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

[redwing]

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.

we rent.....but How about: Good Debt, is debt that is secured against something of increasing value, that decreases the risk for both the bank and the borrower

A PPoR should fit that criteria?

If you are forced to sell, you have something to sell that is worth more than the debt that you carry

 

[yieldmatters]

1. Our home is a liability.

Of course it is an asset. It provides shelter (among other things depending on the individual - i.e. self esteem). This is an ongoing benefit. So I have no doubt it is an asset. Not convinced it's priced correctly but that is a story for a different thread.

 

[jingo]

Hi GoAnna,

Great topic. I have come up with the following reply!

I know what the investment gurus tell us.

1. Our home is a liability..

We were fortunate enough to purchase a piece of land in October 1997 right at the beginning of the last boom. We built a modest home and moved in, in March 1998. We paid cash for the land which cost us $35,000, put $35,000 in cash towards the building and borrowed $60,000. (Total purchase was $130,000) We paid the loan of $60,000 back in 2 years and owned the property outright. In 2001 we purchased our first investment property - a town house in an inner suburb of Melbourne.

Our home has been the corner stone of our investment journey, so for us, it has been an asset!

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

The trick may be to have a substantial deposit, borrow to a comfortable level and pay it off as quickly as possible. Borrowing as little as possible and paying it off quickly worked for us.

So what about the equity available in our PPOR?

The equity can be used to launch into other investments - be they shares or property. Being able to access equity would lead me to think of a PPOR as an asset rather than a liability.

What about the fact it is cgt free??

CGT free makes upgrading to a better quality PPOR an attractive propsition. It also makes the strategy of trading up to a high value PPOR and then downsizing to realize cash for retirement a valid strategy that some people utilize.

What if you bring in boarders?

That would turn your PPOR into an income producing asset! All the better!

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

Meaning that your PPOR provides security of tenure. A letter is not going to appear in the mail asking you to vacate. This could be rather disruptive and you don't get to choose the time to move as this is determined by the landlord.

Once you pay off your PPOR you never have to pay rent again. There are arguments put forward by people who say that it is better to invest in other assets (shares or property) and to rent than to buy a PPOR. But many of the calculations I have read compare someone paying off a mortgage over a 25 year period. I would like to see the calculation for someone who has managed to pay their PPOR off in a short space of time (eg 2-5 yrs) compared with someone who doesn't buy a PPOR but remains renting for the rest of their lives.

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

I guess this would be achieved either by having a substantial deposit and borrowing a small amount of money, or paying off a substantial portion of your loan. In this case I would consider the PPOR to be an asset.

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

We were happy we built our PPOR when we did. It is a modest home but has the features that we require. One day we would like to upgrade, but will only do this when the time is right for us. (ie the decision will not put us under financial duress).

Is it an evil best avoided?).

Not at all. I would advise a FHB to buy something modest to begin with. Pay it off and either purchase some investments or sell and upgrade.

Is it the best thing you ever did?

That and buying our first IP within 2 years of paying the PPOR off were the best things that we have done!

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

Initially we built our house because we wanted to move out of a small dark flat and buy something of our own! We have used it since to leverage into further properties. We view our PPOR as a tool/asset to help us expand our portfolio.

I really look forward to hearing your thoughts.

Bit long winded -but those are my thoughts on the topic!

Regards Jason.

 

[boomtown]

Once you pay off your PPOR you never have to pay rent again. There are arguments put forward by people who say that it is better to invest in other assets (shares or property) and to rent than to buy a PPOR. But many of the calculations I have read compare someone paying off a mortgage over a 25 year period. I would like to see the calculation for someone who has managed to pay their PPOR off in a short space of time (eg 2-5 yrs) compared with someone who doesn't buy a PPOR but remains renting for the rest of their lives.

No. Dead wrong in my opinion.

If you pay off your PPOR in 5 years thats potentially a full property cycle (like the last 5 years in Brisbane 2003 - 2008). A median priced home in Brisbane is about $420k. If you are paying off $420k in 5 years ($84k in principal payments pa plus another $20k in interest - thats $100k pa in cashflow) then you could easily be holding 5 IPs negatively geared.

It should take an IP 5 years or less to go CF+.

I would rather own 5 CF+ IPs than own 1 PPOR that has been paid off. By the time you have paid off your PPOR most of the hard work has been done on my retirement plan.

