Selling up, renting and buying IP.

[AndrewT]

Hi Everyone,

Well it's been almost a year since i have actually been on here, quite disappointing really. Was hoping to have IP no.1 + 2 by now but to no avail. I'm sure I could try and come up with a million reasons but that's not the point of this thread.

Basically, my partner and I are selling up our PPOR. We have lived in it for 2.5 years and owned it for 3. Originally bought it for $345,000 (85% LVR) and with renovations we are now putting it back on the market - which the real estate is confident we should get ~$420,000. Not a bad profit over 3 years but we did spend around the $30-35,000 mark.

Some may say this is alot of hard work for little profit, but I suppose it is profit at least. We learnt hell of a lot about renovating though, mainly how capable we are and how happy we are with the quality of work we can do So I suppose not all is bad when you have gained so much experience!

Currently based out in SW Sydney, we have decided to move into the city to rent. I work in Matraville and my partner works in Padstow, would not be an issue but the fact that I have to drive a work van in every day and experience minimum 3hrs of traffic a day - it's just a killer! A lot of people have already told us the spiel about wasting your money on rent, 'i put up with traffic when I was your age', change careers, etc;.

So we are currently looking at renting an apartment or unit in and around Mascot & Botany and seems to me that rent will be in the vicinity of $500 - $550 a week. I do believe that it is alot of may but will help me move forward in my career and live a happier lifestyle - so worth the money.

Now our issue is, what to do with our money from the house - which we will say is 90k. We do not wish to keep the house and rent, both of us feel our money could be better spent for more profitable property. We have been looking at our options and they seem to be along the lines of:
1) Bank it - sit back and let it grow (I don't mind this idea - but only for a very short term!)
2) Buy a regional property for ~200k with a LVR of 80% and using the rest of the money for another property, or backup funds in an offset account
3) Purchase a unit for ~400k in towards the city with LVR of 80%.
4) Other plans of attack are welcome

I would say that when we do buy again, we are looking for something that is obviously has some capital gains bought into it but mainly something we can rent out for a while (say 1-2years) before having to do any renovations and the rent takes care of the mortgage - at least nearly!

Sorry about the long winded thread, it actually helps you think alot when jotting everything down. Looking forward to seeing some others opinions on the matter because I don't actually have anyone in the family or friends that actually invests at all to discuss matters with.

 

[investor2009]

Hey Andy!

I hope you really do receive $90k from the sale, but in reality the fees will take that down a bit. And thats 'if' you receive the price you're asking. After all this I'd expect you might walk away with $40k or so. Thats $5000 more than the fees you paid to buy it! Not much of a profit if you ask me and depending on how you look at it: whatever you paid in mortgage repayments over this time, you actually go backwards and have lost money.

Are you sure you guys want to sell the PPOR..? I just don't want you to ever regret doing this. Remember: Rent money is dead money, and the best gains we've ever made from any investment has been our own home. You can see why I'm hesitant about this.. Plus, you paid loads of fees to buy it in the first place and what will it be worth in 10 years time? That could leverage you into many, many more options later on. Do what you feel is right, but don't ever regret your decision. If the commute is too far, have you considered using the PPOR as another property investment and purchasing another PPOR? Saves $550p/w and the hastle of renting. Plus, if you sell the PPOR, you waste all the fees you paid buying it in the first place ($35,000?). I think that makes much better financial sense. Also, you ask about positive cashflow investments, chances are your (now) PPOR will achieve a small positive return after tax! So you really have the options you are only currently dreaming about, you just have to 'do' it now. You only get one chance with this, once it's gone it's gone.

You can just refinance some cash out of the PPOR, turn it into an investment, then buy another home. Even if your new home was interest only to save and extra $200p/w, it still beats renting thats for sure because whatever money you pay toward interest over lets say, 10 years, you keep whatever capital growth you receive on the property, and can even turn THAT into an investment and still keep ALL the deductions because you haven't paid it down. In most normal cases you would receive more money than what you paid on interest. Whearas with renting.. You know the drill, there is NO chance of receiving any money back whatsoever.


If you don't mind, what are your goals (financially speaking) over the long term? That will help us give you a better picture. But even then, your current way of thinking will only be taking you backward sorry to say.

