Analysis rut- general advice

[sinead]

Firstly, thank you to about 300 forum members who have helped me research over the last 18 months. You've saved me time, money and stress.
I have spent a lot of time reading different techniques when it comes to property investment and I think I've got myself into a bit of an overanalysis rut. The finaincial advisor I talked to just wanted to sell me shares . Im going to put all my info on the table and see what you guys would do in my position.
23yo, very stable job. Combined income of 110k with partner.
Assets:
PPOR- $500k (mortgage of 400k)
IP- $ 360K (mortgage of 330k) currently IO loan
IP loss of $2900/year
Savings Account: 12k

Nil other debt
Goals: Overseas holiday every year $7-10k. 3k in the offset at any one time.

Options:
A)Sell PPOR, rent, free up about $700/month plus $3000 a year in rates/OC
Use 70k made off PPOR sale (30k in fees, stamp duty etc taken out) and use this as a deposit for a second IP which would be positively geared/neutral ($350k Eastern suburbs Melbourne). Use extra $$ to pay down first IP until its positively geared
B) Stay as we are now (we can afford to, but holidays would be limited and some months are tight)
C) suggestions - we don't have a lot of free time for huge renos



I know its vague.. any suggestions would be so greatly appreciated.

 

[Giuseppe]

Hi Sinead,

I don't what others might say but I would suggest paying off your PPOR. Don't sell anything unless you absolutely have to.

Regards,

Giuseppe

 

[nhg]

Start with holidays near-by, eg S/E Asia, or take advantage of the specials, you can get some really cheap tickets if your work is flexible.

Or perhaps, rent PPOR, and move overseas on a work-visa, have a 6 month holiday.

I'm a strong believer in 'AND' NOT 'OR'. Why limit yourself to one thing.

Sometimes you just need to think outside the box.

 

[Coota9]

How important is holiday each year?

Think about putting that money into a asset producing IP or rolling it though your offset account to knock interest o your PPOR

Coota

 

[Jake Milne]

Hi Sinead,

I don't what others might say but I would suggest paying off your PPOR. Don't sell anything unless you absolutely have to.

Regards,

Giuseppe

I agree with this... Don't sell off your best asset. Entry and Exit costs can kill profit in realestate. Focus on minimising the debt as quickly as you can... Talk to your FP about how you can safely do this - your savings might be better off in low risk fixed term deposits, equities or dividend paying shares.

You're 23 and have a home and an IP... you're in very good shape. Don't rush it, plug away at minimising bad debt and maximising your good debt (within reason). Getting rich takes time.

 

[HiEquity]

I agree with this... Don't sell off your best asset. Entry and Exit costs can kill profit in realestate. Focus on minimising the debt as quickly as you can... Talk to your FP about how you can safely do this - your savings might be better off in low risk fixed term deposits, equities or dividend paying shares.

You're 23 and have a home and an IP... you're in very good shape. Don't rush it, plug away at minimising bad debt and maximising your good debt (within reason). Getting rich takes time.

Good stuff Jake. In the spirit of avoiding transaction costs and making all debt tax deductible, I would definitely suggest renting out the PPOR and finding somewhere cheap to rent yourself. You may well find it frees up enough cash flow to acquire another IP and get you a bit further down the road. It's the moves you make at the beginning that most impact how long it takes to get to your destination. Getting as much exposure as possible as safely as possible (in terms of cash flow) is the name of the game at the beginning. Good luck!

 

[see_change]

23 , two properties . I'm impressed

If you sell PPOR , aren't you going to have to rent ?

If you were one on my kids , I'd say go along with the boom .

Keep the PPOR and put as much money into an offset account. You have just under one mill of exposure to the market and assuming they are well placed in a few years you will have good growth . There at times to sit back and watch the market go up . This might be one.

I'd be happy to watch rents and equity go up and at some time use that for another IP . Maybe this cycle , depends on how aggressive you want to be . The more aggressive , the greater the risk . Another option is to wait of the next crisis and buy a bargain then , but I think that will be many years away .

There are nice places in Australia to check out .....lot cheaper

Cliff

Cliff

 

[Colin Rice]

What I would do;

1. Convert PPOR to IO with offset account. Rent out and rent somewhere cheaper as suggested. Get a depreciation schedule done as well.
2. Channel savings, rents, salaries into single offset account.
3. Consider a tax variation on wages (speak to accountant)
4. Focus on amassing as much as possible into the offset account. Decrease expenses - Increase incomes.
5. Speak to a property friendly financial planner in regards to risk insurance in particular income protection.
6. Go on holidays to asia/cheaper destinations as suggested.
7. Revisit in one year and repost here

 

[Graemsay]

The first thing to do is try to build up a decent level of savings. The recommendation tends to be enough to cover three to six months of expenses if everything goes badly wrong.

A back of the envelope calculation would suggest a level of $25K to $30K as a minimum. This should be held in cash.

As others have suggested, reduce expenditure. $7K to $10K is a big chunk of your annual income, and it seems an awful lot to spend on a holiday. Try to do things more cheaply instead.

Beyond that, I'd look at reducing debt levels. Given the tax rules, start with the PPOR and then the IP. The thing to bear in mind is that few investments will yield more than a mortgage's interest rate, particularly after tax.

At 23, your income should rise as you progress in your career, so that will make things easier.

 

[Colin Rice]

The first thing to do is try to build up a decent level of savings. The recommendation tends to be enough to cover three to six months of expenses if everything goes badly wrong.

Good advice ^^^^^ Id go for 12 - 24 months, but thats just me.

Income protection can create a backstop in the meantime.

 

[Singo]

Some good advise given above.

If you two are on a 110k salary "holidays limited and some months tight" worries me. I would do a budget and see what are the expenses. 7k holiday shouldn't be a big issue for a couple who earn 110k.

