Need a practical advice (sell PPOR to buy IPs ?)

Need a practical advice

Hi,

I just wanted some practical advice from more experienced investors.


The current situation:
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My wife and I own a four bedroom house on approximately 600 sqm block of land in a good location, close to shopping and transport, and not far from the city. After having done renovation we could get about $200,000 - $230,000 capital gain (no CGT). It’s a good equity but the thing is the house is expensive to maintain – the gas bills are enormous, we have to use the services of a cleaner, garden maintenance, insurance etc. It is also a big liability, we own to the bank about $260,000. The house is the only property we have, we have not bought any IP’s yet.


Possibility:
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I’m thinking of selling the house through auction and then buying a smaller place, maybe a 2/3 bedroom unit. Selling the house would pay out our existing loan and would pay for %50 to %70 of the new place (I would use a loan with redraw facility so that I can always access the cash). That way we would have a almost paid out property and be prepared for the possible property price decrease having enough equity to buy few ips.


So, is it worth doing or should we just keep the house and start buying IP’s? I am not looking for someone to tell me what to do but rather I’m expecting that more experienced person could point out things that I’ve missed, something I should consider etc. I would appreciate any advice.
Thanks in advance.
 
Hi Jerry,

I am not an experienced investor, but I think your issue is as much a lifestyle decision as anything else. If you are happy to live in a unit then you will indeed unlock a lot of your equity, possibly for other purposes such as an IP.

Unfortunately I think doing anything with your PPOR is as much an emotional decision as a financial one.

Just keep in mind that you don't *have* to sell your property in order to get involved with an IP. A Line of Credit up to 80% valuation of your existing home will give you the funds to get into IP investing, without forcing you to sell, but you will pay interest on those funds, which would not happen if you "cashed in".

One strategy I have gleaned from these forums, however, is that if I buy another PPOR I will structure the loan as P&I with 100% offset as opposed to having a redraw facility, or even better Interest Only with offset if the lender would allow it (Rolf suggests it quite rare to obtain this on a PPOR, however).

Why? Because it seems to be the most tax advantageous thing you can do if you ever want to convert your residence into a rental property - you can redraw your funds out of the offset account - the ATO doesn't think you've redrawn funds out of the loan, and you then have the maximum tax-deduction on the PPOR-cum-IP, and the funds in the offset account go towards reducing how much you owe on your new non-tax-deductible PPOR (perhaps into a new offset account).
 
Hi Jerry,

I second what Kevmeister just wrote about using an offset account for your PPOR, preferably IO. I wish I had known this before I bought my home. If you are never intending to move on or upgrade from your PPOR, then I suppose it doesn't matter as much. But no one has a crystal ball and plans change, so it's nice to have more options available to you.

John
 
I am no expert but have you considered renting your PPOR then renting a unit/flat for yourself & partner to live in ?

I am not from Melbourne but I hear that there is an abundance of Units in the city area so you should be able to rent a place at a reasonable price.

Example :-
If you owe $260k on your PPOR, @6%(approximate current interest rate) you are paying about $300/week interest. If you can rent a place for $200 to $250 a week, you should have an extra $50+ in your pocket.

There are obviously more costs and figures to take into consideration but punch the numbers into a spreadsheet.

Cheers,
Will
 
Hi Jerry,

Just another small point I'd like to add: make sure you take into account what your housing needs will be in the near and medium term future. Obvioulsy I don't know your personal circumstances, but I will tell you about a mistake I made. My hubby and I bought our current 3 bed/1 bath house a few years ago and it seemed huge after living in a unit previously. We anticipated the child we now have, but now thinking about baby No 2 the house is feeling VERY small. In only 4 years our circumstances have totally changed and the thought of having to buy and sell is a real pain. Not to mention the huge rise in property prices over the last couple of yrs in Melb, and associated buying and selling costs.

If you think you might need a bigger residence sometime in next few yrs it might be worth hanging on where you are (or at least renting it out). Especially when you can do all the good things suggested above, such as use your equity to fund IPs.

The years roll by very quickly!! Good luck. I would love to know what you end up doing.

Lily
 
G'day Jerry,

Take a look at this thread (from the old forum) - it was posted by someone in a similar situation, and there are a bunch of figures that, if you substitute your own, should help to point you in the direction you want to go.

Keep in mind, in the post (below) the owner DIDN'T want to sell - so the answer is geared toward showing the benefits of KEEPING the property. It DOESN'T go into the COSTS of selling your IP (as he wasn't thinking of doing that anyway).

If you wish to sell, remember to consider the costs involved.

Hope it helps - enjoy,

http://www.somersoft.com/forums/showthread.php?s=&threadid=4702


Regards,
 
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Plan for a change in plans

Lily hit a great point.

Plans change, it's in their nature. Selling your PPOR is a huge step. Many people regret trading down.

Also prices may not correct quickly. In Jan 2001 experienced investors (and me :rolleyes: ) Thought the Sydney market had maxed out. How wrong they were :rolleyes:

Regards

Paul Zag
Dreamspinner
 
Thank you all for your suggestions.

