Buy an IP or pay down PPOR? (bare with me, I know it's been asked a million times).

I've been up & down on getting into the resi IP game since I can remember, always though we'd amass a brazillion properties and retire at 30 squillionaires, I'm now 37 and only have one, and that was sort of an accident.

We've almost pulled the trigger on IP's a few the over the years, and for one reason or another bottled it at the last minute or had the "bargain of a lifetime" snatched away from under us. I guess when it comes down to it, we are quite risk averse.

Moving here form the UK 5 years ago meant we were a litttle unsetlled for a while, trying to fit in and find direction. In this time we rented a house, built a house, sold that house and reno'd a 100 year old house which has been our PPOR for the last 2 years and we love it. All the while I keep popping my eye in here and every few months, look at properties for sale again and crunch some numbers.

Where am I going with this? We suddenly find ourselves 'settled' for the first time since we left the UK. We never felt particularly unsettled or homesick, but until moving to where we live now we look back and relise this is where we want to be. We can happily see ourselves in this spot for the next 5 years at least, and most of the hard yards are finished on the house so we can relax a little bit, which means my mind has time to wander again and look at investing.

Our situation is that we have our old house in the UK which we rent out, this one we just forget about and let do it's thing. It turns a profit, but the exchange rate is so low that it all gets left in the UK. It's all documented for tax here though, so all above board!

Our PPOR is valued at around $600k and we owe $410k on it, we have a 100% offset with $75k parked, so we're looking at $600k val and effective equity of about $265k.

Mortgage rate on the loan is 5.49%

We both earn good wages and have no kids, no car loans and no consumer credit.

Relatively speaking, we have a lot of disposable income each month with goes straight into the offset. Every dollar saved is a guaranteed net 'profit' of 5.49% due to the offset. At the rate we are traveling, we hope to have the PPOR pad off in full in 3.5 to 4 years.

Our thinking for the last year or so has been that we didn't really want to go down the path of tying to amass loads of property if it meant being really stretched and constantly worried, so was there any point in just picking up one or two properties over the next few years; would that be enough to earn enough future income to even bother with? What were out goals, well, we'd like a nice couple of acres in the country and enough money to enjoy it. So, we thought get the house paid off, then buy a weekender close enough so we 'd actually use it but far away enough to be affordable once the PPOR is paid off. The end result would be a fully pad off house as a 'sink' for retirement, and a weekender that should also be well paid off by then too. Sounds "safe"?

Wite this current disposable monthly income comes the temptation to sink it somewhere else though. So, my question in a roundabout way is, in the current market, is it really worth investing in another property or two over the next 1-3 years as opposed to the safe bet of parking it all in the offset?

We'd be looking at properties in outer suburbs, (or potentially Bendigo as that caught my eye a little), and looking at something in the $250-$350k range with rents around the 5% mark. Crunching the numbers in my spreadsheet, if we borrow the deposit against he PPOR to maximise tax dedections, we could potentially buy a $300k house with out of pocket monthly costs of around $200-$300. We could do the same again in 18 months and still have the PPOR paid off in about 4-4.5 years.

$200-$300 per month to buy a house seems like a no brainer, but if the market stays flat, (or goes backwards!), or you get a dodgy tenant that ends up costing you repairs etc, or a few months vacancy, I can't help thinking that the costs could end up more than we'd 'make' sitting that money in the offset untill the PPOR is paid off?

Sorry for the ramble, my head is spinning from spreadsheets, calculations and realestate.com.au adverts is all, guess I just wanted to put something down, read it back and put it out there for some less analysys-paralysed opions and to remind me why it would be a good idea to start investing in property.

Cheers.

Tone.
 
was there any point in just picking up one or two properties over the next few years; would that be enough to earn enough future income to even bother with?

If you buy some investment properties you can slowly pay it off so that the net income from it becomes more significant. More importantly, though, for retirement the main thing you need to have is income-generating assets. Investing early allows you to take advantage of compounding returns - so even if your property doesn't generate that much in terms of rent when you retire, hopefully you have enough capital appreciation to be able to sell the property and then use the proceeds to fund your retirement and go traveling etc. That's the end game.
 
If you buy some investment properties you can slowly pay it off so that the net income from it becomes more significant. More importantly, though, for retirement the main thing you need to have is income-generating assets. Investing early allows you to take advantage of compounding returns - so even if your property doesn't generate that much in terms of rent when you retire, hopefully you have enough capital appreciation to be able to sell the property and then use the proceeds to fund your retirement and go traveling etc. That's the end game.

Yeah, I get that and can see the benefits of it if say we had no debt and a pot of cash for a deposit but I guess my main concern is that at the moment, (as in the next 3-4 years), will there be enough appreciation in rent or CG to offset the 5.49% that we are currently guaranteed by leaving every cent in the offset?

Once the PPOR is bowled over, I can see the benefit of purchasing an IP rather than haveing surplus wages sat in the bank being taxed, so it's crystal ball time I suppose? Guessing where 'normal' house & rent prices will go in the fairly short term.

