Hi
First post on this forum. Hopefully the first of many. Want to start on an property portfolio. My situation is this –
1. 32, married 2 years and no kids
2. Combined income of my partner and I is approx 180k (before tax)
3. We already own a 3 bedroom home in Macleod, Melbourne. We bought this in 2009. Mortgage as it stands is 360k but we had the place revalued last year and it now stands at $450k so we have about $90k in equity.
4. From the Macleod home we get $500 per week in rent. So atm we put in $700 from our pocket each month to service the mortgage. The rest is covered by rent.
5. Due to work we both moved to Canberra. Currently rent an apartment paying $475 a week
6. Just finished paying off the wedding and honeymoon from 2 years back. So we have no debts whatsoever now.
7. Each fortnight on average we save about $3k. Current savings is $38kSo now we are looking to buy our 2nd place. We have been looking at properties around the $650-700k mark. The idea is we want to buy and then rent it out for 2 years, then move in. By then we will look to start a family, so hopefully our mortgage is down to approx $500-550k mark. Which since my wife won’t be working for a year or two can be refinanced and be easily covered on my salary alone ($100k).
Is this a worthwhile strategy? Thinking long term before we hit both 40, we want to own 4-5 properties and have kids, go on holidays each year, new car etc. Can we do this all?
Hi emirates
Welcome aboard.
It's always good to see a fellow Canberran on the forum.
What's the plan with the Melbourne property? Do you ever think you'll move back into it?
Either way, given that you're planning on purchasing another owner occupied property somewhere else, I would avoid paying down the principle on your current IP debt in Melbourne.
Why?
Because when it comes to claiming an investment loan as a deduction – only the interest portion of the loan is tax deductible. The principle portion is not. Therefore, if you have an investment loan, and you decide to pay off some of the principle each repayment, you’re effectively reducing this tax deductible debt – meaning there is less tax you can claim back.
This can be a costly mistake for those who also have non-deductible debt (which most of us do). This includes a home loan on your Principle Place of Residency (PPOR), car loans, personal loans, credit cards, etc.
If you want to pay down any debt – it is this non-deductible debt that you should try and knock on the head first. It simply doesn’t make financial sense to pay down your deductible investment debt when you also have non-deductible debt.
So what’s the ideal structure?
Generally speaking, it’s ideal to have all of your investment loans set up as interest only.
With your PPOR debt, there are two choices to consider. If you are a disciplined saver and feel that your PPOR will one day be turned into an investment property, then it's best to also set this loan up as interest only. However, it's important that an offset account is set up against this loan so you can continue to make the equivalent principle repayments regularly into the offset account. The offset account is also a very handy place for parking any spare savings.
Why is it best to have my PPOR loan as interest only if I think it’s going to become an investment property? Because this debt will become deductible in the future – so you shouldn’t reduce it now.
Instead, you can place your money into the offset account which will reduce your PPOR interest repayments whilst the funds are sitting in the account. When this property becomes an investment property in the future, you can move the funds from your offset account on to your next PPOR. This way, you've increased your tax deductible debt and reduced your non tax deductible debt.
The interest only with an offset account doesn’t work very well for someone who isn't a disciplined saver and will be tempted to simply make the minimum interest repayments.
If you're not a disciplined saver and have no desire to convert your PPOR into an investment property at some point, then it's best to have a principle and interest loan on your PPOR. Once you've paid off your PPOR loan and any other non-deductible debt, you may wish to start paying down your investment loans.
So in a nutshell, interest only for all loans with an offset account set-up against your PPOR loan can be a great overall structure – particularly if you think you might turn your PPOR into an investment property at some point. On the flipside, if you have no desire to turn your PPOR into an investment property down the track and you are not disciplined with money- then it’s best to have interest only against all investment loans and principle and interest against your PPOR.
With the deposit for your new PPOR, you have a bit of equity up your sleeve in the Melbourne property that could possibly be used. It just needs to be set up properly so you can identify your non-deductible debt from your deductible debt.
What's the primary motivator for renting the new PPOR out for two years before moving into it? Is it purely an opportunity to reduce some of the debt whilst renting elsewhere? If so, you'll need to crunch the numbers on how negatively geared the property will be during the period it's rented (that is – subtract all of the costs associated with holding the property from the rent it receives) and then add the rent you pay. You might find that there's not a big difference in terms of costs when it comes to renting somewhere else and making up for the shortfall in the negatively geared property as opposed to living in it yourself.
Based on your incomes and some careful planning – there's no reason why you can't achieve your goal.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks mate for the very informed reply!.
Seeing that you are in Canberra, is it possible to tee up an appointment with you and get some advice from you while at the same time put down a plan fwd. I will pm you my details.
But I like your idea of the interest only loan. Currently we pay principle + interest. And we have set up a mortgage offset account which all our savings and pay goes into (that’s the $38k). So we are actually reducing our mortgage quite quickly since we paid off all our debts. It’s taken us about 8-6 months of savings to get our $38k to date and this included a overseas holiday that we just got back from. So we can be very disciplined savers, however our weak point is that we both like to travel. So we go every year someplace overseas.
In response to your question to the Melbourne house. We will probably go back at one point, but don’t know exactly when as most of our family is down there. The Melbourne property is quite old, it’s a 70 year old house on an 800 square block. So we have loosely thought about knocking the house down one day and building or even sub dividing and buying elsewhere, but this is dependent on getting the mortgage down to a level where we can do this. Canberra being a relatively safe market for rent is making us keen to buy a place here and even if we do move back to Melbourne we can still rent it out as investment property.
Hi again
No worries at all – happy to assist and I'll shoot you back a PM shortly.
Canberra has, and will continue to be (IMO), a pretty stable market. You're timing is right as well – there's some good bargains to be had at present.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
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