Author Topic: In a position of weakness - any advice?  (Read 5101 times)

Kiwistache

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In a position of weakness - any advice?
« on: June 20, 2015, 03:25:15 PM »
Recently discovered the lifestyle and absolutely love it. Wish I had known about this when I was 20 but discovered it when I was 32 so still plenty of time to achieve the goal of financial freedom.

Unfortunately, just before I discovered mustachianism, I purchased a house in Auckland, NZ at an overvalued price. I was very naive, and did not research the area, the house and the school zones etc. I was going through some personal issues, and if I am honest there was also some pressure from my parents (who have only really ever known house prices to rise). Anyway, long story short due to the pressure of the auction situation and my inexperience, I paid $547 for a house that would rent for $420 per month. I am now closely watching the prices of comparable houses and I think I would be able to get about $530k for it, there are a few similar houses up for sale right now so I will watch with interest what they go for.

The market for residential property in Auckland has gone absolutely crazy over the past five years. Prices for detached homes have pretty much doubled in that time. People are paying whatever they can afford with little regard to rental yields, which are going around 2-3% for the more desirable suburbs. A new city wide plan is to come into force in 2017 and this will make development much easier for many properties ( but mine cannot be easily developed under the new plan). Once the supply starts coming, and if interest rates rise at all (currently at historical lows) then I could see prices might start to fall given the meteoric rise.

With the price I paid, my house would rent at about a 4% yield. I have now moved in and it is costing me about $800 per week in mortgage repayments, taxes and insurance. So has pretty much wiped out my ability to save, it is also very far from the city and so my transport costs to work are also increased substantially.

Obviously this is not a great position to be in and I wish I had been a little smarter. But what is done is done. Live and learn I guess. If I had done my research, there were a number of other properties that I would have bought instead of the one I ended up with. In fact, if I had known about mustachianism I probably just would have continued to rent and save 75% of my income. So I have been pondering a number of options and would be very appreciative of any advice from those who are more experienced.

1) Sell the property as is. If I went through a private sale then I am hopeful I would be able to get $535 for the place. Since I bought two months ago, the market has continued to rise sharply. If I was lucky I may be able to get back what I paid but I doubt this. I will know more when the houses just around the corner sell.

2) Start doing some improvements to the house, there is plenty to do on the place which will not cost much such as painting and wallpapering. However there is plenty to do on this front and given I have no experience in this stuff, it will take me around 3 months to get it all done. Barring any market collapse, or unless I have really overpaid badly - then I hope I would be able to get out via a private sale for what I paid for the place. However I would need to hold it at a cost of $800 per week over that time.

3) Borrow another $150-200k and build a minor dwelling (below 65 Sqm) on the back section. It is fairly steep so this may not be possible with the council rules - I will have to investigate. If I did this, then I think I would be able to get the yield up by at least 1% point. I would not be cash flow positive, but unless the build cost way more than the estimate of $150-200k - then I would only need to tip in about $100 per week to own it.

4) Rent it out as is and tip in about $300 per week.

Any advice appreciated.

forummm

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Re: In a position of weakness - any advice?
« Reply #1 on: June 20, 2015, 04:53:30 PM »
You may need to ask someone locally about the true market value of your house. If you do want to make improvements, you should also get accurate estimates about the costs and potential increases in property values those improvements would bring. However, most improvement projects actually increase the property value by less than what you spend on the improvements. Sometimes when you do the work yourself, the math works out a little better--but only if you do a good job with it.

How much would you be able to save if you were renting instead of owning?

happy

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Re: In a position of weakness - any advice?
« Reply #2 on: June 20, 2015, 06:04:17 PM »
I have some sympathy since as soon as I read MMM, I realised I had made a huge mistake buying my large clown house 2 years prior.

Firstly how much does it cost to buy and sell in NZ? Across the ditch in NSW there is a nasty thing called stamp duty which is a sale tax which can add 10s of thousands  of dollars to the transaction. Buying and selling immediately here is thus guaranteed to be at a loss.

Secondly it sounds like you have at least a year before the effect of supply kicks in, maybe longer, since the houses will have to be built, which takes a year or two. If you are still in a rising market, this will increase your equity just by holding.

