Advice req'd

[Hugo]

Evening all,

First time poster and short term reader looking for some advice/reassurance from forum experts. Think I know what the answer is but appreciate any comments.

Current Situation
Inner city house ($550K), large mortgage ($290K), wife hasn't returned to work after having 2 children (but is planning to in the next 12 months part time). Mortgage going nowhere fast. No other investments, mid 30's age bracket.

Option 1
Sell house, take equity, move further out and become more proactive in making money through RE. Thinking of buying a 32p splitter, subdividing, selling off vacant block etc and owning house on adjacent 16p. Start investment portfolio.

Option 2
Stay in house, struggle with mortgage but have significant equity in several years time, but no room for other investments.

Interested in peoples thoughts.

Thanks
H

 

[simonjulie]

Hi Hugo
Welcome to the forum :0)
IMHO,Head down and tail up. You are holding an asset that a lot of people stive for.(a house in the inner city) and you nearly own half of it.
You could read the book "the Richest Man In Babylon" and develop a good equity building savings plan. Ask youreslf if you are leveraging your loan effectively by using an offset account against your loan and does it have a redraw facility attached? All that type of stuff can help you reduce your mortgage faster and place you in a better position for future growth.
And there is nothing wrong with practicing finding great deals also develop your financial education.
Just a few thoughts
Kind regards
Simon

 

[Sunstone]

Dear Hugo,

Welcome to the forum. Simon has given some good suggestions (I wish I had a dollar for every copy of TRMIB that I have given away. )

A couple more:

Useful related thread on selling:
http://www.somersoft.com/forums/showthread.php?t=14943

Come along to the next BIG meeting (Good to meet likeminded people):
http://www.somersoft.com/forums/showthread.php?t=16844

Put together a plan on where you want to be in 1, 3 and 5 years. Working on this plan will help make some things clearer and will motivate you when you get distracted. Some people say that the only difference between millionaires and billionaires is that millionaires look at their business plan once a day, billionaires look at it twice a day.

Enjoy the journey.

Cheers,

Sunstone.

 

[see_change]

We did option 1

Had a nice new house , designed the way we wanted it , BUT had the large mortgage.

Sold it, bought something for almost half price with development potential and havn't looked back. Have made more money in the 2 1/2 years since we sold it , than we did in the 15 preceeding years of slogging to pay off mortgages and working at day jobs. If we'd stayed there ...well, after about 18 months we probably would have had to have sold anyway. Since we moved in we've got approval for a dual occ ( subdivision pending ).

Our current house isn't as nice as the one we sold , but assuming things work out the way we plan , in about another two years we'll have a house as nice as the one we sold, mortgage free, along with a healthy investment portfolio.

Some of my wifes friends told her they'de have to be dragged out of the house we sold.....but the relative lack of financial stress has improved our quality of life . I'm a much more relaxed vegimite as I can see light at the end of the tunnel , my wife has stopped working and as a result the stress levels in the family have decreased and our family is happier.

Well that my view

The reality is a nice house isn't necessary for happiness. A happy family is.

See Change

 

[BV]

Hi Hugo,

I would not sell because buying and selling costs money.
In your situation you are probably looking at 50K?
Are you going to make this amount of money using your strategy
in this market? I doubt it. If you were to move further out why don't you
keep this property as your IP? The rent and the tax benefits will help
you manage the loan very easily.

Those getting rich quick schemes don't always work and particularly now.
When See change sold he was lucky that the property market was still
moving rapidly and his particular financial situation and
investement strategy could be much different to someone else's.

I would not take risks and move away from the low risk inner west property
you have in the current state of the property market.

Having said that, a lesser mortgage on the PPOR is always atractive.
if you go for this option be very careful where you buy.
If you stay withing city limits you should be ok but you have selling and
buying costs. If you go too far and might not see cg for a loong time.

Good luck

 

[simonjulie]

Hi Hugo
Your tollerance to risk will increase with experience and practice. If you don't feel comfortable with a deal "don't do it!" Move on to another that you do feel comfortable with. See Change is comforable with his current situation as against his previous. When you go into a deal there are things you could consider.
Comfort Zones
Escape plans
When will you get your money back?
How long will it take?
I have always found that the biggest advantage gained in property investment is at the start.
Good fundamental research. Buy below market value and value add. (That gives two equity hits + browny points for finding a well placed asset)
Have the property revalued then after a short time period take your money back out through refinancing. Duplicate and GROW.
"You make your money when you buy!"
Simon

 

[Hugo]

Thanks for the advice. Any opinions on who might be the best people to speak to regarding our options ie: renting, restructuring finance etc?

Many thanks again.

 

[WillG]

Hi Hugo,

Inner city house ($550K), large mortgage ($290K).

