Sell or stay put?

[ShaunP]

Hi Guys

I am fairly new to property investing and this website for that matter. I just have a few questions I am hoping someone will help me with.

I purchased my first and only rental property September last year, I paid 84,000 and I am currently getting 245pw in rent. I had a valuation done just after I purchased the property and it came back at 88,000. So I didn't purchase alot below market value at the time, but since then house prices here have risen dramatically (the average house price was around 100,000 when I purchased the property and now it is 130,000). My question is should I be selling now so I have money to purchase more properties when the market slows down. I know I am getting a good return but I am having trouble getting the bank to lend me more money, as we have a large mortgage on our own home. If anyone out there could help me with my delima, it would be much appreciated.

Regards
Shaun

[Monid]

Hi Shaun
Nice purchase!
I would be inclined to hold onto it, at $245 thats a pretty good return in the long run, especially if you are paying it off over time.
In terms of accessing more money what is the bank's problem, is it servicing or equity?

If it is equity why don't you get the place revalued and then use that equity as the deposit on the next place, this way you get to keep this place and get another.

If it is servicing then selling such a cashflow positive property isn't going to help.

If you do want to sell it then use the money to pay off your own home loan, and then use the equity in your home as deposits on your future investment properties, this allows you to reduce the amount of non-tax deductible interest you are paying.

Cheers David

[kalovatt]

I agree with Monid, I wouldn't sell it. The return is excellent based on the purchase price. I would get it re-valued and readjust your finances to take advantage of another property opportunity.

Perhaps you could refinance it with a line of credit to 80% of new valuation, then you have captured the increase in value without having to sell. This is what I have done with my IP's, the extra available sits there unused (so not costing you anything) but is there to use later when the market cools and you find that desperate seller.

[cube]

Re: Sell or stay put?

I know I am getting a good return but I am having trouble getting the bank to lend me more money, as we have a large mortgage on our own home.

Hi Shaun,

Welcome to the forum.

There are several Mortgage Brokers who have been recommended by and contribute to the PropertyTalk site - try contacting one of them to discuss your situation and see what solutions they can come up with.

Good luck

cube

[drelly]

I'd definitely keep it either way. The gain and returns are excellent!

However... I have an idea. Check with your accountant to make sure you can do this legally and any tax implications it may have. I'm not a tax expert.

I'm guessing that the rental is in your own name and not a companies? If so, see if you can form a new company (maybe an LAQC) and sell it to this new company at the current market value. The new company will need to raise a 100% mortgage to do this which will increase your tax breaks. You will in turn realise the equity you now have which you can then use to reduce your home mortgage.

In effect, you will be transferring non-deductible debt into tax-deductible debt. I *think* you may be able to do this without paying capital gains tax as it's a technical change of ownership and not a real profit. In addition, the intention is not to lose control of the property but to improve your financial structure.

Good Luck!

[MrIronman]

Hi

I'll buy it!!....more info though..
********

Cheers

Ironman

[hort1]

Hi Shaun

I agree strongly with the others who say don't sell. The cash flow is very important to you and your investing in the future.
I also think it very important for you if you are a wage earner to form a ( LAQC) company because the tax benefits to you will help a lot. In fact it is important for you to form one but you will get advice from your accountant on the benefits.
Don't get put off by the negative bank, shop around, there are heaps of helpful banks, and brokers out there.

Give it heaps

Happy Investing hort1

[CJ]

I also think it very important for you if you are a wage earner to form a ( LAQC) company because the tax benefits to you will help a lot.

There are no tax benefits to an LAQC over personal ownership. There are a magnitude of benefits but none of them are tax. Sorry for be pedantic.

[RentMaster]

I agree with everyone else. Dont sell it. You bought well!!

The return you are getting on that property if excellent. If the bank is not happy, then maybe wait a year or so. The return on the existing property can be used to pay off extra principle on your own house. Remember, that if you have a large mortgage on your own house, then that is the one you want to be paying off first.

p.s. Where is this house?

[ShaunP]

Hi again guys

Thanks for all your positive feedback, the problems I have really are two things. The fact I only earn about 25,000 in wages and the current market conditions here (Timaru) aren't really recognised when you get a valuation done. My parents just have a valuation done on their house and it came back at 195,000 when a real estate agent told them they could get close to 300,000. So there are my two main problems when it comes to buying another property. Any more suggestions on what I should be doing will be much appreciated.

Shaun

[ShaunP]

Hi RentMaster

The house is in Timaru, I went to look at the property in september last year thinking it was just a 2 bedroom house but upon looking at the property I found it had a 1 bedroom flat in the basement of the house. So there are two income streams which puts the cashflow up a bit!

Shaun

[Gatekeeper]

Well done Shaun, added value

I'd keep it, thats an excellent return.

[drelly]

Hi Shaun,

Have you asked around with different valuers and different banks? The valuers are *supposed* to be offering you a market valuation!

[Monid]

Hi Shaun
Its also the case that valuations tend to lag behind sale prices because the data doesn't become available to them until sometime after sales have happened. So when prices are rising rapidly valuations lag behind. Also many valuers are conservative with their estimates, and real estate agents tend to exaggerate...

my mother in law is in a similar situation she has a rental property in Orewa which she bought 2 years ago for $120000 she has just been called by a RE Agent with a buyer who is offering $215000 though it is cashflow neutral, I suggested she sell, her main problem at the moment is cashflow not equity and this will allow her to practically purchase a new place outright.

So it does depend on your situation, and it is clear that servicing is going to be your issue. This ought to mean though that you just need to work harder, and that %80 of the rent for a new place will have to cover the mortgage repayments and a bit more to keep the bank happy.

David