As a growing family we are thinking of buying a bigger house (total cost $860,000) and will be selling our Principle Place of Residence first (Current loan 335,000, Sale Price $570,000).
Now we are also considering selling my Investment Property as well to reduce the mortgage to about $65,000. I have done a 10year plan for the following two scenarios:1) Keep renting the investment property ($330pw, remaining mortgage $405,000 after we put in some savings)
2) Sell investment property (remaining mortgage $65,000)My goal is to choose the option that provides the better net worth after 10 years.
Any help woul be appriciated
Time value of money is important. If you invest that money to buy another property in high CG area, rather than paying of your debt, you could use the increased in equity in the future for another deposit of IP. Equity trapped in your Principle Place of Residence is lazy money, a money you can invest in come producing asset.
If you invest in area where it has history of high CG, plus every 7-10 yrs, historically, the value of your property doubles in value hence, in 10 years, you'll achieve your goal..better net worth whereby your equity has grown substantially.
I was exactly the same situation as you are now until as advised from people I met that who invested successful in real estate that I will miss out on CG each year if I pay substantial amount of money towards my home mortgage if i sell my IP.
You also need to factor in, you will need to paid CGT if you sell your IP. But, you also remember your Principle Place of Residence experiences capital growth each year, hence your equity goes up while your debt remain the same.
Historically, property double in value every 10 years. Alternatively, a book I've just finished reading by Chris Gray – the Effortless Empire – you could hold on to your IP for 10 yrs since it will double in value, sell it after 10 years, then pay your home mortgate hence you are debt free therefore you cut the time it takes to pay your home mortgage in half at least.
I suggest you do the figures for 10 years with different rates for growth etc.
Also consider selling the investment property, paying down non-deductible debt and then reborrowing and buying a similar property again – but this time your tax deductions will be much larger with the only loss being the stamp duty and selling costs.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks all for your comments.
If we get the property we are after I will probably sell my investment property, pay of my non-deductable debt and then begin looking for another investment property when we are settled.
I know all those players of the property game who believe in never selling are probably screaming right now but we believe we are getting our new house for about 15% below its true market value and any capital gain accruing in my investment property is comparable with the extra interest payments on the new property.
have you thought of renting out you PPOR and renting a bigger house in a suburb u want to live, this will give u extra tax benifits
Your option is definitely something we have considered. I have done this in the past but the question for us now is is at what point in time do you say no to the renting game. With the kids in school stability becomes an issue and the last thing we want is to have to move out of a rental because the landlord wants to sell it or something.
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