Hi everyone,
Have not posted for a while but now need your brains to help me figure out where i am!!!
Here is our situation.
IP bought 2005 for $250,000. Did small reno, now worth estimated $320,000. House is in ringwood east
The loan on the IP is $194K (also have adebt on it of $50K that we borrowed as a deposit from my parents to avoid LMI-which now that I know better I would have paid it….) Rented out at $295 week with good tenants.Also have a $360K mortgage on PPOR worth about $390K.
Husband and I both work. I am only earning $55K and he has just changed industries and taken a large pay cut to get his dream job (he has been studying in this industry for 5 years and finally broke through but the strting salry is #%$#house `$40K).We currently run on a pretty tight budget and it will get tighter if interest rates go up. The IP is in a good location in the VIC East link area so we were hoping for a bit of a price increase over the next 12 months. Ongoing maintenance problems are also an issue if held onto long term.
We would like to start a family in the next few years and this adds to my worry as I am the main wage earner and this will fall off for about 12 months if I go on maternity leave. We have $25000 in savings.
My concern is that i want to hold onto the IP to wait until the eastern-link freeway comes through and cash in on the added value but at the same time the extra loan on interest rates rising and cash flow etc….
Should/how do i:
1. Keep it (but how do I increase cash flow and structure to do this?)
2. Sell it and use profit to pay down PPOR for when family comes along (as originally planned). Not sure if the amout of capital gain in the next fews years is going to be worth the amoutn of interest and the fact that I could be using this money to pay down PPOR. What about CGT… should I wait until on maternity leave if I can?
3. Get another job( on top of my 5 days 50 hour week already)Help, please , I am a bit stuck and the more I thnk about it the more I thnk about it and the more I think about it …..and I get more confused and concerned eveytime in my head…..
Hi Snowflake.
Others here are better qualified to answer the more technical parts of your question. My advice would be to first clarify your goals and construct a plan to achieve them in the most direct way. Then work out what obstacles you have and how best to negate or avoid them.
You seem worried about cashflow especially with the planned future extension to your family? I notice that the IP is roughly paying its way (if you ignore the deposit borrowed from your parents). The main cost you have is your PPOR mortgage. Clearly, by removing this cost you could largely reduce the cashflow obstacle. If this was most important you might consider downsizing or renting, however, unless you are clear about your goals it’s impossible to know whether this is an option.
Conversely, the sale of the IP for $350k next year (maybe $60k after costs?) might not help your cashflow much if it was used to pay down the PPOR loan. But if your goal is to reduce interest costs and rising rates are a concern, this option might be suitable.
So start with some goals. Not fuzzy things like “financial independence” or “$1 million dollars in equity”, real, solid and achievable goals.
A goal might be “to have no mortgage on our PPOR within 15 years”
Or “to have $55,000 in savings within 2 years to replace my income for 12 months maternity leave”
Perhaps “to have a positive income stream of $XX per XX from investments within X years”
Or even “to hold $1 million in leveraged assets within X years on speculation that future capital gains will exceed holding costs”*All these goals are achievable. Each requires a very different plan of action.
You should do the same with your investments. A goal might be to make $100k in capital gains by buying a property on speculation that a freeway extension will increase its value by $100k. Or it might be to buy a property to hold for several decades with the intention of eventually receiving an income stream from rent. These are very different, and subsequently, your financial arrangements and plans would be very different.
Instead of asking “should I 1. Keep it or 2. Sell it” which nobody can answer because everybody has different ideas and nobody (perhaps not even yourself) knows your goal, start with the goal and the answer to your question becomes clear.
Cheers, F. [cowboy2]
* Note: None of this should be taken as advice or instruction (especially the big leverage bet). It's just for illustration!
Snowflake,
I think foundation is right, but having said that hear is my 2cents worth.
I get from your post that you are reluctant to sell anything. If I am right, is there any way you could restructure your IP loan to interest only and put the extra money into your PPOR. This should help, especially if interest rates rise, as your minimum commitment should reduce. If not and you do decide to sell your PPOR and rent, on your income you should be entitled to rent assistance and FTB once you have a child (don't quote me on this, please check with centrelink). Maybe worth doing the numbers on that to help you through this growth. The other option is to move from PPOR and rent it out while you rent something that costs you less. You can then claim interest and other costs. This might get you ahead enogh to move back in when you have a littly. Just some thoughts.
JLWll I would sell it if I could figure out that selling and putting the money into my current PPOR will be better than the value increase over the next few years from my IP? Not sure how to make this calculation and what I need to include? Any suggestions on how to figure out these scenarios? P.S at the moment the rent covers the IP loan of $194K but I stll pay 260 fortnight on my parents loan that I used to help fund the deposit on the IP. I could be selling the IP and use the profit and money i am spening on the repayment to pay off more on my PPOR??? But how do I know this is a worthwhile strategy…..
IN additon to this… what could I do to increase my cash flow ie: I am already interest only. What is the benefit of prepaying my interest? Will this help my cashflw throughout the year…. ie: I have some savings I can use to prepay interest if I need to….
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