Buy Investment Properties & Rent The House You Live In

[bmurthy]

Strategy: 4 year strategy to rent a house larger than the one I live in and own outright.

Reason: We are overdue to move into a larger home. Depending on where my children get accepted for high school in 4 years time, we will buy a house in that area.

Our Situation:
* My wife & I are both PAYG earners
* Our home loan is paid off
* we have 1 investment property with a loan against it
* our current annual savings after all expenses is approx $45K p/yr
* if our home is rented we would get $700 p/wk
* we would like to rent a home for $1000 p/wk

The Problem: If we rent our home out and rent a bigger place then my net savings goes from $45,000 p/yr to $20,000 p/yr, and a further $8,000 tax (because I am earning rent on my home with no debt to offset it), so ultimately my savings drops to $12,000 p/yr.

My Question:
How can I minimise the ($45K ? $12K) $33,000 p/yr I will be losing from my savings? Should I take out a new loan to buy say $300K of shares and hope the growth + dividends p/yr will minimise my $33,000 loss each year?

 

[serendip]

the school thing doesn't make sense to me unless it's private? you can't buy a bigger house now in the area in which you want to live? Thereby ensuring your kids get accepted to that school?

 

[Xenia IM]

Our of the $700 you will be receiving per week in rental income, you also need to factor in bigger costs in maintenance as more is spent on rentals than your own home.

Why not rent for $700 - that way you get benefit of tax deductions against your home and possible deductions on premises you are renting if through a business??? Accountants please!

I have lots of landlords on my books who are also tenants of other properties.

 

[BayView]

It has been discussed loads of times by various financial gurus etc that it is financially better for you to rent, rather than buy a PPoR, and use the difference between what your rent and PPoR loan would be - to buy investments.

Unfortunately; the wider majority of folks don't do this with their "difference"...

Most spend it.

Generally, your rent will be lower than a PPoR loan, and you have no other outgoings for that property other than utility usage and contents insurance.

With a PPoR, you have rates for everything, the utilities, the loan, maintenance etc. - and none of it is tax deductible.

Of course; the emotional connection to a rental is not there like it would be with your own PPoR, so most folks find this hurdle hard to get over.

I will be encouraging our kids to stay at home with us for a few years after school ends, so they can get themselves a modest IP, smash the loan on it for a few years while at home with us, and get themselves set up a bit for venturing out into the world.

Add to this that they already have investing savings plans, by the time they are 18 they will be way ahead of the curve in terms of investing funds to spend.

By aged 25 or 30 they might possibly be well over halfway to owning their first property outright - unless they go for the McMansion or penthouse near everything of course.

 

[Truly Exotic]

at a basic level think of it as a leverage perspective

$ per $ you get a better house for rent then a mortgage in general,

plus you dont have to pay insruance, rates, maintennace etc .etc.

you obviously have the risk of being kicked out or not being able to renovate or add your personal touches

I know many successfull people who rent instead of buying

I also know a lot of succesfful people who buy because they are that successful they dont need to worry about saving $10k per year

 

[Redom]

Strategy: 4 year strategy to rent a house larger than the one I live in and own outright.

Reason: We are overdue to move into a larger home. Depending on where my children get accepted for high school in 4 years time, we will buy a house in that area.

Our Situation:
* My wife & I are both PAYG earners
* Our home loan is paid off
* we have 1 investment property with a loan against it
* our current annual savings after all expenses is approx $45K p/yr
* if our home is rented we would get $700 p/wk
* we would like to rent a home for $1000 p/wk

The Problem: If we rent our home out and rent a bigger place then my net savings goes from $45,000 p/yr to $20,000 p/yr, and a further $8,000 tax (because I am earning rent on my home with no debt to offset it), so ultimately my savings drops to $12,000 p/yr.

My Question:
How can I minimise the ($45K ? $12K) $33,000 p/yr I will be losing from my savings? Should I take out a new loan to buy say $300K of shares and hope the growth + dividends p/yr will minimise my $33,000 loss each year?

Heya, very clear post and a great position to be in.

Do you have any property investing goals in mind to add to the mix? E.g. maybe adding a few IP's that are positive c/f and help bridge the $300 p/w gap.

Personally, what i'd do in your shoes is: borrow up to 80% of the value of your current property. Given your rent is worth 700 p/w, I assume there'll be a few hundred thousand there. Go buy 5 NRAS's that get you 10%+ after tax CASH ROI yields at 100% debt. Suits someone looking for after tax income perfectly.

You'd have added 50k to your income within 4 years and you've now paid all your rent. Instead of being $300 down per week, your $700 up (NRAS pays all your weekly rent, and your current PPOR rents for $700 per week).

Happy days. Read euro73's posts if you want more info on this strategy.

Cheers,
Redom

 

[bmurthy]

Thanks Bayview and Truly Exotic, very useful information

 

[bmurthy]

Hey Redo, thanks for your input, it's quite creative and I want to look into that strategy more. So are you suggesting that I would rent out my own home and I go out and rent myself also?

Also, how do I get the posting from euro73 that you mentioned explains it more?

 

[Redom]

Hey Redo, thanks for your input, it's quite creative and I want to look into that strategy more. So are you suggesting that I would rent out my own home and I go out and rent myself also?

Also, how do I get the posting from euro73 that you mentioned explains it more?

Google NRAS, and do a search on the SS search function. There's plenty of information covering how it works and its pros/cons. Certainly not for everyone, but can be powerful for some.

Cheers,
Redom

 

[Juliana Ardila]

Strategy: 4 year strategy to rent a house larger than the one I live in and own outright.

Reason: We are overdue to move into a larger home. Depending on where my children get accepted for high school in 4 years time, we will buy a house in that area.

Our Situation:
* My wife & I are both PAYG earners
* Our home loan is paid off
* we have 1 investment property with a loan against it
* our current annual savings after all expenses is approx $45K p/yr
* if our home is rented we would get $700 p/wk
* we would like to rent a home for $1000 p/wk

The Problem: If we rent our home out and rent a bigger place then my net savings goes from $45,000 p/yr to $20,000 p/yr, and a further $8,000 tax (because I am earning rent on my home with no debt to offset it), so ultimately my savings drops to $12,000 p/yr.

My Question:
How can I minimise the ($45K ? $12K) $33,000 p/yr I will be losing from my savings? Should I take out a new loan to buy say $300K of shares and hope the growth + dividends p/yr will minimise my $33,000 loss each year?

I recently spoke with a financial planner about a similar situation. After our discussion, we thought the clients could do the following:

1- Buy future PPOR as investment, financing 100% plus costs (interest and costs of running are tax deductible for 4 years).
2- In 4 years time, both properties may have experienced capital growth simultaneously. Which is not possible with only one property and renting out the other.
3- In 4 years from now, sell current PPOR as it does not have capital gains impact (usually, please seek tax advice on this).
3- Move to IP (now PPOR), then decide if you want to pay down/off the loan as it will no longer be tax deductible, and/or borrow more and buy one or a few IPs.

This was in our client's particular situation. You would have to take your goals and objectives into account too but it is a very clever way of going about it, especially because you are thinking ahead which I think is fantastic.

 

[bmurthy]

Thanks Juliana for your feedback. So with the strategy you described are you suggesting that I stay in my current ppor or go and rent out another property to temporarily live in for myself?

Thanks