Hope someone could advice us please
We jointly bought this 30yr old 3-bedroom 2-bathroom unit in an exclusive suburb only a stone throw away from campuses, shopping centres, 24/7 supermarket, Police Station & library for $400K 2 yrs ago. Currently value of this property is about $520K; debt on this property is $340K with $90K in an offset account. We have a 9yr old daughter and 2yr old son. As the family is growing we now wish to buy a owner occupied house and convert our unit to an investment property. Based on current rental market, the unit can be let at about $500/wk. My dilemmas are such:1) should we refinance (interest only) so we can negative gear ?
2) our desire is to buy a 4bedroom property within close proximity (within 25km) to CBD valued at below $750K. should we use current savings in offset account plus equity on our unit to settle as much as possible as deposit for the new house?
3) There are currently some cracks in the unit we currently leaving? Should we do minor renovation to patch up these cracks and improve presentation of the unit and sell this property off and use whatever gain from this sale as deposit for the new house and subsequently purchase an investment property in this exclusive suburb taking a fresh loan on interest only payment so we can negative gear?Our idea is to have a bigger house and build our asset base. Our join income is $170k pa
Any advice would be greatly appreciated
Thank you & God Bless!
Hi Julie,
1) Increasing the loan for the purchase of your unit will not increase the interest deductions. Basically, the purpose of the loan decides whether the interest is deductible or not, so increasing it to add to your new PPOR will mean that a portion of the loan (ie, the extra bit) will not be deductible.
2) Withdrawing from the offset will not affect the deductibility of interest on the unit, so you would be better off from a tax point of view to use the offset funds to either reduce your non-deductible debt (new PPOR loan). Or you could put it in an offset against the PPOR. The mortgage brokers may have some other suggestions here.
3) It really depends on what you would prefer to do. Just bear in mind that buying and selling costs are expensive, and would the tax benefits and growth in a better suburb outweigh these costs? Another option is doing the repairs and renting the curent unit for a higher price.
All the best,
Dan
Hi Julie
As Dan has mentioned refinancing will have no benefit if you are looking to increase the Tax deductions and the redrawn interest will not be deductible.
Personally I would spend a dollar or two fixing up the cracks so the property is readily tenantable (assuming these are cosmetic and not significant flaws in the building) and then look at accessing the equity in the IP to use as deposit for your new property.
Selling merely to raise additional cash deposit when you are looking long term to increase your asset base is rather short lived.
The equity released together with some or all of your funds in the current offset account can be used to fund the new PPOR and cover the acqusition costs. Try and ensure your Mortgage Broker does not cross collateralise the loans and keeps them as standalone securities.
Release the offset account on your current IP on settlement and link up a new one to your non deductible debt.
Richard Taylor | Australia's leading private lender
Dan & Richard
Both of you are amazing. Thank you.Julie,
It's great advice from Richard and Dan, but I thought I might offer another suggestion.
If you were to sell the property for $520,000 (and I agree with Richard about doing the cosmetic work) then you would have $180,000 (give or take) to put towards your goal of having an IP and PPOR.
You could consider using that money to secure funding to develop your own IP and PPOR. Assuming an LVR of 80%, this would indicate a budget of $900,000 ($180,000 + $720,000). It gets a little bit tricky from here, but stick with me!
You find the land in the right area, that is suitable for a dual occupancy. That is to say, an existing dwelling with enough land to build a second dwelling. Let's say then that you were to purchase this property for $700,000 ($180,000+ $520,000). The next step would be to carry out the town planning and sub-division works – after which you have two properties. This is also the point at which new values can be ascribed to the original dwelling and the proposed second dwelling. Let's say the bank board valuer (who you should engage) ascribes a value of $650,000 for the existing dwelling (on its smaller allotment) and $500,000 "value at completion" for the second dwelling as proposed. By this time you will have spent say $750,000 ($180,000 + $570,000). Your two properties – when complete – would be valued at $1,150,000.
Theoretically, you should then be able to fund $920,000 ($180,000 + $740,000, 80% of $1,150,000) and complete the second property. Given that $750,000 has already been used on purchase and planning costs, the build budget is then $170,000, enough for say a 120m2, 2 or 3 br dwelling.
At completion, borrowings would be $740,000, you will have increased your equity from $180,000 to $410,000 and have additional depreciation benefits (from a new building) to offset some of the tax payable on $170,000 pa. Some entity and structure engineering should see most of the debt reside with the IP.
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