Its all about cashflow and spraying a PPOR loan with this precious cashflow represents 5 years of opportunity cost.

 

[jingo]

No. Dead wrong in my opinion.

If you pay off your PPOR in 5 years thats potentially a full property cycle (like the last 5 years in Brisbane 2003 - 2008). A median priced home in Brisbane is about $420k. If you are paying off $420k in 5 years ($84k in principal payments pa plus another $20k in interest - thats $100k pa in cashflow) then you could easily be holding 5 IPs negatively geared.

It should take an IP 5 years or less to go CF+.

I would rather own 5 CF+ IPs than own 1 PPOR that has been paid off. By the time you have paid off your PPOR most of the hard work has been done on my retirement plan.

Its all about cashflow and spraying a PPOR loan with this precious cashflow represents 5 years of opportunity cost.

Risk management also needs to be factored into the equation. Holding 5 -ve IP's works well in a rising market (which we have had for the past 10 yrs). In my opinion capital growth will be very limited over the next 5 yrs. The financial system is collapsing in the US. What will the impact be over here and how long will this situation take to play out???

I would caution anybody who is currently paying off a PPOR and planning to gear up on -ve geared IP's over the next couple of years to ensure that they have risk management strategies firmly in place.


Having a fully paid off PPOR and then investing seems like a safer way to play in these uncertain times.

Have you read this thread??

http://www.somersoft.com/forums/showthread.php?t=45294

Shows what can happen when too much leverage is applied and an unpaid PPOR is thrown into the mix.

Not a great situation to be in.

Regards Jason.

 

[HandyAndy888]

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.

Which "Gurus" tell you this???

 

[boomtown]

I would caution anybody who is currently paying off a PPOR and planning to gear up on -ve geared IP's over the next couple of years to ensure that they have risk management strategies firmly in place.

Absolutely. And I have multiple risk management strategies in place. And no unpaid PPOR (no PPOR at all). One of my risk management strategies is knowing I can pick whatever IP is yielding the least (or has vacancy problems) and make that my PPOR which reduces the number of IPs that I hold by 1 at no cost to me (and more importantly, no opportunity cost).

 

[Shadow]

PPOR is a great investment

I definitely view my PPOR as an investment, and would echo Michael and others points about the 'non-financial' benefits too, including stability of tenure and freedom to customise, repaint etc. without an evil specufestor landlord constantly checking up on me!

I also find the PPOR is a great place to park any spare income that I don't need to use to service my IPs - in fact, I don't use any personal income to service IPs - just rental income and capitalisation of the shortfall between IP interest and rent. By parking spare cash in my PPOR, I am effectively 'earning' 8.5% interest tax-free.

Through debt recycling, and parking all income (except rental income) into my PPOR, I have reduced my 'non-deductible-LVR' on my PPOR to 36% after only buying this house in 2005!

At this rate, I'd have the non-deductible debt fully paid off in another few years, however next year I'm planning to buy a new PPOR and convert the existing PPOR into an IP (will probably sell it to my trust). So my non-deductible debt will rise again.

The monthly non-deductible interest charge that I pay on my PPOR is less than I would pay to rent an equivalent house, and with interest rates heading down and rents rising fast, the average PPOR owner is going to be financially much better off than the average renter in Sydney before long.

Overall, the PPOR seems like a great investment to me.

Cheers,

Shadow.

 

[RumpledElf]

I would rather own 5 CF+ IPs than own 1 PPOR that has been paid off. By the time you have paid off your PPOR most of the hard work has been done on my retirement plan.

And for those of us that have a PPoR with a value that is far, far less than the value of any IPs? I have an almost fully renovated PPoR here on a huge block that is worth much less than the council valuation of my uninhabitable IP on a smaller block. Not everyone has an expensive PPoR with cheap IPs rented out.

 

[Aaron Sice]

No. Dead wrong in my opinion.

If you pay off your PPOR in 5 years thats potentially a full property cycle (like the last 5 years in Brisbane 2003 - 2008). A median priced home in Brisbane is about $420k. If you are paying off $420k in 5 years ($84k in principal payments pa plus another $20k in interest - thats $100k pa in cashflow) then you could easily be holding 5 IPs negatively geared.

It should take an IP 5 years or less to go CF+.

I would rather own 5 CF+ IPs than own 1 PPOR that has been paid off. By the time you have paid off your PPOR most of the hard work has been done on my retirement plan.

