Hi
I wonder if I could outline are scenario and ask for some input/advice? We bought a unit in the bayside area of Melbourne about two and a half years ago which we currently use as a PPR. We have been tidying it up whilst living there – giving it a paint, new gutters, polishing floors, re enamelling the bathroom. Anyway, the place is getting too small for us now and ideally we would like to buy a house somewhere in the surrounding area. The unit is in a good location (one minute walk to train station, shops and beach) and so if we can we would like to keep it. Unfortunately thouhg we probably bought at the peak of the boom so it has only really increased in value by about 10% (from $250,000 to $275,000) since we bought it, although we could probably get it valued for finance at more than that (brokers have mentioned at about $300,000 – scary thought). Am thinking that the rent return on the unit would not be enough to cover the repayments though. We currently owe $229,000 on the unit and have about $25,000 cash in the bank (in an offset account). Anyway,
Idea 1 – rent out unit and buy another investment (maybe Frankston area – something cashflow positive) and then find something to rent for us to live in.
Idea 2 – rent out unit and buy another house to live in a similar area. The idea of going into this much debt scares the hell out of me – particularly since we are hoping to start a family soon. And it wouldn’t leave us with much equity. However Melbourne seems to be growing population wise so I can’t see there being a major crash or anything in the market – and we could always sell the unit if we got into dire straits.
It would be nice to find our own home but am just hesitant about the debt factor. Any input would be appreciated.
Thanks.
Julie
Property Conveyancer
MelbourneMy preferred option would be Idea no.1.
If you don’t mind renting a place for yourself, this option will accelerate your wealth much faster I believe. It’s just a matter of getting past the mental block of renting. Once you’ve done that you’re on your way.
The interest on you PPoR is not tax deductible, and it is normally much cheaper to rent unless you own your PPoR outright.
As a side point – my view is that having a large sum of money like that in the bank is not good financial sense and here’s why;
Best interest rate you’ll get on savings accounts is currently about 5.5% (haven’t checked recently to be sure).
After you apply inflation, bank fees and pay tax on the accrued interest, you will have almost zero return – maybe even minus.
Meanwhile, the cheapest interest rate you’ll be charged on your home mortgage is about 6.5%, but it’s probably higher (again, haven’t looked recently – I only use I.O L.O.C). So while you are receiving an interest payment on your savings, you are still going backwards financially.
You are better off to slam the whole amount on your home loan (if the loan permits you to pay extra payments). I don’t know the actual saving in interest over the life of the loan, but it would be tens of thousands and several years off the loan (there are loan calculators on the web to help you work it out).
A better scenario would be to have a loan with an offset account with a re-draw and an investment account . The $25k goes in the offset, thus reducing your home loan interest enormously, but it is still accessible in an emergency, which is why you are holding the cash I assume?
Savings accounts are so twentieth century! The banks don’t want your savings; that’s why the rates are so crap.
You need to get hold of one of our fabulous Mortgage Broker/financial advisors on this site to guide you and set up your loan structure before you commence investing.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Marc
The funds we hold in the bank are in a mortgage offset account against our existing mortgage. Thanks for the tips though. I don’t want to inject the cash into the mortgage directly at this stage until we decide what our next step is. Thanks for your advice. I guess our next job is to find an investment property. Thanks again.
Julie
Julie
Property Conveyancer
Melbourne“The interest on you PPoR is not tax deductible, and it is normally much cheaper to rent unless you own your PPoR outright.”
That has to weighed up agains capital gains tax. If he rents the place out even for 1 day as I under stand it, he waves his right to no capital gains tax when he sells the unit.
Say the rent is $250 and his interest at the moment is about $308 per week. So a loss of $68 then he gets tax back so maybe loss of $40 per week. But has to rent somewhere else for $250, so loss of $290. SO now we are comparind $290 loss renting with IP, to $308 loss on PPOR, only about $20 per week difference. Say the place values to $400k and he sell it making $150k profit. capital gains if im not mistaken will then be $25,000, thats ALOT of weeks at $20 per week…. thats like 20 years…….. so he is way better of not getting an investment mainly beacuse the rent he would get is to low.
