Help to choose between 2 options

[virgo]

Hiya,

I have a little problem and can't seem to find my way out. I hope some financially astute members can suggest a way out..

My situation:
PPOR (Sydney): Debt 560K (Worth 700K)

IP 1(Melbourne) : Debt 230 K ; Worth 230 K; rents 260 per week

IP2: Debt 220 K ;Worth 450 K; rents 450 per week

Note: IP 2 is overseas and is positive cash flow to the tune of 200 per week.(due to very very low interest rate). Tax is nil. (very low tax environment).


We are finding the repayments on the PPOR (about 4200 per month) plus the IP 1 (1700) a month pretty tough going. Basically, we think the non deductible debt is too high. I am loath about selling IP2 as it is cash positive but it looks like we may have no option...

Any creative ideas?


Thanks a lot

 

[BV]

Virgo

I suggest you sell IP1 and IP2 and concentrate on paying off your PPOR

The price of IP2 (depending on where it is overseas) could already be on the way down so if you can offload it, I'd do it.

IP1, is costing you $200/w before tax, prices in the short to medium term are not likely to increase so if it was me and I had a large PPOR loan I'd let IP1 go.

Good luck

 

[jagmcmanus]

Hiya,

I have a little problem and can't seem to find my way out. I hope some financially astute members can suggest a way out..

My situation:
PPOR (Sydney): Debt 560K (Worth 700K)

IP 1(Melbourne) : Debt 230 K ; Worth 230 K; rents 260 per week

IP2: Debt 220 K ;Worth 450 K; rents 450 per week

Note: IP 2 is overseas and is positive cash flow to the tune of 200 per week.(due to very very low interest rate). Tax is nil. (very low tax environment).


We are finding the repayments on the PPOR (about 4200 per month) plus the IP 1 (1700) a month pretty tough going. Basically, we think the non deductible debt is too high. I am loath about selling IP2 as it is cash positive but it looks like we may have no option...

Any creative ideas?


Thanks a lot

Depends on so may variables... How safe is IP2? What has the higher growth prosepcts? I wouldn't want to sell my best performer to prop up the worst performer...

As for the loan repayments, you could always refinance the PPOR and go interest only or P and I over the max loan term (30yrs) this should bring down the monthly repayment.

 

[twobobsworth]

Have you done depreciation schedule on melb IP?

What about income tax variation to get your refund through the year rather then return time?

 

[BV]

As for the loan repayments, you could always refinance the PPOR and go interest only or P and I over the max loan term (30yrs) this should bring down the monthly repayment.

It will still be $1000/week in interest alone which is a lot of money
IMO debt reduction is the best approach

 

[Nth Brisbanite]

Any creative ideas?

The last thing that you should do is sell. Some ideas:

• Convert to interest only for PPOR if you haven't already done so
• Do your sums and see whether it is worth renting out your PPOR and moving into cheap rental accommodation for a while
• Refinance to cheaper loans. Talk to a mortgage broker - there are heaps of good ones on this forum
• Any other ways of earning extra income? eg take in some boarders, get a second job
• Cut back some of your personal expenses

 

[Spectre]

Good thoughts from all.

To add...
*Consider an EFM on your PPR for a short term
*Refi to an intro rate - if you're full doc - for example - refi to st g and get an intro circa 8.24 then roll to .7 off variable after year 1 (either on one of both loans)
*Maybe take the loan term to a 40 year product (bear in mind if you had a 30 year i/o or a 40 year I/o it wouldnt really matter what the term is and its going to be a ? as to if the new loan is any better repayment wise than the old loan)

 

[Aimjoy]

My situation:
PPOR (Sydney): Debt 560K (Worth 700K)
IP 1(Melbourne) : Debt 230 K ; Worth 230 K; rents 260 per week
IP2: Debt 220 K ;Worth 450 K; rents 450 per week
Any creative ideas? Thanks a lot

Virgo,

Probably not a creative idea but you have $680K worth of IP's and $700K worth of PPOR non-ded debt.....way out of balance to my way of thinking.

At first glance your lifestyle choice of a $560K debt on your own home while not even matching that with investments is cramping your investing.

