Hi all, I've really enjoyed reading the posts on this forum, and feel like I'm learning a lot already.
My partner and I are just starting to plan our property investment journey, and one of the first things we are considering is whether to buy big or small first… I will explain.
We bought our PPOR (a 2 bed unit) just over a year ago, and now are building up funds for a deposit on something else (while still paying extra off our mortgage). Later this year we could hopefully be in a position to buy a small CF+ (or nearly) IP in regional Vic – around 150-200k in Geelong, Shepparton, Ballarat, etc.
BUT… in a few years we are going to want to move to a bigger place, hopefully due to a growing family. So, should we instead try to buy a bigger place in the big smoke (what would be our future home) and rent that out for a couple of years before moving in ourselves? The thing is, we'd need more time to save up for a deposit for this, so it might not work at all – by the time we've saved it up we might need to move, given that prices for what we'd want are at least 650-700k.
We're about to do a kitchen reno on our PPOR, and are hoping that this place might also form CF+ property in a few years – but not sure if that will help us to move to a bigger place either.
I'm leaning towards buying a small place sooner – but will that restrict us in the future in some way that I haven't foreseen?
Sorry for the convoluted explanation – as I said we're just starting to get our heads around all this, and work out what our best strategy will be.
Thanks in advance for your advice/input.
Cheers,
Starsoid
Hi Stars,
If you are moving out of your current PPOR then do not pay extra off your mortgage. Plough the surplus funds into an offset account linked to your mortgage. Maybe even convert the loan to interest only.
The reason I make these comments is that when you buy you rnew home you will need to borrow a signifciant percentage of the new loan or sell your existing home so you minimise your non-deductible debt. This will be more of an issue if you are on one wage with family plans in the air.
You simply cannot take the additional payments from your existing PPOR and transfer the debt across to your new home and expect to claim the full loan amount against your existing home as deductible debt. The ATO will coonsider the redraw as non-deductible because you used the funds to buy a new home.
If you are looking to raise a family in the not too distant future then investment and cashflow considerations should be made on the basis of there only being one wage. Do numbers on this basis. The additional cashflow will help meet the outgoings when you reduce to one wage.
Having said that there is not a lot wrong with selling your existing PPOR to buy into a new home. Sure you lose some porfits in agents fees but there is no CGT payable.
For me keep doing what you are (albeit with a change ot loan structure) an dkeep asking questiosn of yourselves to really work out what you want to do and what is viable.
Thanks Derek – very good advice. We do already have an offset account, and I take your point about the additional loan payments potentially hurting us in the future tax-wise if we do end up renting out our existing place. Looks like the best thing to do now is put all our spare cash in the offset, which has the same effect of minimising interest for now but keeps our options open in terms of the future.
Hi Starsoid,
Have you thought about using the equity from your PPOR as a deposit for an IP? If you are doing a kitchen reno, depending on your situation you may add enough value to do this. Then you may be able to buy a more expensive place now instead of waiting to save for the deposit.
Kate
Thanks Kate – yes, that is another point to consider, and one of the reasons we're planning the reno (oh, and because the existing kitchen is woeful!).
We're very much heading towards the idea of accumulating a number of smaller properties that are CF+ or nearly so, rather than being negatively geared on something larger. Instinctively I feel that strategy gives us more freedom in the future, whether we decide to buy a new PPOR in the metro area, or in a regional area, or even if we want to move overseas for a while. And it helps to diversify more easily, in terms of location.
Is there a downside to this that I haven't thought of yet?
starsoid wrote:Thanks Kate – yes, that is another point to consider, and one of the reasons we're planning the reno (oh, and because the existing kitchen is woeful!).We're very much heading towards the idea of accumulating a number of smaller properties that are CF+ or nearly so, rather than being negatively geared on something larger. Instinctively I feel that strategy gives us more freedom in the future, whether we decide to buy a new PPOR in the metro area, or in a regional area, or even if we want to move overseas for a while. And it helps to diversify more easily, in terms of location.
Is there a downside to this that I haven't thought of yet?
A key issue you'll need to consider if you intend focussing on a cashflow strategy is where does your equity come from to buy each property. Borrowing money is all about how much security and income you bring to the borrowing table.
Equity can come from buy well below value, natural price increases, created price increases, paying off the loan etc.
For me it is not all about cashflow – there needs to be some balance in the portfolio. The trouble is each persons right point of balance is different.
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