What may help us make a decision is Emma's parents. They are lookingat moving to Australia permanently, (they are from the UK but are also now NZ citizens). They are skint, (long story, bad investment choices), and at some point we will need to float them. One idea is that we buy an IP now and they rent it from us at a lower then market rent. The bonus for them is they get a nice house, cheap. The downside for us is it will cost us in lower rental return, but the bonus is that there's potential profit down the line rather than simply giving them a monthly handout. I realise there may be tax implications though, (as in claiming a reduced deduction on expenses due to letting at below market rates).

Cheers.
 
Just be aware that you can keep paying down your PPOR debt while at the same time investing in IPs - turning your private debt all into investment debt to better structure your taxes.
 
Hi there!

I was facing a similar conundrum, but have multiple investments already. My focus turned to 'what do i do about this PPOR debt'. Should I start getting rid of that now, or keep going on property.

I have updated my progress under my Target 2020 retirement thread. I am about to update that now if you want more detail.

Long story short - I am about to move into a 'rapid acceleration phase' adding blue chip property at a rate of 2 per year over the next 6 years. The PPOR will sit there and churn along with me paying interest only over that period.

The idea being, I can take, say, $25K per year and offset my PPOR, for as you have highlighted a 5.X% return at present, OR, I can take that $25K and invest it in another property. The idea being, per AaronC above, get a base and let compound growth do it's thing.

So to answer your quesiton - invest. PPOR can be dealt with later. Now is the time ot build the base wealth and take advantage of the next boom. Now that most likely won't be in the next year or two, but there should be growth and acceleration (boom) down the track.

Good luck!
 
Pay down PPOR?

Hiya

I would choose "invest". Your LVR is a very healthy 50% plus %.

if you are serious about retirement income, you need to get your asset base as wide as possible...you sound young so you have time on your side...get a few Ips wait for them to increase and you can sell them down and pay down your PPOR debt in future...don't forget at some stage your super can be withdrawn too to pay off your ppor debt...

and i fully agree with Kiyosaki that your PPOR is a liability not an asset (unless you are like me where i converted this liability to an asset but that's another story yah?:p)

i have a friend in his 50s..with a fully paid off PPOR; that's it, that's all he has on retirement plus some super which is not enough for his retirement needs...he wants to buy IPs now but with his reduced income level now and 4 dependant kids , no bank wants to come to play...sure the mental satisfaction of a fully paid off PPOR is great..but what is life when you do not take a bit of a risk...when young..go for it:)
 
All great stuff, thanks for the replies.

We're young-ish, (37 & 41), so do still have a good chunk of time.

Valuation on the PPOR was done this morning, so once we have some hard figures to work with we'll have a better idea of where to go. Hope to get the refinance underway to a better structured loan for moving forward next week.

Have to say though, it's been an exciting few weeks, we're really fired up this time to get going properly, more so that any time we've been "ready" in the past, and icing on the cake this morning was a note from our UK IP that we have just painted out from the last tenant, to say people are queing at the door to get into the place!

We just need to decide on a plan from hereon in, what's the end game goal and how do we best get there.

Also, what hadn't really sank in earlier was the part about still paying off the PPOR. As in, if we keep paying into it, but keep splitting out loans for investment properties every few years then eventually we'll still owe the same amount on it, but those loans are than all deductable and are for IP's, so technically, it's paid off and all the IP's are fully drawn against instead. It's just the mindset of still owing money against the PPOR whereas in reality we wouldn't as they are for the IP's, only psychologically you haven't actually "paid off" the PPOR. Hope that makes sense...too many coffees this morning.
 
Yep, it does. It's that psychological thing that recently had me second guessing! PPOR can be paid off later, and through super not a bad idea. But we've got some time to think about that! :p

If you must get the PPOR down, offset, don't pay it down directly. You may want to live elsewhere soon, and any money paid down can't be withdrawn tax effectively if you move somewhere else and keep that place as an investment. If you have it offset, you can do what you want with your cash on moving, offset the new place, or use it somewhere else. But when you withdraw, you then have deductible debt you can use.

I'm only two coffees down (at this stage).
 
If you have it offset, you can do what you want with your cash on moving, offset the new place, or use it somewhere else. But when you withdraw, you then have deductible debt you can use.

Yes, it's Offset. When I say pay down, what I mean is park money in the account.

Although, it may make sense to pay actually down some, (depending on bank val), in order to pull more out when we split the loan. eg, we have say $47k to split out now at 80% of current val, but if we want to say pull out $100k for a deposit without paying LMI on the refinance, then would it make sense to pay down the PPOR out of savings by $53k to allow us to then split out the full $100k for deposit on IP? Thereby creating an extra $53k of deductable interest from the PPOR?
 
Great read Tony, thanks for sharing, learn't so much from you and also replies, but also learn't I need to learn sooooooo much more, I too suffer AP :(
 
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