Renovation and IP Finance Options - Help!

[dwnlh]

Hi All,

First time poster here - I've been browsing the forums for the last year or so, but am now at the point where I'm hoping to benefit from more specific advice from all of you!

Current situation is as follows:

1) PPOR - owned outright. Purchased three years ago for $385k, current value ~$440k

2) Cash Savings - sitting in savings account, value ~$200k

Over the next few months, looking to achieve the following:

1) Significant renovations/extensions to the PPOR - love the area, house is too small. DA approval for the work obtained, currently getting quotes from builders. Cost likely to be ~$250k. Extensions will likely involve moving out of the PPOR for 6 months. Note that cash savings by completion will have probably increased by around $50k.

2) Moving out of PPOR presents a timely opportunity to purchase an IP - to live in whilst extensions are completed, and then rent out. Looking at spending around $400k on the IP.

My understanding of the most suitable options is:

Option A - Borrow the full cost of the extensions and 20% deposit for the IP from equity of PPOR. For example, borrow $340k from PPOR equity, spend $250k on extensions, $90k on 20% deposit for IP. Then transfer cash savings to offset account against this loan to minimise non-deductible debt.

Is the $90k borrowed against the PPOR to fund the IP deposit in this case classed as tax-deductible debt? It is my understanding that it is, as the purpose of that component of the debt is to purchase the IP.

Option B - Pay 5% deposit and buying costs on IP out of cash savings and take the hit with LMI. Then borrow the difference between leftover cash and cost of extensions to fund the extensions. For example pay $20k deposit on IP from cash, borrow $70k for extensions against PPOR and use cash for the rest, and borrow $380k against IP for IP.

Option C - Would I perhaps be better buying the IP, putting a tenant in immediately, and renting for 6 months whilst the extensions are completed?

Would greatly appreciate any suggestions/advice.

Thanks!

dwnlh

 

[Aaron_C]

a) Sounds good
b) OK in theory but I would question the need for this because you have so much cash and a low LVR already you don't need to go 95% lends.
c) This is your call but personally I wouldn't bother

 

[dwnlh]

Thanks - I also think Option A looks best.

I particularly like that I could draw back down on the equity easily enough to fund additional IPs...

Appreciate your input.

dwnlh

 

[Terry_w]

Option A - Borrow the full cost of the extensions and 20% deposit for the IP from equity of PPOR. For example, borrow $340k from PPOR equity, spend $250k on extensions, $90k on 20% deposit for IP. Then transfer cash savings to offset account against this loan to minimise non-deductible debt.

Is the $90k borrowed against the PPOR to fund the IP deposit in this case classed as tax-deductible debt? It is my understanding that it is, as the purpose of that component of the debt is to purchase the IP.

Option B - Pay 5% deposit and buying costs on IP out of cash savings and take the hit with LMI. Then borrow the difference between leftover cash and cost of extensions to fund the extensions. For example pay $20k deposit on IP from cash, borrow $70k for extensions against PPOR and use cash for the rest, and borrow $380k against IP for IP.

Option C - Would I perhaps be better buying the IP, putting a tenant in immediately, and renting for 6 months whilst the extensions are completed?

Would greatly appreciate any suggestions/advice.

Thanks!

dwnlh

Option A
Borrow deposit and costs for IP in a separate split from the reno part. Deposit and costs loan should be fully deductible, or interest part of it, if set up right. Don't mix these loans.

Option B
You have plenty of equity so why waste money on LMI and deposits - this may cost you tax if you end up with a bigger loan for reno.

Option C
Where would you live during this time?

 

[dwnlh]

Thanks Terry - great point about not mixing the loans.

I should have been more clear for Option C - what I meant was that I could rent somewhere different altogether, whilst the extensions are completed and with a tenant in the IP...

 

[Terry_w]

Thanks Terry - great point about not mixing the loans.

I should have been more clear for Option C - what I meant was that I could rent somewhere different altogether, whilst the extensions are completed and with a tenant in the IP...

2 advantages with living in the IP first

1. You can fix it up a bit, and
2. You could later decide to claim this as the main residence and rely on the 6 year rule to keep it exempt from CGT for a while. This property may end up with greater gains than the other.

 

[dwnlh]

Agreed. The intention was to find a place that needed a little work, and get that work done in the 6 months we lived in there to ensure maximum rental return.

Will have to look more into the 6 year rule - sounds like it could be useful.

Thanks again...