Question- Got 400K in my pocket after selling my home to move closer to work. Should I rent and use the cash to put deposits on cash flow properties or buy a house for $400K or less and use the equity to finance deposits on cash flow properties which I was doing with my old home.
Option 1 will give me a better spread but then I have to fork out cash for rent (Maybe $15000 p.a.)
Option 2 won’t give me as good a spread as 100% borrowed but no money thrown away on rent.
What do you reckon guys. Which way will make me wealthier quicker? Your input would be appreciated.
Hi Kate,
At the end of the day if you purchase another personal property you will have access to 80% of your money for property investing. However, although you may actually buy the property for cash (upto $400k) you will still be making repayments if you refinance to fund your investing. If the properties you are purchasing are positive cashflow then the income from these will cover those repayments, but if you purchase negative cashflow properties then you’ll be paying off a $320k mortgage (80%) out of your income (plus any extra repayments on the investment properties).
As for advice – depends on your personal goals and lifestyle, something you need to weigh up the positives and negitives of and decide for yourself.
Option 1 (Rent) – Will give you more available $$’s to invest and also more personal flexibility in lifestyle change. You’ll be paying off someone elses mortgage rather than your own though.
Option 2 (Another PPOR) – Will give you the comfort of your own place and also the potential of capital growth if you purchase in a good location. Repayments may be higher if you don’t purchase positive cashflow properties (but this will be the case either way if the investment properties are negitively geared).
Quickest way to wealth – What is wealth to you? In my opinion wealth can be judged in 2 ways – cashflow or asset value. I have a lot of personal lifestyle goals (i’m still early 20’s) so my personal wealth goals relate to cashflow (i.e. realised wealth), so although i will still build a portfolio geared towards capital growth my main concern will be for cashflow. But what works best in my situation won’t work best in your situation, so my advice is to do some homework before you take the next step and see which option relates best to your personal goals.
Good luck, Leigh [
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“If you can count your money, you don’t have a billion dollars”
J. Paul GettyKate
I would probably go for option 2. Buy a home, and use the equity.
The PPOR is really the only tax free investment you can make, so it is definetly worth buying anohter. Als if you were to pay $15,000 pa rent, you would really need to earn $25,000 before tax.
If you get a good high growth home to live in, even better.
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks for the reply guys. If anyone else has got an opinion then feel free to make a post
Am I missing the obvious here? If you have $400K cash, can you not:
1. Buy a house for yourself to live in for $400K or under (pay outright)
2. Take out an investment loan using the house as security
3. and use the loan as deposits to finance other investment purchases?In theory, assuming you buy a house worth $400k, you could borrow $320K (80%). With $320K as 20% deposit, you could finance $1.6M worth of properties. All you lose is the leverage of the first $80K.
You don’t pay rent, and interest on ALL loans are tax deductible.
Did I misunderstand the tax law or are we talking about that first $80K which gets tied up on the house if you buy a house for youself first?
Kate
I would firstly set up a trust in your name as guarantor. Then you have the option of either buying your own property and renting it to yourself as an IP and claiming interest and expenses as tax deductions and using it to fund other IPs the same way.
Although you may then have to pay capital gains tax if you sell it, If you never sell it you never have to pay it. And if you do sell it in the long term, well it was a delayed cost, which has allowed you increased liquidity in the short term to help fund your IP acquisition plan.
You want the fastest growth plan as you mentioned, so this is the approach I would consider. Who cares that your PPOR is an IP that you will have to pay CG tax, when the extra cash flow through tax effects on it, has allowed you to acquire several more properties sooner and multiply you equity in a growing market.
It’s easy said, but as mentioned circumstance plays a big part in any best laid plan. And finally as this is largely a numbers game, I suggest you do the numbers on several scenarios over say 5 years and see where each one takes you.
Otherwise just rent and invest heavily in IPs and maintain some liquidity. You can use the IPs as security anyway.
cheers
Dave
I agree completely with JH.Don’t know about Dave’s proposal of buying in a trust. On average Aussies move every 5 years or so, so you are likely to decide to move out of your house at some stage in the future. I suppose you could just keep it and rent it out, buy a new one in the trust and re-rent that. But if you sold the CGT could be substantial. Imagine if your $400,000 property doubles to $800,000 in 5 years. Thats a $400,000 CG (or $200,000 after 50% discount) which could result in $100,000 extra tax.
I wonder if you have to charge yourself rent if your home is onwed by a trust.
Also if you keep renting it yourself, it will become positively geared – You must charge yourself market rent. So eventually your trust will be paying tax on your rent.
Acountants such as Chris Batten recommend your home be purchased in your individual names not a trust. He actually recommends 99% ownership in the name of the person less likely to be sued.
In fact, this would be a good new discussion topic. Buying Your PPOR through Trust.
Terryw
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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