Investment Thoughts: Sell Investment Property for Shares/Offset or Hodl

Frankensnore on 19/03/2024 - 14:18

Asking for my 40yo-ish friend.

He has an investment property which is positively geared but he is struggling to pay his own PPOR mortgage. He said he has some savings to keep up but would be more comfortable if there is more money in his offset.

Fyi, the rental property is an apartment which doesn't attract much capital growth, but generates enough to pay for itself.

Another possibility is he put some in his offset as security, and some in high growth ETF.

In my opinion, he should hodl, because it is hard to buy property. Harder than buying shares. Although he could possibly makes less profit than ETF or even offset rate, but in the very long term he could win more. He could even downsize when the time is right of his kids can use them. On the other hand, property needs maintenance, dealing with tenants, agents, etc.

What do you think?

Poll Options

  • 56
    Hodl
  • 18
    Sell and buy shares
  • 8
    I don’t know, just interested
Financial

Comments

  • geekcohen on 19/03/2024 - 14:23
    +7

    Fyi, the rental property is an apartment which doesn't attract much capital growth, but generates enough to pay for itself.

    I don't see the problem when it is paying for itself. Maybe he needs to review his PPOR or attempt to find a job that comes with a pay rise?

    • Jake D on 19/03/2024 - 14:39
      +1

      If it's paying for itself because it has a low LVR, the cash proceeds could be saving money on his mortgage.

      My personal example.

      IP: value $500k, loan $320k, generates $2k/ year after all tax, expenses etc, not accounting for capital growth.

      PPOR: loan $405k, interest $25k / year, payments $600 /week.

      If i sold the IP, after all fees and tax I could pay down (or offset) my PPOR by about $125k. interest would then be $17k / year.

      I COULD refinance or go interest only to reduce my weekly payments. could be under $350 / week.

      I'm not going to for a lot of reasons. But i'm not OP's friend in his situation.

      • netjock on 19/03/2024 - 16:37

        cash proceeds could be saving money on his mortgage

        At 6% interest rates you might it is like making $9 and paying 30% tax then pay mortgage non tax deductible.

        Could also pay it into PPOR and debt recycle into shares to make PPOR tax deductible.

        Obviously the government wants property prices to go up so everyone is basically between a rock and a hard place. Can't have people living in $300k properties making $100k and easily debt recycle $200k.

    • HeWhoKnows on 20/03/2024 - 08:26
      +2

      I think OP should stay out of this.
      Its none of thier concern.
      If thier friend wanted our opinion they can post here themselves

      But anyway for property the best strategy is always to hold for the long term.

      • RTX9090Ti on 20/03/2024 - 18:22

        OP and his 'friend' is one and the same.

  • Benoffie on 19/03/2024 - 14:23
    +1

    So many questions. Wheres the unit, what kind of set up is it, what's the likely growth in the area over the next 10 years, how much is the mortgage on PPOR, can that be cleared (or significantly dented) etc

    Realistically, PPOR mortgage should always come first, especially if you're struggling in your 40s to pay it.

    • Frankensnore on 19/03/2024 - 14:29

      Good questions. Can’t share the location unfortunately.
      What kind of set up? Do you mean like 3 bedroom apartment?

      What is the likely growth? Well if we know then we wont ask…

      The PPOR mortgage will be almost cleared by selling this, which is also why the dilemma because he is too young to be debt free.

      • Benoffie on 19/03/2024 - 14:40
        +5

        No one is too young to be debt free.

        As someone who cleared my mortgage last year after selling, the freedom and leverage of having 100% equity in my new PPOR is amazing. I have a mortgage now (we chose to renovate so equity changed) but the relationship with the bank is different and how I feel about my own security is also different.

        Gaining that in your 40s versus 60s was liberating. Your mate has to think of the potential that comes from savings with zero mortgage. It is a huge difference.

        • Frankensnore on 19/03/2024 - 14:53

          I do wish I travel more when I was young, but on the other hand I may not be able to afford my property if I did

          • afoveht on 19/03/2024 - 15:21
            +2

            @Frankensnore:

            he is too young to be debt free

            The establishment is doing its job well.

            • barge-in hunter on 19/03/2024 - 15:35

              @afoveht: I bet we'll see this as the new catchphrase on the next round of bank ads

        • p1 ama on 19/03/2024 - 16:43
          +1

          No one is too young to be debt free.