 

[Ergophobia]

Why not convert the PPOR to ip 1 and draw down the equity to buy ip 2

Then you have hit your goals

 

[fokas]

Welcome back! Hope you stick around!

Why not convert the PPOR to ip 1 and draw down the equity to buy ip 2

Then you have hit your goals

Or rather, draw down equity to buy your PPOR closer to the city and use the ~$500 you were expecting to pay for rent, towards the mortgage? Not knowing your financial figures, I wouldn't be able to guess whether you'd hit anywhere close to your 'ideal' location, although any reduction of driving 3hours a day would be considered an improvement.

What's that saying...people often overestimate what can be achieved in the short term... but radically underestimate what can be achieved long term.

 

[Ricky]

I am having difficulty understanding where the profit lies in the figures you have posted.
Stamp duty initially paid, settlement costs, set up of mortgage fees, agents selling costs and another lot of settlement costs AND will you "really" achieve the sale figure the agent is suggesting given the current market ??????

I agree with the other posters above.

I would attempt to convert the ppor into an IP.

Sit on that for a while, get a feel/ readjust to your new city life with your new budget, then in 1 or 2 years reconsider a 2nd IP.

Otherwise I feel your strategy is only going backward !

 

[Ajax]

Probably didn't pay stamp duty because of first home owners scheme.

Agree costs will eat this up...real estate agent's commission, bank discharge fees, conveyancing fees etc.

Also any LMI paid on initial loan, loan establishment fees, fixed loan break fees??? etc need to be included in calculations.

 

[Alex P Keaton]

Hi Andrew

I agree with the others. Dont sell your current PPOR, you wont make much out of the deal and in going forward. Convert your ppor into an ip!

An important thing that hasn't been asking in this thread and which should have!

What is your income? How negatively geared do you think it will be. Can you afford it? Do you have a buffer in place??

Can you afford a $400 K mortgage for a new PPOR? There's a heap of expenses that go with owning a ppor and unexpected expenses. Maybe renting could be a better option that is if you want to be closer to the Sydney cbd. If you want to live in close to the cbd I think perhaps renting would be the way to go. If you want to buy then you'll have to move a bit further out so you can afford it.

Also take into account what is most important to you at this stage. Lifestyle of living close to the cbd and less travelling. I think its important to weigh up the pros and cons. Lots of things to take into account.

 

[Alex P Keaton]

I have to drive a work van in every day and experience minimum 3hrs of traffic a day - it's just a killer! A lot of people have already told us the spiel about wasting your money on rent, 'i put up with traffic when I was your age', change careers, etc;.

So we are currently looking at renting an apartment or unit in and around Mascot & Botany and seems to me that rent will be in the vicinity of $500 - $550 a week. I do believe that it is alot of may but will help me move forward in my career and live a happier lifestyle - so worth the money.

How about buying something like this in Botany. You'll have to compromise on size though as its just a 1 bed.

http://www.realestate.com.au/property-unit-nsw-botany-109245956

 

[AndrewT]

Thankyou everyone for the replies!

I will post up some more information as requested first. Both my partner and I are on 50k pa, with only having one car which is currently under a personal loan but other than that we don't owe money on a credit card.

At the moment we are paying P&I at 6.7% I believe - but we pay $2100 a month on the mortgage. Unfortunately, we do not have a buffer as such at the moment which is something I would really like to change.

If the property was to be rented out, I believe we should be able to achieve around $430pw - $440pw. It is a 3bed, 2 bath, 1 LUG on 720sqm block. To be totally honest, my main concern is that all my hard work is going to be undone and in 5 years the place will need renovating again. The property is located in Camden, NSW.

At the end of the day, moving to the city is a definite for us. We would love to purchase a property in around Botany but I feel it is too expensive for us to even get our foot in the door.

Thanks in advance to everyone.

 

[BMan]

if the property was to be rented out, I believe we should be able to achieve around $430pw - $440pw. It is a 3bed, 2 bath, 1 LUG on 720sqm block. To be totally honest, my main concern is that all my hard work is going to be undone and in 5 years the place will need renovating again. The property is located in Camden, NSW.

