buy to the max or buy cheaper and pay less interest?

[Gatoblanco]

I have 420k borrowing capacity - 100k of that is my deposit. That 420k figure allows for future rate rises.
I want to buy a house as PPOR or maybe if it is more economic (tax deductions) to rent it out then I will do that.
If I live in it, is it better to say buy a $350k house which i will pay less interest on then upgrade when i have more equity or buy something at $420k and provided it goes up in CGs then I will be better off than the amount of extra repayments. I dont expect my income to increase in a hurry.
I cant work this one out. I guess the second scenario relies on CGs being greater than interest rates.
I would love to get some advice on this.
Thanks
Jesse Taylor
[email protected]

 

[alexlee]

Jesse, you're all over the place. What do you want? A PPOR? What sort of PPOR? Or do you want to build an investment portfolio first? Do you actually understand the different tax pros and cons of a PPOR and IPs?
Alex

 

[Bargain Hunter]

Hi Jesse,

Welcome to the forum.

I think your question is, will the capital gains from a PPOR outstrip the costs of interest rate rises on an investment property. With so little information it's crystal ball stuff.

As Alex points out you really need to determine what you want. Do you want a PPOR and not pay rent? Or do you want to pay rent and have someone else (tenant) assist you in creating wealth.

In regard to your borrowing capacity, is your income secure? This has to do with your job and industry trend generally as well as your personal goals such as children. If you want children, do you want to be a stay at home mum, can you afford the mortgage repayments if you are staying at home?

You say you have allowed for future rate rises, how high have you allowed for?

In regard to tax deductions, in my opinion these should never be a driver to buy a property. Sure they can be put into the calculations but they are certainly not the reason for making the decision.

The way we got into investing (but certainly not the only one) was to buy our own PPOR, make some improvements, make some payments and create equity which we used to purchase our first investment property. Mind you we didn't start with the end in mind, and it wasn't as smooth as I make it sound but that was the general principle.

My suggestion would be, get a clearer idea of what you want to acheive,
spend a little time on the forum gleaming information to help you determine how this can be done, and then post a more specific question.


Regards

Andrew

 

[jaycee]

Firstly Jesse saved $100k deposit by the sounds of it - if it was avings, first of all well done (if it ws won in lotto, good luck to you and well done for not blowing it!)

Sounds like you want a place of your own, but do not want to get trapped with too much 'bad debt' becuase you overpurchased when it might be wiser to settle for something smaller, and later on be in a position to increase your lot easier.

Depends.. depends and depends...

If you purchase correctly, both houses should go up in value (350k or 420), if you are set on selling & upgrading with the profits, sounds like the 350 is the way to go

you can rent it out, but if you are a firts home buyer, you might lose that grant if you rent it immediately (believe you can lve in it for a certain period & then rent it out if that;s what you want)

LA Aussies gave a rough guide to working out expenses for a rental (deduct 20% of the rent for the holding costs/expenses. deduct the nett rent from the loan interest). Soyou can run a couple of rough numbers wiht this in mind & compare it to paying it yourself

Do you also want to be able to purchase more property, or are you more keen to get yourself a PPOR (not everyone wants to be an investor) but this will help guide the advice you receive

 

[BayView]

If it's for a PPoR, buy a cheaper house and smash the loan down asap with any excess cash you have.

You can still do this if you decide to use it as an IP as well.

The combination of debt reduction and any cap growth will accelerate your equity and get you into a position to afford the next one very quickly.

 

[marg4000]

Hi Jesse

We all want to get ahead as quickly as possible.

Here's some advice - feel free to ignore it.

Look around for the cheapest PPOR you are prepared to live in for at least 4-5 years.

Buy it. Get the FHOG and stamp duty exemption and any other goodies you can get as a first home buyer.

Save like crazy for the next 12 months or so (offset account on PPOR in case you want to turn it into an IP one day), at the same time spending your weekends painting your new home, doing the garden, all the little touches that add value without spending too much money. With a bit of luck you have bought a good, solid house but one that is a bit sad and tired and in need of TLC.