 

[skater]

This!

1. Convert PPOR to IO with offset account. Rent out and rent somewhere cheaper as suggested. Get a depreciation schedule done as well.
2. Channel savings, rents, salaries into single offset account.
3. Consider a tax variation on wages (speak to accountant)
4. Focus on amassing as much as possible into the offset account. Decrease expenses - Increase incomes.
5. Speak to a property friendly financial planner in regards to risk insurance in particular income protection.
6. Go on holidays to asia/cheaper destinations as suggested.
7. Revisit in one year and repost here

Very good advice. By renting out your PPOR, you get the best of both worlds. You get to keep your PPOR, AND claim the expenses on it, while funnelling more $ into your savings. Revisit moving back perhaps when kids are on the way & you want more stability.

B) Stay as we are now (we can afford to, but holidays would be limited and some months are tight)

This worries me. With the income you've got coming in, you should be able to put a lot aside to increase your offset account AS WELL AS afford a holiday.

Do a budget! Break it down so that everything is accounted for. Only by doing this will you see where the money is going each month.

Also, I'm not sure if there's anymore cheap tickets left, but Air Asia has a sale on. Fly during the first half of the year & it's really cheap. We've just booked tickets to Thailand. Return flights for two people for less than $1500.

 

[greedy2000]

Goals: Overseas holiday every year $7-10k. 3k in the offset at any one time.

Options:
A)Sell PPOR, rent, free up about $700/month plus $3000 a year in rates/OC
Use 70k made off PPOR sale (30k in fees, stamp duty etc taken out) and use this as a deposit for a second IP which would be positively geared/neutral ($350k Eastern suburbs Melbourne). Use extra $$ to pay down first IP until its positively geared
B) Stay as we are now (we can afford to, but holidays would be limited and some months are tight)
C) suggestions - we don't have a lot of free time for huge renos

It seems strange that you would consider destroying what you have achieved just to go on a holiday each year.

Lose $30K in fees, so you can spend $7-$10K on holidays each year? thats crazy

You are young, your income will rise and you will be able to afford more holidays over time.

Do a budget, you can make it happen on the cashflow you have now, work out where your money goes.

Only other suggestion which has already been touched on is to keep you PPOR but rent it out and live somewhere else. You'll get more back at tax time but its probably not going to result in savings great enough to pay for a holiday each year.

 

[nhg]

Not intending to go all Dr Phil on you...

I think you may want to ask yourself if this is a ROOT or a SYMPTOM of something deeper.

Dissatisfaction with life/work?

I personally believe the worst advice would be to suggest shutting down your feelings. Otherwise you'll crash hard during a mid-life crisis. Rather I would ask, is this what I REALLY want, is there another way to fill the thirst, if not, how can I do it in a way that won't leave me falling behind in the long run.

There is a balance to be had. I'm just past my mid 20's now, and I have done both 'extensive' travelling (25+ countries over the last 5 years) and purchased several IP's. I wouldn't be a very happy person if I hadn't done both. Never Option A or Option B. I always think, how do I get Option A AND Option B, with a bit of Option C to boot.

 

[monalisa]

I agree with others - I wouldn't be selling the PPOR. If you are too concerned, just turn it into an IP and rent elsewhere to reduce costs.

I think you are doing well!

 

[sinead]

Holy crap. I didn't expect to find all this when I logged on! Thank you so much for taking the time to reply! It has eased my mind so much!
In reply to some comments

Holidays: Reading my post back, it does sound a little shallow. The idea behind it is- A while ago my partner and I had a talk about our 'goals' and what came out of that convo was that regardless of our assets or jobs or whatever is going on in our lives- what would make us truly happy is to be able to travel AND to be able to not stress about money. We travel to asia most years (thanks for all those that mentioned it) and spend between 5-6k. I assumed that if branch out to say Europe in the next few years that it might add a few grand- thats where the 7-10k comes from.

Savings- A few people mentioned savings for a rainy day- I am a big fan of the barefoot investor so that 12k in savings is my work in progress for my rainy day/lose our jobs fund.

PPOR- Im actually shocked that people have suggested we keep this. The most common story I see on here is people renting and getting as many IPs as possible. Im really glad that almost everyone suggests keeping it. If we were to rent it out based on my figures we'd save the money come tax time but not necessarily on renting elsewhere (unless we choose somewhere below $450/week). I will call the RE tomorrow and get a rental appraisal for PPOR though and do some accurate figures. This plan sounds like it would suit our lifestyle and not increase risk.

Budget- I was shocked that people suggested we shouldn't be tight based on our incomes. I mean, Im embarrassed. I will sit down and budget and see where the money is going. This was the comment that hit home the most!

THANKYOU!!!!

 

[JacM]

Hi Sinead

Just focussing in on that IP that is losing $2900 per year - do you have a depreciation schedule for the property?

 

[sinead]

JacM- yes we do. It's 2yrs old- $168000 building cost
Capital works deduction: $3066 and depreciating assets: $3513

 

[JacM]

Right ok. So about the $12k savings account - is it viable for you to pop the bulk of those funds into an offset account against your PPOR (or if you don't have one because it is on a fixed loan, then putting the cash into the offset of the IP is the second choice). It won't save you bucketloads of cash in interest - probably about $650 depending on your interest rate. But $650 is a nice start.

 

[sinead]

JacM- yes I moved it over yesterday actually, I was initially reluctant because I thought if it's in our everyday offset account we'll be tempted to use it. But we did a budget and we now have a little more control. Unfortunately looking at the past 2 years in detail we have had a loss of about 7k from our offset which we didn't notice so much as we started with quite a bit of funds and our incomes are variable.. Sigh.