IMO all your hard work is going to be undone if you sell.....
why will you need to renovate in another 5 years?

if money is tight you could create a LOC with some of the equity on the property and use that to fund the IP so you wouldnt be using your after tax $$ for any random expenses, bills, etc
you should/could also change it to I/O which lowers the repayments giving you more in your pocket each week

since it has been renovated you can get a depreciation report to claim alot of stuff back each year which will help even more with renting it out
also if its negatively geared you could also fill in a tax variation form


why do you think it would be better to sell than rent it out?

are you expecting it to be a high maintenance property?
the saying never sell goes around abit and theres a reason for it
the costs to buy and sell are a fair amount of wasted money that you could be using via equity
but then theres reasons why you should sell aswell

 

[Honest John]

It was all about the experience. You're now wiser and possibly richer. I would use the experience again, it's something you can't buy. Good luck.

 

[mrmonopoly]

If your current PPoR can rent for $430-440 per week and you were planning on reinvesting the sale proceeds anyway, then why not save the transactions costs by converting the mortgage to interest only, make the PPoR into an investment seeing as the property will now more than likely be cash flow positive anyway. Put any increased cash flow into an offset account maximising your tax advantages and flexibility.

Further to this if you're hoping to continue your investing journey, then you may be able to pull out some of the equity already established to reinvest. In fact given your in NSW with the current SEPP regs and a block size of 480sqm+ you may even be able to build a high yielding granny flat on the property.

This way you will have minimised your transactions costs, achieved your short term investing goals and even increased your cash flow, whilst renting in an area which allows you a better quality of living. Potentially there's a win, win, win, win scenario.

Not to mention all your debt will now be tax deductable, your PPoR capital improvements can be depreciated as could the cost of building the granny flat.

Just an idea, but worth investigating?

 

[AndrewT]

Ok, so we have sat back and had more of a think about our situation. Now I know there are plenty of reasons for and against for what we plan on doing, but as someone else has mentioned - you have to do what you think is right. Although, everyones comments so far have been great food for thought.

So we have come up with the next range of options based on the situation:

1) House doesn't sell for what we want (Will not take any less then 420k) so we then put it onto the rental market and move into the city to rent. Save what we can, change loan over to IO and eventually move towards our next plance

2) House sells for what we want, use the money to fund a purchase in towards the city. Something that needs renovating, Interest Only loan. Something around the 450k mark, fix up over a year or two (with being rental in mind) then keep and move onto the next property.

3) Everything turns to crap, leave the country....just kidding

 

[Terryw]

Why not sit down with excel and do some different scenarios and see how each pans out. Then you can make a more informed decision.

 

[investor2009]

Hey Andy!

It sounds to me like you're just not willing to be a property investor.
I wish we could change your mind (for you and your partners sake) but I'm not holding my breath.

As previously stated: 1. Take a LOC for more than you require, but a property where you want to live, keep the rest in an offset account and chances are you'll never use it anyway but good to have, which will give you a good sized buffer as you stated is a goal for you. And happy days. You HAVE everything you want currently, but aren't really willing to use it.
Which is called investing.

2. Sell up, lose/waste a heap of money/hard work Thats not investing.

I hope you can see what were trying to say

 

[AndrewT]

I see exactly what you guys are saying - and I am happy for the persistance, at the moment i am waiting for the real estate to get here so they can give it a rental appraisal. I got one over the phone of $450, but want someone to inspect it to give me an accurate figure.

What I need is help with my calculations. I seem to be getting different figures with different spreadsheets that are meant to calculate the same thing!

At the moment:

Loan = $315,000
Value = $420,000
Rent = $450
Salary = 50k (both parties)
Depreciation = not to sure on this one, new bathroom, laundry, kitchen, fans + fireplace. Building was built in 1955s
Rates = $350pq or $1400pa

I have had calculations range for $40pw after tax to $100pw?!?!

 

[Terryw]

I see exactly what you guys are saying - and I am happy for the persistance, at the moment i am waiting for the real estate to get here so they can give it a rental appraisal. I got one over the phone of $450, but want someone to inspect it to give me an accurate figure.

What I need is help with my calculations. I seem to be getting different figures with different spreadsheets that are meant to calculate the same thing!

At the moment:

Loan = $315,000
Value = $420,000
Rent = $450
Salary = 50k (both parties)
Depreciation = not to sure on this one, new bathroom, laundry, kitchen, fans + fireplace. Building was built in 1955s
Rates = $350pq or $1400pa

I have had calculations range for $40pw after tax to $100pw?!?!

