Should I Liquidate Investments to Pay Off My Negative Cashflow Property?

For heads up, I am no property expert, in fact, I am more of an amateur.  This is also the main reason why I am rather hesitant to write this post as it discloses my "failed venture", or should I say, an investment decision that did not turn out the way I thought it would.  However I think it is important for me myself to look into my failure and scrutinize it so that I can truly learn and grow from this episode, and thus be in a better financial position to progress into Barista FIRE phase.  Note that this is not financial advice, and it is mainly as a personal record. 

As I grow older and gradually refine my financial journey, I often find myself questioning the balance between investing for future retirement and reducing debt for peace of mind.  Recently, this question has become more pressing because of my intention to progress into my next phase of life, Barista FIRE.  The main issue lies with my investment property in Malaysia.  For information, I am Malaysian, so I do not have any minimum property value to adhere to if I buy a property in Malaysia.  Despite this, unlike my equity investment portfolio which generates dividends and supports my long-term FIRE plans, this Malaysian property is currently cashflow negative.  Every month, I need to top up cash to cover the mortgage instalment, a less than desirable situation that eats into my mental bandwidth and overall financial comfort, especially if I intent to FIRE.

Initially this property purchase was promising, as it was located in a lively neighbourhood, security is good and it was with unblocked view.  However the deal-breaker was that it was bought in end of 2019, and two days after I receive the keys in March 2020, Covid-19 lockdown hit and I was trapped in Singapore.  So the house was left idle over a year but mortgage instalments remain ongoing.  Thankfully with the help of my brother and his agent friend, this property was rented out a year later in 2021, but the circumstances has immediately caused this supposedly good investment to drop to a subpar investment property.  

Fast forward to today, the circumstance worsen further because news broke that right in front of my unit, a new project will be constructed (on a relatively tiny plot of land) and that means, the view will be blocked, and the 3-year construction period will be "deadly" for rental or sale.  As the lease of the previous tenant ended, my agent informed me that there will be difficulty with finding buyer, and it may be easier to find another tenant.  At this juncture, it means that the negative cashflow issue will not be resolved in the short term.  I have to restructure my portfolio to improve the cashflow.  This got me thinking, should I just clear this mortgage once and for all with corresponding trade-offs.  Currently, I see three possible options for myself:

Option 1: Liquidating About 10% Of Equity Portfolio To Pay Mortgage

This would be the most straightforward approach.  By selling all my US growth stocks and ETFs (7% of my total equity portfolio), and a small bit of my SG Dividend Portfolio (another 3% of my total equity portfolio) so that there is minimal impact to my dividend cashflow, I could clear the loan immediately.  The pros are clear:

1)     Guaranteed return: I effectively “earn” the mortgage interest rate (about 4% currently in Malaysia) as a risk-free return by eliminating the debt.

2)     Immediate relief from negative cashflow: no more monthly bleeding, and the cash from active income saved can be channeled into growing my dividend portfolio further.

3)     Lower financial and mental stress: not having to deal with a liability on a property that is not performing would lighten the mental load.

But the cons are also real:

1)     My US growth allocation is a small but important part of my long-term strategy.  By liquidating, I lose potential compounding from this growth engine even though dividends are not impacted.

2)     Given that growth equities can outpace mortgage interest rates in the long run, I could be sacrificing future returns.

3)     Once the money is sunk into the property as equity, it is illiquid.  Unlike stocks, I cannot easily pull it back if I need cash.

In short, this option brings peace of mind but at the cost of future growth and flexibility.

Option 2: Use Dividends From SG Portfolio Accumulated Over 2 Years To Pay Mortgage

This option involves “enduring” the pain for two more years.  During this period, instead of reinvesting my dividends back into my dividend portfolio, I would accumulate them and eventually use the lump sum to clear the loan 2 years later.  The pros include:

1)     My US Growth Portfolio remains intact, possibly continuing to grow and compound.

2)     I avoid missing out future possible gains in my US Growth Portfolio, which may or may not happen.

But the cons are equally clear:

1)     I still need to endure two more years of negative cashflow, which means draining my monthly cashflow and possibly feeling unnecessary stress.

2)     There is an opportunity cost to not reinvesting dividends for two years, slowing down the compounding of my SG Dividend Portfolio.

3)     Market conditions in two years may be different, but the mortgage will continue to demand instalments until then.

This is a middle-ground option that protects long-term growth but prolongs my current discomfort and stagnates my dividend income growth.

Option 3: Sell The Property

This is, in my opinion, the “best solution” where I just get rid of the property altogether.  Once sold, the mortgage is gone, and so is the headache of dealing with a cashflow-negative asset.  However, this is also the option which is least within my control.  The pros are:

1)     Completely removes the liability and ongoing negative cashflow.

2)     Simplifies my portfolio with fewer moving parts to worry about as I age.

3)     Allows me to focus on my dividend portfolio in Singapore, which is core to my FIRE journey.

However the cons to consider are:

1)     The timeline is uncertain.  It could take months or even years to sell, depending on the market, especially when recently there is a new flood of new properties entering the market by developers, which makes my older property pale in comparison.

2)     Until it sells, I still bear the burden of negative cashflow and monthly instalments.

3)     There is also a possibility that the sale price will not be favorable, which could mean crystallizing a loss.

4)     Based on current circumstances, with construction on-going right at my "door-step", it is hard to sell now.

This option offers the cleanest long-term outcome but is also the least predictable and hardest to materialize in the short term.

Weighing the Three Options

Looking at my personal situation:

1)     Best for immediate peace of mind: Option 1 (liquidating US growth).  It kills the debt right away and stops the bleeding.

2)     Best for long-term portfolio growth: Option 2 (enduring 2 years).  It preserves my allocation and lets compounding work for the US Portfolio in the expense of the compounding of the SG Dividend Portfolio, and also at the cost of short-term stress.

3)     Best for overall simplicity: Option 3 (sell the property).  However the uncertainty of timeline makes it risky, and I cannot control when it happens.

4)     Worst option: Doing nothing and hoping things resolve themselves, because it prolongs stress without a clear plan.

My Conclusion

Given my personal circumstances, I lean towards executing Option 1: liquidating my US growth portfolio to pay off the mortgage, and Option 3 at the same time.  While it is not the most financially optimal choice on paper (since growth stocks may outperform my mortgage rate), it solves the immediate problem of negative cashflow and removes a source of stress from my life.  Most importantly, it is 100% within my control, when I want to do it and how I want to go about doing it, all while at the same time, continuing to market the property for sale.  In the event the sale goes through later, I may consider another path of using the sale proceeds to slowly build up a dividend portfolio in the Malaysia Bursa market.

Indeed for now, if I execute the plan above, I would sacrifice some future returns.  However at this stage, peace of mind and simplicity probably matters more than squeezing out the last percentage point of returns.  Having my SG Dividend Portfolio intact and compounding gives me enough exposure to some growth and income, while eliminating a problematic liability helps me move forward more confidently.

So, for now, after talking to myself here in this post and laying out all circumstances and possible solutions for myself, my direction is clear: reduce complexity, kill the debt, and let the rest of my portfolio continue working for me.  Hopefully with this post, it helps me to be more well-explored in various perspectives and enable me to make the decision I will want for myself without regrets.  Barista FIRE, here I come...!