Time to cash in my chips, am i crazy?

Im in need of a little advice from the collective wisdom that is Somersoft. Lately i have been doing some thinking about where i would like to be in 10 years and what my journey is going to be like along the way. Im 29 now, I got married earlier this year. My wife is 25, we're thiknig of starting a family within 2 years. I run my own business, I have been doing this for the past 6 years, my wife works a payg job.

We have 2 IP's with a combined value of about 900k - 920k with debts of 500k, so about 400k equity give or take. Our PPOR we built a year ago which is worth about 550k with debts of 320k, we would be happy to stay here for at least the next 5 years. Along with this we have some super, cars, etc the usual stuff.

Lately i have been getting a bit run down in my business (I think I am having an early mid life crisis ) and I am thinking of scaling back to relieve some of the stress. Along with this I am also thinking of selling my IP's that are negative geared to the tune of 15k a year ( who know how much more as interest rates go up) and using the equity to pay of our PPOR debt which should leave us with 50k or so that i was thinking of buying some blue chip shares with.

We would end up with a paid off PPOR, and a small share porfolio that we could further add about 50-80k each year of our savings plus reinvest the dividends, maybe leverage a bit depending on how things go. So we would still be investing but also have very low living expenses because of no PPOR and no negative IP's. I would imagine it's a big monkey off your back no longer having a PPOR loan.


Is this much of a plan?

ok180 said:

Is this much of a plan?

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Hi,

In the end there is really no right or wrong strategy and the best thing to do is what you feel comfortable with. You are in a reasonable position for your age, having around 630k in property equity.

The way I see it without knowing the specifics of your IP’s, you have two long term growth assets working for you, while costing you a small amount in cash flow each year (but this won’t always be the case).

You need to seriously consider why you’re thinking of selling.

Is it because you think interest rates are going to rise significantly, your income will decrease by working less and you wont be in a position to service the debt? If so this is a genuine concern.

Is it because you don’t think the properties will provide good long term returns? Remember time if your friend in residential property and over the long term even an average purchase provides a reasonable level of growth.

Is it because you think you can get a better return in the share market? If so go ahead, but do you have the knowledge and experience to build a blue chip share portfolio that will outstrip the return you can achieve on leveraged residential properties?

Is it because you are worried about your level of debt so want to play it slow and steady by reducing debt then slowly contributing to shares? In the end you don’t want to worry yourself all the time, and if this is what you feel is the best option then go for it, but fear is all in your mindset and it can be overcome.

What would I do? I wouldn’t be selling, I would pause for a while and focus on paying off as much off the PPOR as possible. Selling IP’s just for the sake of it is usually not the best option, as it’s expensive both in transactional costs and opportunity costs. If you bought well initially you may well regret the decision once they’re gone.

Rickardo said:

You need to seriously consider why you’re thinking of selling.

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In a word. Freedom.

At the moment I feel like im the boss of a few but the slave of many.

I am in a similar situation as you. 2 IP's and PPOR. I considered selling one of the IP's to pay out the PPOR (when I left the paid workforce to have children). I projected forward with a note pad and pen What would my situation be in 5-10 yrs if I sold the IP and paid out the PPOR and continued to re-invest (in property) as compared to keeping the IP's and continuing to pay down the PPOR. I faired better with the latter. Your situation may differ but perhaps you could just look into the future

ok180 said:

In a word. Freedom.

At the moment I feel like im the boss of a few but the slave of many.

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If you are talking about financial freedom, do some ten year projections on both scenarios, you may find that you will be closer to financial freedom by keeping the properties.

If you mean freedom from debt and the effect this will have on your psyche, that doesn't have as much to do with the unemotional (in theory) world of investing, and is really just a decision based on your mindset. Sounds like selling may be the right decision for you at this time.

ok180 is looking at some freedom now, not ten years down the track. He is feeling stressed working to support some negatively geared properties and they want to start a family.
I can see the attraction of having a PPOR with no debt and taking a step back for a while. He's young and has done well to date and there is no reason why he can't ramp things up again later.

We paid off our PPOR before investing in IPs.

Admittedly this was back in the 1980s when finance/investment opportunities were far more limited.

Owning your own home free and clear is a great feeling, and certainly nothing wrong with you doing that if it is what you want. It may be a particular benefit if you are contemplating a family, and want to be debt free while kids are young.