Quite frankly I think alot of people are getting ‘hooked’ into investing when there is no real reason to. INvestors will look at his situation and say “wow he has $50k equity” . I look at it and say he has $200k debt. Remember you need somewhere to live, so until you own a house outright (or are close), I recon you should not consider investing, UNLESS you are moving to a house that is considerably cheaper than your IP. Alot of people get this wrong.If you are going to upgrdae your house, its probably best to sell this and get on withit, because $50k off the loan of a $450k is going to save you buckloads in interest that the IP would take many years to create.
“That has to weighed up against capital gains tax. If he rents the place out even for 1 day as I under stand it, he waves his right to no capital gains tax when he sells the unit”.
The C.G.T on your PPoR if you rent it out is pro-rated, and you can rent it out for up to 6 years without being liable for C.G.T (there was considerable discussion about this a couple if weeks ago on another thread).
“Say the rent is $250 and his interest at the moment is about $308 per week. So a loss of $68 then he gets tax back so maybe loss of $40 per week. But has to rent somewhere else for $250, so loss of $290. SO now we are comparind $290 loss renting with IP, to $308 loss on PPOR, only about $20 per week difference. Say the place values to $400k and he sell it making $150k profit. capital gains if im not mistaken will then be $25,000, thats ALOT of weeks at $20 per week…. thats like 20 years…….. so he is way better of not getting an investment mainly beacuse the rent he would get is to low.”
You are assuming he will get back a bad rent return/tax return on the I.P. Some of us can get a pos cashflow on our properties after tax (and even before tax).
If you rent a house worth $500k, the rent is normally around $500 per week or even less. The same value property to buy would carry a weekly mortgage in today’s finance costs (7.4%) of $711.53 interest only, plus rates, insurance, water rates, maintenance etc. Let’s call it a grand.“Quite frankly I think alot of people are getting ‘hooked’ into investing when there is no real reason to. INvestors will look at his situation and say “wow he has $50k equity” . I look at it and say he has $200k debt. Remember you need somewhere to live, so until you own a house outright (or are close), I recon you should not consider investing, UNLESS you are moving to a house that is considerably cheaper than your IP. Alot of people get this wrong.If you are going to upgrdae your house, its probably best to sell this and get on withit, because $50k off the loan of a $450k is going to save you buckloads in interest that the IP would take many years to create”.
Sounds like the cup is half empty. I feel sorry for you.
Here’s an EG for you:
– Say I own a PPoR worth $250k, have $150k usable equity in it.
– With $150k I can leverage into another $1mill worth of I.P’s with 100% finance, interest only and pay nothing off the principal. By carefully selecting my purchases they are c.f.p – cost me nothing out of my own pocket.
– Assuming the average of property doubling in value every 10 years (could be less – Rule of 72), in 10 years I will have property worth $2 mill.
– I still owe $1 mill, but have capital gain of $1 mill and will have paid off my PPoR.
You say I have $1 mill of debt, I say I am worth $1 mill. And with this $1 mill I can make another $1mill and so on and so on.And you say DON”T invest? At these returns I can’t afford not to!!
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Heres another option if you haven’t already considered it. If your PPor is in both names you could sell your half to your husband for $150k without paying CGT, only stamp duty on purchase. This may give you a bit more money to purchase a new PPOR, and putting a bit more debt on investment. You’d have to way up $$$ also to make sure it’s worth it. I enjoy having PPOR that will rise in value, no tenant hassles, agent fees, landlord insurance, CGT, do what you like to property, don’t have to move if landlord wants to sell. Downsides to owning PPOR are though it’s heaps chaeaper to rent, (n building ins, rates) and kids do tend to cause a lot more wear and tear to homes. Way up costs carefully (do some spreadsheets with different scenarios). Regards, Linda
I’d be inclined to go option 1. Rent your house out, claim deductions and rent. This should save you money and also allow you to keep your house CGT free for up to 6 yrs (s 188-145 of the ITAA).
Terryw
Discover Home Loans
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Thanks everyone for their replies. The unit is in my name only. If we rent then we can claim a lot of the rent on tax as hubby runs a business from home. I do like the idea of owning my own home though – I just think that buying our own home would be a more expensive option at this stage. Am also not too keen to sell the unit at this stage as we don’t have a massive amount of equity in it. I would rather keep it and use the equity. Thanks again.
Julie
Property Conveyancer
Melbourne
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