Then hopefully you can get your PPOR revalued and with the increased equity and savings you will be well on the way to getting your first IP.

Good luck!
Marg

 

[Gatoblanco]

Jesse, you're all over the place. What do you want? A PPOR? What sort of PPOR? Or do you want to build an investment portfolio first? Do you actually understand the different tax pros and cons of a PPOR and IPs?
Alex

More information about my circumstances/goals.
I am not a first home owner. I have entered into a contract to sell my unit for 175k (only property) in Cairns. Once I pay the loan off I will have $100k.
I work for the Fed Govt. I have very good job security. I earn 50k exactly. I am single with no other financial commitments. I am prepared to take on big repayments as I really like property. I dont really want to spend money on other things right now. My borrowing capacity given my income seems to be about 350k. So I figure to borrow 320k will give me some leeway for rate rises. My income is not expected to rise by much. A minimum of about an extra 2000 per yr more if I get promotions.
My long term goal is to be able to buy a house close to the water on the sunshine coast and live in it and garden and surf.
I estimate this may take me several houses more to do this. I.e. buying, building equity by renovating and getting CGs, and then selling and buying another. I.e. moving up the property ladder. Whether I have more than one property doesnt matter to me. I guess my goal in dollar terms is to get to the point where I can afford to buy a property worth $700 000 (in todays prices) and afford the repayments.
In the meantime if I build wealth (equity) faster by renting the property out and just renting a room elsewhere then I am prepared to do that. So I guess that is the first issue. Whether to live in it or rent it out. Eg. Live in the three bed house and rent out two rooms but not get any tax benefits or rent the whole thing out and be able to make the very relatively high interest tax deductable.

The second issue which could apply to either living in it or not living in it I think is whether or not to get a cheaper place and therefore pay relatively less interest and be able to pay back the principle quicker because I would be paying less interest and have more money for extra repayments. However then I would only get the CGs on say 350k rather than capital gains on 420k. I figure that ceterus parabis if the capital gains outweigh the interest rate then it would be logical to borrow as much as possible. The concern i have is that the next level up of house, say a 500k house, if it increases by 10%, then the 10% on the 350k house (plus any inroads I make into the principle) will not match that and my income increases wont make up the difference.
I hope this makes sense. It is hard for me to explain. Any further advice is appreciated. thanks.

 

[alexlee]

Why are you selling? Have you considered refinancing the property?

So your goal is to be able to 'afford' a 700k property. Presumably that's your dream home. What then? Do you keep working? What are you going to live on? Would it not make more sense, for example, to have a 'cashflow' goal as well?

As you said, if you buy a $350k house and want to buy a $500k house, and both increase by 10%, then you're losing ground. So one solution is to have MORE than $500k in property so that the increase is more than what the $500k is appreciating at. For example, your unit is worth $175k, and you are going to sell it and buy a $350k place. That's fine, but what if you kept the unit (and save yourself agents fees and CGT, if you're not living in it), refinanced (probably 70-80k depending on the LVR, given that you have 100k in equity), and bought a $350k property with THAT?

You would then have $525k worth of property appreciating at the long term average. THAT would make it easier to build equity through appreciation to 'move up' to the $500k property, no? Now, apply that principle again. What if, as time goes by, you refinance again and buy even more properties? Give that another 10 years. What can you afford then?

Paying off the principle isn't really worth much in the long run. You pay $1 off the principle of a loan, your 'return' is the interest that you save (say 8%). You use that $1 on another property, and you 'pay' the 8% but can get 5% rent and 7% appreciation. Apply that over years and millions of dollars in property. Which do you think is better? As an investor I am perfectly happy to NOT pay principle at all (I use interest only loans) and just plow extra cash into buying more properties and shares.

I think you need to think about your plans a lot more. Say you can afford a 700k place. What then? Do you still want to go to work? Why stop at just being able to afford a 700k house? How about having the cashflow to do whatever you want, and have an even better house?