You can always finance into investments further down the track when you are ready.
Marg

Hi ok180,

You're in a good position now.
If you sell now, the "freedom" you seek may only be temporary.
Once you start a family, I believe things will be more difficult and plans to invest again may be delayed.

In my opinion, I believe the more you can do before starting a family, the better off you will be after.
So go hard for the next 2 years before starting your family and then reassess the situation.

ok180 said:

We would end up with a paid off PPOR, and a small share porfolio that we could further add about 50-80k each year of our savings plus reinvest the dividends, maybe leverage a bit depending on how things go. So we would still be investing but also have very low living expenses because of no PPOR and no negative IP's. I would imagine it's a big monkey off your back no longer having a PPOR loan.


Is this much of a plan?

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With 50 - 80k per annum to spare you are easily managing to cover the -ve gearing as well as pay off a whack of the ppor each yr.

I guess you have to weigh up the CG potential of the IP's. Are they in high demand areas? Can you value add? Subdivide? Reno? Are they high or low maintenance?

You need to think about the selling costs and CGT. IP's work their magic over the long term. It's boring stuff. Have you read Jan Somers books? Have you put your IP's into PIA to see the long term potential?

Lots of questions. Hope I'm not confusing you but you need to consider all of the ramifications.

Ace in the Hole said:

So go hard for the next 2 years before starting your family and then reassess the situation.

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I agree, don't make any rushed decisions.

Don't worry about the holding costs.
Read the international news and you'll see that the Western world is in big debt trouble so interest rates won't be going up much higher than they are now.
in fact, if Eurozone problems spread as they are expected to do next year the interest rates will fall and share prices will probably halve.

If I was in your situation I'd access the equity and put it in a LOC waiting for share prices to come down and when the time comes I'd spend it all on shares and retire

We done so far on 3 properties under your belt.

How long have you held the IP's? Is the $15k negative gearing before or after tax?

Have you considered capitalising rental expenses such as rates, insurances, land tax to help pay more off your PPOR?

Have you considered only sellling one IP to help focus on paying more off the PPOR?

I would suggest that selling is the last and most expensive option to consider.

Go on two holidays per year and 1-2 weekends away with the trouble and strife....If you enjoy yourself you will relax with the money issues

Don't forget about capital gains tax. Your profit will not be all clear- you may be up for a big hunk to be paid to the ATO.

first of all - wow - what a fantastic financially secure-ish position to be in at your age.

but - i know exactly how you feel - you get to the stage where you just feel tired of it all and are looking to take the path of least resistance. been there, done that.

have you thought about getting some help with the business? can the business operate without you being there? if not, then it's not really a business as such, but a job. is there any way you can set the business up to run for period of time without you via systems and taking on part time staff (such as a bookkeeper) to help relieve the load? it may mean slightly lower profits for you by outsourcing, but if it keeps you sane in the short term, and allows you to take some time away, then it may be a valid path to take.

another option is selling off the ip's, pay out your ppor debt and then you can launch back into buying ip's with "all" the debt tax deductable. but you need to do the sums on this in regards to selling costs, cgt, stamp duty etc to sell out and buy back in. and also, be aware that your wife will probably want to take some time out with new babies and may not end up going back to paye work.

i think the others hit the nail on the head when they said you need to do some projections in your various scenarios. another good option is to sit down and work out "where" you want to be financially in 5-10-15 etc years time. ie, in 10 years time i want to have a passive income of $X/yr ... and then you work out how you are going to get it.

some of the passive income may be by you building the business to be self reliant via employing staff and installing systems. some of the income may come from investments such as rent or share dividends.

my example is that in 10 years time i want a passive income of (in today's dollars) $150,000/yr-ish, after investment expenses but before tax.

to achieve this we need 10 stock standard, 1970's, red brick, totally unglamorous, 2 bedroom units paying (in today's dollars) $310/wk with no mortgages.

how are we going to achive this? by buying 3-4/yr for the next 5-6 years, hold for the remaining 4-5 years, then sell down to pay out debt. some of the debt payout may come from us down/sideways-sizing our ppor when the kids are grown, some of it may come from hubby's super.

but, work out where you want to be and the most boring, safest, easiest way to get there.

good luck with it all.

