Ease the pain

If your in­vest­ment prop­erty has turned out to be a dud, it could be time to make some hard de­ci­sions

Money Magazine Australia - - PROPERTY - PAM WALK­LEY

If you own an in­vest­ment prop­erty with neg­a­tive eq­uity, mean­ing the mort­gage is greater than the value of the prop­erty, should you bite the bul­let and sell now? And what if your in­vest­ment is worth less than what you paid for it even though it’s not in a neg­a­tive eq­uity po­si­tion? It all de­pends on a num­ber of fac­tors, say the ex­perts.

With house and unit prices fall­ing in some of Aus­tralia’s key mar­kets, some in­vestors who bought at the top of the boom may be fac­ing neg­a­tive eq­uity. The Syd­ney mar­ket peaked in July 2017 and me­dian prices are down 5.4% in the year to July 31, ac­cord­ing to CoreLogic. Mel­bourne peaked in Novem­ber 2017 and had fallen 2.9% to the end of July. Of course, some sin­gle-in­dus­try re­gional ar­eas, par­tic­u­larly those linked to min­ing, have fared far worse than this, with falls in val­ues of homes and units of up to 30% or 40%.

Michael Yard­ney, a direc­tor of Metropole Prop­erty Strate­gies, doubts that many city buy­ers would have neg­a­tive eq­uity in the true sense but con­cedes that even if your prop­erty is worth less than you paid for it you may be wor­ried.

“It’s silly to sell now and crys­tallise a loss if you have an in­vest­ment-grade prop­erty,” says Yard­ney. “But if you’ve bought a dud – maybe you’ve been taken in by a spruiker – the worst thing you can do is hold on in the hope that things are go­ing to get bet­ter.” It might hurt but it’s bet­ter to take a smaller loss now than a big­ger one later, says Yard­ney.

Anna Porter, prin­ci­pal and prop­erty ad­viser with Sub­ur­ban­ite, agrees. “If the fun­da­men­tals are all wrong – for ex­am­ple, it’s in a min­ing area, or a ser­viced apart­ment or there is no ten­ant de­mand – there may be fur­ther down­side.”

Think long term

But Porter also agrees that if your prop­erty is in a mar­ket with strong long-term fun­da­men­tals the best op­tion is to hold. “Even in good mar­kets, val­ues can fall be­cause of events such as a royal com­mis­sion or an elec­tion but these are just speed humps in the

road and you should not panic just be­cause ev­ery­one else is.”

So how can you tell whether the prop­erty you have bought is a lemon or you just have a short-term prob­lem?

“Maybe your prop­erty is do­ing badly be­cause of the cy­cle, so it’s a tim­ing is­sue,” says Yard­ney. You can per­haps do some­thing to man­u­fac­ture eq­uity, such as ren­o­vate. “But if it’s a lo­ca­tion prob­lem you can’t change that – lo­ca­tion does 80% of the heavy lift­ing of in­vest­ment prop­erty.”

It’s worth as­sess­ing the sit­u­a­tion through an in­de­pen­dent set of eyes be­cause there are costs associated with sell­ing, says Yard­ney.

And if you re­ally do have neg­a­tive eq­uity, how are you go­ing to make up the short­fall? Let your bank know be­cause it re­ally doesn’t want to own prop­erty in a min­ing town and it cer­tainly doesn’t want bad pub­lic­ity, so it may ex­tend your mort­gage if you want to hold on, says Yard­ney.

In weigh­ing up whether to sell or hold, Porter says you need to as­sess the spe­cific mar­ket the prop­erty is in. “Is there some­thing in that mar­ket that will turn it around? If it’s just a tim­ing thing, it might be worth push­ing through the pain.”

Also in­ves­ti­gate the op­por­tu­nity cost of hold­ing on. “Could you rein­vest in some­thing that will pro­duce more growth?”

Porter is wary of ren­o­vat­ing to man­u­fac­ture eq­uity. “You could be throw­ing good money af­ter bad. You might get back to square one but you might not.” But if you want to lessen the pain of hold­ing you might ren­o­vate for ten­ants, mak­ing low-cost, ef­fec­tive im­prove­ments to make your prop­erty stand out from the rest to at­tract a pre­mium rental or longterm ten­ant, she says. Make sure you have the right prop­erty man­ager in place.

Also work with a bro­ker to get the best in­ter­est you can, even though this might be chal­leng­ing. In­ves­ti­gate whether you might be bet­ter off with a prin­ci­pal and in­ter­est loan.

Don’t lose any sleep

If you’re a neg­a­tively geared in­vestor, you can get your tax breaks on your prop­erty each pay day rather than wait un­til the end of the year. To do this ei­ther you or your ac­coun­tant will need to lodge a PAYG with­hold­ing vari­a­tion ap­pli­ca­tion with the tax of­fice ei­ther on­line or on pa­per (see ato.gov.au).

Maybe you can seg­ment your prop­erty into two ten­an­cies, says Porter. Does it have a sep­a­rate self-con­tained area such as a granny flat or a garage con­ver­sion that can be rented out sep­a­rately? If ten­ants are hard to find, does your prop­erty have the po­ten­tial to pro­vide af­ford­able hous­ing? Talk to your lo­cal coun­cil about this.

But at the end of the day, don’t lose sleep over it, says Porter. Re­mem­ber it’s just “stuff”. If you’re ly­ing awake at night, putting pres­sure on your health and fam­ily, it’s just not worth it.

She re­cently helped a cou­ple with five in­vest­ment prop­er­ties in re­gional ar­eas. They had bought seven to nine years ago, and four were in ei­ther neg­a­tive eq­uity po­si­tions or worth less than they paid for them. The fi­nal de­ci­sion was to sell two and keep three. The first one to be sold was the one that they had some eq­uity in due to pay­ing down the loan. The se­cond was in the worst neg­a­tive eq­uity po­si­tion but it was in an area where there were ten­ant prob­lems, which meant the own­ers were hav­ing prob­lems get­ting in­surance and other has­sles.

Hold­ing the other three was more a tim­ing thing, says Porter, and over the long term they should be OK if not great. The cou­ple de­cided to put sur­plus funds from the sales into buy­ing one re­ally good growth as­set that Sub­ur­ban­ite helped them choose.

Poor as­set se­lec­tion can of­ten re­sult when peo­ple go on hol­i­days, says Porter. “One big mis­take a lot of peo­ple make is they go on hol­i­days, love it there and de­cide to buy a prop­erty in the area with­out re­search­ing the fun­da­men­tals. Their at­ti­tude is ‘what can go wrong?’ ”

Nei­ther Porter nor Yard­ney are big fans of re­gional in­vest­ing. Ma­jor re­gional hubs such as Gee­long will grow, says Porter, but it’s a long-term “nest egg” strat­egy. “But we dis­cour­age peo­ple from in­vest­ing in smaller re­gional towns which don’t have di­verse em­ploy­ment driv­ers.”

You want to in­vest in an econ­omy that has mul­ti­ple pil­lars, says Yard­ney, and this does not ap­ply to many re­gional ar­eas.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.