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Our property investment is losing money. Please help.

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Q.  Five years ago we bought an investment property in Port Douglas. It is a dual key apartment and is in a complex with 40 other apartments. We pay an interest only loan of over 400k. I am at my wits end because there are only a few months of the year that the rentals pay for the interest payments - around $3000 a month.

My husband and I have used our savings and have withdrawn $25000:00 from his super fund to assist in the payments. If we sold the unit at present we would lose about 80 -100k. We are close to retiring age and don’t want a huge debt hanging over our heads.

The other partner is my sister who can’t afford to put much money towards payments as she is on her own and doesn’t earn a lot of money. We thought that the rentals would cover the payments but with all the competition up there now, the units are rented at a lower price. Have you any suggestions?

Josie’s answer: I am so sorry to hear about your dilemma.   Unfortunately, it is a common story.   There are plenty of examples of investors who get caught up in the hype and emotion of a holiday destination, or feel there is some urgency to get into the housing market before it too late (and usually buying at the tail end of a boom).

Then reality sets in.  The figures presented by ‘the experts’ were projections and the assumptions they used were unrealistic.   Not sure if they offered you rental guarantees in the early years, but I don’t like them.  Just the cynic in me.  Quality investments do not need guarantees and I suspect they need to inflate the value of property* to absorb this expense.

The only saving grace for you at the moment is that interest rates are decreasing, so this should help a little.

You really are in a bind, and I am talking from experience here.   I purchased property with members of my family and was constantly ‘nagging’ them for money.  It was in the days of 17% interest rates and we really struggled.  In the end we had no choice but to sell the property and accept the losses.   It was a heart wrenching experience at the time, but we had to move on.

Interestingly, with the benefit of hindsight, we might have been better off holding on for a few years, but who knows how my relationship with my family would have fared.    Money is not that important.    I am hoping your financial circumstances are better placed than mine were at that time.

Debt is wonderful when asset prices are increasing, but can have a devastating effect on personal wealth when they are going south.    We are all caught up in a  global financial crisis, because greedy, unscrupulous lenders were prepared to give money to those who could least afford it on the assumption that property prices will increase.    However, if there is no growth attached to an investment, then the investor has to rely on the income and in your case it is very little.

The only way to cope in these times, is to reduce debt.  You mention you are dipping into your super to help service the $400K loan (your interest payments are at least $30K+ each year).   This is a big concern, especially if you are drawing funds from an investment with some exposure to the sharemarket.  Your losses are real, not just on paper.

You cannot continue doing this as you are helping to fatten the banks profits and eroding your retirement savings.    If you do not have assets to help reduce this debt, you have no choice but to sell the investment unit and accept the loss.

My disclaimer here is that I am not an expert on the future growth of Port Douglas, so you need to do your research.  Not sure who you would talk to.  I certainly wouldn’t rely solely on the opinions of real estate agents as they have a vested interest.

You also need to ensure the managers of your property are doing the right thing by you.   Look closely at all your expenses and make sure you are maximising your income.   Are you able to rent the unit permanently, in order to get some certainty of income?   When money is tight, consumers cut back on discretionary spending, which unfortunately includes where they go on holidays.

You must also sit down with a finance professional, such as a financial planner or your accountant to run through some scenarios before making the final decision.

It really breaks my heart to hear these stories.    My money tip without the BS this week is ‘Will Property Values Fall?’.  It summaries the forecasts of some reputable experts on growth rates of property in the coming years.   None of them are bullish about the property market in general.   Remember they are forecasts and nobody has a crystal ball.   Don’t hesitate to keep in touch.   I am more than happy to share my thoughts.

I wish you all the very best for the future.  Remember, money is not everything.   Don’t let money problems affect your health and general well being.  The love of family and friends is all that matters.

Josie Kay

Sponsor - Savvytel* As featured on Money Matters…you get to keep all your credit…check them out to save money.  Calls half the price of Telstra, Optus and Vodafone.

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives.   It is recommended that you seek personal financial advice specific to your needs.     Thanks for posting your question on www.askjosiekay.com.au.

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