Hi Everyone,
I can’t believe it’s been over 2 years since my wife and I joined PropertyInvesting.com and that we’ve only now plucked up the courage to post our first contribution to the forum! Anyway, here goes…
My wife and I are currently trying to make (for us) a very big decision for which we’ve sought advice from two reputable professionals, both experienced property investors, one a financial planner, the other an accountant. Frustratingly, we’ve received conflicting advice from them and, strangely, the more conservative advice came from the financial planner, not the accountant. We’re now hoping that some feedback from Forum members will help. First, some background information on our quandary:
We have just moved back to Australia after living in the UK for nearly 7 years and are currently housesitting (rent free) for most of this year while we build our first PPOR. During a short visit back to Australia 3 years ago we learned that a property boom had started after we moved to the UK. Worrying that the growth trend might put property beyond our reach when we eventually returned to Australia, we took immediate action during our holiday. We purchased a newly built negatively geared, residential investment property and also bought some vacant acreage on which to build our PPOR when we returned to Australia permanently.
Having now permanently returned to Australia, we’re now trying to decide whether to re-mortgage the investment property to acquire further (PCF) investment properties, or to sell it and put the profit towards the mortgage on our PPOR, leaving it almost mortgage free, then leveraging our equity in our PPOR in about a year or so to invest in PCF properties.
The financial planner / property investor advised us to sell our negatively geared investment and put the proceeds towards our PPOR mortgage, mainly because there are no tax benefits on PPOR mortgage, and he doesn’t like the future growth potential (5 to 7 years hence) of the suburb in which our investment property stands. The accountant / property investor advised us to retain the investment and leverage its appreciation now to acquire further investments.
Here are some figures:
Investment property purchased for $285K with $57K deposit (20% required because we were ex-patriots at the time); $228K owing on interest only loan; value recently appraised at $450K.
Vacant acreage purchased for $170K with $34K deposit (20% as above); $120K owing on P&I loan; value recently appraised at $340K.
We’re expecting the PPOR we’re building (a project home) to cost about $230K all up.
Apart from the financial aspects of the alternatives, each strategy also has a few less tangible pros and cons for us, for example: The hold-the-investment-and-invest-further-now strategy is attractive to us because we greatly desire to invest further as soon as possible and it seems a logical means of wealth building through leveraging; on the other hand, the negative cashflow may put a little strain on our finances later this year when we start our family and lose one salary. The sell-the-investment-and-pay-down-our-PPOR-mortgage strategy is attractive because our personal cashflow will benefit from only having one smallish mortgage instead of 2 large ones; on the other hand, we’ll be delaying our further investing by a year or two.
We’d really value reading your opinions on what you think we should do, and any alternative strategies you might suggest.
Cheers
Cam & Leanne
PS: When all feedback is in, we’ll post a follow up to let you know our decision. We might also offer a gift to the contributor of the advice we heed!
This is just re-gurged from other entries I have read.
Sadly if you draw down on your IP you cannot use it for personal use AND claim deductions on the interest.
However, someone mentioned either selling the IP to your partner or to a trust. Then your interest may be deductable. You keep the IP and have cash to put down on your PPOR.
Just another angle.
Good luck and seek real advice on this one.
Mat
I would suggest re-financing both, set it up so the investment property has just enough paid to make it neutral (then you don’t have to worry about supporting it). Don’t overspend on your PPOR and set up as a LOC or Offset with all other equity, then buy another property with again enough in it to make it neutral, from your figures you should be able to do this.
Investment property purchased for $285K with $57K deposit (20% required because we were ex-patriots at the time); $228K owing on interest only loan; value recently appraised at $450K.Hi Krookfamily,
Although I’m normally a buy and keep kind of person, I think I can see benefit for you in selling the IP. Here’s what I think:
Taking your figures as reality, you’ve made a profit of $165k on the IP. Subtract the buy/sell costs, and maybe $150k profit. Now, if it is owned in Joint names, then each of you own half. Thus, $75k profit each. And, since you’ve owned it for >12 months, that gain can be halved – so $37.5k each added to your wage as Income Tax is calculated.
Now, if you haven’t earned much in Oz, then the Tax is likely to be 30% (or ~$23k total in CGT). But I’m not sure how your earnings in the UK are considered, so you’ll need to allow for that. And then, if you don’t sell until 1 July, then you won’t be due to cover the CGT until ~Oct 2007 (by which time, you may well have garnered further investments, and can easily handle the $23k CGT).
So, initially, the $165k profit can cover MOST of the building cost of your PPOR, then be “clawed back” by using an LOC to fund another property (or pay your CGT). After its built, it seems you will have a $600k PPOR with mortgages of around $200k.
This leaves plenty of Equity to go shopping (depending on your DSR of course). Good luck
Benny
If you ever lived in that unit, you pay be able to claim it as your main residence and, hence, sell it CGT free. Section 118-145 of the ITAA (I think).
If not, it may still be worth selling. You have to add up all the costs – agents fees, CGT etc. and then you will eventually be replacing the investment with another prperty so you should included the purchase costs here to: stamp duty etc.
Just work out al the sums on selling and the interest savings if you sold and paid down you loan.
Terryw
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Parramatta
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Hi guys back from the cold of the UK.
Firstly whoever told you that a 20% deposit was required as you were an ex-pat didnt now what they were talking about. I have dozens of expat clients living in Pommie land and around and regularly arrange IP loans at 90 / 95% loans for them.
Why not make the equity you have work for you. Structured properly you could look to pay down your PPOR as fast as possible yet not be having to wait around to expand your investment portfolio.
You do not mention details on your income or rent (and we wouldnt expect you to air this on the forum) from the IP so it is difficult to make a recommendation on structure but talk to a mortgage broker and i am sure you will receive some unbiased advice.
Richard Taylor
Residential & Commercial Finance Broker
**Lodoc Commercial loans from 7.39%**
Licensed Financial Planner
Ph: 07 3720 1888
[email protected]Richard Taylor | Australia's leading private lender
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