Here is the upshot on our financial situation. I am wanting to know what others would do in our situation.
Our family home is valued at 900k with 80k mortgage. We have 4 children & want to demolish our home and build new. Our location is 5km from GPO with excellent sized block. Cost of build approx 500k.
We have a 2 bedroom investment property inner city worth 800k with a 90k interest only loan. $400/wk rental return. We are considering a renovation to increase it to 3 bedrooms, so as to receive $650/wk return. We will have total loan of approx 350k to do this. Our rent will cover all the loan repayments. Property post renovation will be approx 1m+.
Or should we borrow 300k against our investment property and buy shares now? However I am concerned that I have to service the loan fully if we buy shares – due to no rent equivalent coming in each week.
Thanks in advance.
The following gives you an idea of the complexities of financial advice: Please consider
1. Plans in relation to health, income insurance, Trauma, Life/TPD (term or whole of life)?2. Asset protection-general insurance (house, contents, Liability, Indemnity etc)?3. Tax Deductible Debt v Non Tax Deductible Debt4. Fee’s and charges charged by banks and other related industries?5. Your own home and tax benefits- Owner occupied exemption, CGT exemptions 6. State and Federal Grants for homeowners.7. Mortgage Broking concerns- interest rates, variable, low doc, LOC, fixed (short v long-15 years), 100% offset, investor loans- tax deductible set up, Records to keep for tax deductions, Consumer credit code, LMI, Capacity8. Purchasing costs of a home- government search, conveyancing, P&B9. What is capitalising interest? Sub accounts?10. Are you in the property business? 11. Business structures, Sole trader, Partnership, Company and Trust ( Bare, Discretionary, Unit, and Hybrid).12. How does A= L+OE apply to a property business?13. Why would you buy a house in a trust? This is often not good contrary to the latest hype.14. Investment property seminar –interstate, are they deductible? 15. The benefits of Holiday homes.16. In who’s name for taxation and capital gains purposes?17. Is interest payment tax deductible prior to a house being rented out? What about repairs after the property has been tenanted for income purposes?18. Land tax- name on title, joint tenants, tenants in common, % effect v taxable income v Capital gains tax19. Joint ventures?20. Expected rate of return v inflation (opportunity cost)21. Commercial v Residential v Public Trusts v Syndicates v Trust22. Do you want to retain your present home/ what are your house plans or areyou planning to move within several years?23. Rent v Buy, Shares v Property24. Employment situation and taxable income?25. Non -Tax deductible debt: credit cards, hire purchase and leases of domestic nature. What effect do these have on your mortgage or loans available?26. Depreciating assets v appreciating assets – What are these?27. Free cash flow- How can I improve this situation? How do you structure yourself to afford more property.28. Income Tax Brackets and Capital gains Tax.29. Age profile and the ability or risk that may be taken?30. Should I pay off my home?31. Mortgage repayment calculator? What can I afford to repay?32. How can paying off my home be accelerated?33. Negative v positive geared, The upside and downside to both of these?34. What is OPM, leveraging, equity, and collateral?35. Where to buy, unit/house, rental yield, new/old, price range, pool etc36. Management issues with properties. How to avoid these? 37. Can someone house share with me to help pay the mortgage?38. Strategies and tricks?39. Co-owners with friends is this a bad idea?40. Depreciation v Repairs v Capital Improvement41. Loan cost write off42. What is the Cost base for CGT and the trigger date?43. How a line of credit can be so wrong?44. Pre-paid interest and variation to PAYG ( form 1515).45. How Lenders Mortgage Insurance (LMI) is of no financial concern.
A question such as the above will get a response that may cover only one of the above topics – If you went away to make a decision based on one, two, or even three of the facts above then you are short changing yourself and the ability to make a valid decision for your future.The opportunity cost is also something you should consider? Buying shares as you have suggested….. Better still, is trading long term covered call options…..
Oh my god number 8,
That's a sure way to scare the living bejesus out of someone ….. one way to kill off all possibility for sure!
Jezzaust,
Ultimately as I'm sure you're already aware, you will have to choose what to do. Forums such as this are great ways to ponder ideas from others and then ultimately waigh up the pros and cons and choose.
You should start by looking at what your investment goals are for the the next 5 and 10years. It's also a good idea to follow what you are passionate about. For instance … if you are passionate about property, then making some mistakes will be a learning curve on your journey not something to scare you away from having another go.
Naturally there are considerations to take into account for investing in shares …. market flictuation, what strategies to use, short term, long term etc etc etc.
There are also many things to consider in property. One thing though, is that history has shown, even through down-turns, property has always doubled in value in 7-10 year intervals. This is what makes property very attractive, apart from rental values increasing as well.
Both sector will require you learning, growing, and likely, making some mistakes and learning from that. If you dont have a go, you'll never reep the rewards that are available.
Your thought process sounds very reasonable and you're in a great position to continue to grow your investment property portfolio. I'm quite partial to property as it is a passion of mine, hence we hold regular property seminars free to the public (free public adverisement! Yay!
)I'm not passionate about shares and can't advise you on that area as that's not my expertise.
Many people would give an arm or a leg to be in your shoes and have the possibilities you have in building a portfolio in property (or both). There are a great deal of strategies to profit hansomely in property, including how to learn how to purchase property with virtually nothing down.
Hope this helps
I just recently was given an older book called Borrowing to Invest – the Fast Way to wealth – a Guide for Borrowers by Noel Whittaker and Paul Resnick. It was written in 2002 i think so a few things might have changed (when they wrote it stocks were still going up strongly but probably better to buy shares now than 18 months ago) but they went through the pros and cons of borrowing money for both property and shares. It gave some useful food for thought for both.
Noel leant more towards borrowing for shares as over time, with both diviends reinvested and tax credits from fully franked shares and growth etc and all the rest, he worked it out that shares would be a bigger gainer than property, but either option executed properly could provide handsome returns.
His thinking was that you would probably need at least $200k invested in shares to have a properly diversified portfolio, so that is a range of maybe 10 shares across different industry sectors and also a mix of some low and some medium/high risk ones depending on your appetite and investment goals.
Learning about shares is not impossible, but you'd need to invest a little time in it to learn all the lingo etc… you can even take classes at http://www.asx.com.au… they do have their good and bad points compared to property, but if both are held for the long term rather than being sold out during panics, both should provide good returns if chosen well at the start… you can probably also invest the money in managed trusts or whatever who have people who buy and sell shares for you of all different classes and risks etc… so various ways to do things while your starting out…
I guess one of the advantages is (and when i have enough money probably i would like to try it) is that when shares are up often property will be down and vice a versa and so just like in a property portfolio you like to diversify into different suburbs or typs of property rather than having all eggs in one basket, having a larger diversification in your investment strategy of shares and property will hopefully protect you more… if people had had the money and the balls to buy in 6-12 months ago the ASX has bounced bock really well (over 50%)… the smart investors know to buy when everyone else is selling as the entry costs are so much less as all the stock prices are being reset to lower levels and growth can begin again…
Again, maybe buy a book or two and think it through, but future performance unfortuantely can't be forecast from past experience and the massive bull runs we have had on the stock markets…
Mark
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