"Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

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From: Julie Villani


Hello all,

First time post - enjoying the variety of information shared generously on these boards.

Husband and I (self employed - he milk bar/cafe, me medical typing service home based) have PPOR worth approx 550-600K (150K loan) in Prahran, Melbourne.

There is a Duplex 4 sale(650K) in the local area. Our idea is sell PPOR and purchase Duplex, live in bottom level which has a garden and 2 BRs, and rent out top level for around $300.00 p.w. (3 BRs no garden). The property needs work - painting, floorboard polishing, etc. Further enhancements could be made to exterior, rendering, landscaping.

The painting and floorboard polishing would need to be done prior to us taking up residence (mould on downstairs ceilings - old dusty carpets - our teens have asthma). Top level would need these improvements also - but our understanding is that if the improvements are carried out before tenanted they are not claimable as expenses but are treated as improvements to property. If we wait until tenants are in place they would then be considered maintenance? Is this correct as we can probably overcome this by renting to our 18 year olds' friends short term.

Currently it costs us $285.00 p.w. to stay in PPOR. All of the loan on the duplex would be attributable to the rented out top level and we would be about $20.00 out of pocket a week. In effect, this move would allow us to use our disposable income (the $285.00 we used to pay on PPOR) to renovate, purchase further IPs, etc.

Question is the duplex has been on the market for about six weeks (Private sale). Apparently highest offer of 635,000 rejected by owner.

Are we missing something.

Would this be a wise decision, i.e. downgrade living to free up money available.

P.S. the Duplex has only one small car space - with no way of adding further parking. Also, Council has approved subdivision of property, so upper and lower level have separate titles (this still needs to be lodged with Titles Office, which I have been told can be done within 2 years).

I would really appreciate your help. Be gentle, though, extremely green newbie.

ozgal
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1
From: Ian Findlay


Instead of selling PPOR, why don't you convert it to a LOC (line of credit
loan). Then with draw the excess equity ($450k $600-150) and use this as a
substantial deposit on the duplex. Move into the duplex as you suggest and
rent out your current house and the top units?

Should be pretty easy to do . .getting a loan should be easy even for self
employed as long as you have a sizeable enough deposit - am I correct here
Rolf?

It would be worthwhile to have a chat to our resident mortgage broker
uru - Rolf.

Ian

----- Original Message -----
From: "propertyforum Listmanager" <listmanager@bne003w.webcentral.com.au>
To: <Recipients of 'propertyforum' suppressed>
Sent: Thursday, May 16, 2002 11:18 AM
Subject: Sell PPOR to buy Duplex (Live in 1, rent 1 out)


> From: "Julie Villani" <medipro@bigpond.net.au>
>
> Hello all,
>
> First time post - enjoying the variety of information shared generously on
these boards.
>
> Husband and I (self employed - he milk bar/cafe, me medical typing service
home based) have PPOR worth approx 550-600K (150K loan) in Prahran,
Melbourne.
>
> There is a Duplex 4 sale(650K) in the local area. Our idea is sell PPOR
and purchase Duplex, live in bottom level which has a garden and 2 BRs, and
rent out top level for around $300.00 p.w. (3 BRs no garden). The property
needs work - painting, floorboard polishing, etc. Further enhancements
could be made to exterior, rendering, landscaping.
>
> The painting and floorboard polishing would need to be done prior to us
taking up residence (mould on downstairs ceilings - old dusty carpets - our
teens have asthma). Top level would need these improvements also - but our
understanding is that if the improvements are carried out before tenanted
they are not claimable as expenses but are treated as improvements to
property. If we wait until tenants are in place they would then be
considered maintenance? Is this correct as we can probably overcome this by
renting to our 18 year olds' friends short term.
>
> Currently it costs us $285.00 p.w. to stay in PPOR. All of the loan on
the duplex would be attributable to the rented out top level and we would be
about $20.00 out of pocket a week. In effect, this move would allow us to
use our disposable income (the $285.00 we used to pay on PPOR) to renovate,
purchase further IPs, etc.
>
> Question is the duplex has been on the market for about six weeks (Private
sale). Apparently highest offer of 635,000 rejected by owner.
>
> Are we missing something.
>
> Would this be a wise decision, i.e. downgrade living to free up money
available.
>
> P.S. the Duplex has only one small car space - with no way of adding
further parking. Also, Council has approved subdivision of property, so
upper and lower level have separate titles (this still needs to be lodged
with Titles Office, which I have been told can be done within 2 years).
>
> I would really appreciate your help. Be gentle, though, extremely green
newbie.
>
> ozgal
>
>
>
> To reply: mailto:propertyforum.40324@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1
From: Julie Villani


Hi Ian,

Thanks for your suggestion. So, if I understand correctly this would be our position.

Convert PPOR to LOC (if valued at 600K) less $150K loan = 450K equity.

Use this 450K equity as deposit on Duplex (650K & 35K stamp duty [grrrrrr]) 685-450K = 235K shortfall (further loan?).

