Buying "expensive" PPOR as IP

[HiEquity]

.. any others ?

A variation on number 2: Keep living in the house. Use the equity as deposits on further high yielding IPs, giving you a retirement income stream later.

Option one could be attractive if it was a family home and the kids have all left. Don't like option three.

I guess we have heard of a few investors with 20+ higher yield IPs all going great but with nowhere nice to live that was a permanent base for them. I have seen some sell the majority (if not all in one case) just to get the one big PPOR. The CGT bill would be horrendous!

I like to have it both ways, keep a balance of higher yield IPs to offset the loss in supporting the one nice future PPOR. This way you don't have to sell them when you move in. Only have to sell the previous PPOR (free of CGT).

 

[boomtown]

Alot of change over costs as well.

 

[Trogdor]

Thanks all, this has been very useful.....

Certainly a plan for the next few years.... It would be nice to "lock in" a decent PPOR for the future for when its time to "settle down".

 

[josko]

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).

Fantastic Book!

I bought a great old 4BR PPOR with waterviews and high Capital Growth that was grossly undervalued. We had no intention of moving but it was in the next street up from us and I wandered through for a sticky beak, as you do.
The street was reknown as being the best street in the suburb.

To my absolute delight there was a Council Approved newish flat attached to the property that was not advertised by the agent. BIG mistake.

The original house was built in the 70's and the original owners daughter was elderly and needing to retire.

I just saw bargain. I did the numbers and the next thing we did was throw an offer 50k under even though it was already below market value.

That was Jan 2005. Without reno's we have made at least 200k, and with reno's - at least 300k....and still renovating.

We have been renting out the flat - it is now giving me grocery money of $210/week. Not bad for an attached 1BR flat.

We had recently looked at moving out to rent it and save some money - but the rental market flattened for a while, too many people doing what we were trying to do and down size to save a buck. I fear that while we rent, our PPOR might become empty and we will be stuck with a hefty mortgage AND rent.

Still trying to come to the decision....... We are also not paying tax now, so NG the PPOR will not make any difference at the moment.

Regards Jo

 

[FrankGrimes]

Heya Trog,

Trust all is well in London - I'll be there in 4 weeks

Something I have pondered for a while. I think buying an expensive PPOR as an IP first makes sense with the intention of moving in down the track once you have reduced the debt, sold down other IPs etc. It's one of the few assets you can enjoy and make money from at the same time.

To take it one step further it would be ideal if you could find someone else in a similar situation to you and both buy a similar value PPOR in the same area and then rent from each other. Best of both worlds - Tax savings but the security of your own home which will be more important when "settling down".

A consultant we had helping with a project recently was about to do this - His brother in law and him were going to buy a house for around 800k-900k then rent off each other.

Cheers,

Grimey

 

[Bushranger]

PPOR as Investment property

Hi Trogdor,

I am fellow expat in London and have just done exactly what you are proposing for the purchase of my first property. I would say its been a good option for me as I couldn't have purchased a property of this quality on an Australian income. Buying off the plan seemed to suit me as well, as after paying the deposit there was plenty of time to do all the paperwork, conveyancing, etc. I think generally as being overseas it can take longer to get everything sorted so the settlement period needs to be longer....As others have mentioned there is the emotional barrier of thinking about tenants living in your home. But having said that, other than photos I haven't seen or stepped foot in the property so I am also a little detached (although I am also thinking about buying more property soon which may be the PPOR instead). One of the obvious downsides is that you have to pay the higher rate of stamp duty and don't get any concession (that I think you may get if you actually move in on settlement). As you may know (and this may vary state to state? - but this is applicable to Queensland where I bought), you have to move in to the property within one year of settlement and live there for approximately six months to be eligible for the First Home Owners Grant. However, if that doesn't suit your situation, you could claim it on a second property, as long as you dont move in to the first one. So mabe in the future you may want to purchase a cheaper investment property when you get back - live in it first - then swap places. Either way, Im buying to hold, so I see this strategy as a win-win.

Cheers,

Justin.

 

[Bushranger]

Buying from London

I don't work for any of these firms, etc.

They are in London and you may find them useful if you don't know about them already:

http://www.migrantbanking.co.uk/

http://www.smats.net/

http://www.aussieproperty.com/

http://www.dms-london.co.uk/

 

[Bushranger]

.....I forgot to mention...

Hi Trogdor,

Something I forgot to mention (and the most important bit too) is the Australian tax aspect. What I am about to say will be applicable to you if the Australian govt deems you to be "an Australian non-resident for tax purposes".

Basically, and you may know this already, normally as an Australian resident you can claim the property expenses (interest, body corp, PM fees, council rates, etc) against the rental income and when the former is greater than the later you investment is operating at a 'loss' and you get the negative gearing situation.

However, as a non-resident, and presumably receiving a UK salary taxed by the UK govt, you have no other Australian income to offset your property losses against. This being the case, those property losses accumulate indefinately year after year whilst you remain an Australian non-resident. When you come back to Australia, those accumulated "tax credits" can be used to offset against a rental surplus, capital gains on sale, or to offset australian taxable income. And there is no rule to say that you can only claim those losses in the first tax year of your return to Australia. You just claim them until they have all been used up, however long that takes. So theoretically, you could be in a situation where you pay no Australian income tax for X number of years when you get back, depending on how much you have accumulated in losses. Sounds too good to be true, but its absolutely brilliant. Its one of the key advantages of buying property as a non-resident.