          Not really that black and white - the reality is that there are benefits to being more highly leveraged when you are younger - having hundreds of thousands of dollars (if not millions of dollars) undiversified in your PPOR is not a great way to build wealth.

          Personally, I think of my mortgage as just ongoing rent - I actually only pay around $1,000 more per month for my mortgage repayments (at 80% LVR) vs. what I would be paying if I was renting in the same suburb. Just happens to be the case that I'll get to own the house after 30 years.

          I could technically try to pay it off more quickly, but my sense is that it's better to put that money towards other investments when you're young, e.g. into an ETF, for example.

          • Benoffie on 19/03/2024 - 20:27

            @p1 ama: I understand that but OP stated that the friend is having trouble paying the PPOR mortgage.

            This then becomes a no brainer. Mortgage first, always.

        • HeWhoKnows on 21/03/2024 - 15:38

          100% Correct!

      • Jake D on 19/03/2024 - 15:10
        +5

        "The PPOR mortgage will be almost cleared by selling this"

        Sell it. Be mortgage free. Save up, not down.

      • 2esc on 20/03/2024 - 12:57

        Why is he too young to be debt free?

        • sumyungguy on 20/03/2024 - 13:18

          Because debt is good. Leveraging equity allows you to purchase growth assets and make more money

    • 87percent on 19/03/2024 - 15:15
      +1

      There’s not a lot of growth in apartments, and unless it’s in a boutique block, it’ll likely not grow much than it will now

  • Drakesy on 19/03/2024 - 14:27
    +5

    Honestly,

    Investors seem to be bailing at the moment and tbh the only thing keeping it going is immigration.
    The Australian Share market is in bubble territory imho given China and Iron ore's pullback and is crushing our per capita GDP.

    • Frankensnore on 19/03/2024 - 14:37
      +1

      In theory population increase would breed more population which will increase property demand?

      • Drakesy on 19/03/2024 - 14:39
        +1

        In theory yes, but if that population can't afford the extortionate rates then there's a ceiling to which people are happy to pay. Property doesn't only go up, especially in places like perth which are particularly prone to boom bust cycles, the prices closely mimic those of the iron ore/miner's share prices.

        • plmko on 19/03/2024 - 16:54
          +2

          Oh man when you get a tenant that stops paying rent….world of pain, good luck to the mon/pop investors.

          • Drakesy on 19/03/2024 - 17:27

            @plmko: Yeah i imagine a lot of the people with their investment properties would go backwards fast if that happens, negative gearing though heavily softens the blow.

  • Jimothy Wongingtons on 19/03/2024 - 14:42
    +3

    Hodl brah

  • freefall101 on 19/03/2024 - 14:46
    +2

    Sounds like he needs a financial advisor, IMO giving financial advice to mates based on what you heard on the internet is a good way to ruin a friendship.

    Financial advisor could help him balance his debt and budget. IMO debt with good investments isn't a bad thing, because for a lot of people it makes them control their spending. No point clearing his debts only to see his cost of living keep growing faster than his wages.

    Without seeing the detailed numbers it's impossible to tell what would help or what would just delay going into a bigger hole.

    • Frankensnore on 19/03/2024 - 14:49

      I like this comment, it’s true that investing makes us spend less.

      Does anyone have an idea how much a financial advisor costs?

      • Antikythera on 20/03/2024 - 14:44

        i don't know what a good one costs, but a bad one can be really expensive.

    • nomoneynoproblems on 19/03/2024 - 17:28
      -1

      Financial advisors are junk for the everyday investor. Unless you’re fronting over 7 figures, they’re not even worth your time.

  • JimB on 19/03/2024 - 14:52
    +6

    Not a financial adviser but this is what I would do.

    If I had trouble paying PPOR mortgage, I'd be selling any assets that doesn't offer much capital growth potential. In this case here, the apartment.

    Use net sales proceeds to pay down PPOR mortgage.

    Once PPOR paid off or paid down to much more manageable level, borrow against house to purchase an investment property/share portfolio.

  • Dollar General on 19/03/2024 - 15:00
    +4

    I would sell the apartment and pump the money into my PPOR mortgage. Once that’s paid down, then start your path to wealth creation.

