So is a PPOR an asset a liability or something else again?

[GoAnna!]

I know what the investment gurus tell us.

1. Our home is a liability.

2. The debt used to borrow a home is "bad"debt ie non tax deductible non income earning.

So what about the equity available in our PPOR?

What about the fact it is cgt free?

What if you bring in boarders?

What about the fact that you do need somewhere need to live and would otherwise need to pay rent?

What about if the cost of your mortgage is now less than renting the equivalent house?

So how do your feel about your PPOR ( ot lack of).

Is it an evil best avoided? Is it the best thing you ever did? Has it got everything to do with your investment strategy or nothing at all?

I really look forward to hearing your thoughts.

 

[toony]

Best thing I ever did - its compulsory savings. It makes you find the repayments each week. Its like paying rent. I look at the guy accross the road who rents and never bought a place. He will always rent and my house is now paid off.

Really who invests after paying rent. Who invests after paying your monthly repayment. At least those with a home loan will end up better in the long run and without even knowing they are investing.

I hope this makes sense

 

[eastside]

thoughts on PPOR

Hi there,
I think in Sydney the attitude to PPOR is changing. Sure, it is a liability, but how about needing somewhere secure and stable to live so you can earn the income to service those investments? No point if every time your lease expires they won't renew it because of renovations or whatever and it's a big drama to find a new place - and you start thinking of leaving. You may remember my posts about the landlord next door saga, we found another rental (wemoved twice in 4 weeks, even though working overtime as well). We are now in the process of buying a PPOR and selling an investment property to finance it. There is a lot to be said for not having unreliable, lying real estate agents or weird owners in your life when you work 60 hours per week in stressfull jobs,and I think the time has come in Sydney that you can't do it anymore unless you have your own place. That's my thought for the day

 

[MichaelW]

Hi GoAnna,

I read all the points of view on this in Josko's thread and was intrigued by the debate. I must admit that I definitely count the PPOR on the asset side of the ledger. It gives me:

* Free rent
* Free capital gains

And if I assume rental yields at around 4.5% and capital gains of 3% in line with inflation, then it is returning me 7.5% pa.

Now, an IP has the added benefit of also giving me negative gearing deductions, but that's about it. In the above scenario that can add another 2% odd to the total return. BUT, and its a big but, what price do you put on:

* Stability of location.
* Stability of kids schooling.
* Not having to report to a landlord and host inspections.
* Ability to value add to your residence.
* Ability to customise your residence to your tastes.

If any or all of those things add up to more than the negative gearing benefits afforded from holding the property as an IP instead of a PPOR then I'd say owning, not renting, a PPOR is the better option. I personally value those things a lot more than the incremental 2% of negative gearing benefits. As such, I now own my PPOR outright and have 100% deductible debt. This was my first investment goal, and the only one to date I have achieved. The subsequent ones are around cash flow neutrality at a certain level of total assets controlled. I've got the assets controlled milestone, just not cash flow neutral yet. Develop mona Vale and sell one of the IPs and I hit that next milestone nicely.

For everyone, I suggest the PPOR decision is a personal one. But for me, owning a PPOR is a critical part of my asset accumulation strategy as well as a critical part of my mental security. Ain't noone can kick me and mine out of my home now. Tick!

Cheers,
Michael

 

[Aaron Sice]

while i view my PPOR debt as non-deductible (which it is), i don't feel it is BAD DEBT. that's a horrible term to use for your own home.

you have to pay to live somewhere, why not own it and reap the CG benefits (both profit and tax exemption) rather than pay someone else's mortgage? sure, you can use the money saved by renting to buy another deductible asset, but i wouldn't want to be raising my family of 3 kids in a rented home... talk about stress!

while it may be a liability TO MY CASHFLOW, i feel the security my children will feel and learn from by us trying to own our own home is invaluable.

how do i feel about it?

well, i'm trying amass as much CF~ or CF+ properties as possible so that when CG does return to the markets, i can take advantage of that to live off while my business profits pay down my mortgage. i'd like CF~ or + because there's minimal outlay to hold a property - and those deals are out there now.

so guess my feeling is i need to try to eliminate the non-deductible debt to minimise my exposure and be able to re-invest that money elsewhere, possibly buy'n'hold shares, perth commercial etc etc.

my home is my castle. i designed it myself, i bought in a good area with great CG potential that when rented will cover the mortgage should any strategy go belly up.

 

[BayView]

For most of society, owning a house is the best financial move they will make.

This is because the majority of people don't do any investing at all - except invest into their super, which is paid by their boss anyway. If they didn't have that, most people would do nothing, or at best; put it in a Bank, which is equivalent to doing nothing almost, after you factor in inflation and tax to be paid on the interest.

However, if you were to pay rent, in most cases it will usually be less than any mortgage you would have to pay on a similar property if you bought it today. If you then invested the difference between the rent and the mortgage, it works out that renting will be better for you financially. But most people don't do this either, so they are better off buying a PPoR - at least it's a forced saving and eventually they should own it and it will be worth a good deal more than what they paid for it.

