325 (excl. rates and insurance).

    [Is renovating/ extending your existing house an option?]

    The house is in very good condition and we plan to paint/paper as well before putting in on the market - for sale or as a rental. We are on a xlease which is 800sqm in total so our section is roughly 400sqm. We could extend but not by much because of council bylaws. Real estate agents have told me that if we extend we would probably not get back what we spent if we were to put the house up for sale now.

  4. #4
    Join Date
    Jun 2005
    Location
    auckland New Zealand
    Posts
    5,236

    Default

    Hi Ameera, if you like your house and the area my advice is use the equity in it to buy positive cashflow property. All you ever want with property is access to your equity to have it making money for you. No need to sell to get access to it. If you need more help there's truck loads of info here or you could contact Andrew King, Keiran Trass or myself. We all provide mentoring to investors

  5. #5
    Join Date
    Jul 2005
    Location
    Waitakere, Auckland
    Posts
    78

    Default

    Dean,

    Thank you for the reply. Spent the whole day yesterday browsing the forums on this site and also had a look at your site. There is such a wealth of information out there that I hardly know where to begin.

    We do feel better about keeping our property and turning it into a rental. All of our equity is tied up in this house so we are pretty nervous about making the wrong move and ending up back where we were a few years back - renting with no equity. The Westgate area is going through a lot of development so we have wondered if selling without buying here would be a mistake. On the other hand, does it really matter if you don't own the house you live in? If we invest well elsewhere we may be better off renting. Any thoughts?

    Does +cashflow from a rental necessarily mean taxable income? Forgive me if it's a silly question.

    Thank you again!

  6. #6
    Join Date
    Nov 2004
    Location
    Christchurch
    Posts
    163

    Default

    Crikey! you are almost descibing my house. I purchased 150K, tidied it up - valuation 240K, and I've put tennants at $300/wk.

    Ok, based on your 145K purchase I would expect you'd get about $4000 /yr profit from rent. But check this: take rent and multiply by 50 weeks (two weeks vacancy) subtract off expenses (mortgage interest, rates, insurance, maintennace allowance, legal/accounting, other?) - what you are left with is a yearly profit. This profit can then be applied to your new house mortgage.

    Now if you sell your house, you'll pull out about 100k (allow for real estate fees, legal, etc.). This 100K will be applied to your new mortgage reducing the interest bill by $7600/yr (at 7.6% interest - westpac 5yr fixed rate).

    On the face of it selling your house looks to be better - but what about capital gains? At the value of 255k you only need 1.5% growth to break even - Note: you will still have to front up with the $3600 difference interest (7600-4000) per year from your bank account.

    The next thing to think about is structuring your mortgage. The interest on your rental is tax deductible, your home is not. So load up the mortgage on the rental (decreases home mortgage) the interest bill coupled with depreciation (you need a valuation with chattels breakdown) you'll turn your rental profit into a paper loss and you get a tax refund - how much I'm not sure - probably not $3600 though.

    So in summary:a) rent your house out for $4k profit per year plus capital gains (capital gains don't put food on the table in the interm)
    b) Sell and reduce your interest by $7600/yr

    Run through the numbers and see what you get - my figures are guestimates and are highly inaccurate.

    As for being a property manager - go for it, but do it properly. Go to the tennancy tribunal website for all the info you need to know.

    Here's a started for you

    Chemill

  7. #7
    Join Date
    Jan 2004
    Location
    Whangarei
    Posts
    5,867

    Default

    Hi Ameera,

    Another thing to consider is this; How much cashflow are you prepared to lose for some extra space? Is it really worth the extra $100k ($7500/yr interest) that you'd have to spend to get it?

    Of course, if you have 8 people in a small 3 bed house then I can understand that it would be worth it!

  8. #8
    Join Date
    Jun 2005
    Location
    auckland New Zealand
    Posts
    5,236

    Default

    Hi Ameera
    On the other hand, does it really matter if you don't own the house you live in?
    Short answer is no. Whatever gives you the best debt servicing and loan to value ratio is the best decision from an investing point of view.
    You will get lots of different opinions and they are all kind of right. For you personally you need to define clear goals for yourselves and that will enable you to answer some of these questions. For example if you decide your goal is to aggresssively invest in property so you can retire young and rich tehn you need to talk to a good mortgage broker and let them advise you on the best way to deal with your current property to maximise your investing power. If on the other hand you're not in a hurry and just want to "do the right thing" then it really doesn't matter what you do with your house, as long as you set yourselves up to be able to access the equity in it.


    Does +cashflow from a rental necessarily mean taxable income? Forgive me if it's a silly question.

    No question you don't know the answer to is a silly question. In todays market and prices you will be safe that any property that is positive cashflow pretax will also show a taxable loss after depreciation etc. In fact generally owning property will significantly reduce your presonal tax as long as you structure it correctly

    Thank you again!

  9. #9
    Join Date
    Jul 2005
    Location
    Waitakere, Auckland
    Posts
    78

    Default

    Thanks for the replies!

    Chemill, thanks for the info. At this point renting this place out looks like the best option.

    Dave, good point. We don't really want to borrow an extra $100K just for a little extra space - and it wouldn't be much if we were to remain in this area.

    Dean, I love the sound of "aggresssively investing in property so we can retire young and rich". Can you recommend a good mortgage broker? I spoke to the one we have been dealing with lately (referred by a RE agent) but I am under the impression that she thinks it would be a better idea for us to have a wopping mortgage on our PPOR than to rent ourselves, use our current PPOR as a rental and possibly purchase another IP sometime soon. I have asked her to let me know how much more we could borrow towards a new IP and she will be getting back to me next week.

    Am still trying to get my head around the basic concepts of property investment so will get busy reading and will probably have more questions soon. Thank you for all the info!

    Cheers,

    Maria

  10. #10
    Join Date
    Jun 2005
    Location
    auckland New Zealand
    Posts
    5,236

    Default

    Hi Maria,
    Can recommend
    A: Stuart Duncan mobile:021 676 747 who works with me.
    B: Most of the brokers at Mortgagepeople are good value.
    C: John Lawson at Apex Group is also fabulous for investors


 

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