Hi everybody, my first post here! I'm delighted to have found this forum as I've been flying blind as it were for the last few weeks trying to get my head around a few things.
My first query for you is a pretty general one, and pretty simple: Do you think owning an investment property is feasible for us?? I am only looking for some general opinions of course, nothing will be taken as gospel
I will throw a few figures at you, but I don't expect anybody to give me any definitive answers on anything. I just need to know it is something we can practically afford to do, and hopefully here there may be a few folk who are in the same boat and have been there done that.This is our situation, I'll try to make it short and sweet.
– We bought a 2 bed unit 2.5 years ago, mortgage was $320k.
– Mortage now $240k, unit worth approx $440k.
– Current mortgage repayment is $470 / week
– Current net income between both us, wife working part time, is $1900 / week
– Possible rental return on our unit currently about $420 / week
We have started a family since we bought, and will probably need to move somewhere bigger this year. I had always assumed that we would simply sell our unit and buy a 3 bed townhouse or house.
However, our area (Lane Cove, about 7km from Sydney CBD) has shown good growth recently, both in prices and in rental returns. The latest Residex report forcasts rents to increase by 86% over the next 5 years! So we have begun to toy with the idea of keeping our current unit as an investment. It's all new to us though, so it's a bit of a scary prospect if things go wrong, what with having a young family and all.
We have pre-approval from the bank to borrow up to $675k if we keep our unit as an investment. Borrowing that amount would make things very tight for us though. I've done a bit of research on the tax implications. We won't be very heavily negatively geared on the investment property as you can see, and as the block is over 30 years old I don't think we would benefit much from depreciation from what I gather.
Some rough figures I have done, if we spend $650k on a new place, leaves us out of pocket by around $1200 per week on both mortgages, that is after working out the tax deductions etc.
Now that doesn't sound too bad, especially considering future possible payrises and the fact that my wife won't be part time forever. But, one thing bothers me. Having both properties leaves no room for extra repayments, so both mortgages will decrease at a snails pace. Having one mortgage however, leaves room for extra repayments and quicker increases in equity, even if it is only in one property. It is at this point that I get confused and switch off!
So if anybody has any practical advice, or thinks I may be missing something, please let me know, I'd be mighty grateful. So far I have only spoken to a financial adviser from our bank, who didn't tell me much more than I already knew (and of course spent more time trying to sell me insurance products!!).
Sorry for the long windedness, and profuse thanks to anybody who has made it this far!
Rob
Hi Rob
To have paid off $80K ($320-240K) in 2.5 years is an amazing achievement. Well done. Also your equity position looks very good. So it might come down to serviceability and a few other things.
Borrowing against the equity to buy an owner-occupied home will create debt that is not tax deductible. Also borrowing $650k more for 1 mortgage would probably equal the $1200 per week alone to carry this mortgage. You would have to add in the cost of your rental unit of $470pw unless we assume 100% occupancy with an offset at the potential rent of $420pw and zero property maintenance and running costs.
You might want to consider whether you can continue to live in your two bedroom unit for a few more years and begin investing first. If you were to use some of the equity to buy a property (or two) for $650K and the equity used plus the new investment property mortgages would be tax deductible. What would be the rent you would achieve on the rental properties? This might be used to offset the costs of carrying the mortgages. If the area is as good as you think it is – this might allow you to cash in on the increased prices and rental returns. 3 or 4 years down the track, making this decision might look very different but you would be in the marketplace already.
However, money may not be everything. Let's say you find the dream home for $650K and borrow against your equity (in your unit) to the maximum amount possible – and rent out the 'dream home' first for a year or two. You get the tax deductible benefits. Then 18 months to two years down the track, you sell the unit and move into the dream home. The mortgage on the dream home is carried at $500K which is now non-tax-deductible. You have about $80K to $100K left over after paying out the mortgage on your unit – and the $80K becomes your stake for further investment which you could put in an offset account against the 'dream home' to reduce the interest until you're ready to invest again. Alternatively, you could put that $80K against your $500K mortgage and reduce the mortgage further to $420K Assuming the dream home has grown in value to $700K, This provides you with about $220K tax deductible equity to use for investment.
It becomes to some extent a question of lifestyle versus wealth. Only you can be the judge.
Rob
Have you consider selling the Unit to a Trust with both of you as Trustees.
This way you could borrow an amount equal to the Transfer value or current valuation being 440k repay the existing loan of 240k and use the additional amount as deposit for your new PPOR.
Whilst Stamp Duty would be payable on the Transfer value you would be shifting the burder of non tax deductible debt to deductible interest this increasing your Tax deductions.
If you rent the propertry out now then you will only be able to claim the interest on the current balance and this will be split dependant on the way in which the property is held i.e Assume Joint Tenants.