I'd turn the PPOR into an IP (yikes a $700K IP ) if it gets a decent return or sell it if not.....and live cheaper so you can invest properly.

Just my take without knowing your circumstances or income etc.

 

[Rolf Latham]

Hiya

The 200 a week net cash flow from IP2

Is it being taxed here ?

ta
rolf

 

[josko]

Hi there Virgo,

I don't know whether you saw my post ;

www.somersoft.com/forums/showthread.php?p=458248#post458248

But if you read about my situation, which is similar to yours, you may feel a little better.

I too, have too much non-deductable debt in my PPOR.

MY first option would be:

How much money will you save by turning your PPOR into an IP and renting yourself. I know a few local accountants who have done just this.

Pretty much everthing else you could do has been mentioned above.

If you find, none of these things will make a difference, then your only options are to either sell your NG IP, or your PPOR.

I chose to sell my PPOR because:

1. No CGT.
2. Biggest non-deductable debt.
3. It has equity.
4. IP's have lost too much value on paper, so did not want to "realise" the loss.
5. I am looking to make an equity swap with my IP's. In otherwords, I will get rid of my bad IP Loans and Interest rates, and swap them for my PPPOR Loan with a 3-4% difference!

Although this has been a better thing for me to do financially, it is caused some emotional heartache. My 7 yr old is excited though.....she wants to rearrange her bedroom, but my 10yr old is a real homebody and got quite upset. Hubby took about three weeks to feel better about it, but now feels a little relieved at the thought of not having all this financial stress.

In the end, I am only trying to do waht I think is best for my family IN THE LONG TERM, as should you.

regards JO

 

[virgo]

Decisions decisions decisions

Hiya

Thanks for all your replies; it gives me many pointers to mull over....

Just to add some more details to my situation:

My IP2 is likely to go sideways in terms of capital growth in this market; if i were to sell it however, there is no capital tax!

We are already on Interest only on PPOR and IP1. IP2 is P & 1.

Hubby and my income total about 180K a year (i know, we are one of those financially illiterate ones...and should i add we are in our mid 40s.)

I guess we can still continue holding the 3 properties but just can't figure out whether this is the best way forward; our situation just seem so stagnant!

Any other help (and some basic number crunching) would be appreciated...we just don't seem to get our head around the numbers...

Cheers

 

[sash]

Hmmm...sounds very familiar!

Have you thought of renting out your PPOR and renting?

Assuming you get 650pw for your PPOR, that should being about 65k in rental income. Based on that you should be cashflow negative to say about 25k based on 8% interest only (includes rates and other expenses) once depreciation and tax is applied you are probably only negative to the tune of 15k. If you add rent of say 450 per week that is still going to be about $3200 per month. Still LESS than what you are paying now.

I agree your non deductiable rent is killing you!

Cheers
Sash

Hiya,

I have a little problem and can't seem to find my way out. I hope some financially astute members can suggest a way out..

My situation:
PPOR (Sydney): Debt 560K (Worth 700K)

IP 1(Melbourne) : Debt 230 K ; Worth 230 K; rents 260 per week

IP2: Debt 220 K ;Worth 450 K; rents 450 per week

Note: IP 2 is overseas and is positive cash flow to the tune of 200 per week.(due to very very low interest rate). Tax is nil. (very low tax environment).


We are finding the repayments on the PPOR (about 4200 per month) plus the IP 1 (1700) a month pretty tough going. Basically, we think the non deductible debt is too high. I am loath about selling IP2 as it is cash positive but it looks like we may have no option...

Any creative ideas?


Thanks a lot

 

[Bandita]

Hi Virgo,

Do you have an offset account against your PPOR loan? If you put any/all excess funds in there, it could reduce your monthly interest repayments dramatically.

Cheers,
Jen

 

[virgo]

Renting out the PPOR

Dear Sash,

Thanks for that! But at the moment, am paying about $4200 per month on the "cursed" PPOR (and that's IO!!). I reckon we can rent the PPOR out for about 500-550 Per week; and on top of that we have to look at another place to rent about $450 per week.

