Newbie Question - Sell PPOR or Convert to IP

[COLJP]

Was all on track a few months ago to venture into investment property when my investment partner (then de-facto) and I went our separate ways. I have since bought her share of the PPOR so now will be going it alone with IP’s.

I am seeking advice on how to begin with my new circumstances.

PPOR (3br house w. pool) is valued at $460k. On that basis I now have $110k equity in it after paying out ex’s share. (About 24% equity, and a $350k P&I loan)

PPOR is too big for just me to live in and I’m not too keen on the upkeep – yard, pool, palm fronds etc.

To get into IP’s was thinking of selling the PPOR and buying something smaller, e.g. unit or smaller house then using increased equity in new place to fund IP.

Does that sound like a good idea? Am open to suggestions on this idea and any other ideas anyone may be able to suggest.

Or maybe it would be better to convert PPOR to an IP? (probably covered in other threads but not sure how to do the PPOR conversion thing).

Hope this isn’t too vague a question. Any food for thought is very welcome.

Christmas Cheers, Col

 

[Lil Skater]

Hi Col.

I'd be keeping PPOR, change it to IP1.

Buy unit as PPOR or rent and buy another property as IP2 if you have the funds.

Silly to sell, to get into investing.

Conversion is nothing, you move out, hire a PM if this is best for you, or manage yourself..As for this i'd be talking to someone more experienced, or has done this before. Not sure how self management goes at this stage.

But i'm sure if you do a search you will find plenty on PMs and self management, also anything you may need for your first IP, these threads go back years!

 

[skater]

To sell and then buy again you will incur a huge amount of costs, dwindling that $110k equity down substantially. This home must have some redeeming features for you to have bought it originally. If you keep the property you can lease it out for up to 6 years and still have it classed as your PPOR if you sell. This means no CGT. Also, a lot of things can change in 6 years. Who knows you might have a new relationship where a nice big house would be exactly what you need. You might even have kids before then. If I was in the same situation this is what I would do:

Change the loan on the property to IO and have an offset setup against it. Put all spare funds into the offset. This will have the same net effect as paying down the loan, but will keep the loan balance high, should you want to use some of the savings for non-investment purposes.

Interview PM's. Get a rental appraisal on the property. See what the demand is in the area. Ask about pool upkeep. A pool isn't ideal for an IP, but they can be managed. In fact we have one IP with a pool which was going to be our PPOR, but became an IP by default and has had great tenants ever since we bought it.

Find out if there is anything that needs to be done to make it tenant ready. For instance, does the gate for the pool swing shut? Do you have smoke detectors? The PM should be able to advise if there is anything that needs to be done.

Next, go rent somewhere small for yourself, knowing that you have a nice quality home out there with tenants paying it off for you. Your interest on the loan is tax deductable, so in any maintenance, insurance, PM fees etc. You have up to 6 years to decide if you want to keep or sell it. If you want to keep it, and still declare it as your PPOR, then all you have to do is move back for a while. You can do the whole 6 year thing all over again if you wish.

 

[HandyAndy888]

Yep, keep PPOR converted to IP and buy yourself a small unit. It's what makes sense (to me...).

 

[COLJP]

Thanks for all the advice. Plenty of food for thought and a lot of calculating ahead of me.

Probably more sensible to keep PPOR to avoid losing a big chunk of money in moving expenses and then convert PPOR to IP.

Main problem is that my 20% or more of equity in PPOR cannot be reduced without attracting LMI so am assuming that to buy another property to live in I will have to save for another deposit since that 20% is effectively locked up?

Regards, Col

 

[skater]

Main problem is that my 20% or more of equity in PPOR cannot be reduced without attracting LMI so am assuming that to buy another property to live in I will have to save for another deposit since that 20% is effectively locked up?

So rent for the time being, and save up using an offset account. This way you reduce your interest on your loan, but you can withdraw at any time.

Say you get $350pw for your house, but you pay $200pw rent, you will be better off to the tune of $150pw, straight up. Then, because your mortgage is now tax-deductable, you gain there too.

 

[HandyAndy888]

Probably more sensible to keep PPOR to avoid losing a big chunk of money in moving expenses and then convert PPOR to IP.

Regards, Col

How did you come to this conclusion???

 

[COLJP]

Hi Andy,

Don't want to sell PPOR and pay agent's commission and all that. Would be great to buy a unit to live in but problem is that 20% of my 23% equity or so is locked up to avoid LMI, so I will need to save for deposit for IP.

Skater's suggestion that I move out and rent to make PPOR loan tax deductible while saving is also a possibility. I was silly enough when I recently re-financed not to get an offset acct though. My current variable rate with ING is 5.92% but if I switch to an offset product with them the rate goes up to around 6.22%. My MB is pretty switched on regarding IPs I think so I'll be having a chat to him in new year too. Meantime will to do some further reading to improve my knowledge. Hope I've got this all correct.