Its all about cashflow and spraying a PPOR loan with this precious cashflow represents 5 years of opportunity cost.

but if you have erased the non-deductible debt side of things in 5 years, then you can use the same property to generate deductible debt.

i think getting rid fo the PPOR debt is a good thing - FIRST - then getting into property investing. it's slower, but you then have 0% chance of losing your home should the economy turn against us all if you don't x-col.

but then there's what you've done, buying IPs first and then will possibly look to a PPOR paid for with the cash generated by those IPs - which i also believe is a sound strategy.


my opinion anyway...cheers.

 

[steveadl]

i think getting rid fo the PPOR debt is a good thing - FIRST - then getting into property investing. it's slower, but you then have 0% chance of losing your home should the economy turn against us all if you don't x-col.

but then there's what you've done, buying IPs first and then will possibly look to a PPOR paid for with the cash generated by those IPs - which i also believe is a sound strategy.


my opinion anyway...cheers.

I tend to agree with Boomtown, paying off your PPOR first can come at a greater overall cost.

Granted you have to manage your risk etc., but for me the overall asset/wealth picture is more important - especially when starting out. Assuming you can afford to either pay more off your PPOR debt, or instead hold an IP - holding the IP will offer you much more future benefit.

Doing it this way has allowed me to obtain a portfolio 3 x the size of my current PPOR's value. Or the alternative would be to have just the PPOR with less (but not no) debt. I'd still be waiting to increase my exposure to the market. This way i have $Y x 3 in property value exposed to the increasing market already but yes, still a higher PPOR debt.

Another key advantage of this strategy is the ability to plough through the PPOR debt quicker with debt recycling if you choose.

Anyway, all just opinion - horses for courses.

 

[Witzl]

I have to agree with Steveadl - however that is based on my current situation.

For anyone who is starting out, and who doenst have a massive wad of cash/equity.... i firmly believe a PPoR is a liability.

Myself and my gf are starting out, with just one IP at the moment (was PPoR for 6 months, but is now rented). We have looked at buying oursevles a new ppor....
but, once we learnt about property investing, i worked out that for the same price as the new PPoR, we could afford to rent an equivalent house and own IPs worth about $200-300K more than the PPoR.
Thus our kickstart to wealth building would be compounded by the greater leverage available thru buying IPs.


I do agree with all the points that a PPoR provides security and stability - but being mid 20s without kids, these points dont weigh so heavily.

However, we do plan to incorporate a PPoR into our accumulation phase 2. The plan is (we are targeting sydney only)
- accumulate 3-4 more cheap IPs (sub $300K) in the next 18-24 months
- accumuate more after that, as equity becomes available, cashflow allows and risk management allows
- sit and ride the boom, and watch the equity grow.
- once we have sufficient equity and timing works, purchase a PPoR
- use debt recycling to pay down ppor loan
- use CG in the PPoR to leapfrog into the next round of accumulation


We think this strategy works well for our situation and our life plans. In our example, yes the PPoR will be a liability - until the ppor mortgage is paid down and equity used to leapfrog into more IPs.

Now...... BACK TO THE TOPIC AH....

Here are my thoughts on if a PPoR is an asset or liability:

• if you dont already have a decent wad of cash or equity, the PPoR is a liability... it will hinder wealth creation
• if you already have a decent property portfolio, then buying a PPoR and using it to further leapfrog into more IPs, makes it an asset..... as it will assist wealth creation

However, there are other variables that come into the equation as others have said... such as a family, security, personal situations, etc. These have a strong effect on the equation.

 

[lizzie]

depends entirely on the situation.

we tend to buy ppor's that we can massively increase the value of - rather than choosing somewhere just "to live".

with our current ppor we've spent around $50k in reno's. the value has increased around $500,000. we haven't finished the reno's yet with another $70k odd to go (kitchen, rendering/painting whole house exterior etc), but by which time it will have increased in value - purely from the reno's - by around $1mil.

to me that is a definate asset.

previous ppor doubled in value in 7 years - which allowed us to buy the current ppor - i would consider that ppor another asset because it allowed us to massively increase our worth.

previous ppor to that was subidividable, put on 2nd house and sold both that enabled us to buy the middle one. so i would have considered that an asset too.

if we'd just stuck with the first house, not subidived and not moved then i would not have considered it an asset - but because we made all our houses work financially "for" us, i consider them assets.

now - currently we are renting due to a work transfer (our ppor is also rented out so is definately now an asset and we will finish the reno's when we get back). there are no fly screens on the big sliding doors in the living area, summer is coming and when the door is opened to let in some fresh air the flys swarm in ... because it is a rental i cannot just put up some screens, i have to ask the owner nicely for them to do so and then hope that they say yes. it's now been a week since i asked and have had no reply.

personally i'd rather own.

