Buying "expensive" PPOR as IP

Has anybody gone down the path of buying an IP which is - rather than their "usual type", a very expensive (relative to your situation) property which will be rented for a period (say 3 - 5 years) with a view of making it your PPOR down the track?

This enables you to buy a much, much more expensive PPOR that you otherwise would, and get the price "locked in" now as well as negative gearing benefits to help pay it down (or save cash to transfer into an offset when you move in).

I see this as possibly working if you:

(a) are on a higher income tax bracket
(b) are in a major capital city, where a "period house" or house on a big block close to the city costs quite a bit, but there isnt much a normal tenant can do to hurt the property too drastically.

Thoughts/comments?
 
Of course you need to keep the CGT treatment in mind.

Thanks Boomtown...

I assume if you get it valued by a licenced (or some other recognised??) valuer just prior to moving in if you ever sell you are liable for CGT on the increase from when you purchased to the valuation at the time you move in, but thereafter is CGT exempt (unless of course you move out again at some point in the future)??
 
Argh handheld that I am using to post is playing up.

In the post I deleted above I basically said I thought it was a good idea.

With regards to CGT yes that's how I understand it works. I'm sure someone else can confirm.

I take it you do not have the option of moving in first for 12 months as you are overseas which would give you 6 years to move back in.
 
Argh handheld that I am using to post is playing up.

I take it you do not have the option of moving in first for 12 months as you are overseas which would give you 6 years to move back in.
Blackberry or iPhone??

What do you mean about the 12 months? You mean to get the 6 year exemption? The moving in and out thing sounds like a bit of a hassle. I guess it depends how much prices increase while you are out renting somewhere else to justify it or not.
 
Has anybody gone down the path of buying an IP which is - rather than their "usual type", a very expensive (relative to your situation) property which will be rented for a period (say 3 - 5 years) with a view of making it your PPOR down the track?

This enables you to buy a much, much more expensive PPOR that you otherwise would, and get the price "locked in" now as well as negative gearing benefits to help pay it down (or save cash to transfer into an offset when you move in).

I see this as possibly working if you:

(a) are on a higher income tax bracket
(b) are in a major capital city, where a "period house" or house on a big block close to the city costs quite a bit, but there isn't much a normal tenant can do to hurt the property too drastically.

Thoughts/comments?
This is a good financial strategy generally.

However, the downsides are:
a) most people can't bring themselves to let grubby tenants live in their dream home and wreck it. This is unlikely to happen with higher-end properties, but there is an emotion factor to overcome.
b) the combined cost of rent shortfall on your IP, plus the rent you already pay for your own accommodation may be too big a hit on the hip pocket.
C) I'm pretty sure you need to live in it first so you can class it as your PPoR for when you move out, so there are the moving hassles.
d) in relation to c) if you use it as an IP from day 1, you will have a CGT liability on the period it was used as an IP if you should ever sell it. This may not be a big problem if you hold it for say, 20 years and only use it as an IP for say, the first 5 years. The amount of money in tax will seem insignificant after this time.
 
Blackberry. Not trendy enough to have an iphone!

All depends how long you will be gone for and whether you will resell sometime after. Prices could double but it all becomes a bit irrelevant if you don't sell.
 
ppor 6 year rule

The drawback to the 6 year rule is that the other property you are living in will not be PPOR as only one property at a time can be PPOR
 
Has anybody gone down the path of buying an IP which is - rather than their "usual type", a very expensive (relative to your situation) property which will be rented for a period (say 3 - 5 years) with a view of making it your PPOR down the track?
One problem with this is that you lose the First Home Owners Grant unless you move in much sooner than 3-5 years.

But provided you're OK with this, it could assist serviceability in the early years. The strategy is particulary good if bought prior to a boom as you'll have had a few extra years of capital growth.

Peter
 
Good strategy. I would suggest if possible to live in it straight away for a short period of time.
Two reasons
1/ possible use of the 6 year rule
2/ use of the valuation method to calc CGT, if you dont live in the house prior you cant use the valuation method. CGT will be calc'd pro rata
 
Hi Trogdor

Sounds like a good idea to me. I'm doing something similar at the moment - bought a large victorian house in Inner West Sydney although my plan is to live ground floor, rent out 4 self contained flats above (already configured that way with separate rear access) and eventually return the house to its former glory when finances allow.

Just to ask the other guys on the CGT implications - as my plan is to have the property as a hybrid PPOR / IP how would it be treated for CGT purposes?
 
we did it around the other way ... bought an expensive ppor that we knew, with a little renovation (about 10-15% of purchase price) it would easily double in value.

we haven't finished the reno's but with a job transfer 2000km away we rented have it out and are currently renting ourselves, so we don't loose any of the cg rise for 6 years.

even if we move back to the area we will probably rent (maybe have the trust buy something and rent off the trust) - and will only move back in/kick tenants out to finish the reno's and sell ... but we have 6 years to do that in.

right from the start we looked at this ppor as an investment.
 
