Hello Clients and Friends,
Now that Cup Day has come and gone, and we’ve had yet another interest rate rise, I expect I’ll be receiving more of the same question I’ve been receiving from people for the last 6 months:
“I’m thinking about selling my home/investment property as the repayments on my loan are really starting to hurt, do you think it’s a good time to sell?”
While every situation is unique, my answer will more than likely be the same…. No!
In general, I always advise people to do everything they can to hold property for as long as possible. Yes, the higher interest rate environment is biting everyone now, but selling now (in my opinion, and many other experts’ opinion) is the worst possible time.
While the higher interest rates mean it costs more to hold the property, the same higher interest rates mean there are less people looking to buy right now, so you will be selling your property in a market with fewer eligible buyers. This means you are likely to have less competition to push up the sale price of your property.
With interest rates tipped to decrease next year, if you can do everything possible to hold your property through this period, you will be far better off long term.
If your property is an investment; with the rental market being so tight right now, it is also highly likely you will be able to increase the rent. Plus, the expected immigration numbers set to arrive to Australia is going to make it more difficult for individuals to find a suitable rental property, which will again increase future rents.
Let’s try to put this in real terms:
Case study – Peter. To sell or not sell.
Client (Peter) has three investment properties which are currently negatively geared by 5k each (the expenses, plus interest paid on each property outweigh the rental income received). His ‘holding costs’ for the 3 x properties is 15k per year. Peter is considering selling one of the properties to ease the pressure on the repayments, is it worth it?
Let’s say each property was bought for $400,000 and each is now worth $600,000, so a total portfolio value of $1,800,000,
Peter’s interest only loan on each property is 80% of the original purchase price = $320,000 @6.5% interest rate, he is paying $20,800 per property in interest per year. Total interest of $62,400 across all three properties.
If Peter was to sell one property for $600,000 and get $200,000 profit (this doesn’t include selling costs, CGT, legal fees etc that he would lose) an option Peter would have is to put the $200,000 in an offset account against one of the loans.
Peter’s repayments for one of the properties is now only based off $120,000 ($320,000 loan minus $200,000 in offset account) @6.5% = $7,800. He still has interest to pay on his other property, so his total interest payments decrease to $28,600, down by $33,800. Sounds like a good option right? Perhaps, but Peter is now only holding two properties. If Peter’s 3 properties increase in value by 8% over the next 12 months, his $1,800,000 portfolio would be worth $1,944,000. An increase of $144,000
If he sells one property and the same 8% growth happens on his two properties, his $1,200,000 portfolio would be worth $1,296,000. An increase of $96,000.
During this period, he has saved $33,800 on interest charges but missed out on $48,000 in capital growth.
You should also consider the hidden costs of selling your property. These include agents selling fees, market and staging fees of the property, legal costs for the preparation of selling documents and capital gains tax fees that could be applicable to your property.
There is no right or wrong answer to Peter’s Case Study, the point is you need to know the numbers inside out before deciding to sell. If you don’t know the numbers, you are deciding blindly.
Here are some ways you might be able to continue to hold your property in the short term:
1. Can you get a 2nd job or revenue stream for the short term to increase your weekly income?
2. If it’s an investment property, can you raise the rent you are currently charging the tenants/ is your Managing agent doing everything they can to get the best possible rent?
3. Are you able to refinance your loans to Interest Only for a year or two to decease the holding costs?
4. Is there some equity in your property that you may be able to access to allow you to hold the property for the next year or two?
5. Do you have access to some savings that can be used to fund the current shortfall for the next year or two?
If you would like further information about how we can help with items 2 -5 above, please get in contact as these are strategies the team at First Avenue Finance use to help manage our own personal property portfolios.
In summary, it is likely the current holding costs on your property are the highest they have been in years, but this is expected to change into next year. My advice is to find a way of “trading through” this period so you don’t sell a quality asset which will continue to appreciate into the future.
If you, or any friends or family would like to have a confidential discussion about financial solutions for your properties, please get in contact with the team at First Avenue Finance.
Have a great end to 2023!
Michael