I have not actually considered renting the house out, could be a possibility. The problem is that we have a split loan, 30% is fixed for another 1.3 years and the rest is variable (0.5% less than standard variable, 100% offset with redraw facility), both halves are principal and interest. So if we will be renting it out I may have to convert the variable part to interest only (if possible at all) and wait for the fixed to expire. Will need to do some calculations.
 
Link to old forum

Hi Les,

I could not access that link, it takes me to the login page even if I'm already logged in.
Could you please let me know which forum it is in, the subject and when it was posted so that I can find it in the old forum.
Thank you.

Jerry

Note:- Readers - thanks to Mike's vigilance, the link that is NOW posted DOES work. The old link was to the old forum, while this new link is to the current forum. See the link below (in bold)

Further Note - some following posts still refer to the "I can't access the link" comment - these are now invalid Les



Originally posted by Les
G'day Jerry,

Take a look at this thread (from the old forum) - it was posted by someone in a similar situation, and there are a bunch of figures that, if you substitute your own, should help to point you in the direction you want to go.

Keep in mind, in the post (below) the owner DIDN'T want to sell - so the answer is geared toward showing the benefits of KEEPING the property. It DOESN'T go into the COSTS of selling your IP (as he wasn't thinking of doing that anyway).

If you wish to sell, remember to consider the costs involved.

Hope it helps - enjoy,

http://www.somersoft.com/forums/sho...=&threadid=4702


Regards,
 
Last edited by a moderator:
>I have not actually considered renting the house out, could be a >possibility. The problem is that we have a split loan, 30% is >fixed for another 1.3 years and the rest is variable (0.5% less >than standard variable, 100% offset with redraw facility), both >halves are principal and interest. So if we will be renting it out I >may have to convert the variable part to interest only (if >possible at all) and wait for the fixed to expire. Will need to do >some calculations.

You wouldn't have to change your loan structure. You will find that you are paying mostly interest at the earlier stages of the loan (if you have another 25 to 30 years to run).

You could continue to dump your wages into the 100% offset account and live off your 55 days interest free credit card while renting.
 
Hi Jerry,

I don't know your exact circumstances (ie. income, how large the home should be, etc...), but what I would consider if I were in your situation would be:

Sell the house
1. Rent a place in an area of choice (assuming can afford to do so), as many areas the landlord is only making gross 2-3% of the property value & needs to cover the rates, repairs, etc...
2. Proceeds from the sale of your place can then be invested in your IP portfolio (again structured in a way that best suits your circumstances, ie. weather it is postively geared, neutral, etc...)
3. Structure the loans in a way where minimal of your cash is required & the rest to be in offset accounts in case in the future you decide to purchase a house of your own (ie. rental yields increase & may be cheaper to buy your own home, which I can't see it happening too soon)... A good mortgage broker could assist you with the structure (ie. Rolf)...

Just my 2cents worth...

Cheers,

MannyB.
 
G'day Jerry,

Of course, because I had ALREADY logged onto the old forum, (as I was "chasing" this article), the link worked fine for me.

So, first off, log into the old forum (click on the link, enter your username/password), then go back to the NEW forum and click on the link - it should take you straight there.

But, in case it doesn't - here is the "blow-by-blow" approach:-

The old forum URL is bne003w.server-web.com/~wb013

This should put you into the "username/password" arena.

Then, go to "Apprentice Millionaire Guide", look for "Home Issues" (the very first thread in AMG), and look for #7 thread titled "Renting Own Property Legal?"


Calling Sim

And, just in case, maybe Sim can confirm whether (or not) NEW readers are able to log into the OLD forum (e.g. what if they DON'T HAVE a username/password? Can they still access it?)

Jerry, let me know how you went, won't you?

Regards,
 
Originally posted by Les
G'day Jerry,

Of course, because I had ALREADY logged onto the old forum, (as I was "chasing" this article), the link worked fine for me.

So, first off, log into the old forum (click on the link, enter your username/password), then go back to the NEW forum and click on the link - it should take you straight there.

But, in case it doesn't - here is the "blow-by-blow" approach:-

The old forum URL is bne003w.server-web.com/~wb013

This should put you into the "username/password" arena.

Then, go to "Apprentice Millionaire Guide", look for "Home Issues" (the very first thread in AMG), and look for #7 thread titled "Renting Own Property Legal?"


Calling Sim

And, just in case, maybe Sim can confirm whether (or not) NEW readers are able to log into the OLD forum (e.g. what if they DON'T HAVE a username/password? Can they still access it?)

Jerry, let me know how you went, won't you?

Regards,


Hi Les,

Thanks, I had a look at that thread. I haven't done my calculations yet but I'm more inclined to follow Manny's suggestion:

1. Sell the house
2. Rent a 3 bedroom flat/unit
3. Buy IP... buy more IP ... maybe move in IP, live there for few months (making it our POPR) and sell ... buy more IP ...

Why sell now? here's my reasons:

1. house is a big liability, doesn't really make me any richer
2. I pay a lot of non-tax deductible cash for maintenance and bills (it's a big house remember)
3. the property boom is almost over, even if it's not we'll make a good return
4. it should be easy enough to find a good renal place these days
5. why must I own a house?


Reasons against:

1. not sure if the rental place will have DSL
 
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