Is it worth the hassle to downgrade?

[travelbug]

We are nearing retirement and our idea is to downsize our PPOR and sell one investment property to pay down some loans. I will go part time in 1-2 years. Hubby has about 3-4 years until he'll retire.

Selling the investment property will give us $20,000 a year in our pocket (less interest- taking into account lost rent etc as well).

I was hoping to clear $150,000+ when downsizing but after looking at houses we will only clear $100,000 so giving us $6,500 roughly in less interest. Our current house is also expensive to run (too big + pool etc).
So I'm thinking we will be about $50 a week better off in a smaller house.

So with the investment sold and down grade we will have extra income of $30,000.

Just wondering whether it's worth the hassle of the downgrade for $100,000? Also thinking the banks may want some of their money when we retire. Our LVR is 55% including our PPOR (but no personal loan on it).

Your thoughts are welcome.

 

[Sunfish]

Some people never outgrow their big homes so it is a personal thing. We moved into a bigger home and added a bachelor flat for our son AFTER retirement and we are as happy as a pig in muck.

Downsizing often goes hand in hand with a tree/sea change or, as in the case of a guy I met y'day, 1st time in 40 years, you intend to spend a lot of time on the road.

 

[Truly Exotic]

im no where near retirement age, but a recent house sitting experience for 3 weeks made me hate big houses!!! i can see why anyone middle aged and above wanting to down grade in size!

 

[lizzie]

We're used to big houses - and love them. Not lots of rooms, but big ones ie, bedrooms 5x6m.

We're currently greased into a rental about 1/3rd the size of our last house (albeit normal size for most) and even tho there are only 3 of us, we spent most of our time tripping over each other!

I guess the big difference is that we will be ppor mortgage free with this build, 5-10 years ahead of retirement, which gives us a lot more options as long as the IP's are neutral/pos geared.

 

[devank]

What if you don't like the new house? How about simply renting out for a start?

Selling is going to cost about 2-3% and buying is going cost you 5% + moving hassle.
My parents were in a similar situation. They liked the location but didn't want to maintain the old house, pool and the large garden.

Finally they asked us to build a very large house so that we can live upstairs with a degree of separation. We have our own small kitchen and lounge area.

They got a smaller but newer and easy to maintain ground floor. They also feel much safer now.

We also benifit because we are living where we can't afford in a place otherwise. Our kids get to be with their grand parents and highly spolit

This is just an odd example but you may want to think of ways to live comfortably without selling.
How about building a duplex? Rent out the other one.
Or very nice, over the top granny flat for you to live and rent out the main house?

 

[virgo]

Dual living

Hi Devank

i think what you and your parents have done is a great idea....keeps the family close but each has their breathing space

I have also added a granny flat to my own PPOR; one day my son may live in it (i like my kids close to me ) or it will be rented out to be part of our retirement cash cow

Also, we plan to live out the winters in Asia so we will lock up the main house and go wandering.....moo moo here i come

 

[travelbug]

What if you don't like the new house? How about simply renting out for a start?

Selling is going to cost about 2-3% and buying is going cost you 5% + moving hassle.
My parents were in a similar situation. They liked the location but didn't want to maintain the old house, pool and the large garden.

Finally they asked us to build a very large house so that we can live upstairs with a degree of separation. We have our own small kitchen and lounge area.

They got a smaller but newer and easy to maintain ground floor. They also feel much safer now.

We also benifit because we are living where we can't afford in a place otherwise. Our kids get to be with their grand parents and highly spolit

This is just an odd example but you may want to think of ways to live comfortably without selling.
How about building a duplex? Rent out the other one.
Or very nice, over the top granny flat for you to live and rent out the main house?

Thanks everyone. Couldn't sleep last night trying to decide as I need to decide on a house today.

My worry is of course liking the new house. I love my house and am spoilt with space.
Even though we don't use the lounge dining at all and we both have a bedroom each for a study plus one room as a guest room.
The thing that got me last night was the fact that my bedroom is massive. In the new house I'd lose half my wardrobe and would only have the dressing table (no tallboys).

In the end the changeover would be less than $100K and the purpose was to have extra cash. Hubby isn't happy as he loved the massive garage. He also kept adding stuff we could do to the new house (adding up the expenditure).
So we'll keep decluttering here and tidy up some areas and if something pops up we're ready.

