New Investor

Hi,

I was hoping for some advice about my current plans. My wife and I currently own a 2 bed unit in Erskineville (Sydney) which has a market value of 800-850k. We purchased the property 2 years ago for 595K. We are currently looking at using this equity to purchase an IP with the intent of turning it into a PPOR in 2 years (put the saved money in the offset account of the unit while we live there with the intention to pay down the mortgage on the new PPOR when we move in)

The new IP/PPOR will be around the 1.4-1.5 mil mark. We have 280K of equity accessable (already available as a second mortgage to use as a deposit, we would pay this off first) and a current mortgage on the unit of 270k.

Now my question is, what to do with the current 2 bed unit when we move? Is it better to sell it and take the CG and reinvest into other IP's in other capital cities? I have come up with 2 options however I am unsure which one of them is the best:

1. Keep current unit as a positively geared IP (larger non-deductiable mortgage on new PPOR). Then use available equity in unit to purchase new IP's as we are able
2. Sell current unit and pay down new PPOR mortgage then use this equity to purchase IP's in different states (smaller non-deductable mortgage on PPOR)

The only downside to 2 is that the current apartment is in a prime location and will be very easy to rent and I believe even with a market downturn will retain good long term CG prospects. Also the idea of a property that pays for itself appeals to me as my end goal is to have a passive income from positively geared properties of around 100k in current dollars. I should mention that the unit is in my wife's name (lower income) and our combined income is around 300k a year.

Are there any options I haven't thought about or can anyone offer any advice with regards to our situation?

Cheers and thanks in advance
 
Welcome.

I like option 1. Although option 2 gives you a CGT free profit, as you say that will give up a property with good prospects.

If the long term goal is to have a passive income of $100k, then you would also need to purchase some more investment properties. You may find this best done before you move into the new PPOR with all that new non deductible debt.
 
It is just a matter of doing the sums and working out what it will cost you to sell and rebuy a replacement and how much non deductible interest you could save. Work out how long it will take to make your money back and then assess if it is worthwhile.

Pity you didn't own the current place in just 1 name. This would have allowed the other spouse to buy 50% and borrow to do so and thereby increase the deductible loan when renting out. No stamp duty or CGT.

Maybe keep this in mind for the next one.
 
Thanks for the replies guys, nice to know that i'm thinking along the correct lines. With option one I was planning on purchasing 1 or 2 more IP's prior to moving into the new PPOR as we unlock additional equity in the current unit. Then the plan is once the new PPOR loan is down to a reasonable level, move in there and continue to draw equity out of the inital property as we are able to continue to expand our portfolio.. Does this sound like a reasonable plan?
 
Hi Terry_w,

The current place is only in my wife's name. The next property will be in both names as we will require both incomes to get the loan. How would I go about purchasing 50% of the current PPOR? I take it this is something our mortgage broker could assist us with?

Cheers
 
Hi Terry_w,

The current place is only in my wife's name. The next property will be in both names as we will require both incomes to get the loan. How would I go about purchasing 50% of the current PPOR? I take it this is something our mortgage broker could assist us with?

Cheers

Wow, lucky ducky. You need tax and legal advice. Broker would need to get you the pre-approval first perhaps. You would buy her 50% share she would use the money received to pay off 50% of her loan and the rest in the savings account. You borrow 101% of the value of her 50%.
 
So basically it works like this:

800000 property value

50% = 400000

current loan 270k (wife name)

borrow 400k to buy 50% of property - pay off half the loan

270000/2 = 135000

400000-135000 = 265000 in savings account

New total loan against property

135000 + 400000 = 535000 (67% LVR)
 
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