Also, how old are you? I know nothing about your circumstances, so forgive my ignorance but will you always be single? If you're young, you might get married and have kids someday. Your needs will change.
Alex

 

[Gatoblanco]

Hi Alex I like your thinking.
The reason I didnt keep the Cairns property is because I dont want long term exposure to the Cairns market and I prefer to have my money in a house/s with land rather than a unit. I am doing a private sale.
I had the plan to get an investment property only after I had a house that was good for me to live in. Buying a 350 000 house is a bit out of Brisbane for me to get to work. But yes I agree with your strategy. So given that I will have $100 000 and a 50k income what would be your next advice about building wealth? Thanks Jesse

 

[alexlee]

Hi Alex I like your thinking.
The reason I didnt keep the Cairns property is because I dont want long term exposure to the Cairns market and I prefer to have my money in a house/s with land rather than a unit. I am doing a private sale.

Why not both? Buying and selling involves costs. Keeping might be better. What is it about the long term future of the Cairns market that worries you? I started out buying units and townhouses. Now, I prefer houses because of the land content. That doesn't mean I sold my previous units: I still have them, harvesting the equity to buy more IPs.

I had the plan to get an investment property only after I had a house that was good for me to live in. Buying a 350 000 house is a bit out of Brisbane for me to get to work. But yes I agree with your strategy. So given that I will have $100 000 and a 50k income what would be your next advice about building wealth? Thanks Jesse

I bought a couple of IPs before buying my PPOR last year. My IPs are worth much more than my PPOR. For me, that was much better. I can now have a PPOR AND be able to buy more property.

It's not the next buy you need to think about. It's what you're going to do AFTER that. For example, your selling the cairns unit and wanting to buy a house and land suggests that you're not thinking long term. Have you considered the costs (including tax) of selling the unit? Even more importantly, you're selling to buy a house. That's fine, but what then? Will you keep selling each successive house and upgrade? So you end up with a nice house, but what are you living on? You need to start thinking about MULTIPLE houses. What if you KEEP the property you buy, and refinance to buy MORE property? It's VERY different owning a $1m PPOR, say, to owning a $300k PPOR and $700k in IPs. Play it right and instead of just upgrading until you own a $1m house, you might end up with a $1m house AND many millions in IPs. The PPOR you live in, the portfolio produces your living expenses.

Think about the long term plan. One way to build serious wealth would be to KEEP buying whenever you are able to. Forget how much money to have and what your income is for a moment. Get the mindset right first. What do you want? The 700k house? What else? How much do you need to live? Will there come a time when you might have a family and need a different place to live? Are you going to surf until you're 90?
Alex

 

[Gatoblanco]

Why not both? Buying and selling involves costs. Keeping might be better. What is it about the long term future of the Cairns market that worries you? I started out buying units and townhouses. Now, I prefer houses because of the land content. That doesn't mean I sold my previous units: I still have them, harvesting the equity to buy more IPs.



I bought a couple of IPs before buying my PPOR last year. My IPs are worth much more than my PPOR. For me, that was much better. I can now have a PPOR AND be able to buy more property.

It's not the next buy you need to think about. It's what you're going to do AFTER that. For example, your selling the cairns unit and wanting to buy a house and land suggests that you're not thinking long term. Have you considered the costs (including tax) of selling the unit? Even more importantly, you're selling to buy a house. That's fine, but what then? Will you keep selling each successive house and upgrade? So you end up with a nice house, but what are you living on? You need to start thinking about MULTIPLE houses. What if you KEEP the property you buy, and refinance to buy MORE property? It's VERY different owning a $1m PPOR, say, to owning a $300k PPOR and $700k in IPs. Play it right and instead of just upgrading until you own a $1m house, you might end up with a $1m house AND many millions in IPs. The PPOR you live in, the portfolio produces your living expenses.

Think about the long term plan. One way to build serious wealth would be to KEEP buying whenever you are able to. Forget how much money to have and what your income is for a moment. Get the mindset right first. What do you want? The 700k house? What else? How much do you need to live? Will there come a time when you might have a family and need a different place to live? Are you going to surf until you're 90?
Alex

Yes i agree with what you are saying about creating an income. I guess that is part of looking at properties that have a good rental return relative to the purchase price.

Can you elaborate more on this statement:

"It's VERY different owning a $1m PPOR, say, to owning a $300k PPOR and $700k in IPs."

