IP vs PPR Loan? Please Help!
- Thread starter Hawks100
- Start date
Generally:
1) Pay off PPOR: every $1 'earns' you the interest rate on your PPOR tax free
2) Buy IP: pay the interest rate on your PPOR, but you 'make' the net rent + capital appreciation
Long term, assuming net rent + capital appreciation is greater than your PPOR interest rate, you are probably better off buying IPs instead of paying off your PPOr.
Of course it's not that simple, because you have to take into account what you're comfortable with, what your goals are, tax, etc.
One variation, for example, is to pay off part of your PPOR loan, refinance and use the proceeds to buy an IP. That increases your deductible debt.
Alex
1) Pay off PPOR: every $1 'earns' you the interest rate on your PPOR tax free
2) Buy IP: pay the interest rate on your PPOR, but you 'make' the net rent + capital appreciation
Long term, assuming net rent + capital appreciation is greater than your PPOR interest rate, you are probably better off buying IPs instead of paying off your PPOr.
Of course it's not that simple, because you have to take into account what you're comfortable with, what your goals are, tax, etc.
One variation, for example, is to pay off part of your PPOR loan, refinance and use the proceeds to buy an IP. That increases your deductible debt.
Alex
Interest on your IP loan is tax-deductible, as are all the maintenance costs - interest and maintenance costs on your PPOR are not deductible.
Your PPOR balance is fixed as at the time you took out the loan, and will not rise in line with inflation. If you postpone purchasing an IP, the cost of the IP could well go up considerably by the time you get around to buying, say 5 or 10 years down the track after you've paid off your PPOR - I'm ignoring market cycles here, since no-one has a crystal ball.
And finally, if you have 2 properties, then you have 2 lots of capital growth - and if you have several IPs then .....
Apart from all that, the SANF is very important - you have to do what you feel comfortable with.
Cheers
LynnH
Your PPOR balance is fixed as at the time you took out the loan, and will not rise in line with inflation. If you postpone purchasing an IP, the cost of the IP could well go up considerably by the time you get around to buying, say 5 or 10 years down the track after you've paid off your PPOR - I'm ignoring market cycles here, since no-one has a crystal ball.
And finally, if you have 2 properties, then you have 2 lots of capital growth - and if you have several IPs then .....
Apart from all that, the SANF is very important - you have to do what you feel comfortable with.
Cheers
LynnH
Standard IP these days: 3.5% net rent + 7% capital appreciation COMPOUND.
Paying off PPOR loan: 10% (say) simple interest. It doesn't compound. You just save 10% a year, every year.
As a simple example. You have $50k. You put it into your PPOR loan, you 'save', say, $5k a year. So over 10 years you save $50k. You can also include the investment returns you would get on the $50k that you save.
Instead you buy a $250k IP with it. Assume net cashflow is neutral over the 10 years (negative at first, neutral in the middle, positive at the end). In 10 years the IP might be worth $500k. So that's $250k more in net assets (because in the first example you also 'buy' $50k worth of equity by paying down the PPOR loan).
The key is that buying an IP gives you COMPOUND growth on a bigger asset. Paying off the PPOR loan saved you simple interest (which you can invest to get compound returns).
Alex
getting the % info.
This is gonna sound dumb but im gonna ask anyway. How/where do you get the 3.5% net rent and the 7% capital appreciation. The net rent, is that weekly rent x 52 weeks/ ourchase price x 100 ? and the 7% info, do i get that by purchasing the last 10 years data, ei. 'Guide to Property Values?
Thank you,
zee
This is gonna sound dumb but im gonna ask anyway. How/where do you get the 3.5% net rent and the 7% capital appreciation. The net rent, is that weekly rent x 52 weeks/ ourchase price x 100 ? and the 7% info, do i get that by purchasing the last 10 years data, ei. 'Guide to Property Values?
Thank you,
zee
It's just a rough estimate. My assumption would be 5% gross rent (rent per week x 52 / purchase price x 100) less an estimate of 1.5% in costs (council rates, insurance, management fees and so on). 7% is just a general assumption that property doubles every 10 years over the long term. Of course there are endless variations between suburbs but I usually use 7% for my own estimates.
Alex
what are you talking about? Saving interest on PPOR does compound. The new saved money can now be funneled as additional payments into paying off more of the loan.
Thats why in the first few years of a loan, you pay off little, but later in the loan, it compounds to paying off quicker.
If I put my figures from one place in, I get 15% return for the first part. This has always confused me. The longer somebody holds a place, the higher the return would be, or am I missing something?
Well, yes, if you look at it only in terms of the money that you initially invested. Because your investment in the property increases as the amount of equity in it increases, I always look at yields in terms of MARKET VALUE rather than PURCHASE PRICE, because you need to consider the performance of your investment relative to other things that you could have invested the money into, ie the opportunity cost.
Of course quoted rental yields are always relative to market value; any other figure is meaningless.
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