    People prefer to listen to spruikers though who want to sell you property or some investment scheme

  • AustriaBargain on 19/03/2024 - 15:04

    Even in Australia Warren Buffet would say sell and buy shares. Though he has the benefit of being Warren Buffet and he can afford to lose billions.

    • hornbill on 19/03/2024 - 21:37

      So would Peter Thornhill.

  • Ghost47 on 19/03/2024 - 15:10
    -1

    Take some equity out of the IP, use it to pay off some of the mortgage. Increase rent. Simples.

    • Jake D on 19/03/2024 - 15:14
      +4

      That's not how equity works.

      You just told him to get a loan to pay a loan.

      the new loan would be at a higher interest rate and just as non-deductible as the PPOR loan.

      He probably can increase the rent though.

      • Ghost47 on 19/03/2024 - 15:14

        Damn thought I was onto something there. I only invest in the markets so I'm a property noob.

      • AustriaBargain on 19/03/2024 - 16:16

        You forgot the increase rent part, as if the guy wasn't already charging the maximum rent the market would bear, out of the kindness of his heart I suppose. Though with a million migrants queuing up around the block to inspect he probably really could charge what he wants.

  • George Washington on 19/03/2024 - 16:55

    I think the answer should be you shouldn't give advice as you are not a licensed legal financial advisor.

    • Frankensnore on 19/03/2024 - 17:36

      This is true, another post said it ruins friendships. Tbh this is not the first advice I gave him.

      But he asked first, what would a bloke do?

      • George Washington on 19/03/2024 - 19:02

        i use the line

        'Do what u feel best, as long as you sleep well at night nothing worst then putting money before health'
        Followed by Many solutions but you need to sit down and nut it out

  • 87percent on 19/03/2024 - 17:33

    If they’re in VIC, the new land tax laws also come into effect..

  • 33725 on 19/03/2024 - 18:06

    Without actual figure, it's hard to calculate but why not take out the equity, buy something else that doesn't cost too much and have 2 investment and aim to break even

  • garetz on 19/03/2024 - 18:32

    Alof of people think a positively geared property is when you get enough from rent to pay for the mortgage, however what about the money that is locked in the property as equity. If its just sitting there, and the property is not appreciating through capital growth, then the money is basically there doing nothing.

    • Ozbar Gain on 19/03/2024 - 19:23
      -1

      The money is not "just sitting there", it was paid to buy an income producing asset.
      The only way to use the same money again is to loan against it, which is the opposite of what the OP is trying to achieve

    • larndis on 20/03/2024 - 07:55
      +1

      Positively geared == income (rent) is greater than tax deductible expenses and depreciation, resulting in a net increase in your taxable income

      If your point is about capital growth, no need to lead with your misunderstanding of gearing as they are unrelated

  • Drpepper666 on 19/03/2024 - 21:58
    +1

    Just raise rent on the IP

    • Aureus on 19/03/2024 - 22:11
      +3

      #InfiniteMoneyHack

  • JIMB0 on 19/03/2024 - 23:27
    +1

    If there's an offset account on the apartment your friend could transfer that money to his ppor loan and save on tax.

  • sumyungguy on 19/03/2024 - 23:44

    Consider the apartment in isolation. Would a professional fund manager hold a property with that level of return in his/her portfolio?

  • Ashless on 20/03/2024 - 09:39

    Depending on when the IP was bought there may be CGT implications. He needs to talk to his accountant to see what actual cash he will be left with after all tax and selling expenses (agent and advertising fees etc) are accounted for.

  • dontboopthesnoot on 20/03/2024 - 12:30

    If its positively geared use the extra funds to pay off the PPOR. Cut down on some expenses. Hold for the time being. If its too much or too stressful just sell and live comfortably.

    • dontboopthesnoot on 20/03/2024 - 12:32

      I should add, its better to sell in an upmarket then a down market. He could also save on commission fees and see if the Tenant would like to buy it.