Thanks for challenging me about my goals. I havent thought about long term goals apart from wanting to own a house near the water on the sunshine coast.

 

[alexlee]

"It's VERY different owning a $1m PPOR, say, to owning a $300k PPOR and $700k in IPs."

Thanks for challenging me about my goals. I havent thought about long term goals apart from wanting to own a house near the water on the sunshine coast.

What are you going to be eating when living in that waterfront home? Sand? How are you going to pay for the upkeep? Electricity? Water? Do you know how much it would cost to keep a waterfront home? Especially if your salary doesn't go up much?

Quite simply, most people only focus on buying things. The big house, the car, whatever. Rich people realise that you need income to back those possessions up, and that means investments FIRST before you go for the possessions.

To me, someone who owns a $1m PPOR, and nothing else, isn't really rich. Because they're going to be so emotionally tied to their PPOR the house is just a dead weight around their neck. They're not going to use the value of the PPOR, so it might as well not exist (except as a nice place to eat no frills canned food). Someone who owns a $300k PPOR and 700k in IPs shows that they are more focused on investing. It shows that a person is focused on the long term.

For example, I could, if I sold everything and maxed out on a mortgage, buy a VERY nice house in Sydney. I choose not to do that: I bought a decent PPOR, but kept all of my IPs. Why did I do that? Because if I bought the very nice house, I'd be tied to my job for the rest of my life. I would have no other income and have to keep working. Even after I pay off my house, what then? I still need to eat. But I would still own that nice house, you say? That's an asset, right? Yes. But think about the MINDSET that goes with putting the house as your ultimate goal, and then putting years into paying it off. The only way to get income from it would be to rent it out (yeah, like you're going to want to move out of your dream home) or sell it and downsize (yeah, like you're going to want to sell your dream home). There are plenty of sydney elderly homeowners who own million dollar homes, and live on very little income. You should be able to do better than that.

Your main issue, the way I see it, is you're only focusing on buying ONE property. Mainly because you're not thinking about anything other than the big house (and not what you're going to live on, how you'll pay for the day to day expenses, etc) Think bigger. Think millions of dollars in property, shares, etc, producing income for you to live on. Think about how to accumulate ten, twenty $350k properties. The dream home will never be out of reach if you focus on the investments first. As I always say, if you have money, you'll be able to buy a house. I mean, are you going to be homeless if you have a couple million in net assets, producing a couple hundred k in income? Learn how to do it. This forum is a great resource to start with.
Alex

 

[BayView]

To me, someone who owns a $1m PPOR, and nothing else, isn't really rich. Because they're going to be so emotionally tied to their PPOR the house is just a dead weight around their neck. They're not going to use the value of the PPOR, so it might as well not exist (except as a nice place to eat no frills canned food). Someone who owns a $300k PPOR and 700k in IPs shows that they are more focused on investing. It shows that a person is focused on the long term.

My mindset exactly.

I don't include the PPoR in the nett worth, unless it is being used for investment. It has to be earning an income to be an "asset", otherwise it costs money (even if you own it outright) and is a liability.

Most people buy it, live in it, and one day sell it.

But if they gave up their job tomorrow they couldn't live off it.

I have a very close friend who has the mindset of: "big house, flash cars; I'm rich".

He has a good income, but hates his job, and has just started the process of selling the already great house to move up to the even greater house.

Welcome to the next 30 years of working in your job that you hate to pay for it.

If he was to sell his PPoR, and pay cash for half a dozen IP's (that's how many he could buy with his PPoR), live off the rents and rent a nice joint himself, he could probably retire tomorrow, or at least work when it suited him, and not very often.

 

[momo]

My mindset exactly.

I don't include the PPoR in the nett worth, unless it is being used for investment. It has to be earning an income to be an "asset", otherwise it costs money (even if you own it outright) and is a liability.

A PPOR can be a good income-producing asset, provided you utilise the equity to purchase those assets. Unfortunately, if all you do with the PPOR is live in it without tapping into the equity, then it is wasted. I view my PPOR and IPs no differently.