Building on ours or extending is not an option. Although we could section off the back family room and huge master bedroom and make a granny flat but that's the area we love and live in.

Back to the drawing board.

 

[weg]

I'm assuming you have other retirement funds and the 30K pa would be extra.

Is the 30K absolutely crucial to your retirement.

If so could you not pay down some debt over the next 3 or so years, then both work 1 or 2 days a week, if it allows you to keep the PPOR.

It all depends how much you like your PPOR, how much you dislike work and what income amount you feel you must have in retirement.

 

[marg4000]

Fill in the pool.

We did once the kids stopped using it and never regretted it. Bonus was the electricity bill went down by about $80 a quarter (and this was about 15 years ago).
Marg

 

[travelbug]

I'm assuming you have other retirement funds and the 30K pa would be extra.

Is the 30K absolutely crucial to your retirement.

If so could you not pay down some debt over the next 3 or so years, then both work 1 or 2 days a week, if it allows you to keep the PPOR.

It all depends how much you like your PPOR, how much you dislike work and what income amount you feel you must have in retirement.

We are not retiring yet. I plan to go part time in the next 1-2 years but won't need to touch any retirement money. I love my job so won't fully retire for many years.

The downgrade would only bring $10Kpa. The other $20K will come when we sell one IP. Yes we will have the other IP's plus super. So $10K is pretty minimal in the scheme of things.
We will stay unless something wonderful pops up that will put money in our pocket.
thanks everyone.

 

[Graemsay]

Downsizing doesn't generally release as much capital as people might think due to the transaction costs, but I think that it's worth considering in your case because:

• You describe your house as being too big and too expensive to run. It strikes me that you're paying out money for something you don't really need.
• On a historical basis, or compared to other cities worldwide, Sydney property is expensive. (I know that some people will disagree with me here. ) Right now is a good time to sell if you want to lock in profits, as you could be close to the market top.
• By selling an IP and downsizing the PPOR you'd save around $30K a year. At a realistic rate of return (5% to 6%), you'd need around $500K or $600K of assets to generate that sort of income. Reducing these outgoings would be the easiest way to improve your living standard in retirement.

The other thing to consider is a more radical option for downsizing. I'm guessing that you're a living in a four bedroom house without any kids, so why not look at a two or three bedroom house or townhouse?

It sounds like you've got a large living space you don't use, whilst the guest bedroom will be empty most the time, so you could lose both of those. Instead, have a study double up as guest room, and possibly even share it.

 

[travelbug]

Thanks Graemsay.
Yes our run costs would be less due to pool etc but not a massive saving there.
The $500-600K we would pocket would come off our loans thereby saving the $30K.pa. We know the buy/sell costs and have calculated that.

Our other IP's are CF+ and have built in equity. That and our super we will use later when we need it. We are looking at 3-4 bed houses (hubby needs a decent garage). If the bedrooms are big enough we considered the guest room/study option.
Having a look at a couple this weekend.

 

[sash]

No offence but this is thinking with the heart not the head. If there are two people why not buy a villa with a double garage? Over the next few years you will see the big houses in the Hills get harder to sell...take your cash now and buy something practical and something which will see you through your retirement. Do don't want to lose capital on another transaction.

As for CF+....I can't see how you will use that help you fund your lifestyle.

Just the numbers (made a lot of assumptions). Lets say your total portfolio (excluding super) is $3m with a 55% LVR (that means you have $1.65 in loans or $1.35 net equity).

Lets assume your PPOR is $690k and your 7 IPs are worth $2.31. Based on this figure your loans on your IP are $1.65k leaving.

Lets say the average rent on your properties is $315pw so that is about $115k per annum. The expenses (rates, water, strata, mgmt) are say $5k per property or $35k per annum anf interest (at 6%) is $100k or total of 135.

So thr overall shortfall is $20k (before depreciation)...assuming 1 IP is sold this figure ....the shortfall is $12k.

So assuming you go part time say 40k per annum plus hubby on 70k. You are still at a status quo. You need to keep working.

The better option would be to reduce the properties which have the least amount of capital gains to reduce paying tax.