I suggest you see an Australian accountant in London if you haven't done so already.

Cheers,
Justin.

 

[Trogdor]

Thanks all - very valuable and useful advice.

To confirm - if you take out the loan for the property as the IP, its obviously tax deductible.

At the point at which you move in, the loan is no longer tax deductible, of course.

If, later on down the track, you move out again and re-commence renting the property, is there any tricks / traps, or does the loan become deductible once again?

Thanks!

 

[Jacque]

Hi Trog

Best person to speak to is a broker who is familiar with overseas loans and structures. Try someone like Rolf Latham from www.asapfinancial.com.au who's helped several clients in your situation. Best to get the entire structure set up correctly before you begin searching for that perfect PPOR.
Vitally important.

 

[Bushranger]

Yes if you buy as investment property, move in as you PPOR, then move out again - and start renting it again - it can return to having all the usual tax deductions associated with an investment property. No tricks or traps that Im aware of.

You need to consider how you are going to structure your loan - as interest only would obviously be the best way as an investment, but you might want to change P&I when you move in, depending on what your plans are.

Also something else springs to mind - When I bought my property as an overseas resident I was told it was a legal requirement of non-residents that I needed to put down a minimum 20% deposit (which I did). But I've since heard that this may not be the case anymore?! Well worth shopping around.



Good luck!

 

[Lilli]

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.

Are we certain that this is the case....???

 

[whiteknightoz]

What is this 6 year rule you guys are talking about??

I currently nearly own my own PPOR and am looking at buying an acreage property with a little 3bedroom house on it and am going to rent this out with the intent of building another dwelling on the same block (NOT subdivide) in a few years and then move into the larger dwelling and sell my current PPOR.

Does this 6 year rule apply in this case for anything as I am not sure how my proposal above will affect CGT.

 

[jcjchung]

Ive done exactly that

My GF and I recently bought an expensive 5 bedroom house with pool in Sydney's north shore 8 weeks ago.

We are both in our late twenties, not even engaged and have no children. We will marry in the next 18 months and have children in about 5 years time.

We will move into the property in 10+ years time when we have more than one child. The house is simply too big for the 2 of us even with one child.

We didnt go looking to buy a house that we would move into in 10 years time but rather a house we would move into after we get engaged. It so happen that we found this awesome house that we thought had good bones and had great potential.

Our motivating factor was we didnt want to pay almost $3 million in 10 years time when we are ready for a big house.

The house was in good condition and was rented out straight away. It is now rented out to a family with 3 children.

we already have a 2 bed apartmt. not sure what the next move is. buying a small IP or a PPOR for next 10 years.

 

[Trogdor]

My GF and I recently bought an expensive 5 bedroom house with pool in Sydney's north shore 8 weeks ago.

We are both in our late twenties, not even engaged and have no children. We will marry in the next 18 months and have children in about 5 years time.

We will move into the property in 10+ years time when we have more than one child. The house is simply too big for the 2 of us even with one child.

We didnt go looking to buy a house that we would move into in 10 years time but rather a house we would move into after we get engaged. It so happen that we found this awesome house that we thought had good bones and had great potential.

Our motivating factor was we didnt want to pay almost $3 million in 10 years time when we are ready for a big house.

The house was in good condition and was rented out straight away. It is now rented out to a family with 3 children.

we already have a 2 bed apartmt. not sure what the next move is. buying a small IP or a PPOR for next 10 years.

Congratulations!! May I ask after tax deductions/depreciations, and rent, does this cost a lot to hold?

 

[BayView]

What is this 6 year rule you guys are talking about??

I currently nearly own my own PPOR and am looking at buying an acreage property with a little 3bedroom house on it and am going to rent this out with the intent of building another dwelling on the same block (NOT subdivide) in a few years and then move into the larger dwelling and sell my current PPOR.

Does this 6 year rule apply in this case for anything as I am not sure how my proposal above will affect CGT.

The 6 year rule applies to when you move out of your PPoR and rent it out.

You can do this for up to 6 years, and then have to move back in to avoid being liable for CGT when and if you sell it in the future.

 

[Lilli]

When people refer to buying an 'expensive' PPOR as an IP how much are they refering to? I ask this as when people talking about purchasing cheap properties some are refering to a $80k property, and others mean a $300k property.

 

[The Y-man]

When people refer to buying an 'expensive' PPOR as an IP how much are they refering to? I ask this as when people talking about purchasing cheap properties some are refering to a $80k property, and others mean a $300k property.

In Melbourne, would you agree that "cheap" would be say $200k, and expensive at $800k plus?

Cheers,

The Y-man

 

[keithj]

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?

Not sure if it's been mentioned before....

...most people have no idea what sort of house they'll want in 5 yrs time, their job location, their personal circumstances, the number of kids (or partner) they'll have, their tastes.

I'd say invest elsewhere (probably with better servicability) and worry about a flash PPOR when you need it.

 

[RumpledElf]

to me, cheap is $30k and expensive is $250k