Positively Geared Property- Hold or Sell?

Seeking some guidance on my scenario. I have a positively geared investment property in Sydney Western suburbs, this was my residence till 1.5 years back. The rental income is more than loan repayments as I paid off most of my loan while I resided in the house, and at that time did not think I will convert it to investment. One week of rental income is now covering monthly repayment so its quite positive. The balance of rental income helps in repayments for my new residential property. Though I will end up paying quite a bit of tax on investment income this year.

The value of this property has gone up by 25% in last 1.5 yrs. If i sell now i will get a large sum to help with reducing my home loan.

WRT my situation I am working full time and has got at least 15 years before i retire.

So just wondering, is it a good idea to sell or hold further?

I am not very financial savvy so please be kind. Thanks.

Comments

  • +11 votes

    Leverage the asset and use that to add more assets to your portfolio.

    “If you don't find a way to make money while you sleep, you will work until you die.” W.B.

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      Thanks rektrading

  • +11 votes

    It depends on your ROI.

    For example, if your property is making $500 per week and your equity in it is $5,000,000… then sell. If your equity is $500,000 then hold.

    The reasoning is that $26,000 per year in net income ($500x52 weeks) on $500,000 asset is roughly 5% yield which is higher than interest on your mortgage.

    In other words, do not dispose investment to pay off debt if the yield from investment is higher than interest on your debt.

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      Thanks @lubos makes sense.

  • +1 vote

    IMWO - go get some professional financial advice.

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      thanks pharkurnell. I might do that

  • +2 votes

    Alot of people do not take into consideration the money tied up in the equity of the property. The rent might be covering your monthly mortgage repayments however is it also covering the interest you would be earning on the principle equity you own ? If it is not doing that, then i would not call it positively geared.

    I would less worry about gearing and more worried if you think interest rates are going to increase and the value of the property will decrease in the mid to long term. If that is the case you should sell. If not, then hold.

    However then again if you do end up selling and releasing the equity in the property, what do you intend to do with that equity that will earn more now that it is liquid instead of invested into the property ? You need to have a plan in place, not just hold the cash in a low interest bearing account.

    You should do the maths and use that as an indicator.

    • +1 vote

      People rarely account for all the factors in property. It never ceases to amaze me the number of people who say "I bought a property for $X 20 years ago and sold it for $Y, so my profit is $Y-X". Lol, ok then…

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      Sound advice garetz. Appreciated.

    •  

      Sound advice garetz. Appreciated.

  • +2 votes

    I would leave it positive geared.

    I would then take that rental income that is excess and then invest it into something else.

    What you invest it into is dependant on your comfort level and how risky you are.

    You can invest it into a managed funds. Do your research but there are managed funds that are almost like superannuation and very low risk and safe but also lower return. The only difference is you can take out the money whenever you don’t have to wait till your 65. So you will effectively have 2 super funds.

    You can buy another property.

    Invest in individuals shares.

    I would not worry too much about tax. At the end of the day if you have a big tax bill it obviously means you are making a lot of money as well, they go hand in hand. A lot of people just focus on saving tax, but do not focus on the creating additional income and assets. What would you rather be. A person with many properties, millions in debt, lower salary due to negative income, but you pay no tax. Or a person with one house, no debt, $40k extra income on top of your salary but $10k extra tax per year.

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      Thanks TheBilly. Appreciate you taking time to advice.

  • +3 votes

    It's not possible to provide any even close to definitive answer without knowing the totality of your situation.

    But here's some broad numbers for you to consider. The numbers are there solely to illustrate … adjust for your own circumstance.

    Your current PPOR I'll assume is worth $1m with an $800k mortgage. Assuming you're paying 3%, that's an interest bill of $24k per year on that debt.

    The old PPOR/now investment property is worth $600k. You'll be earning maybe $300/week or $15k per year on that. The mortgage is sitting at $200k and costing $6k a year in interest. Therefore you have $9k of income from this property that is taxable, so you probably end up with $6k.

    This effectively gets your interest bill on the PPOR down to $18k.

    I've not bothered with other out of pocket costs.

    […]

    As an alternative, sell the investment joint and bank the net $400k in equity you have. This reduces your mortgage to $400k and the interest bill to $12k. You now have generated an additional $6k cash flow per year. All else being equal, this gets you paying off the PPOR more quickly.

    So in this scenario you have to come up with $12k per year to meet your interest obligations.

    The result is you have lower total assets, lower total debt, and higher net cash flow. But by reducing your overall asset base, you have reduced your potential for capital growth (all else being equal). You would need to think about that.

    […]

    Now you can think about purchasing a new investment property.

    Again, to keep it simple, redraw the $400k you paid off above to buy a new investment property that attracts rental of $200/week or $10k per year.

    This $400k debt will increase your interest payments by $12k per year. This is fully deductible on tax and you have created a negative gearing situation ($2k per year short fall).

    To summarise at this point, you are paying $24k in interest in total, $12k is deductible and you have $10k in rental income. There will be a small tax time benefit for you here on the negative gearing, for simplicity let's call it $1k.

    So here you end up needing to come up with $13k per year to meet your interest obligations.

    […]

    Ultimately this story comes down to debt structuring. In your current scenario you effectively have debt "trapped" in a non-deductible situation. This is causing you to have reduced cash flow.

    If you can restructure the arrangements, you may be able to create a better outcome from a cash flow perspective.

    The above numbers are for illustrative purposes only and I've not contemplated the risks attached to various scenarios, but hopefully this helps to generate some thinking.

    As ever, seek the advice of your accountant on these matters.

    • +1 vote

      Many thx Seraphin7 for a thorough case study based example here. Very useful.

  • +1 vote

    Use the income as serviceability for the next one.

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      Yes this looks like a consensus from most comments here. Thanks

  • +2 votes

    If you sell you will have lost a passive income flow that is increasing in value. Your only income will be from your job. I like to keep a passive income flow. How much do you owe on your loan? I would keep the passive income for quite some time, as selling and rebuying carry their own problems and expenses. If you eventually pay capital gains tax find out what that means in regards to the tax you are paying now on rental income

    •  

      Thanks hellopam2019. Passive income is good as you and others have suggested.
      I am not sure about your comments about capital gains tax (CGT) and tax on rental income though : do you mean we can get a deduction in CGT if tax has been paid on rental income?

      •  

        I dont know, I learned a lot on google search fori nvestment property, I didnt have enough to invest in property so I found a property fund thats going VERY well

  •  

    If u dont need the funds, I would keep it.

    Buy another investment ppty that is negatively geared if you want to be in that tax position.

    •  

      Thanks SmiTTy. I am considering this scenario now.

  •  

    Have you got a proper depreciation schedule done?

    You will probably find a heap of deductions.

    Also, take out a loan for the investment property for more than you need (but obviously within its valuation). Place the extra funds into an offset account in your current home/ loan.

    Make it work for you.

    •  

      Thanks for your advice.