Rent out top of Duplex = 300.00 p.w.
Rent our current home = 420.00 p.w.

Total income 720.00 p.w.

Further loan, say 7%, 235K = 316 p.w.
LOC at, say, 7%, 450K = 605.00 p.w.

so, Cost 921.00 p.w.
Income 720.00 p.w.

Shortfall 201.00 p.w.

Mmm....paying 201.00 p.w. is still better than our current situation of paying $285.00 p.w. on PPOR with no investment property holdings.

Are my rough calculations above correct? Also, I am a little confused as to what would happen to the Capital Gains tax free on our PPOR with this scenario.

Would love to hear your further comments if you can bear with me. Also, if Rolf is available to comment that would be a great help as I get really confused once I get too deep into maths (!!).

ozgal
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1
From: Ian Findlay


Hi Julie,

Comments in blue below.


Thanks for your suggestion. So, if I understand correctly this would be our
position.

Convert PPOR to LOC (if valued at 600K) less $150K loan = 450K equity.

Total borrowing on a LOC would be 80% of value of house i.e $480k (80% of
$600). Of this $480k, you already owe $150, this leaves $330k available
equity.


Use this 450K equity as deposit on Duplex (650K & 35K stamp duty [grrrrrr])
685-450K = 235K shortfall (further loan?).

Yes except $330k. $685-330=$355 shortfall which you get loan for.
You would have 2 loans, one for the $355 (duplex) and other for $480.
Total assets $650 (duplex) and $600 (home) = $1.25 million, total loan
$480+355=$835k

Rent out top of Duplex = 300.00 p.w.
Rent our current home = 420.00 p.w.

These are very poor rents - are you sure thats all you would get for that
value of properties.

Total income 720.00 p.w.

Ok lets accept those for now.

Further loan, say 7%, 235K = 316 p.w.
LOC at, say, 7%, 450K = 605.00 p.w.
You have missed out the $150k you already owe

Two loans = $835k of which $150k is your PPOR.
Investment loan of $685 @ 7% = $922 per week cost

This $922 per week is tax deductible against rental income of course so
isn't anywhere as high as this, say $700 per week depending on your tax,
depreciations etc.

Total weekly cost is $700+202 (for the $150k you owe)=$902


so, Cost 921.00 p.w. $902
Income 720.00 p.w. $720 (which I still think is very low
rent)

Shortfall 201.00 p.w. $182

Mmm....paying 201.00 p.w. is still better than our current situation of
paying $285.00 p.w. on PPOR with no investment property holdings.

So you will end up paying less whilst doubling your investment portfolio. Of
course these figures are very rough but they do give you an idea. One reason
why people like property so much!

Are my rough calculations above correct? Also, I am a little confused as to
what would happen to the Capital Gains tax free on our PPOR with this
scenario.

See above re calculations - hope I've done them right!. Re CGT, my
understanding is that CGT will start from the time your PPOR becomes an IP.

Would love to hear your further comments if you can bear with me. Also, if
Rolf is available to comment that would be a great help as I get really
confused once I get too deep into maths (!!).

Me too, the general principles above should give you an idea - if I've done
my sums right! Rolf is the right man for the job.

ozgal
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1
From: Ian Findlay


Sorry, but the blue text doesn't seem to have worked!
Anyway I've emailed Julie privately off forum so the blue should be on this
post!

Ian
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1
From: Always Learning


You say.<p>

All of the loan on the duplex would be attributable to the rented out top level and we would be about $20.00 out of pocket a week.
<p>

And you say that the council has only approved the strata titling of the duplex.

<p>
Just my imagination but maybe the ATO wont see 100% of the loan to be attributed to the upper part of the duplex, since at this time of purchase the duplex is one title (correct?). I would guess that the ATO would expect that only a 50% proportion of interest and other expenses the duplex could be allowed as a taxable deduction.
<p>
Once you complete the transfer to strata title I guess again that the tax office wont look favorably you claiming 100% of the interest because you have migrated 100% of the loan to one unit whilst you then live in the "mortgage free" unit. Maybe if the strata title was completed prior to transfer then this would work.
<p>
If you don't go with keeping your current PPOR as suggested. One possible solution is to hold as much as you can in a mortgage offset account ( this is quite different to a mortgage redraw facility for the ATO) until the strata titling is completed. After strata titling is completed simply refinance, dumping all the offset account money into paying off YOUR unit.
<p>

Maybe it's not the best financial move sometimes, but I think most people feel a glowing ring of confidence upon owning outright their PPOR. Owning their PPOR for many gives them confidence to take up a more aggressive IP investment strategy. I know this is just a mind game (mind set), and that financial unemotional reality suggest otherwise, but clearly investing is as much a mind-set/mind-game as it is a financial, legal and technical process.