Not much saving and too much hassle to save about 1000 per month? or am i missing something?

My dilema is whether to sell my beautiful cash flow positive IP2 (Cash flow positive to the tune of 200 per week ; NO TAX because it is in another country) to pay down my non deductible PPOR! And that is where i lose the plot...

Grateful for any input

 

[Qlds007]

Personally from what has been written and what you appear to want to achieve i like Richard's idea of switching the loan to an Equity Finance Mortgage and only servicing upto 70% of your current debt.

 

[Paul Mollica]

I agree with the above consider converting your PPOR into a rental property and renting a home to live in. Depending on your income (tax bracket) and other needs you should be able to rent a similar place for $3,000pm or less. The current council expenses, interest on loan etc that you pay will become tax deductible further improving your cashflow and you wont have to pay these expenses when renting your landlord will. It is my understanding that if you don't buy another PPOR to live in you have 6 years to move back into your home and it will retain its capital gains tax free status. Further to this your accountant can help you to set up a tax variation on expected tax deductions to improve your take home pay. Alternative is to sell the PPOR - no CGT etc but be careful because if cashflow is tight you might not qualify for another loan immediately and you have all the transaction costs as well as moving costs and for all the hassle will have 2 investment properties instead of three. Depending on the age of the properties I would look at a depreciation schedule to further improve deductions.

 

[BV]

My dilema is whether to sell my beautiful cash flow positive IP2 (Cash flow positive to the tune of 200 per week ; NO TAX because it is in another country) to pay down my non deductible PPOR! And that is where i lose the plot...

Our PPOR is often our best investment because it's CGT free.

Also, you need to live somewhere and most people want to live in a nice PPOR
and they also want to have the security of owning their home.
I'd hate to be renting and to be told that I have to move.

I believe property in general is a good investment and don't normally say to people to sell. However, in this instance it makes sense to reduce your PPOR loan.

You are both on good salary and if it was me I'd forget IP's and concentrate on paying down the PPOR loan. Next best option for people with your pay would be to salary sacrifice into super. Our super has taken a hit in recent times due to the problems in the share markets but it will turn around soon enough.

IMHO

Cheers

 

[virgo]

Equity Finance Mortage

Dear Richard,

Pray tell what is an Equity Finance Mortgage in a nutshell? And what are the requirements one needs to comply?

Thanks!

 

[Spectre]

Virgo

There is an older thread re EFMs here
http://www.somersoft.com/forums/showthread.php?t=31169&highlight=Rismark

and you can probably do heaps of searches on it to find out some more info.

Bear in mind the old thread is something that was created just when they first were introduced so there have been a few 'tweaks' since. From memory much of the thread is fairly negative - it isnt a product suited to everyone but if you see a lot of 'financial distress' getting ready to happen it can be something that might tick the box (different strokes for different folks)

So have a scan thru. Its not a push for you to do an efm but it will give you a bit of info

 

[HiEquity]

Thanks for that! But at the moment, am paying about $4200 per month on the "cursed" PPOR (and that's IO!!). I reckon we can rent the PPOR out for about 500-550 Per week; and on top of that we have to look at another place to rent about $450 per week.

Not much saving and too much hassle to save about 1000 per month? or am i missing something?

You don't like saving $1000 per month = $12k per year? That's post tax dollars in the first year that will reduce your loan faster, reduce your interest bill and compound fairly quickly.

Anyway, I think that number is too low - $4200 per month @ 30% marginal tax rate = $1260 extra tax refund per month by making it deductible debt. Assume a $100 per week ($400 per month) differential between your new rent and the old PPOR rent means you make $1260+$400 = circa $1600 per month by converting it into an IP (maybe $1500 post tax as you will pay tax on the extra rent = $18k per year). Plus your rates, PM fees etc are also deductible on this house.

If you are struggling with repayments I would have thought $18k a year post tax just to move to a different house would be a no-brainer... and it's compounding! And you keep your IPs along with their cash flow. If you wished you could use the funds for lifestyle - in which case you could go on a pretty nice holiday once a year... I know what I would be doing!