You don't give interest rate, but assuming 6.5% IO, then:

Expenses
Interest pa $315,000 x 6.5% = $20,475
Running costs est 20% of rent = $4,680
Total Expenses = $25,155

Income
Rent = $23,400

Profit = Income - Expenses
Profit = $23,400 - $25,155 = $1755 LOSS

But, this is not taking into account non cash deductions such as:
Building Depreciation
Depreciation of fittings and fixtures
Borrowing costs

So your taxable loss may be much larger. This means your overall taxable income will decrease and you will save some tax.

This could result in the cashflow being slightly cashflow positive even with a taxable loss.

 

[investor2009]

PS, Just my 2 cents here but don't even worry about what the appraisal comes in at. You might get what they tell you first day on the rental market or you could even have to drop it by $50p/w to get someone in until the lease runs out and things turn around for the better, Thats happened to me numerous times and at the end of the day a REA will tell you what you want to hear to get your business, it's not their money is it. it's just how rental property works, but over the LONG TERM your rents will skyrocket. You can never believe what someone tells you until it actually happens.

You are in a fantastic position right now because with those numbers you are cashflow positive after tax.

When you earn $50,000p/a and have maxed out your serviceability (not unlike me) then you can start worrying about an extra $50p/w in rents across the portfolio and it would start to make a load of difference to your cashflow, but with just one IP that is going to be either CF pos or a tiny bit negative after tax then mate.. It really doesn't matter at all. And in 20 years time you'll just laugh about this conversation. Thats how insignificant it really is in the scheme of things. I'll bet that in 2 years you'll be in definite positive CF territory and there will be no going back from there.

Bottom line is: You make more money than you spent over the long term. If you think you can do this then your answer is..?
You're in a good position. You need to start thinking long term man. Seriously

I see exactly what you guys are saying - and I am happy for the persistance, at the moment i am waiting for the real estate to get here so they can give it a rental appraisal. I got one over the phone of $450, but want someone to inspect it to give me an accurate figure.

What I need is help with my calculations. I seem to be getting different figures with different spreadsheets that are meant to calculate the same thing!

At the moment:

Loan = $315,000
Value = $420,000
Rent = $450
Salary = 50k (both parties)
Depreciation = not to sure on this one, new bathroom, laundry, kitchen, fans + fireplace. Building was built in 1955s
Rates = $350pq or $1400pa

I have had calculations range for $40pw after tax to $100pw?!?!

 

[AndrewT]

So after all the pondering on what everyone has said, I have bit the bullet and at least been smart enough to take on the advice. Initially, before posting this thread, we had already signed a contract to sell the property through a real estate and had the Contract for Sale being processed - I suppose one reason I was hesitant to change my decision. Went ahead and called the appropriate people and have successfully cancelled all of the selling proceedings and have now organised for the house to go onto the rental market.

Thankyou to everyone who has posted in this thread. I should have stuck with renting it out, which were my original plans when we first purchased this place - I remember telling my partner that we will never sell this place!

Now I will focus on getting a place suitable for us in the city, move in and focus on work. Then down the track we do have a property that could be suitable for a granny flat, just 1 minute walk from the local hospital and the property has site access with loads of room down the back.

Thanks again.

 

[mrmonopoly]

So after all the pondering on what everyone has said, I have bit the bullet and at least been smart enough to take on the advice. Initially, before posting this thread, we had already signed a contract to sell the property through a real estate and had the Contract for Sale being processed - I suppose one reason I was hesitant to change my decision. Went ahead and called the appropriate people and have successfully cancelled all of the selling proceedings and have now organised for the house to go onto the rental market.

Thankyou to everyone who has posted in this thread. I should have stuck with renting it out, which were my original plans when we first purchased this place - I remember telling my partner that we will never sell this place!

Now I will focus on getting a place suitable for us in the city, move in and focus on work. Then down the track we do have a property that could be suitable for a granny flat, just 1 minute walk from the local hospital and the property has site access with loads of room down the back.

Thanks again.

Good on you Andy. Also if you didn't know already that because you'll be renting your next place, your current PPoR can stay as your PPoR for upto 6 years as far as the ATO are concerned, so even if a few years down the track you do decide to sell you will still be capital gains tax free