In the strictest financial sense, a PPoR with a mortgage is a liability, because it costs you money from your pocket to own it, and there is no income from it.

Owning a PPoR is the best thing I ever did, until I found out I could use the equity in it to leverage into income producing investments.

That's the best thing.

Our PPoR is currently an asset, because we don't owe any money on it, we receive rent from it, and we have used some of its equity for further income producing assets.

 

[kissfan]

I'm also on the side of those saying your PPOR is an asset.

Commiting to a PPOR (loan) made me learn and think a lot about planning and financing for the future which in turn helped me to develop my investment mindset (without me even realising it at the time).

That feeling of paying that loan off was magnificent, even if it was shortlived as I used the PPOR to help finance the next investment.

Regards
Marty

 

[PrimeCommercial]

I know what the investment gurus tell us.

1. Our home is a liability.

2. The debt used to borrow a home is "bad"debt ie non tax deductible non income earning.

I dont think the guru's actually say the mortgage against your PPOR is bad debt, without examples I cant be sure but from what I remember its the loans against depreciating 'items' like motor vehicles which is bad debt. Debt against an appreciating asset cant really be classed as bad.

 

[wylie]

I have never paid rent in my life, and never want to.

I am not so good with figures, but our mortgage on our PPOR is $850 per month. To rent this house we would be paying $650 per week, and no way would I want to pay that to someone else.

We paid $230K ten years ago, spent $230K on major reno including pool and value would be around $800K or more. It is not the Taj Mahal, but to rent something with four bedrooms, two bathrooms and a pool we would be paying high rent. And I know we could squeeze into a three bedroom, one bathroom place, but why should we, when we have worked hard to get into the position to live in a nice place.

If I didn't have children, I would possibly consider renting and owning IPs, but I really cannot imagine having to answer to anybody about our living arrangements, and live with the possibility that every time the lease comes up, we pay more rent or are turfed out. No thank you!!

Sometimes the head just has to be told it cannot always be the ruler, and that the heart has to have a say in some things .

 

[keithj]

This thread came about when nonrecourse said

Is it such a difficult concept to understand that owning your own home is a discretionary expense? Most people view their home as an investment. Guess what your bank views your home as; their investment ! Your on the other side of the balance sheet

I was never much good at accounts, but this doesn't make a lot of sense.

I think he should have said 'the home loan is their asset' & therefore our liability... and on the other side of our balance sheet is an asset - our PPOR. The PPOR debt is a liability, and the PPOR is the asset.

Is a wholly owned PPOR (without debt) an asset ? - of course it is.
Is a PPOR with a $1 debt an asset ? - of course
Is a PPOR with a 100% LVR an asset ? - yes

Is a PPOR a discretionary expense ? Possibly, from a purely accounting POV if it's costing more than equivalent rented accommodation. OTOH, anything more than a cardboard box under the bridge could be viewed as discretionary expense.

But life is more than just accounting........

 

[LynnH]

I think it depends on the individual's situation.

I believe that your PPOR is an asset - IF the total costs of holding it (interest, rates, insurance, repairs, maintenance, etc) are less than you would pay in rent for an equivalent home. Other positives are that it (usually) increases in value, and that you can use the equity in your PPOR to borrow for other investments. So, in such a situation, I would definitely classify it as an asset. And even more so when it is fully paid off!!

However, if it is costing way more in holding costs that renting an equivalent property, I would have to classify it as a liability.

Cheers
LynnH

 

[GoAnna!]

I dont think the guru's actually say the mortgage against your PPOR is bad debt, without examples I cant be sure but from what I remember its the loans against depreciating 'items' like motor vehicles which is bad debt. Debt against an appreciating asset cant really be classed as bad.

For some gurus ( I haven't checked them all) if an asset is taking from you its a liability. So a home is a liability and the debt against it therefore "bad" debt rather than "good" debt. I am sure they all differ in their views but I was just looking for a point of discussion

One example

http://www.piaa.asn.au/articles/How_Bad_Debt_Will_Stop_You_Dead_in_Your_Tracks

 

[Aimjoy]

For me our PPOR has been an asset. It has been reno'd (which we get the benefit of by living there) and has been used / refi'd to provide deposits on 3 of the last 5 x IP's we purchased.

 

[The Y-man]

What about the fact it is cgt free?

For me, property investing is about taking advantage of the perculiarites of the tax laws. In the case of the PPOR, I think the cgt free status makes (for me) the ppor a part of the overall "property investing strategy".

As a consequence however, to make full use of this particular quirk, one needs to trade PPOR's, as well as strategically selecting ppor's for CG - and this is where the lifestyle/emotional attachment factors may cross over and come into play. For example, a house custom designed specifically for a particular lifestyle may not fit in with mainstream tastes - and may therefore affect it's performance as an "asset". It may end up then that you will live in a string of PPOR's which might appeal to the majority (but not necessarily to you), or live in a relatively spartan house on a huge block of land etc.