  • wau2 on 20/03/2024 - 13:32

    Sell property, offset account. Then when property drops (if it ever does) or another great investment comes along, take it out. Either way your saving like 6% return from interest

  • May4th on 20/03/2024 - 14:01
    +1

    if it's positively geared he is paying tax on any income/rent from the apartment, whilst his PPOR mortgage repayments are not deductible, which is not ideal. I'd sell and reduce PPOR debt and when he is a position to invest, re-evaluate property vs shares. if you are in mortgage stress, it doesn't make sense to hold onto an investment that has limited capital growth potential. all that's between you and a nervous breakdown is a bad tenant or an unplanned special levy

  • mrvaluepack on 20/03/2024 - 16:27
    +1

    Lol apartments as investment properties are one of the worst investments. Nice to buy and stay but always at the mercy of the body corp. No cap growth plus ongoing fees. Only ever buy landed properties for investment properties.

    My advice - sell apartment and put all that money into PPOR. Then start debt recycling journey to claim tax offset against PPOR home loan.

    • Frankensnore on 21/03/2024 - 12:02

      Houses aren’t cheap though

  • Duckie2hh on 20/03/2024 - 16:31

    struggling to pay his own PPOR mortgage

    cut back on the smashed avo on toast or the imported craft beers

  • Lunarboogie on 20/03/2024 - 17:26

    Hodl lah. He's forked out the start up expenses on the IP (stamp duty, mortgage insurance et al) any way. Interest rates will soon dip, rent will continue rising, which will combine to generate more to defray the PPOR payments (which too will come down). Then leave the magic of house price growth to kick in and he'll be even more ahead.

    Short term pain for long term gain. I'd stick it out.

  • Aneurism on 20/03/2024 - 19:25
    +1

    Pretty easy to see why people lose their houses in Australia when interest rates go up.. Because they cling to investment properties when theyh have over extended ..

    This is really a situational decision depending on so many undisclosed factors that this poll is kind of pointless.

    That being said, if I were in a similar situations, if I were in that situation with my varying factors, ..

    I would either sell the investment property and pay of the PPOR or I would keep the investment property and sell the PPOR in order to downsize to a smaller or lower priced PPOR.. Part of the decision woluld be how much capital gains tax and stamp duty is in play. I assume that the IP is an apartment if there isnt much for capital gains.

    There is no point holding an IP if it costs your PPOR

  • enzioFirenze on 20/03/2024 - 21:54
    +1

    please ask him to look into debt recycling; if you can restructure the loans so that maximum amount of loan is on the investment property and it is negative geared as much as possible, the HODL exercise will be much more appealing.

    Can you give us some numbers to work with? What's the valuation on PPOR and IP and what are the mortgage on them?

    • Frankensnore on 21/03/2024 - 12:00
      +1

      My understanding that’s illegal to ato. Cant top up investment loan and use the money to offset private assets

      • mrvaluepack on 21/03/2024 - 14:39

        What's illegal to ato? Debt recycling? I'm claiming all of my interest from my PPOR loan off my tax because I told the bank i want to get a loan for investment purpose. I'm paying additional 0.1% because its classified as an investment loan and i used that money to buy etfs.

        • larndis on 22/03/2024 - 08:07
          +1

          The ATO doesn't give a stuff what you told your bank. Did you actually use all the funds for an investment purpose? If yes that's fine. If no that's illegal and not 'debt recycling'.

          You can't legally 'convert' your current PPOR loan to be tax deductible. You can borrow more money against your PPOR, legitimately use that money for shares or another investment and claim that portion of the interest payments as a tax deduction. But not the interest on the initial loan amount that was used to purchase the PPOR.

          • mrvaluepack on 22/03/2024 - 10:53

            @larndis: I paid off my loan entirely. Then took out a new loan against my home. Then used that funds for investments.

            • Frankensnore on 22/03/2024 - 19:52
              +1

              @mrvaluepack: It sounds fine.

              Enzio said the other way, top up investment loan and put that money in ppor. That’s illegal, can’t claim the extra expense in investment. Pointless basically.

              • mrvaluepack on 22/03/2024 - 19:56

                @Frankensnore: I think what he meant was debt recycling meaning the are 2 loan facilities, one for ppor hime and one for investment.

  • Bargain4Days on 31/03/2024 - 01:19

    Hmm, hard to say without looking into further details and numbers. With the knowledge that you have given me, consider the following;

    Missed Opportunities cost. Sure he has a positive geared IP, but apartments are generally poor capital growth assets, if he can sell the IP, divert the profits to PPOR and then pull equity out of PPOR and buy IP elsewhere where capital growth (Debt recycling pretty much) can be obtained. Can claim tax benefits and better use of the investment opportunity.

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