Thirdly, if there is work to be done that might improve the resale price then this could be worthwhile if you can do it cheaply. But be careful, do some research about "staging" a house for sale. You are improving to sell, not to what you would want yourself. So you only do the things that will make a huge visual difference but cost relatively little. So this is usually NOT  completely redo the kitchen and bathroom, (unless they are falling apart).  If you have no idea, then research on the internet, ask a real estate agent what work you should do ( again in Australia, a good agent will do a valuation and tell you what you could do to optimise selling price, all free of charge) or even get a staging consultant to do a report for you (in Ozz this costs a few hundred dollars). Also go look at a lot of houses on the market to see "whats hot".  A fresh coat of paint is relatively cheap and can be done by the homeowner, as long as you pay attention to the detail of preparation and are neat and tidy in your application. Currently the fashion here seems to be to paint it all white/offwhite. Be careful with wallpaper,  its more costly, and a bit harder to put on, and may not add much extra value overall to paint. If you are reselling good presentation should get you a higher price, back towards what you paid for it.

The other option would be to rent, and add to the equity by paying down the mortgage until you are starting to be positively cash flowing. Do you get a tax deduction for making a loss on a rental in NZ?

To be honest the sell/rent question probably depends on your view of the Auckland market, which I can't help you with.

marty998

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Re: In a position of weakness - any advice?
« Reply #3 on: June 20, 2015, 06:23:59 PM »
Relax, chill.

You've just made one of the biggest decisions of your life. (I mean come on, how often do you decide to spend $547,000 in a day?)

It's natural to feel doubtful about it, what if, what if, what if etc. How do you know you wouldn't have been outbid on the other properties? It's all in the past now.

First year of the mortgage always hurts like hell. I was spending 57% of my after tax income just on the minimum payment.

Then it gets better as the more you smash it the interest costs starts to fall away dramatically. You just have to throw everything at it.

You can't predict when the market will go down or up. but we can say that the market goes up over any long term period. Hence don't send all your time and effort worrying about falls.

If prices fall, big deal, use it as an opportunity to buy another one.

good luck, enjoy the ride.
« Last Edit: June 20, 2015, 06:50:36 PM by marty998 »

Kwill

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Re: In a position of weakness - any advice?
« Reply #4 on: June 20, 2015, 06:49:30 PM »
If it's a big house, and if you're single, could you rent out one of the other bedrooms? It'd be good if you could a housemate or two you get along with well--maybe a friend of a friend who likes the area but isn't ready to buy a place. You might have fun that way. And a year or two of someone else paying a chunk of the mortgage could make a difference.

SwordGuy

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Re: In a position of weakness - any advice?
« Reply #5 on: June 20, 2015, 09:19:20 PM »
I do not understand your math.

$547,000 for the house.

You pay $800 per week for the mortgage, but you could only rent it for $420 per month?  Yet you claim you are getting a 4% yield?

You would be losing a metric-shit-ton of money each month renting at $420 a month so I don't understand how you think you are getting any kind of yield!

Please explain the numbers again.

Can you get some roommates?  How many and for how much?

Can you come up with the money to pay off the difference between what you can sell it for and how much you owe?

What % of your income is taken up with this mortgage?


urbanista

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Re: In a position of weakness - any advice?
« Reply #6 on: June 21, 2015, 02:12:18 AM »
I am pretty sure $420 is rent per week.

4% rent is "normal" for houses in Australia (not all area, but many of them). I wouldn't stress about the purchase. Move in and get roommates .

Lordy

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Re: In a position of weakness - any advice?
« Reply #7 on: June 21, 2015, 03:25:02 AM »
Since you sound very unhappy with the decision to buy this place I would suggest to cut your losses now.

Unless you are an experienced renovator I would not put more money in than you already have. You may loose a few bucks but that's the price of this lesson.

Kiwistache

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Re: In a position of weakness - any advice?
« Reply #8 on: June 22, 2015, 05:17:38 AM »
Thank you all for your helpful replies. Some really great advice and I really appreciate it

.
I do not understand your math.

$547,000 for the house.

You pay $800 per week for the mortgage, but you could only rent it for $420 per month?  Yet you claim you are getting a 4% yield?

You would be losing a metric-shit-ton of money each month renting at $420 a month so I don't understand how you think you are getting any kind of yield!

Please explain the numbers again.

Can you get some roommates?  How many and for how much?

Can you come up with the money to pay off the difference between what you can sell it for and how much you owe?

What % of your income is taken up with this mortgage?



Thanks Swordguy. It's probably because of my poor understanding of real estate investment and also the fact that the terminology we use down here is quite different.

Yes there is no yield, except a negative one :-).

I pay $720 per week in mortgage repayments. The insurance plus city council charges add about another $70 per week, so a total of close to $800 per week plus any maintenance. The house would rent for about $420 or $430 per week.

