My husband and I are in our early 30s and we earn $175,000 combined. We are aggressive wealth-builders. However, one of our investment properties is in negative equity by $75,000 (we had a loan to value ratio of 97 per cent). We have no way of refinancing or selling as we cannot cover the shortfall currently. We have three other investment properties (one that we will move into in five years) and thought to sell them to cover the shortfall. However, we have just had independent valuations done and this would only cover $20,000 — a huge mess! Do we direct our ‘fire extinguisher’ money to this and pay it down to where we can sell it? I say yes, partner says no. HELP!
Aggressive is one word for your situation.
Borrowing 97 per cent of the value of the property doesn’t leave you with any wriggle room (negative equity simply means you owe more on your mortgage than the house is worth, in your case to the tune of $75,000).
I understand the concept of aggressively using the equity to ‘leapfrog’ and buy more investment properties. There are entire books devoted to the strategy, and they all end with the landlord becoming filthy rich. In the book, that is.
The ‘only’ thing you need to watch out for is going broke in the process! To avoid that, you need a buffer.
So let’s talk about your buffer. You need to make sure that you have enough money to cover the impact of higher interest rates, prolonged vacancies, and maintenance costs. That’s just for the investments. You also need Mojo (and income protection) in case one of you can’t work.
Either way, I’d be aggressively saving — and then potentially looking at unwinding the strategy.