PPOR to IP

Hi all,
have lurked a little on and off for a while, but I now have a question that I'd like to start learning more about.

We are going to see an accountant/financial planner, but in the mean time, I wanted to gauge if anyone can offer any advice to our current situation.

We are paying off our PPOR, which we built in 2008/9, and currently have a loan of ~$352K for. The house was valued in April at $450K (4/2/2 in Darra, Brisbane). Our mortgage is around $440 a week (we pay $600 comfortably), an real estate says that we would get $400-440 a week in rent for the house. The house is newish, so not anticipating any large repair bills in the near future (although will plan for it).

I am studying as well as working full time in a reasonable paying, secure job, with lots of future potential to increase my income. My job will be moving to Brendale on the north-side soon, and rather than commute the whole way across town 50mins each way, the wife and I have thought about renting out our PPOR as an IP, and renting a house closer to where my work is (Enoggera/Mitchelton/Gaythorne/Ferny Hills etc area). The wife works in the city, so the train line and walking distance to it is a must (currently catches the train from darra - 20mins express or 30 mins non express). Would prefer no further than we currently are out (so around 30 mins on the train is OK).

Our combined income is around $130K, and aside from the house and a modest new car, we have no other debts. We are NOT selling the car as we need family sized reliable transport (I ride a motorcycle which I own outright to and from work). We dont chop cars in often, and will keep this one till it dies.

So hopefully thats enough background, but my question is - Currently the loan on the PPOR is a P&I loan, which i'm happy to keep paying at the rate that it currently is. From what I understand, only the Interest portion is tax deductible (which is practically all of it anyway). A friend has said because our house is ~5 (almost 6) years old, we could probably claim depreciation of that as well.

We dont want to spend more than 450-500/week rent (same as current loan) - do you think this would be a worthwhile move financially/tax wise? This house was always built with being an IP in mind (not our dream house). As I'm getting older (currently 35) i'm conscious of building a decent portfolio of assets (I want to start shares as well) spread across a range of markets to minimise risk (currently paying a little extra into super also). I have never stayed in a house this long before, so am happy to move, despite loving the western suburbs as a place to live (with young kids - convenience to amenities is great!).

So what are the major things I need to look for (as a complete noob) and what can I do to maximise my tax benefits? Due to studying, I pay a very large amount of tax just on my income ($~30K) so any way to reducing the taxable income would be great! Any tax return money I get would likely be put either into the house offset, or into shares to help grow our wealth.
 
Change loan to interest only and stop paying it down ASAP and any extra cash just sit in the offset account. This will help maximise your tax deductions when it turns into and IP.
 
Thanks for the quick reply!

Forgot to mention as well, earlier this year we fixed our loan for 3yrs (with CUA) as our original loan was a rubbish interest rate. Will that affect changing it to a IO loan?
 
Change loan to interest only and stop paying it down ASAP and any extra cash just sit in the offset account. This will help maximise your tax deductions when it turns into and IP.

DO THIS GREAT ADVICE I WISH I HAD KNOWN EARLIER. I payed my PPOR down to $140K from $452K it changed into an IP when I still owed $390K on it or I can say is im a blooming friggen idiot but I have learnt my lesson now.
 
Luckily, we only just refinanced, so we owe 352k, off a 359.5k loan (with ~5k redraw since April, plus offset).

Will talk to the bank about changed to io and will stop the extra payments.

Trying to find a decent financial planner and accountant. The
 
As far as I know, you are currently stuck with your fixed loan. In my experience it isn't worth the break fees to muck with it. However do contact your bank and ask them outright: Will it cost me anything to change it now to Interest only?

Even if it is too costly to change over, you can still get your accountant to claim the interest part in your tax returns once it becomes an IP. The interest charged will be shown on your statements. In the greater scheme of things, it wont make much difference. Paying a little bit off your principal (P and I loan)cannot hurt you. Just keep your spare cash in an offset account rather than decreasing the principal.

I think renting where your wife can get to the train line is an excellent idea. But don't take my word, I'm sure there will be many more comments after mine. The train from Strathpine to the city is 30 minutes express, so don't discount a house in Bray Park or Strathpine. They are currently much cheaper to buy compared to Mitchelton and Enoggera, if you consider buying in the future.

Any suburb along the Ferny Grove line will offer a family-friendly place to live, with good schools and shopping centres.
 
DO THIS GREAT ADVICE I WISH I HAD KNOWN EARLIER. I payed my PPOR down to $140K from $452K it changed into an IP when I still owed $390K on it or I can say is im a blooming friggen idiot but I have learnt my lesson now.

Not meaning to be mean, but to show others - this is probably costing Brocky someting like $15,600 in lost tax deductions each year for 20+ years ($312,000 x 5%).
 
Not meaning to be mean, but to show others - this is probably costing Brocky someting like $15,600 in lost tax deductions each year for 20+ years ($312,000 x 5%).

Yeh thanks Mate :D:D You just made my day..... I hope others just dont make the same mistakes....... boy I wish I found this forum earlier anyway better late than never
 
Thanks for the replies!