The house is financed at 6% as it is all on a floating term - if I was to fix I could get this down to just over 5%, which would bring the monthly mortgage payment down to $650.

My income is about $1400 per week, so this takes up just under 60% and it makes it much more difficult to save. I was previously saving around $1000 per week.

I could get some roommates however the rooms are quite small and the house is not modern so it would be only I think around 120/130 per week for each room. Let's say $250 per week.

I am pretty sure that the loss would not be more than the deposit I put down of about $40k. I have some other money invested in stocks but not much.

Thanks mate!


Kiwistache

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Re: In a position of weakness - any advice?
« Reply #9 on: June 22, 2015, 05:25:54 AM »
You may need to ask someone locally about the true market value of your house. If you do want to make improvements, you should also get accurate estimates about the costs and potential increases in property values those improvements would bring. However, most improvement projects actually increase the property value by less than what you spend on the improvements. Sometimes when you do the work yourself, the math works out a little better--but only if you do a good job with it.

How much would you be able to save if you were renting instead of owning?

Good idea. I will go and ask the estate agents what they think the true market value is. The market here still seems to be going up (don't ask me why, I think it is completely insane).

I'm single with no kids so I would be able to rent a room within biking distance of work for about $150 per week. Living here I pay $800 per week plus $50 for the train to work.

Kiwistache

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Re: In a position of weakness - any advice?
« Reply #10 on: June 22, 2015, 05:53:15 AM »
I have some sympathy since as soon as I read MMM, I realised I had made a huge mistake buying my large clown house 2 years prior.

Firstly how much does it cost to buy and sell in NZ? Across the ditch in NSW there is a nasty thing called stamp duty which is a sale tax which can add 10s of thousands  of dollars to the transaction. Buying and selling immediately here is thus guaranteed to be at a loss.

Secondly it sounds like you have at least a year before the effect of supply kicks in, maybe longer, since the houses will have to be built, which takes a year or two. If you are still in a rising market, this will increase your equity just by holding.

Thirdly, if there is work to be done that might improve the resale price then this could be worthwhile if you can do it cheaply. But be careful, do some research about "staging" a house for sale. You are improving to sell, not to what you would want yourself. So you only do the things that will make a huge visual difference but cost relatively little. So this is usually NOT  completely redo the kitchen and bathroom, (unless they are falling apart).  If you have no idea, then research on the internet, ask a real estate agent what work you should do ( again in Australia, a good agent will do a valuation and tell you what you could do to optimise selling price, all free of charge) or even get a staging consultant to do a report for you (in Ozz this costs a few hundred dollars). Also go look at a lot of houses on the market to see "whats hot".  A fresh coat of paint is relatively cheap and can be done by the homeowner, as long as you pay attention to the detail of preparation and are neat and tidy in your application. Currently the fashion here seems to be to paint it all white/offwhite. Be careful with wallpaper,  its more costly, and a bit harder to put on, and may not add much extra value overall to paint. If you are reselling good presentation should get you a higher price, back towards what you paid for it.

The other option would be to rent, and add to the equity by paying down the mortgage until you are starting to be positively cash flowing. Do you get a tax deduction for making a loss on a rental in NZ?

To be honest the sell/rent question probably depends on your view of the Auckland market, which I can't help you with.

Thanks Happy, I appreciate your good advice. MMM certainly makes you see some of your past decisions in a vastly different light. And honestly I'm a lot more content now that I understand filling your life up with junk doesn't make you happy.

Fortunately we have no stamp duty here in nz. So if I sell it without using a RE agency, then my only costs will be the legal fees and some bank fees - less than $5k all up.

You are right about the supply. Right now there is a large shortage of homes and the supply is going to take at least a year to catch up, based on some sales in the last week or two that I have seen, the market still seems to be rising. So no need to panic I think.

The fortunate thing about this house is that the kitchen and bathroom are the two rooms in the house which have been renovated. So I can leave those and just do the basic stuff like painting. I have never attempted anything like this so will be a good learning opportunity for me to learn some new skills.

I would be quite far from being positively cash flowing, I calculated I would need to pour in another $200k (which I don't have). Renting it out is another option, losses can be claimed and offset against other income so that would help. I would still need to pour a fair bit in to it each week to top up the mortgage.

No idea about what will happen with the Auckland market. Major supply shortage and people seem happy to buy at very very low yields - I regularly saw places sell at 2.5% gross yield. It could well keep going up for a year or two, whether it then falls or just levels off who knows.

Cheers,