Is my PPOR worth keeping as an IP?

[EmilyC]

Hi all,

I recently discovered this forum and I'm really keen to start myself on the road to my own IP portfolio. I've started reading some recommended books and feel like I'm learning more and more by the minute.

I've been doing lots of searches on here and I've seen lots of threads about turning PPORs into IPs.

What I'm trying to figure out is whether my current PPOR is worth keeping as an IP or not.

I only discovered the world of property investment a little while ago so this property was certainly not bought with any thoughts of it becoming an IP in mind. I bought it with my OH to get our foot in the property market door. We have outgrown it somewhat now and are looking to upgrade to a larger house at some point in the future but don't mind staying here for longer if it helps us to start buying IPs sooner!

So here goes -

We bought our current PPOR in 2005 for 330k. We owe 290k and it would be worth approx 400-450k on the market today. Estimated rent would be around $300 a week.

Details of our current PPOR:
Conventional solid brick house built around 1950.
Living area 97sqm.
Land size 700sqm with a 16m frontage.
Five main rooms (2 good sized bedrooms, living room, dining room and kitchen. Also bathroom with separate toilet and a small laundry).
Original kitchen and bathroom.
Floorboards throughout.
Single garage.
Large shed.
Original pergola/verandah area.
Backyard is all lawn - no garden.

Improvements:
Roof painted and sprayed, and new colorbond gutters installed.
Installed new aluminium windows and timber venetian blinds throughout.
Replaced one side of the backyard fence (previously very poor condition corrugated iron) with 6 ft colorbond fence. Remaining fence is galvanised corrugated iron in good condition.
Added cat fencing to keep our cats in our yard and keep other cats out.
Used the government rebate to install insulation.
Installed two split system air conditioners one in the living area one in the master bedroom.
Put in new automatic garage door.
New front door and security door.

Location:
Henley Beach, SA - fairly popular beachside suburb.
In a cul-de-sac on the same road as a high school with a primary school one block away.
We have enjoyed living here as the location is lovely, away from main roads but close to local shops, close to public transport, 5 minutes drive to the beach, 10 minutes to West Lakes shopping centre or Glenelg, 20 minutes from the CBD.
My main issue with the location is that the cul-de-sac we live in turns into a parking lot for the high school students during the day.

I'm finding it really hard to be objective when thinking about whether to keep my PPOR as an IP. I think I'm too emotionally attached to the house because it is my first house which leans me towards keeping it so I'm really hoping someone can help me by looking at it from an investor's point of view.

Apologies for the lengthy post!

Any advice/opinions would be much appreciated.

 

[Simon]

I wish I'd kept my first home as an IP.

It would be worth 300% more today with bugger all mortgage against it.

If you think you will be saying this in 20 years time then hang onto it.

Don't make the question harder than it needs to be.

Good luck

 

[rugrat]

So long as you think you can rent it out for a decent price with decent tenants, or it will have good capital gains (prefferrably both) keep it. IMHO.

 

[jrc77]

Emily,

You also need to determine if your home loan is "contaminated" for ongoing deductability.

You said you owe about $290k on your mortgage ... Do you have a redraw facility on it? If so have you used it? (eg. paid down extra and then drawn it back?)

Regards,

Jason

 

[EmilyC]

Thank you so much for the replies.

I am very tempted to keep it as I feel it does have potential to have quite good capital growth long term...however keeping it will probably hold us back from acquiring any new IPs for a little while as well as take us longer to upgrade to a new PPOR. I'm also worried about the maintenance costs of hanging onto it because it's an older house and we've had trouble with drains and so on...and the fact it only has two bedrooms and a small overall living area makes me worry about whether that will make it harder to find tenants for it.

I know I'm probably overanalysing everything but that's just the kind of person I am.

Jason - thanks for your reply. Unfortunately I think my home loan is 'contaminated'. Before I discovered SS I had no idea about anything to do with property investing and had no plans for turning my PPOR into an IP. That being the case (and having been told by my lender that the redraw was 'exactly the same as an offset account') I did pay an extra $30k into my homeloan which I redrew for personal use over the christmas break. If only I knew then what I know now!

Is there any way of fixing the fact that I have contaminated my home loan? Does this make selling it and starting fresh with a purpose bought IP (with properly structured IO loan) a better idea? If I chose to keep my PPOR as an IP and refinanced with another lender would I be able to claim tax deductability on the interest payments for the $290k or only on the $260k? Sorry if these are silly questions...I'm still learning!

 

[The Y-man]

Emily,

If you sell the PPOR (tax free!) what will you do with the proceeds?

Cheers,

The Y-man

 

[travelbug]

Hi, quite a few things to think about.

If you keep it where will you get the deposit for your new (bigger and more expensive) PPOR?

From you post (correct me if I'm wrong) you'll have a huge undeductable debt on your new PPOR.

I would think you'd be better off using the capital growth of this PPOR to buy your new PPOR. Pay 20% deposit and put the rest in an offset account and save like mad to reduce your new mortgage then look at buying an IP with better yield. The yield on your current PPOR is very poor.

 

[EmilyC]

The Y-man – the CGT free aspect does definitely appeal to the wanting to sell side of things! In all honesty I think I would use the proceeds from the sale of my current PPOR and put them into the loan for my new PPOR. After doing that I would hope that my new PPOR would have some good CG (which it should in the areas I’m looking to buy) and then use the equity to start an IP portfolio. If only I had a crystal ball and knew that my current PPOR would be guaranteed to have good growth in the next few years I would be quite happy to stay here for a few more years and wait for a little more CG and then hopefully have enough funds from the sale to pay for the deposit on my new PPOR as well as a new investment property. Unfortunately that means I would be waiting and hoping for a big ‘what if’ scenario which I’m not sure is the right thing to do….

travelbug – I would have to save for quite a while to come up with the deposit for my new PPOR if I don't sell my current PPOR and you are also correct in saying that I would have a huge undeductable debt on the new PPOR if I kept my current PPOR as an IP….Your thoughts about selling and using the capital growth to buy my new PPOR is definitely a plan I’m considering. I guess that with so many people saying that the sooner you get into property investing the better I just worry that it would be unwise to sell my current PPOR to buy a bigger PPOR when I could be buying investment properties and setting myself up for the future instead…

Having said that – in the books I’m reading most of the examples are of people who have their current PPOR that they have paid $____ much off and then use the equity in their PPOR to buy their first IP and so on buying more IPs when they are able etc etc…I guess my issue is that although I do have my current PPOR it’s not where I see myself living out the rest of my days…when looking for my new PPOR I would be looking for somewhere I would be happy living for the rest of my life.