Will have to find out about the interest only. I kinda figured that due to fixed loan, we wouldn't be able to change it (and we are seeking to minimise costs here).

A side question.... Is it better to hold off on a few improvements (repair a fence, improve the yard etc) for when it is available for rent? My understanding is that I would be able to claim that directly this year if I did that.

Strathpine and bray park are a little too far north for us. We aren't planning on buying on the north side, just renting there.
 
Just be aware that repairs and improvements are treated differently.
e.g. You can't wait until a tenant moves in then fully renovate the bathroom and claim it as a repair.

However, it is probably a good idea if something is getting old but replacing it wont improve the rental return, to wait until it breaks while tenanted to have it repaired.
 
From the entrepreneurial perspective, & maybe a bit more big picture.

Get this advice from your accountant...listen to him about the but make your own business decisions. Then set up your structure so you reduce the amount of tax you pay.

Specifically I would weigh the cost of breaking the load, and freeing up the cash flow. Negotiate hard with he bank and they will wave some fees, especially if you are increasing the loan. Also get competitive quotes, other banks will buy your business buy paying the fees.

Don't have a home loan. Rent, or own your home in a company or trust and rent rom your own company, or trust with a corporate trustee.

Don't pay tax...it's a religion

Buy more property, but do it intelligently. ir Build a new house land package so it has instant equity when you finish, then decide to hold or sell. Long term is more money in holding. Just get on to the land developer, pick a lot in the next stage , regular shape, culdesac or near a park, good frontage and buy the land, then get a builder to build the house. You will have instant equity and positive cash flow.

You first and you make the rules!

Tax advise comes from the accountant, not the forum!
 
Yes, Financial planner and accountant will be consulted. Bouncing an idea here first to make sure it makes sense before seeing them.

Building doesnt always guarantee equity straight up, but if the right choices are made (like all house decisions) then gains can be had.

Thanks everyone for replying, i'm sure i'll have loads more questions in the time to come.
 
Thanks for the quick reply!

Forgot to mention as well, earlier this year we fixed our loan for 3yrs (with CUA) as our original loan was a rubbish interest rate. Will that affect changing it to a IO loan?

No worries :) It's unlikely. Though, I don't know CUA's policies as it's a lender not on my panel, best to give them a call to see what they say.

Building doesnt always guarantee equity straight up, but if the right choices are made (like all house decisions) then gains can be had.

Correct. But are the gains from the growth of the suburb or from building itself....
 
To jerry
Enough of the sales pitches. How many new estates are there in Brisbane within half an hour's walk and train journey to the CBD? Where are they all?

How does this help a person asking about renting, anyway
 
Angel,

This person has a huge tax problem. Reducing tax to zero takes a strategy and a bit of know how. I think renting is the minor issue here.

Also they have excess income capacity to utilise and well as tax he is paying the government he can use toward an investment.

I would want to quantify that with my accountant and see how much excess capacity to afford a property investment. Also get advise on which structures will help reduce tax and give asset protection

Check on what loans they can get approval for.

Then research areas where there is potential for capital growth based on infrastructure growth, business growth, transport. Seek property analysts advise, and real estate professionals.

Then seek opportunities in those areas that match there investment criteria and affordability. Use real estate professionals.

The window of opportunity with low interest rates and low post GFC prices will not remain open forever. Early and immediate capital gains are available for those who who follow a disciplined approach and invest with their heads, not their hearts.

I see a person turing their PPOR into an IP as a person thinking about their future in an intelligent way. Once they get started they will never look back!

Cheers,

Jerry Parker
 
Just an update - Meeting with accountant& financial planner friday.

Based on schools, we're going to move in closer. Specifically targeting Ashgrove/Bardon area as there is 5-6 excellent state schools there (one is right at the top of the state! Rainworth for those interested.)

Happy to have a 3/1/1 if it means getting our kids into an excellent school, and location wise, the area suits my wife very well (5 k to city) and me OK (around 25-30 mins to Brendale, but against traffic).

Have cancelled the extra payments to the loan, and will just leave the money in the offset. From what I gather, redrawing the money wont help will it? We have around $5K in redraw available right now. Original loan was for $359K - if I can redraw the money out and leave it in the offset, but claim the additional interest money i'd be happy.

At this stage, if the sums add up, the plan is rent PPOR out, move to a rental ($450 a week looks do-able) then assess capacity for further investment. I may start with a small loan ($20-50K) for shares or look for another IP.
 
A side question.... Is it better to hold off on a few improvements (repair a fence, improve the yard etc) for when it is available for rent? My understanding is that I would be able to claim that directly this year if I did that.

Such expenditure will be claimed at 2.5% pa over a 40 year period... and includes things like painting ... called capital works.
 
But if it's a repair while tennanted, then that's claimable straight away?

The house is only 6 yrs old so minor repairs only are required.
 
Original loan was for $359K - if I can redraw the money out and leave it in the offset, but claim the additional interest money i'd be happy.

I would be happy if I could claim underpants as a deduction - but it doesn't relate to the production of income, same as you borrowing $5k to park in an offset.
 
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