We might do this - build a house that will suit our needs (not hard, just need a generic 4br house) and probably rent it out for the first year so we don't run into too many cashflow issues. Then after that year we can decide whether we want to move into that house and sell ours, continue renting it out, or go somewhere else again. As it is our IP is already 3x the 'value' of our PPoR, by the time its finished it'll be 4-5x more and the rent should be close to what we pay on the mortgage for both properties. A second IP will take us into crazily positively geared territory.

We don't have the luxury of being able to move and rent to save money, which is the usual suggestion. Anywhere we'd like to move to will cost us so much more than the rent we'd get from our PPoR - anything up to $100pw - it'll hit our budget very hard. Although just thinking about it I'd probably get $40pw more rent than the mortgage costs and $50pw rent assistance from the government so we might come close to breaking even ... until the insurance and council rates and debate about who pays for the water kicks in.
 
Hi Trogdor

Sounds like a good idea to me. I'm doing something similar at the moment - bought a large victorian house in Inner West Sydney although my plan is to live ground floor, rent out 4 self contained flats above (already configured that way with separate rear access) and eventually return the house to its former glory when finances allow.

Just to ask the other guys on the CGT implications - as my plan is to have the property as a hybrid PPOR / IP how would it be treated for CGT purposes?

Pom - how does the ATO view the cashflow side? Do you apportion a part of the purchase price to your "PPOR" section and the balance of the interest payments are deductible?
 
Pom - how does the ATO view the cashflow side? Do you apportion a part of the purchase price to your "PPOR" section and the balance of the interest payments are deductible?
Thats what I am planning to do (settlement isn't until next Friday).

I assume I should have the house valued once I've refurbed the PPOR portion downstairs and then revalue it when I take occupation of the 1st floor as well for the PPOR but BEFORE I renovate it?
 
I've been thining about this recently aswell. I'm not sure what our PPOR rental value is, so I'll need to find that out first, just out of curiosity. I'm not sure if I could actually do it though, but it's good to have the option open.
 
Six yr rule can be applied to properties bought initially as IPs

c) if you use it as an IP from day 1, you will have a CGT liability on the period it was used as an IP if you should ever sell it.
If you move into the property at any time i.e. make it your ppor (regardless of what it was first purchased for) and then you move out, the six year rule will apply.
I checked this with the ATO.
 
We have done exactly this. Bought in a "blue chip" suburb next to the beach in Perth early in 2005 as an IP while we were living in our cheap PPOR on a triplex block in a "down and out" suburb. :rolleyes:

There would have been no way we could have afforded this place without it being an IP - paying interest only on a PPOR has no appeal to us! Between the tax deductible interest and a small amount of rent (!) the holding costs were manageable as an IP.

The idea was that our "down and out" suburb block (with an 80sqm dilapidated house!) was land value and should have good CGs and we would wait until it had gone up in value before selling it CGT free and use the funds on the new PPOR. Well, life has moved on and we haven't been living in Perth for a couple of years now anyway but the upshot is with the Perth boom both properties (along with others....:D) have more than doubled in value in this time, meaning that we can now move into this house debt free and with no CGT from selling our "down and out" house.

We will have to pay some CGT when we eventually sell our "blue chip" house but this won't be much as it is at least a ten year plan to live there and probably longer... A long term base to bring up our kids.

The deferred gratification seems to be coming to an end now - after much discussion it seems like we will be moving back to Perth shortly for work and with the lease on that place due to be end in six months we should be able to spend some quality time on the beach... :) :)

I guess we just got lucky...:rolleyes:
 
I am actually doing what you are proposing now ... negative gearing helps me to afford the house or else I wouldn't be able to .. i know its risky but at least i can own a PPOR in a really nice suburb ... plan to move into it in 5 yrs time ..

in the meantime, i put aside all the $$ i save from NG into my current PPOR ..

Have you decided what you want to do with your current PPOR when you move into the IP ? Sell it or convert it to IP for rent ?

If the latter, make sure your finance structure is right NOW to maximise tax deductibility in the future !!
 
Off topic, but in Jim McKnight's (very good) book "Ordinary Millionaires" there is a detailed profile on one couple (teachers as I recall) whose investment strategy was to have 1 property (a PPOR) and to trade up whenever they could. As I recall they ended up in a waterfront house overlooking Sydney Harbour.

Not for everyone but certainly a valid strategy and one which could be advantegeous from a tax perspective (though that alone is not a reason to do something).
 
This is almost a topic unto itself, but I guess the problem with that strategy is how to access the wealth in your PPOR at retirement. There are various ways all with its pros and cons.

(1) Sell the PPOR, downgrade and live off the released equity (big emotional price of selling your home)
(2) Redraw the equity, reinvest at a return higher than the interest rate and live off the profit (risk that your returns will not be significantly > loan interest rate)
(3) Reverse mortagage and live off the equity (you lose a lot of equity to the bank in return of some cash)

.. any others ?
 
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