No advice here but just a couple thoughts. Sounds to me like it's just a cashflow issue, you are not really wanting to get out of investments all together?

If that's the case then why throw the baby out with the bath-water? Go just as far as you have to, and solve the cashflow problem. P'haps sell just the worst CF property & keep the funds handy in offset against your ppor. Then slow business operations to more managable levels. Once you have more time use the funds to buy/create a CF+ property with capital gain potential. It's harder to acheive but you won't be in a hurry.

If your CF+ property only gets ave 7%pa capital gains, at 20% LVR thats still 35% ROI, better than most shares. Property has to be at 50% LVR before shares are better IMO. Anyway if you buy well you'll get better than 7% long ave.

I have actually heard stories of people turning CF problems around without selling, just buying/creating new CF+ deals. But those deals have to be super.

Wow, this is exactly what I am going through but you have a bit more equity and I have 1 more IP. We recently got pregnant and the thought of going down to 1 income is scary. And I'm sick of having debt on our home, and having to go to work everyday.

I LOVE the idea of paying off my PPOR and having that freedom, but we have decided to suck it up and stick it out for the long term and not sell up.

I think you have worked hard to get where you are and you will kick yourself in 10 yrs time if you do sell and CG continues.

Like has been said once you have kids it will be harder to get back into investing, and ofcourse banks won't be as friendly when you have dependants.

Good luck with your decision.

ok180 said:

Im in need of a little advice from the collective wisdom that is Somersoft. Lately i have been doing some thinking about where i would like to be in 10 years and what my journey is going to be like along the way.

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......and where exactly would you like to be? That, coupled with your current financial position and your personal risk profile, is what determines your best chosen strategy to use to get there.

Where would you like to be in 10 years?

First of all, as others have said thats a cracking effort, however if you can hold on for longer the gains will be greater imho. I was in your shoes about 4 years ago and sold up some great stock to buy a PPOR for cash (see earlier posts). It seemed like the right decision as my family was very young and i was worried about the debt although i didnt have any problems paying the shortfall. In hindsight it was dumb of me to sell. I made a few bucks but allot was churned up in the CGT and sell costs and as they were great ip's, the CG of the last 4 yrs has been smashing.
Hold on for as long as you can, you are young and have lots of years for inflation to reduce your debt. If the US keep printing notes this will affect all, higher rates but more inflation and increased wages and devaluation of loans.
Most poeple in the world want to live in Aus (china 1.2b india 1.2bish) so I cant see immigration being a problem for demand for RE.

Are the properties -15K each or combined?

How much are your cars worth? Could you downsize your cars put the money aside so you have 2 years worth of neg money to help remove the stress?

Wow, a lot of replies here. Thanks everyone.

The properties are negative at about 10k over the past year, projecting forward with IR increases im factoring in 15k.

IP1 is in the NSW port stephens area. I purchased this 7 years ago and it hasnt gone up much at all in this time. It is a house, have held it because it's in a good location, a couple of hundred meters from the beach and on a flat 820m2 block. Potentially i want to build a second house on this block sometime soon so i have kept it.

IP2 is a terrace house in Sydney about 3 km's from the heart of the city. It's done well for me, ive tipped some more cash in over the years and it is positvely geared. I would probably be pretty bonkers to sell this when i think about it now.

Really, the cashflow isn't hurting me much at all to hold. Between IPs and PPOR it is about 30k i am forking out in interest payments, we can handle it. The reason for me reducing debt are more because of my depressed mindset at the moment due to my business failing. Since the GFC I have taken a big hit, tried everything and it's just not improving for me. Feels like im walking through an endless corridor with no exit.

lizzie said:

have you thought about getting some help with the business? can the business operate without you being there? if not, then it's not really a business as such, but a job. is there any way you can set the business up to run for period of time without you via systems and taking on part time staff (such as a bookkeeper) to help relieve the load? it may mean slightly lower profits for you by outsourcing, but if it keeps you sane in the short term, and allows you to take some time away, then it may be a valid path to take.

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It's hard lizzie.

In small business you have to wear a lot of different hats. When times are hard like now, you just can't afford to luxury of paying to outsource for help. I haven't even taken a wage at times over the last 2 years. I don't feel there's anything fundamentally wrong with the business anyhow that not having me there would fix.