 

[jingo]

i think getting rid fo the PPOR debt is a good thing - FIRST - then getting into property investing. it's slower, but you then have 0% chance of losing your home should the economy turn against us all if you don't x-col.

Interestingly Jan Sommers in her books gives examples of people who pay off their PPOR first and then start investing in property. Sure it takes longer. But it is a safe strategy.

 

[Kenster]

Definition of Asset and Liability

Originally Posted by nonrecourse
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

This is how Kiyosaki says it:

Asset is what FEEDS you​

and

Liability is what EATS you
​

A property can be either Asset or Liability, depending on the direction of Cashflow that attached to it.

If a debt makes your cash outflow more than inflow, then the property is a Liability.

In case of a paid off PPOR, it is still a Liability since there is still council rate to pay.

(Council rate is a form of land tax - Try not paying it and see if the Council can sell your PPOR)

 

[josko]

Hi guys,

Robert Kiyosaki got me started.

I guess from my view, I have to agree with him, AND i agree with Witzl, lizzie,

The PPOR and it's "value" as an asset or liability will depend on your current financial situation.

Those of you who say" of course it is an asset, how can you put a price on your family home?" are thinking emotionally. Although GoAnna did not stipulate whether we were debating emotionally or financially - I would ask you "emotional" posters to try and step back and think with your financial caps on. Then you could probably still say it is an asset, as it is obviously not draining your pockets as mine now is. But leave the emotions aside.

My PPOR was my asset. It is now my liability!

Regards JO

 

[GoAnna!]

This is how Kiyosaki says it:

Asset is what FEEDS you​

and

Liability is what EATS you
​

A property can be either Asset or Liability, depending on the direction of Cashflow that attached to it.

If a debt makes your cash outflow more than inflow, then the property is a Liability.

In case of a paid off PPOR, it is still a Liability since there is still council rate to pay.

(Council rate is a form of land tax - Try not paying it and see if the Council can sell your PPOR)

Kenster, the issue I have with this argument is that it seems to ignore the fact that we do need a roof over our heads. In the case of say RumpledElf you would be hard pressed to convince me that her PPOR is a liability as the cashflow required is less than a rental. So her PPOR in fact IMPROVES her cashflow (and equity position).

 

[Dazz]

A property can be either Asset or Liability, depending on the direction of Cashflow that attached to it.

If a debt makes your cash outflow more than inflow, then the property is a Liability.

Nonsense - RK's definition is a load of book selling toss.

I drive past vacant blocks in the city every day.

Some were bought 5 years ago for 3M, costing the Owners 350K p.a. to hold. That's 4.8M all up over the past 5 years.

They have just sold to developers for 14M.

Most people would agree making 10M in 5 years out of a "liability" is doing OK.

 

[evand]

Great thread,

I have a different view on this. I consider my ppor as neither an asset or a liability but as a place for my family to live and my kids to grow up. In my mind it has nothing to do with what i do as far as investing or business.

Having said that, i have used the equity in it (as it is owned outright) to buy IPs @ 105% finance in the past but thats it. As soon as i have enough equity in the IPs, i get it out of there.

The ideal situation and the one i'm most familiar with is to have your PPOR completely separate from what you are doing in business or investing.

I am looking to get our PPOR solely in my wife's name asap and that's the way i like it. I can take business or investing risks without having to risk selling - or losing - the family home. For me, that's the ideal situation and no money can replace that peace of mind.

Not sure i agree technically with a lot of RK's stuff. Good for beginner mindset, that's about it.

 

[Ross]

Agree with Evand in keeping PPOR financing with a separate bank to IP financing if/where possible.
I used to be against PPOR debt if it can be avoided but now my focus is on building the biggest asset base I can, Im not overly fussed if its PPOR or IP assets, the more equity I have, the more gearing options I have. Probably more of a Yardney / Chan mindset. They dont seem to focus to much on rents, cashflow etc, just building the biggest asset base they can.
Just bought PPOR this year, plan to do major reno and create some tax free gains, revalue the portfolio and keep building.

Just my two bobs worth
Ross