Something whihc you should think about is doing a transition to retirement super. You can each contribute about $25k each to super..continue to work full time but pay tax at 15% instead of 32-40%. With depreciation you will probably pay almost no tax....but still have a similar income to now...whilst youre super grows at $42.5k per annum (after the 15% contributions tax).

Anyway all the best....

Thanks Graemsay.
Yes our run costs would be less due to pool etc but not a massive saving there.
The $500-600K we would pocket would come off our loans thereby saving the $30K.pa. We know the buy/sell costs and have calculated that.

Our other IP's are CF+ and have built in equity. That and our super we will use later when we need it. We are looking at 3-4 bed houses (hubby needs a decent garage). If the bedrooms are big enough we considered the guest room/study option.
Having a look at a couple this weekend.

 

[travelbug]

Thanks for your input Sash.
I see your thinking but your figures are way off (I know you are basing them off where I was when I last saw you but my portfolio has grown and so has my equity). Also the rents are higher and we have no shortfall. As I mentioned we are CF+ (before tax).

When it comes to your PPOR you need to have some heart in it. It's where I'll be living. We cannot live in a 2 bed villa. We have transient children and 2 parents that may need to live with us if they need care. Hence my reluctance to move ATM unless the money talks.

We don't have enough to retire now but we don't want to retire now. We can live on a 1/3 of your wage. I do salary sacrifice quite a bit and a lot has gone on renos and weddings the last few years. If we slow down the renos and we are running out of kids to get married so more cash to spare. Plus I will have a small inheritance before I retire. Traveling is my only vice.


I plan on working part time for the next 7? years. Then I'll be close to retirement age then maybe I'll retire. While I love working I'll keep doing it, even if only 2 days per week. 2 days per week gives me an income of $30K, that with the $30K from sale of IP1 and downgrade is enough to live on actually. But in 5 years we may sell another. But then we will access our super if we need it.

Cheers.

 

[Aaron_C]

My parents are in a similar situation but I don't think they are considering downsizing to a small townhouse/villa/unit. The main criteria is having a reasonably sized single-storey home and the investment criteria isn't that relevant since they would be selling their existing home (tax-free) to buy it. It's not really a monetary decision it is always about what you want out of life - and you are at that stage where making more money isn't that important for your retirement.

 

[travelbug]

Doin it!!!

Well we've finally done it. House under contract and we've bought our new house.

We got early access and stripped all the wallpaper. Settled now and stripped the bathroom and painted.

LOVE the house and hubby loves the garage. The bonus is that it has 6 bedrooms . We are sectioning off 2 bedrooms, a bathroom and a family room to make a granny flat. Just got approval so work starts on that next week.

Very exciting. Financially it works for us to with the cash from the downgrade and the rent from the granny flat.

Can't wait to move in. I've been frantically picking wall colours and tiles etc. No more Hog Bristle (all our IP's are Hog Bristle 1/4) for me. Much more exciting than IP renovating.

6 bedrooms, loungeroom, dining and kitchen ALL with wallpaper was a killer. Just the new paint has worked wonders.

 

[westminster]

So did you go for something smaller or just something less expensive?

What is the plan for the granny flat? One of the kids or will you rent it out.

Very exciting! Hogs Bristle is my go-to colour for IPs too. I have just done the colours for 4 villas and the outsides are HB in 400/200 and 100% and the insides are 50 and 25%.

Congratulations.

 

[devank]

Very exciting. Financially it works for us to with the cash from the downgrade and the rent from the granny flat.

Congratulations! Glad it worked out well

 

[virgo]

Congratulations!

Hi Travelbug

Congrats!! Great move to convert your PPOR (a liability) into a granny flat setup (an asset) ...

(BTW Do i take the credit for the granny flat idea??!!)

jen

 

[travelbug]

Westminster. The idea was to get something a bit smaller and cheaper.
We will rent out the granny flat.

Jen you can take the credit if you like. I did like your set up and we saw a few when browsing so thought- why not?

Didn't think in our wildest dreams we'd find one though with our needs (4 bedroom and big garage) but we lucked out.

We have our new home and the garage and the granny flat.

Now to just get this blooming firewalls built. Bigger than Ben Hur.