This week’s burning question comes from Gupta, who has found himself in something of a financial pickle.
Gupta’s story isn’t unique: in fact I think there are plenty of Australian investors in a very similar situation.
You see, Gupta has two investment properties… in Perth.
“My strategy was to buy older properties with land for capital growth. I own two properties and between them, they’re costing me $26,000 per year after tax. I’m trying to find some ways to move forward, such as selling one or both properties or constructing a granny flat to boost my yield, as the properties are currently draining my cashflow and it makes me feel like I’m tied to my job.”
Over the years I’ve meant countless investors who could pretty much recite Gupta’s scenario word for word.
The thing about property investing is that it’s meant to help you create freedom and choice in your life; not make you feel chained to your day-job. If that’s the case, then things are not going to plan.
So – if you’re in this situation, what should you do next?
First of all, I want to comment on Gupta’s investment strategy. Overall, it’s a good strategy – buying property with land to develop down the track is a really great way of creating good yield and capital growth as well.
But it’s a long-term strategy and there can be bumps in the road. This is a really good burning question from Gupta as it addresses the fact that investing isn’t one smooth ride forward.
We all know that Perth is in the midst of a down cycle. Property values are constrained and there is little to no capital growth on the horizon. Obviously this kind of environment is not the ideal time to sell.
However – selling could make sense for Gupta, if he is going to be able to get out of the deal and break even financially, to then get into another deal, as a result of ditching one of his Perth properties.
It really does depend on his individual properties. There are different micro-markets at play in Perth, and if his investment has enough equity in it that he can sell and move on from the deal without making a financial loss, then this could be a smart decision.
He’s also looked at potentially constructing a granny flat to increase his rents and make the cost of holding his portfolio more affordable? My thoughts on this are: it could be a great idea. Or it could be a terrible idea. Again, it depends on the suburb.
If you’re going to build something in the backyard, are tenants going to want to rent it out? Are granny flats a sought-after accommodation type in that neighbourhood? If not, it could be a risky move. The last place Gupta wants to be in is paying an additional mortgage on a granny flat that sits empty without an additional rental income balancing his books.
The other thing he could do is simply wait it out, by continuing to pay his mortgage and waiting for the market to improve.
The right answer for Gupta? It all comes back to his individual strategy. So my advice to Gupta is to gather as much information as possible and take it to your accountant.
If you sell today: How much would you realistically get for it? How much do you owe on your mortgage? How much would you be left with after all costs are taken into consideration?
If you build a granny flat: How much will it cost? Will you be able to get finance for a construction loan? What rental income are you likely to achieve?
If you buy another investment: Can you locate a positively geared property to add to your portfolio and balance out your costs? Can you afford another property and will you get finance?
Once you crunch the numbers on all of these options, go to your accountant and let them run their assessment. Leverage their expertise to help you create a meaningful pathway forward.
Did any part of Gupta’s story ring true for you – or do you have another burning property question that you’d love some clarity around?
I really love getting your Burning Questions and they’re coming in thick and fast every week. If you’d like to add your query to the pile, please click here and look out for my 2 Cents reply in an upcoming episode!