The Unit Trust could be structured with you holding the majority of the Unit so that you are able to make the larger claim.
It is strategy i use for clients on a regular basis especially where they have made significant inrodes to their current home loan and then decide to rent the property out.
Richard Taylor | Australia's leading private lender
Thanks very much for the replies guys, they have been very helpful.
Gary, you have kind of confirmed what I was thinking. We are doing things the wrong way around, having the higher mortgage as our primary residence and therefore not benefiting a whole lot from the tax office on the lower mortgage. The best we could do would be to redraw the $80k odd we have in redraw and put it on the new mortgage, giving us an investment mortgage of 320k and a primary mortgage of 580k. Which would not leave us with a whole lot of room to manouevre, and would probably be only advantageous in the long term, maybe after 10 years. Until then we would be mortgaged to the hilt with a slow gain in equity on both properties. Of course increasing rental returns would help, but who knows by how much. Unfortunately staying in this unit is not really viable for longer than another year or so, due to a hopefully expanding clan.
Richard, that is an interesting idea, of course as a layman something I had not considered before! My understanding of what you are suggesting is that we retain the unit, but sell it to ourselves in a matter of speaking? That way our investment mortgage would be 440k and the primary mortgage 450k? That would make a big difference, I'll have to do some numbers on it, if I am assuming correctly.
As you guys are obviously well versed in these things can I ask your honest opinion on what you would advise me to do? Maybe we should knock the idea on the head for the next few years, get ourselves a house, try to hammer the mortgage, and then maybe in a few years pick up a unit? Although it seemed like a great idea, having a choice unit in a choice location, to hold on to it, maybe it's just not the right thing to do at the moment. Unless we somehow found a suitable 3 bedroom property for less than 500k!
Thanks again
I have a feeling this site is not going to do my sleep any good! My mind is boggling with the wealth of info I have just taken in reading old threads.
A couple of questions, both about things that I never understood the benefit of:
1/ Would there be any way it could be beneficial for us to move out and rent, say 500/week, keeping our unit as an IP? Obviously it would give us a nice cashflow, but is the only gain the savings we could make that would go towards a new place?
2/ I have never understood the benefit of interest-only loans. To me it's like you're paying an amount every week or month, but at the end of the year you haven't gotten anywhere? What am I missing? Is it only beneficial for an IP?
Rob
1) Yes it does have merits but the rent you are paying someone else could go towards your own interest.
2) As interest on your own home is non tax deductible you want to extinquish this debt as quickly as possible. This is one of the reasons you would use a interest only loan on an IP to enable you to apply the additional saving to your non tax deductible debt.
No an interest only loan is a useful tool for a PPOR. Imagine you had done this on your own home and deposited the funds that you have paid of the principal in the last couple of years to an offset account. The net interest charged would be the same but now you woul dbe able to use the entire amount of principal reduction as a deposit for your new PPOR.
The interest on the original loan balance would be deductible rather than the current balance.
Interest only loans can be used effectively in many situations.
Richard Taylor | Australia's leading private lender
OK, Richard, now you've got me thinking about selling our PPR to our Trust… obviously we'd want to sell our PPR to the Trust for a figure that is not unreasonable, but "in the high end of the range of market value". Provided that the lender accepts that valuation for the purposes of lending to the Trust, does the ATO have any problem with the price paid (being a non-arms-length transaction)? My concern is that if we sell to the Trust for $800K, could the ATO come back and say "market value was only $700K therefore only 7/8 of the interest is tax-deductible", or something like that?
I'm aware of the loss of the PPR CGT exemption, and potential land tax implications. Are there any other tips or traps with regard to transferring your PPR to a Trust?
Thanks in anticipation, Tracey in Brisbane
Tracey
Remember the Bank valuation and the open market valuation maybe 2 totally different figures.
It is wise to hold 2 independant valuation assessments to be on the safe side these could be either an independant valuation from a favourable valuer or a market assessment from a local real estate agent.
The higher figure now will mean more stamp duty but less CGT down the track.
Same as everything provide and retain documentation and you will have no dramas.
Richard Taylor | Australia's leading private lender
Rob – the interest only loan strategy is used by investors to increase the funding available.
When banks work out what your elegibility is, they look at the LVR (loan to value ratio) and the DSR (debt service ratio). The second uses a calculation that sums yout total commitment in loan payments.
As the payments on interest only loans is listed as being lower than P&I loans, you thus have a higher borrowing capacity. You are still able to make capital repayments if you wish, but you are not obliged to, thus extending your DSR ratio.
Cheers Len
Hi, remember to include admin costs of setting up a trust.
Kum Yin
I will throw a few figures at you, but I don't expect anybody to give me any definitive answers on anything. I just need to know it is something we can practically afford to do, and hopefully here there may be a few folk who are in the same boat and have been there done that.
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