For our own home, I am always looking at local sales and determining our "break even" exit point, given holding costs (interst, repairs, rates etc). If at any point the price goes significantly over the "break even", I will then consider selling and moving to an area which I might deem "undervalued" at the time.

Cheers,

The Y-man

 

[Aaron Sice]

For some gurus ( I haven't checked them all) if an asset is taking from you its a liability. So a home is a liability and the debt against it therefore "bad" debt rather than "good" debt. I am sure they all differ in their views but I was just looking for a point of discussion

One example

http://www.piaa.asn.au/articles/How_Bad_Debt_Will_Stop_You_Dead_in_Your_Tracks

BUT

this is where these sorts of advices fall flat on their face.

a neg geared property costs you - even after your tax deduction you're still outta pocket.

does that make it a liability?

 

[steveadl]

Whilst the PPOR debt is bad and best to be rid of asap, the PPOR itself can be one of your best assets.

As others have mentioned, you'd be paying rent elsewhere anyway, plus the continued growth in your PPOR's value allows you to leverage into further investments.

Our current PPOR is one of my most important IP's!

 

[boomtown]

My non-deductible debt is about 2% of my total debt. I will have no non-deductible debt by the end of 2010.

I do not own a PPOR and do not intend to purchase one. For me it would be an indulgence. I don't have kids though and if I did - I might feel differently. But maybe not. I grew up in rentals and it did me no lasting harm.

 

[Ausprop]

BUT

this is where these sorts of advices fall flat on their face.

a neg geared property costs you - even after your tax deduction you're still outta pocket.

does that make it a liability?

if it costs you money than yes it is a liability. hoping that capital appreciation will bail you out is just that... hope.

 

[Peter Parker]

Is it an evil best avoided?

Unless you grossly overpay or you can't service it, buying a PPOR is hardly ever a financial evil.

Rather I'd reserve the term 'financial evil' to things like bottled water, buying new cars on credit, quack medicines and those dinky 'snack' cracker biscuit packs with cheese that cost 4 times per biscuit as the usual 200g packs.

While not evil, buying a PPOR may have an opportunity cost.

The degree of this opportunity cost depends on your stage in investing and your income.

Eg:

a. low income earner just starting out: buying a PPOR potentially kills off buying IPs due to likely reduced serviceability. 1 PPOR = 3 IPs and only 1/3 the portfolio size and therefore reduced capital growth potential for the same negative cashflow.

b. established investor with a few IPs, not on particularly high income: Already running out of tax deductions so tax benefits of (say) the 5th IP isn't as compelling as for the first or second. So a PPOR isn't as bad relatively speaking. And the relativities regarding possible portfolio size aren't as great (eg $200k vs $600k for new investor as against $1.5 vs $2.0m for more established investor).

c. high income earner: can afford it so doesn't matter and little opportunity cost.

Has it got everything to do with your investment strategy or nothing at all?

While it is conventional wisdom to keep the two seperate (Wakelin et al), buying a PPOR with an investor mindset can mitigate the liabilities of having a non-deductible mortgage and potentially high negative cashflow. Indeed I would go further and say you must mitigate unless your income is high and/or you don't want to buy more IPs.

Such mitigation measures could include:

* Having a few IPs under your belt first (see above)

* Buying a PPOR in a 'quality' location, eg inner city or bayside (especially if to balance against IPs in cheaper or country areas and provide a diversived asset base). Or the reverse - buying a cheap place in the bush to live in while keeping metropolitan IPs.

* Buying a PPOR that's below your means to keep mortgage payments affordable, not throw out portfolio balance and ensure the next IP can be bought sooner rather than later. Eg if your portfolio is $1m then a $500k PPOR may kill you financially. But a $200k PPOR might be fine.

* Buying a PPOR that has a 'twist' that you think has not been factored into the price you pay. Especially if it also has potential for minor renovation/value-adding, with potential revaluing/use of equity later.

* Buying at a time when the market is soft (ie now!) and/or negotiating on price as you would an IP rather than the home you love (ie without emotion). Or just finding one with a cheap advertised price and just paying that.

* Buying a PPOR that would make an excellent IP if times get tough and you have to move out/let it to make ends meet.

I followed all the above mitigation measures in choosing my PPOR and don't regret it!

Peter

 

[RumpledElf]

My PPoR allows us to live like utter scrooges while we beaver away with Plan A, which won't pay off for some time. It costs us $200 a month (plus $500 a year in rates and the usual amount in electricity), and I've just switched all my insurances to a "you have a mortgage with us so here, have some discounts" deal and saved another $50 a month. You just can't rent houses for that sort of price.

I did use the equity in it to get our IP, but the IP value will eclipse the PPoR value so fast that I won't be doing that again. I'll be paying out the PPoR loan and getting it released as security asap if we get the subdivision and sale through.