Pay off loan or buy?

Hi chrisb57,

The short answer in my opinion is pay off your owner occupied home, then go looking for an investment property with the deposit from what is left over (if any) or by using the equity in your home for the minimum deposit on the investment.

The loan on your owner occupied home is paid from after tax dollars and the out of pocket expenses on an investment property is paid for from before tax dollars. Can make a big difference especially if you are in the highest tax bracket. Any positive return from your investment will be taxed. So think of it like this: you'll be paying x amount off your home loan after already having paid tax on that amount, and then paying the tax on the positive return from the investment. Double whammy. Depending on what the figures are it could be a big difference.

Not sure if I've explained it well enough but if you need a more detailed explanation I'd suggest you get a few books on property investment, or maybe see a reputable advisor who specialises in property, but make sure you thoroughly check them out first if this is the way you go. There are alot of "property investment advisor" companies whos real business is selling you their or an associate companys over priced property.

Maybe you could get a few recommendations on this forum if thats what you want to do?

In an environment like this,  and with that equity at your disposal, it's pretty difficult to ignore the merits of investment property.  Consider these points;

A- We have the lowest rental vacancies in just about forever… and it WILL stay this way for some time yet. (see point D below)
B- This has lead to significant upward pressure on rentals already. It will continue to gain momentum ( again- see  point D)
C- This is further compunded by the critical shortage of new stock in the pipeline, meaning even further upwards pressure on rentals for at least another two years. More likely the next 3 years.
D- the Credit crisis has made, and will continue to make it almost impossible for developers to find funding to get new developments started…meaning an ever widening gap between available stock and demand for stock. Even when the crisis passes in 12-18 months, there are lead times involved in getting DA's, design, planning, finance, pre sales etc… so there will be a good 18-24 month lag AFTER the credit crunch, before any sort of significant new volume of stock becomes available,  and finally
E- interest rates heading south, which does two things. Reduces mortgage stress and therefore mortgagee reposessions which have been driving valuations down, and it also boosts borrowing capacity as assessment rates reduce. In other words, there is a critical set of influences converging, which all scream  "investor opportunity" right now.

Now, I acknowledge that conventional wealth creation wisdom/methodology preaches negative gearing and capital growth, but if you can own properties that are positively geared, you can pretty much own em for free!!! Smart investors realise the power of positive gearing always beats negative gearing.  In particular, its a real bonus in your circumstance, as you are 50 and dont have 20 years to see a strategy evolve. This is a really unique opportunity to look at the facts above rather than following conventional wisdom or current "doom and gloom" sentiment, because those factors outlined above will mean that when the credit crisis has passed and sentiment has started to return, there will be significant capital gain to be made. Worst case scenario is that you will make no capital gain in the next three years, but the properties will be positively geared, so you will have no holding costs and maybe a little tax to pay. No big deal, you will see capital gain compensate for that ten fold at some stage within a few years. Best case scenario is that you will see  some gain starting mid 2009 and by 2011 you will have made a nice little profit.  Cretianly if you wish to retire at 55, it's an amazing opportunity for you. My bet is that the capital gain  you eventually realise will far outweigh any short term tax you may need to pay on an investment property.

Here's an example… lets say you buy  a 250K 2b/r unit and can rent it for $300 per week. I/O repayments on current fixed rates of 5.99 for example, or maybe on even less for variable rates by the New Year, would mean repayments of approximately 14,975 per annum. If rates get to 5.5%, it would mean $13750 per annum, etc etc.  Probability is rates will get to around 4.5-5%, so you may see repayments as low as $11250 annually. Your rental income will be $15600 , minus some management costs and strata fees etc…lets say 6% management fees and $400 p/quarter strata- a total of $2536. You will net $13065. Your holding costs at 6% are essentially $160 per month, and at 4.5% they are ZERO. Its highly likely thats where we are headed, so in reality you are looking at a situation where you can essentially have someone pay your investment property for you, free of charge.  I'd look to lock in a fixed rate when they hit the 5%ish range… rental yields already exceed 5%… so it becomes a no brainer then. Your only real costs are 5% deposit plus costs/duties. To be profitable, your property really only needs to make back about 9 or 10% in the next  4, 5 or 6 years to pay for those costs. Everything else is gravy! Chances of seeing it reach 275K ? Pretty good I would imagine, if you take the "doom and gloom" sentiment away and refer back to A-E, above.  Much more likely you'll see it reach 300+. 

Anyway, just my two cents. But all that free equity… I think you are sitting on a fantastic opportunity to accumulate 2 or 3 little 250K 2 bedders right now and watch them make you quite a tidy profit over the next few years.

Chrisb,

Buying out your sister sounds good.  Then put the profit towards paying off your ppor.  Minimal risk with sound investing.