Avoid accumulating debt for future windfall

Question: I'm concerned about my debt level. I am an expatriate who has invested in a flat which I am renting out, while staying in a separate property. My plan was that I'd use the balance of the rental income to pay back the loan and cover the rent on the property I stay at. Unfortunately, the rent income doesn't cover the loan payment and maintenance charges. The tenant will not move out, and she went to the Rents Committee, and I'm now stuck paying rent and sharing my current flat, and losing money on the deal, and generating more debt. I'm trapped - please help!

Answer: Even in a young property market like Dubai, there are traps for the unwary and it's possible to find yourself trapped in a negative situation like this one.

One of the important rules of investment is that you should avoid generating additional debt in the hope of realising profit down the line - rather, you should invest from the surplus generated by the gap between your monthly income and outgoings.

For your situation, the debt you've incurred in buying the property isn't being offset by your income and, in fact, when additional payments are factored in, your debts and liabilities are significantly inflated. Resolving this situation is going to take time and patience.

The first step is to divorce the emotion of the situation from your finances. I'm sure that you are frustrated that you're sharing a flat when you own a property and that your tenant is refusing to move out and make it easier for you. However, just as the buyer should beware, so should the landlord. This is a situation that you are at least partially responsible for.

One question to answer is which is more important to you: to improve your living situation, by moving into a new flat, or resolving your current financial imbalance? Unless you are confident of a windfall in the near future, I would strongly advise you to focus on resolving the finances first.

The core issue is that is seems you have set the rent level below the market value of your flat. Tenants' rights are protected under the law, so this situation cannot be resolved overnight.

Your tenant has established her right to remain in the property, so you need to plan for her staying there for the medium term. While you can increase the rent level incrementally according to the Rent Law, it may not be enough to cover your outgoing expenses.

What you need to do is manage your outgoing expenses, so as to prevent being overwhelmed by your debt burden. You should talk to the bank about changing the payment terms on your mortgage, although it is likely they will ask for a penalty charge.

You could also look at reducing your living expenses, in order to save more: while you might not like sharing your current flat, you may have to live with the situation in the short-term.

Looking to the future, it's worth remembering that you own a valuable asset with your property. Unlocking the value of the property will enable you to resolve your debt situation and regain your sense of freedom. You need to plot the course to this point, and be careful not to incur further debt along the way.

- Michael Walton is Director of General Insurance at Nexus, one of the region's leading financial advisor.

Views expressed here are the author's own and do not necessarily reflect the views of Gulf News. If you have any questions please email at: advice@gulfnews.com.