Cash vs equity, confused

[freerange]

First post here so might as well get into the nitty gritty

I'm going to go see a financial adviser and/or accountant before I make any decisions and I'm still a little way off that, I'm just terrible when it comes to money as I have never really cared for it.

I am currently partial way through a subdivide and build of a corner block retaining the newly reno'd exisiting house and building on the backyard. I'm just not sure whether my plan should be to sell or hold. We will probably be looking to do another straight away afterwards if we can find the right property, I reckon I could get through a second one in half the time.

Current plan once finished is to rent exisitng out and move into new to finish of landscaping my self etc in the time it takes to become my PPOR to reset cgt. Now with the new house I'm not sure whether it's worth keeping as a rental or just offloading and freeing up cash for the next.

numbers are roughly like this
income 120,000ish minimal savings few thousand safety money (combined me and partner, on a shoe string somewhat to get this done)

exisiting house: owe $220,000 ..... value $260,000 going of comparable subdivided houses in the area
new: looking at numbers so far loan will be under $200,000 for finished product (subdivision, retaining, landscaping and building) ...... value conservatively $300,000 (this sold 2 streets away same size block similar kind of house $375,000 in march http://www.realestate.com.au/propert...ella-115417787)


As rentals, existing should be positively geared as IO loan +$50 a week, new house should be double that as a principle and interest loan I'd hope, not many new rentals in the area to compare it to, but would make interest only just because.

So after all that blabbing what would be better to fund the next project using equatiy in my 2 properties or selling 1 or both to have cash in hand as such since we dont have any real savings or cash behind us any other way? or is it all much of a muchness?

 

[tobe]

Welcome!

Selling crystalises any capital gains tax that may be payable, so thats a consideration.

Renting them out may be cashflow positive, but there are some things you can do to lessen the taxation implications. a depreciation schedule for a start, means that while it may be cash flow positive, after tax in might be closer to neutral.


How comfortable are you with debt? what about taxes, would you be happy paying extra PAYG tax over and above what you currently pay for your job?

What sort of risk profile do you have? And most importantly, what are your goals? What is the end game in doing this development/investing in property?

 

[Terry_w]

If you have non deductible debt then using cash would mean you end up paying more interest which isn't deductible= paying more tax

 

[Brady]

First things first I would be speak to an accountant with good understanding on property regarding the different tax implications, really dont think the FP is going to help you as much as an accountant. FP can do some modelling but the accountant should be able to help.

Selling straight after developing, income tax & GST?

Was the existing renovated property your PPOR?

Would you be planning to sell one or both?



How are the loans currently structured? are they x-coll?

I would be looking to get valuations done on completion, if there are comparable sales for $375k thats what would be basing the figures on. If yours is worth $375k and you owe $200k you can get access to another $100k @ 80% LVR. $100k should give you enough to go again.


If you're looking to be aggressive next purchase could be 88 or 90% LVR for less deposit down leaving you more $$ for development costs.


Once you speak to an accountant I'm sure you will have a clearer idea of best way to proceed.

 

[freerange]

thanks for the reply.

For me debt is not a real issue I generally err on the side of caition when it comes to debt though and levels I would comfortably get to (I bought my first place about a month before interest rates shot to 9%+). With tax as as my income isn't that great so my tax levels are not so bad just yet, I would prefer to be making money and paying tax on it then losing money

As for end game that is the tricky one, If you asked my misses she would tell you to comfortably afford acreage close to town for her horses. I'm more looking towards long term, self funded retirement etc (I'm only 29) exisiting house and subdivision is all in my name though only the new build in both our names.

 

[freerange]

First things first I would be speak to an accountant with good understanding on property regarding the different tax implications, really dont think the FP is going to help you as much as an accountant. FP can do some modelling but the accountant should be able to help.

Selling straight after developing, income tax & GST?

Was the existing renovated property your PPOR?

Would you be planning to sell one or both?



How are the loans currently structured? are they x-coll?

---snip--
.

Cheers Brady,

Existing house we are still currently living in, and we still only have the one loan on the ppor as we paid for all subdivision costs, new build deposit etc from our own back pocket. Have been in talks with broker for finance of the new house just waiting for the total final costing to come through before we can get it all finalized. Final LTO fees paid and Water meter went in yesterday, house is through first stages of council approval, almost there

We are going to move into the new house for the first 6-12 months or so, so it will become our ppor and can save some $$$ doing all the landscaping myself, no rush on things.

I see your in adelaide any recommendations for accountants?

 

[Brady]

Cheers Brady,

Existing house we are still currently living in, and we still only have the one loan on the ppor as we paid for all subdivision costs, new build deposit etc from our own back pocket. Final LTO fees paid and Water meter went in yesterday, house is through first stages of council approval, almost there

I see your in adelaide any recommendations for accountants?

If that is the case I would be on the hunt for next project, selling existing with CGT exception and look to repeat the process. Think you will find that you can't continually do this. Keep the new property as it will have some great depreication, alot of equity which you can use for next projects and should likely rent out quiet easily. Once you have kept it for a year should be able to sell with a 50% CGT discount. I wouldnt look to be moving into the new property as then you can loose the CGT on the existing property. I would borrowing for costs of any finshes on the new property and putting a tenant in there. (confirm all this with an accountant)

I cant recommended a good local accountant, I will be looking to change accountants next year. I've spoke with Paul from Price Account (post here on SS) he gave some great info [email protected]. Will likely be looking to switch to him when I develop my property. Dont really need to see anyone face2face and if you do can be done on skype.

 

[jpcashflow]

thanks for the reply.

For me debt is not a real issue I generally err on the side of caition when it comes to debt though and levels I would comfortably get to (I bought my first place about a month before interest rates shot to 9%+). With tax as as my income isn't that great so my tax levels are not so bad just yet, I would prefer to be making money and paying tax on it then losing money

As for end game that is the tricky one, If you asked my misses she would tell you to comfortably afford acreage close to town for her horses. I'm more looking towards long term, self funded retirement etc (I'm only 29) exisiting house and subdivision is all in my name though only the new build in both our names.

I love this comment and I am a mortgage broker my self.. and only 30.
I also don't have a issue in paying tax if I am generating an income... Also I wouldn't just take debt on just because I get to save tax, but rather help us out a bit.

With the market heading into uncharted waters, the less debt the better... from my point of view. Our property that my wife and I live in is 98% paid off with access to a line of credit and we have another property that only has 40% LVR, the rent covers all expenses and I get regular income from this.

 

[Rolf Latham]

For me debt is not a real issue I generally err on the side of caition when it comes to debt though and levels I would comfortably get to (I bought my first place about a month before interest rates shot to 9%+).

some of us older folk remember 18 %

ta
rolf