<p>
e.g. If you sell your current PPOR for 560K, mortgage 150K, costs 10K you will have 400K cash. Get uncle Rolf to organize a 90% no LMI loan for the duplex. Thus you will need to use only 65K of the 400K, place the remaining 335K into an offset account. After strata title is complete, then refinance, I think you you can realistically place 335K and 50% of 65K (32.5K) = 367.5K into your PPOR, which given other costs should be enough to hold the property outright. Even with spending several thousand on fixing it up and strata title fees, I think you will be ahead financially. However I agree with the others that if you both feel comfortable and can sleep at night given the "debt", I would go for the option of not selling your PPOR. Sit down with an accountant and discuss ways to maximize the income and minimize the tax!
<p>
Of course if anyone (eg Dale) can offer differing and better opinions/options on this then accept my preemptive apology.
 
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"RE: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1.1
From: Duncan M


Always_Learning,

Where does one get a no LMI 90% Loan?

Regards,

Duncan.
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1.2
From: Julie Villani


Hi,

Thanks for your post. To the best of my knowledge the property has been granted subdivision by Council (it has been approved and a permit given). Council told me it just needs to be lodged with Titles Office (would definitely get this done before settlement).

Pardon my ignorance but what the heck is a no LMI 90% loan? (Our current PPOR is nearing the end of the first five years which have been fixed at 7.75% - hubby had a change of job at the time of purchase so we needed to fix the interest to be on the safe side). We need to change the loan one way or another in August.

Hubby and I are reluctant to sell PPOR but were not aware of other options. Also, since my original post the Real Estate Agent has told me the owner is sitting tight on the duplex and now wants 675K (a week ago the REA said 650K would clinch the deal)!

Think the owner is prepared to sit back and wait until someone pays his asking price. There have been a few interested parties to date who have put in written offers (635K the highest I know of).

In addition to the equity in our PPOR we have access to about 40K cash.

Anyway, in no hurry to rush into anything. Would rather take time to make proper decision.


ozgal
 
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"RE: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1.1.1
From: Always Learning


I have not got a 90% no LMI loan (yet). But from memory (excuse me if my memory is incorrect) I remember Rolf suggesting that this was possible. Rolf is conspicuous by his absence today!
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1.2.1
From: Always Learning


Sorry, a 90% no LMI loan is :
A loan for 90% of value of the property. Generally lenders want you to pay for an insurance policy to protect them against you defaulting. This is known as Lenders Mortgage Insurance, LMI. The higher the LVA (loan amount to property valuation) the higher the insurance cost. I guess a typical non-bank lender such as Aussie or RAM's would want heaps of cash for a 90% LMI on a 650K property. However I have the understanding it may be possible that some lenders may waive the LMI on 90% lends in some cases. Maybe Rolf can help, I am not sure about it if you and your husband are not part of the salaried workers rat race.
<p>
Do what I do, just keep smiling and asking questions!
 
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Reply: 2
From: Rolf Latham


Hi OG

I will leave the tax issues to the tax experts - not touching that part of it.

I am assuming the the taxable incomes are not huge. If you have a solid CRAA (credit file) with less than 6 enquiries in the last 12 months, and the majority of the loan is for investment purposes you can get a LOC on your exist place up to say 350 000 (split into 150 and 200) to pay out the exist loan and provide a deposit + costs of say 200 k for the new place.

Then get a 75 % loan for the new place at around the 6 % mark.

Dont know if it all makes financial sense because youd be geared to the teeth, but if holding a maximum property porfolio is your aim then that is one way to go.

Ps all the above are No or Lo doc loan structures.

Ta

Rolf
 
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"Re: Sell PPOR to buy Duplex (Live in 1, rent 1 out)"

Reply: 1.1.1.1.1.2.1.1
From: Julie Villani


Thanks mightily for clearing up the LMI abbreviation....duh....(smacking side of head).

Rolf has also replied in next post...so will mull things over for a while.

ozgal
 
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Reply: 2.1
From: Julie Villani


Hi Rolf,

Am trying to absorb the info....brain a little tired after day of traversing the boards.

Here goes, though.

You are right - taxable income not high.

LOC taken out on PPOR, say, 350K, and 150K used to pay out current loan, with the 200K balance used as deposit on Duplex...at this point I start to lose track of borrowings, but will try.

LOC loan:350K (150 - PPOR loan, 200 - Duplex)
Loan 450K: balance of loan required on Duplex


Total loans 800K

Own funds of 40K to be used for stamp duty, costs.

800K @7% p.a. = 56K

Income (Duplex) = 350 x 52 = 18,200.00
Income (Current PPOR) 450 x 52 = 23,400

total income: 41,600.

14,400 shortfall (276 p.w.).

Combined property value would now be 1.25 million rather than our current 600,000 with us still paying out around the same money
we do now, i.e. 285.00 pw at current PPOR).

Food for thought...

Have I done my sums correctly?

Also, I have not taken into account any tax benefits the above would provide so end result would be better. Plus rental figures above might be a bit high, but just wanted to test the scenario.

Also, as Duplex has subdivision in place would prefer to purchase bottom of duplex (which would become PPOR) outright (i.e. say half duplex prop value of 325K) and put 25K towards top of duplex for negative gearing/tax benefits).

ozgal
 
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