Hi Everyone,
I am new to the investment game and even newer to this site. I have a few queries that I would love some feedback/advice on. If anyone could help it really would be greatly appreciated…
A bit of background first…
1/ I am 28 years old. I built a house about 2 years ago in Mildura, Vic. to get full use of the $36.5k First Home Buyers Grant. I used $22k (10%) as the deposit, and the rest for fitting the house out with furniture etc.
I estimate the value of the house to be around $235k now (probably more, just being conservative). This gives me around $35k in equity.
2/ My ‘soon to be’ Wife also had her own House near Mildura when we met. She earns a lot more money than I do and has been able to make a lot of extra payments into her house since buying it. Her house would be valued around $225K (conservative again), but only owes about $140k giving her around $85k in equity.
We both now live in my house and we rent hers out for $250 p/w. I know that this was probably the wrong way to do things (should have moved into hers and rented mine), but mine was unfinished and not suitable for renting.
Both of our houses are quite small and not suitable for family life. We would like to start building a family home within the next 12-18 months before kids come along (I am a tradesman who will do about 75% of the work myself, but am currently a department manager at a well known Hardware store, so all materials needed to build will be basically cost price).
We are very keen to get into the investment market to try to supplement some income while she will be off work with Children (potentially 8-10 years).
Also to be able to build our property Portfolio, be financially free and retired from work around 45-50 would be an absolutely amazing outcome.
My questions are:
– If we build our family home, are we better off to sell both of our existing homes and start investing from scratch?
Or
– Sell mine and keep hers, but pay enough off it (going by Steve’s 11 second rule, we would need to pay another $15k off to bring it down to $125k loan) so we can positive gear it and reap the weekly benefits and leave the Capital Growth there to keep increasing?
Another few questions I have are:
– How do Positive geared properties make money in the long run? Is the idea to keep them forever or to sell them within the 6 year period to avoid CGT?
– I have read a few books on the topic now and in none of them does it say anything more than to ‘HAVE AN EXIT STRATEGY’. What kind of exit strategy could we have? Hypothetically, if we had 50 Investment houses and the interest rates went through the roof and every one of our houses overnight became ‘Negative geared properties’, what kind of exit strategy is possible, apart from bankruptcy??
– Are we better of using cash as deposits on investment properties or just on the first one, and then the equity on that one to fund our next one, and so on and so on..? Or do we use equity from our PPOR?
I have about a million other questions and queries about the Investment game, but these are the main points that just rack my brain…
I welcome and appreciate any feedback from everyone.
Thanks for reading.
Kind regards,
Muz.
Hi Muz and welcome to the forum.
I am going to post multiple posts as this is my FIFTH attempt!!… Each time I get half way through the page freezes up and I loose everything! Grrr!!
Anyway…..
If we build our family home, are we better off to sell both of our existing homes and start investing from scratch?
I believe so. That way you are maximizing your tax benefits, by having the larger loans as tax deductible and the smaller loan being non deductible.
Sell mine and keep hers, but pay enough off it (going by Steve’s 11 second rule, we would need to pay another $15k off to bring it down to $125k loan) so we can positive gear it and reap the weekly benefits and leave the Capital Growth there to keep increasing?
If you decide to keep either property as an investment do not pay off any more of the principle. This will be reducing your tax benefit and the money is better off going towards your non deductible debt.
How do Positive geared properties make money in the long run? Is the idea to keep them forever or to sell them within the 6 year period to avoid CGT?
This is what you want to hang on to if you plan on eventually replacing your income! To sell it CGT free in 6 years you have to be claiming it as your PPOR. And you can only ever have one of these at any one time. Personally I would never sell… Especially if it is putting money in my pocket every week.
I have read a few books on the topic now and in none of them does it say anything more than to ‘HAVE AN EXIT STRATEGY’. What kind of exit strategy could we have? Hypothetically, if we had 50 Investment houses and the interest rates went through the roof and every one of our houses overnight became ‘Negative geared properties’, what kind of exit strategy is possible, apart from bankruptcy??
I guess this is where it pays to buy in places that will always be in high demand. So if things get crazy you can always offload them all or a few and hopefully walk away with not too much debt and a lesson well learn't.
– Are we better of using cash as deposits on investment properties or just on the first one, and then the equity on that one to fund our next one, and so on and so on..? Or do we use equity from our PPOR?
You are better off keeping your cash and using your equity. It doesn't matter where the equity comes from as it is it's use that determines whether the loan is tax deductible or not.
Hope this helps a little bit and good luck with it all…. it's exciting isn't it
-Nathan
This is my take on your questions:
– How do Positive geared properties make money in the long run? Is the idea to keep them forever or to sell them within the 6 year period to avoid CGT?
They make money for you by replacing your working income. Positive geared properties have a main purpose to help you be financially free. Therefore, you need enough positive cashflow from properties to replace your current income. In that way, you could retire by your 40s-50s to achieve your goal. You could keep them forever, and as you do, you gradually increase rents every year which also helps to increase your cashflow.
– I have read a few books on the topic now and in none of them does it say anything more than to ‘HAVE AN EXIT STRATEGY’. What kind of exit strategy could we have? Hypothetically, if we had 50 Investment houses and the interest rates went through the roof and every one of our houses overnight became ‘Negative geared properties’, what kind of exit strategy is possible, apart from bankruptcy??
That;s why it's important to choose positive geared properties that take into account the event that interest rates do go up. When you do your calculations of expenses, you can either use repayment expenses that use the average interest rate over the past couple of years OR you could figure what's a high interest rate that it could reach, and if the property is still positive cash flow even in that scenario then its worth it.
To reduce your risk,d do the calculations beforehand so that you don't have to stress in the case of interest rate rises. Fixed rate loans can also help to give you more peace of mind.
– Are we better of using cash as deposits on investment properties or just on the first one, and then the equity on that one to fund our next one, and so on and so on..? Or do we use equity from our PPOR?
If you use cash, and have to save up for every property, it may take you a while to amass several properties as you have to ongoingly wait for more deposit money. This is possible if you want to be more conservative.
If you use equity, you can get more properties faster – preferably postiive cashflow ones.
Thanks for your feedback nguli…
"If you decide to keep either property as an investment do not pay off any more of the principle. This will be reducing your tax benefit and the money is better off going towards your non deductible debt".
I understand what you are saying here, have higher loan on IP rather than on PPOR for tax benefits..? But would it not be viable to pay the IP loan down to the amount where we could Positive Gear it, and with the extra money this produces, pay 'that' off our PPOR? Or would the figures work out better to do it your way?
Hi M.Investigator, thanks for your feedback.
They make money for you by replacing your working income. Positive geared properties have a main purpose to help you be financially free. Therefore, you need enough positive cashflow from properties to replace your current income. In that way, you could retire by your 40s-50s to achieve your goal. You could keep them forever, and as you do, you gradually increase rents every year which also helps to increase your cashflow.
This makes sense. The only thing that concerns me is the type of property that we could get cheap enough to Positive Gear would typically be an old almost run down place (correct me if i'm wrong). If we were to buy a place like this that we could make money on from day 1, that would be fine. But what happens 5-10-15 years down the track when repairs and maintenance need doing (ie. Hot water, air conditioner, carpet, appliances etc). As soon as these costs come into play, would the property not turn into a negative geared asset as it is costing us money (depending on return of course)? How do we go with this? Just Negative Gear it for a couple of years until expenses have paid for themselves???
Is this true, are we heading for a massive downturn?
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