 

[BayView]

A PPOR can be a good income-producing asset, provided you utilise the equity to purchase those assets. Unfortunately, if all you do with the PPOR is live in it without tapping into the equity, then it is wasted. I view my PPOR and IPs no differently.

IP's are different to PPoR's.

They are similar in that many IP's are neg geared, and therefore cost money from the owner's pocket every week; just like a PPoR (rates, insurance, manitenance etc).

But the difference is when they are debt free, or close to debt free, and the owner doesn't work anymore.

The PPoR still costs the owner money out of their pocket every week, while the IP; the asset, puts money in their pocket every week.

The PPoR is wasted unless it directly, or indirectly produces an income, either by utilising the equity to buy income producing assets such as a business or IP, or you use it as an IP and rent it out.

The IP isn't wasted as it is producing an income, and provides tax deductions, which could be called income too.

Saying an IP is wasted because it is not used for further use of equity to buy more is like saying a business, which is an asset if it makes a profit and goes up in value, is wasted because it is not being used to buy more IP's or businesses. That's not the case; it is a stand-alone, income producing asset.

 

[alexlee]

A PPOR can be an asset, if it is used in that way (namely, refinaced and the equity used to buy investments, or sold and the money used to buy investments). However, for your average 'I want to buy my dream home and pay it off' type of person, they'll never use it in that way. The only value it has is as a place to live. While important, that won't pay for food as Woolies.

This is an example of how your mindset affects reality. A fully owned expensive PPOR CAN be a good asset, but if you don't use it as such, then it's not.

Most people get emotionally attached to their PPORs. I'm getting emotionally attached to my PPOR. That's why if you're just starting out, I suggest delaying the PPOR thing as much as possible and buy IPs. Not just because IPs make more financial sense than PPORs (especially if you don't sell), but because you can only have one PPOR at any one time but you can have as many IPs as you can afford. Train yourself to think of properties as investments, not as PPORs.
Alex

 

[alexlee]

A PPOR can be a good income-producing asset, provided you utilise the equity to purchase those assets. Unfortunately, if all you do with the PPOR is live in it without tapping into the equity, then it is wasted. I view my PPOR and IPs no differently.

I would argue that buying a PPOR first increases the chance that you become emotionally attached to it. Because we keep getting bombarded with the (already new) message that PPOR debt should be paid off ASAP, many people will do that. While paying of PPOR debt will save you say about 11.7% pre tax (say 8.2% / 0.70, assuming a 30% tax rate), what do you give up? An IP or share will most likely return more than that over the long term when you include both net rent/dividends and capital growth.

Even more importantly, paying off a PPOR debt is SIMPLE interest only. The growth of the PPOR is not affected by your repayment of the debt. You just save 11.7% a year. But returns on another IP or shares are COMPOUND. Over decades, the different is huge.
Alex

 

[DavidMc]

The PPoR still costs the owner money out of their pocket every week, while the IP; the asset, puts money in their pocket every week.

The PPoR is wasted unless it directly, or indirectly produces an income, either by utilising the equity to buy income producing assets such as a business or IP, or you use it as an IP and rent it out.

The IP isn't wasted as it is producing an income, and provides tax deductions, which could be called income too.

I've never agreed with Kyosaki's view that a PPOR is a liability and not an asset from a pure accounting POV. In my view, the cash flow status of an item is not the determining factor.

I think an asset is something of economic value, especially that which could be converted to cash.

Anyone with $2m PPoR's or $120k Mercedes 'liabilities' (or non-assets) can transfer them to me if you like.

A PPoR can experience capital growth just like an IP, and it saves you from paying rent you'd otherwise have to pay without it (in the same way some could say an offset account 'earns/saves' interest, you could say it 'earns/saves' rent). Other expenses, tax status, 'commitment and emotional factor' is where they differ.

In fact, most property investors start with significant equity in their PPoR through capital growth. This wasn't an asset for them prior to them using it? Is a sandwich not a sandwich until I eat it?

Relying on a solely PPoR for your retirement and not working out your future income needs (with a plan to stop having to exchange your time for money) is an issue.