I have summarised 2 options (with assumptions)

Options (over 5 years):

1. Stay and do nothing)
@ 6.5% you are paying $18, 850 interest/year to live in your current house
Over 5 years = $94250
Estimate rates (water, sewer, general) @ $4.5 to $5k per year
Over 5 years = $22.5k
Capital gain for 5 years :
2%: $45k, 3%: $69k, 4%: $93k, 5%: $119k, 6% $144k, 7% $171k

Position @ 7%: + $54250
Position @ 5%: + $2250
Position @ 3%: - $47750

2. Sell up and buy house further out
Cash from sale: $260k
Selling Costs: $12k
Stamps on new property: $12k
New Property : $410k
Loan: $174k

@ 6.5% you are paying $11, 310 interest/year to live in your current house
Over 5 years = $56550
Estimate rates (water, sewer, general) @ $3 to $4k per year
Over 5 years = $15k
Capital gain for 5 years :
2%: $34k, 3%: $51k, 4%: $70k, 5%: $88k, 6% $108k, 7% $127k

Position @ 7%: + $55 450
Position @ 5%: + $16 450
Position @ 3%: - $20 550

Additional savings from paying less interest ($94 250 - $56 550) = $37 700
This can be left in an offset account against your PPOR or to fund another property.

Observations:
* Downsizing will put more money in your pocket (over 5 years even after costs) and reduce losses if the property market continues to stall over the next 5 years. You would need capital growth of at least 7% to break even in your net worth. You will be left with a PPOR with less capital growth capacity but you will have a better chance to reduce personal debt and buy further investments.

I have attached the spreadsheet used for these calcs.

 

[Glebe]

Option C

Take a step back over the short term in order to take steps forward over the long term. Rent out your house for $400 a week or so (rough figure) for 3 years. In the meantime you rent in an outer suburbs for 3 years at $200 a week (rough figure).

Saving per year: $10 000. Combine that with your current repayments and you should be able to make a good dent in your mortgage until your wife returns to full time work without the costs of buying and selling a property.

 

[not a sheep]

Hi Hugo,

Something else you may want to consider is renting yourself.

This will enable a tax free haven of 6 years for your existing ppor while recieving all other investment benefits. (I.E. convert your home to an ip without the worry of cap gains tax)

Secondly the rent you pay can be claimed off your tax at a rate of around 20%, this is on the basis a portion of the property is used for work related requirements.

You can also claim a portion of your utility expense against tax under the same scheme.

Speak to your accountant for further details.

If you want a well respected accountant try Dale, he is a member of this site.

Regards,

NAS

 

[WillG]

Hi Hugo,

Secondly the rent you pay can be claimed off your tax at a rate of around 20%, this is on the basis a portion of the property is used for work related requirements.

NAS

Hi Not a sheep,

can you explain 'claimed off your tax at a rate of around 20%' ?. Are you saying you can use a room in the rented premises as a home office to manage the property and claim one fifth of the rent ?

 

[not a sheep]

Afternoon WillG and all others,

The 20% claim is eligible if you can verify that a portion of your rental property is used for work related requirements.

This is not specific to the investment property but to the work you perform.

I.E. if there is a need for you to have set up a home office to perform a work
function from home.

This can include and not limited to:
*After hours work
*People that work from home, either P/t, full time or even 1 day per week.
*Potentially studies that are required in association with your work that are required for you to remain or rise further in your profession.

I.E you "need" a dedicated portion of your property for this function.

Please speak to your accountant for furter clarification or prior to performing any such claims against the Tax Man.

Regards,

NAS.

 

[JumJones]

All aboard !!

All excellent fodder for thought.

Maybe also check out Navras strategy - using that home dollar 6x etc etc. not a bad way to start.

You have committed to a journey that in the long term you will be glad to have embarked on. Above all else, educate yourself further - read everything, listen to everyone and then decide for yourself. It will take a lot of time and commitment but imho is so fulfilling you will never look back.

 

[BV]

Hi Hugo,
I would do what Glebe is suggesting.
It will allow you to sleep comfortably at night,
you will keep your (what I call) low risk investment and if later
your wife goes back to work you can stretch your wings and invest further.
If you decide to invest further, you can get some ideas and to an extend
some advise from our resident mortgage brokers.

cheers

 

[Jacque]

We did option 1

Some of my wifes friends told her they'de have to be dragged out of the house we sold.....but the relative lack of financial stress has improved our quality of life . I'm a much more relaxed vegimite as I can see light at the end of the tunnel , my wife has stopped working and as a result the stress levels in the family have decreased and our family is happier.

Well that my view

The reality is a nice house isn't necessary for happiness. A happy family is.

See Change

Ain't that the truth! In the end, you can have the best house in the street, but if you're stressed to the max about keeping it that way, more than your bank balance suffers. Though I enjoy a nice house in a lovely neighbourhood and have what I consider a fairly balanced lifestyle, I am becoming far more relaxed about what constitutes my idea of a "dream house" as I grow older. There are so many people I know who keep their homes pristine but never have anybody over (lest it become messed up!) Bit sad really....

Renting can save you a whole lot of money, if you do it right. Just make sure you put that extra mortgage money aside and don't fall into the habit of spending it instead.
Good luck in your choice!

 

[skater]

Doing what Glebe suggested is the option that I would consider, but with one small difference. Attach an offset account to your mortgage, that way if your situation changes you have preserved the tax deductability of the original loan.

Cheers