Beginner guidance needed

[csd]

Hi,

I'm just starting out hoping for some thoughts and guidance.

My situation is essentially as follows (values are conservative):

PPOR1 value 420k owe 340k
PPOR2 value 500k owe nil

No other loans, CC etc

We are looking at a new place due to family needs and expect this to be around the 900-950k mark for what we need.

I would prefer to keep both PPOR1 and 2 and convert into IPs, but if I was to do this and use a LOC on PPOR2 for a deposit am I not getting any tax benefits?

Would I be better selling PPOR2, paying this off the new PPOR (PPOR3), then using some equity to purchase a new IP(s)?

Any help would be much appreciated.

 

[Aaron_C]

Yes if you use equity in your houses to buy the next one, it will not be tax deductible. Whether you sell PPOR2 is up to you, depends on whether you think there is growth in holding onto it.

 

[csd]

I guess I would be getting taxed on the income from the rent, but there would be no deduction against that property?

I seems like it might be better to sell, have a reduced loan on the new PPOR3 and then draw down on it's equity to purchase new IP(s) and start these from scratch?

What would others do? Am I looking at this wrong?

 

[Rickardo]

I guess I would be getting taxed on the income from the rent, but there would be no deduction against that property?

I seems like it might be better to sell, have a reduced loan on the new PPOR3 and then draw down on it's equity to purchase new IP(s) and start these from scratch?

What would others do? Am I looking at this wrong?

You're not looking at it wrong, you're just in the situation a lot of people find themselves in if they don't get good advice before structuring loans.

You've paid off all debt, that's a great result but not so great if you were ever intending to rent the property out at a later date.

From a tax perspective it's better to sell, however you've gotta balance that against ensuring whatever you do with the funds (new PPOR it seems) will get you a better overall long term return than if you were to keep the old PPOR and the CG and rental income that comes with it.

 

[Rolf Latham]

You're not looking at it wrong, you're just in the situation a lot of people find themselves in if they don't get good advice before structuring loans.

Often thats because borrowers dont know the right questions to ask because the credit "professional" was not sufficiently robust in their questioning. This means the solution suggested was usually "transactional" ie , the here and now.

This isnt always the case though, many times peops suffer from confused knowledge of the well meaning ( but often structurally poor) advice of friends or relos, and even though they KNOW they need to X, in their state of "fear of the unknown" they will do the exact opposite.

CSD, you have some great resources there, im sure you will find a way to make that work for you


ta
rolf

 

[Greg Reid]

I would run the numbers and see what makes better sense.

As an example:
Borrowing 105% for a PPOR even via 2 loan facilities will cost $3,750 per month ($900k @ 5% IO). Rent at 3.5% yield less costs less tax may generate $750 per month. Net after tax cost = $3k per month.
Selling PPOR2 less commission will mean a new loan of say $400k @ 5% = $1,666 per month.

If you like the prospect of another IP, establish 2 loan facilities when you buy, a $400k with offset and then a separate $320k LOC (to an 80% LVR) used to fund the settlement of another IP. I think the numbers will show which is a more advantageous option depending on your MTR. It also gives you the ability to debt recycle.

 

[jingo]

I would run the numbers and see what makes better sense.

I think the numbers will show which is a more advantageous option depending on your MTR.

This was the best piece of advice I gained from a highly successful investor who used to post here. When in doubt, run the numbers on various scenarios and choose the one that best suits your situation. You're in a good position, though, having a debt free PPOR isn't all that bad!

 

[Corey Batt]

2x PPOR's, is this two families combining under one roof?

Make sure that in the process of getting out of one poorly structured situation, that you do not enter another!

 

[csd]

Thanks for the advice guys.

CJay - in simple terms, yes this is the situation and why I want to make sure that I get it right, to set ourselves up properly for down the track.

 

[Colin Rice]

Make sure that in the process of getting out of one poorly structured situation, that you do not enter another!

Sterling advice right there ^^^^^

 

[Corey Batt]

Lots of options available, depending how you would proceed. One option I see quite a bit for this scenario if the PPOR's arent investor grade is to sell off old props, purchase new outright/near outright, take out LOC/loan against property for future investment purchases. Minimises non deductible debt and opens up a large growth platform for investing, however there are a lot of changeover costs in the process.