Hi, Hope someone can offer advice on which would be the best way for us to go. Current situation:
Have PPOR – owe 412K, worth maybe 440K (P and I loan) – only had for 3 years.
1 IP – owe 225K worth 300K, rent currently $285 week (long term tenants, av local rent for same now 300 – 320 per week). Loan IO. Slightly positively geared after tax deductions.
Looking to buy rural residential block and build on it (have made offer). There are a couple of ways we could go but not sure what to do…
Option 1 – buy land, build house – combined cost 500K (but may have to compromise on what we want house wise). Keep PPOR and change into IP – we have done the sums and can afford to do this but I worry that we may get into trouble if house not rented all the time. Predicated rental income would be 430-450 per week.
Option 2 – sell PPOR and have extra $$$ to put into new house build – borrow $700k instead of 500k and have the "dream house". But then we basically come out of our present home having made no gains at all if we sell it…hubby is happy to take the risk to keep the 2 houses and build a new one but it makes me anxious.
Option 3 – buy the land and pay it down quickly and then build on it in a few years – more equity in all 3 properties and less risk for us…plus can save up to get the house we want. Either sell our current PPOR then (with more equity) or keep it and change to IP.
Annual combined income is $200K so the borrowing/rental income figures all stack up – IF rental income is steady and mortgage rates don't go up more than 2%
What would you do???
Before getting back with any suggestions theres one question, from the figures above the LVR on the O/Oc property is 94% and the LVR on the Inv property is 74%. (loan divided by the value) the overall LVR is 86% which is fairly high. You will need funds to settle the purchase i.e. deposit and costs, do you have savings or were you hoping to use available equity in your existing properties to fund the purchase costs? Perhaps shoot me an email and I will crunch the numbers for you on a spreadsheet.
Unfortunately under NCPP it is difficult to provide a structured answer without further information on your goals and objectives so my answer will be fairly brief.
You obviously havent at this stage decided whether you will sell your PPOR or retain it and rent it out.
Initially why dont you convert the loan on your PPOR with your existing lender to an interest only loan with 100% offset account and this will at least give you time and flexibility.
Remember you mentioned you have made an offer on a couple of blocks so if these were accepted you would need to act fairly quickly in your decision making.
The other consideration is the zoning and location of the land.
I am hoping that it is standard sized block on an acceptable post code.You can still get 95% lvr on land (many lenders it is only 90%) however the other associated costs would need to be funded from your own cash resources or equity in your cirrent IP so i am hoping that the loan securities are not cross collateralised.
if you believe the current PPOR is in an area which will grow and the asset appreciate the certainly look to retain it and even consider fixing the rate to cap the negative gearing and reduce your interest rate risk.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Selling your PPOR would be tempting as you can free up the equity keeping your new home loan down and of course it is CGT free. I am a strong believer that investment decisions and lifestyle decisions should be kept seperate
You need to remember to factor in selling costs when deciding whether you want to sell your current PPOR. If you have selling costs of 5% (which based on a $440k sale price is $22k), you will only end up with a net of $418k. This doesn not leave you with much money left over after the sale once you take into account your current debt of $412k!!!!
Cheers,
LukeHi again
Thanks for all your comments. A bit more info to help if anyone can give any further advice:
The deposit for land will be from equity in current IP (and a bit of savings so no LMI to pay). Land is 7 acres in Millthorpe NSW – sealed road, electricity, town water, natural gas connected so a pretty good block – and with lots of growth in the area with new hospital and mines don't think we will be paying too much for it.
It would be our long term home when built – our current PPOR is in Orange and rental prices have risen quickly in the last six months due to rental shortage. Again, one of the reasons we are in two minds about keeping or selling is whether rents will continue to go up or when new housing estates are built and demand is softer that there could be risk of over supply of rental housing. Do others think Orange is likely to keep growing as it has been static since maybe 2006 house price wise until maybe 6 months ago?
Agree with you Luke86 selling seems pointless from an investment point of view because we would come away with really not much to show for 3 years of ownership – but maybe I get to sleep better at night with less debt!
our PPOR if rented (IO loan if IP) would be in the "executive" (real estate agents words) end of the market – good area not far to town, 4 years old, nice home but likely to be a smaller pool of people wanting to rent as would be at the upper end of rental prices for the area.
The more we think about it the more tempting it is to buy land and pay down quickly and wait to build in 3-4 years time. Kids will have finished Uni, wages and (hopefully) existing properties go up in value and we can keep to the "buy and hold" strategy that we initially set out to do without too much financial stress.
Our financial plan was to eventually have enough equity in property to pay off much of our PPOR in 10-15 years time and not have to work to 65 as we could then put more money into super.
Would love to hear what others advise as still not sure what to do…
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