I bought the wrong property in the right location. what do I do?

Question

i bought a property which was great in many ways and terrible in many other ways.

its near the river, near the zoo, four schools, 2 shopping plazas, 20 minutes from the beach, 10 minutes from the train station, 40 minutes from a major university, 5 minutes from a major hospital, 5 minutes from the nearest commercial hub, 40 minutes from another major city and has great tourism industry, commercial hub and everything is a tick EXCEPT the fact that when I purchased the house, it was a sad little brick house in a sad little part of town, with sad qualities and below average appeal. Its structurally sound on a very good block of land but here's the biggest but- ITS NEUTRALLY GEARED. I lose 4000K a year on it but I get 4000K tax refund from it as well. I am able to tap into 180K equity but my income and cashflow is very limited and I am scared that I might be gambling and pushing my luck if I tap into the equity now.

the house was last valued at 450,000. The mortgage is 265000.

What do I do with the equity, -- tap and GO ?? or just pay down the mortgage and then tap into the equity when the mortgage is around 150K??

I'm a single mum with two kids. I live with my parents and I earn 45000 from my day job. Any ideas are welcome.

Joe Villeneuve · Answer

You're not going to like this answer, but if you don't do it, your financial situation will just continue to get worse.

1 - That list of really cool things,..."its near the river, near the zoo, four schools, 2 shopping plazas, 20 minutes from the beach, 10 minutes from the train station, 40 minutes from a major university, 5 minutes from a major hospital, 5 minutes from the nearest commercial hub, 40 minutes from another major city and has great tourism industry, commercial hub"...means nothing to a REI.  Why?  Because you can't interpret the impact it has on the people that live there.

2 - "Neutrally Geared" means what?...a fancy way of saying you're losing money, but you are going to rationalize that you're not?

3 - A tax refund isn't new money...it's your money just coming back to you.  It doesn't change the losses you are incurring here.

4 - $180 in equity = &100+ in profit.  Equity is dead money.  Profit is real money.

5 - If you "tap into your equity" by refinancing, all you're doing is paying for the use of it...and increasing the losses.

6 - Paying down the mortgage is a cost to you...which just adds to the losses you are incurring.

7 - Sell it an move on.  The longer you stay with this property, the more you lose money.  The more you lose money, the longer it takes you to turn a profit, since a profit only occurs after you break even on the cash you put into a deal.

Amanda G. · Answer

I second what @Joe Villeneuve says, but I would add- hey, look, you are not in a panic situation, you can get a good market price for it and then put that money into a purchase that will actually help your family's financial life. Good luck!

Bob Woelfel · Answer

@Tamara Al Hashimi...the only numbers that look good on this property are the numbers if you sold.  As a rental it's bad and taking out a HELOC will only make the numbers worse.  You have two kids and make $45,000 a year, but if your numbers are right you stand to walk away with around 150k if you sold.  I don't know if you should 1031 or just sell outright and pay the taxes, but you should have sold YESTERDAY!  Best of luck.

Jack Szalasny · Answer

Tamara,  My question concerns the $450,000 valuation.  Is that a tax assessment, an as-is appraisal, or a real estate agent's CMA?  All three are different.  You say the property looked sad when you bought it, have you done any improvements?  How long have you owned it?  It sounds like over a year, so you're at least looking at long-term capital gains if you sell it, which is more favorable than short-term.  It sounds like you're more geared toward buy and hold, and I agree overall with the majority of posters that you should most likely sell it and put the profit into a more cash-generating rental.  Also, look into a 1031 exchange if you do sell the property, whereby you can defer any capital gains at time of sale.  It sounds like you may qualify.  Best of luck!

Theresa Harris · Answer

I don't know what neutrally geared means either.

If you are losing $4K per year, it isn't doing well, and you have a lot of money in it,  sell it and buy a place with better numbers.  You have almost $200K in equity in the house and if you are living at home with your parents and making good money, you are also saving on expenses.

I bought the wrong property in the right location. what do I do?

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