So many options

[Law]

G’Day Everyone,

I just found this forum last night, what a wealth of information and so many knowledgeable people! Anyway I was wondering if I could get some feedback and advice on my investment options.

Here is my situation:

I’m 23 and work full time (On about 52k), I own a 2 bed unit in Sydney which I bought 2.5 years ago, lived in it for 6 months, got the FHOG, then rented it out for 2 years. My gf and I have just moved in there now so it’s our PPOR (No more tax advantages dammit). It’s worth about 320k with a 234k loan against it, i.e. ~86k equity, 73% LVR. I also have 100k cash in the bank and no debts, apart from the home loan, obviously. The loan is currently fixed until April at which point I plan to dump all of my cash savings in which would give me about 134k owing, i.e. 186k equity 41.8% LVR . I want to get back into property investing and build up a solid property portfolio, but we would like to move into a house in the next 4 years. My gf will also start working full time in the middle of this year which will increase our paying-off power.

Goals:
- Build up a solid property portfolio that will allow us the option of retiring between the ages of 35 and 40.
- Own and live in a house (In Sydney) within the next 4 years
- Never have a LVR greater than 80%
- Keep DSR within acceptable limits (I need to define what is acceptable, but lets assume this isn't a problem.)

Now best as I can tell I have many options, but I’ve narrowed it down to 3 which I think suits my situation and goals:

1. Put as much money as possible into the PPOR loan. After paying it down to say around 75k, redraw as much as possible to buy an in-need-of-renovation house and renovate (Unit becomes IP) with the intention of selling after around 18 months and upgrading.
Pros: Get into house earlier. Doesn’t rely on capital growth as much to make gains.
Cons: I don’t have so much experience renovating. Doesn’t allow for the purchase of many IPs.

2. Put as much money as possible into the PPOR loan while slowly purchasing negatively geared IP in Aus capital cities, say 1 per year, obviously only if money allows. Pay down loan to less than 50k, redraw as much as possible to purchase a house as PPOR (Unit becomes IP). Then continue to purchase NG IP as money allows.
Pros: Slowly build up a solid property portfolio
Cons: After the first couple of IPs, a reasonable portion of cash flow will be sucked up by the NG IP loans, limiting the number of properties that can be purchased. If the market performs the way it has in the past, there won’t be so much capital gains for the next few years.

3. Put as much money as possible into PPOR loan while slowly purchasing positive cash flow (Or ever so slightly negatively geared) property in more regional areas. Pay down PPOR loan to around 75k, redraw as much as possible and buy house (Unit becomes IP). Then continue to purchase PG IP as money allows.
Pros: Lower cash flow requirement will mean more properties can be purchased quicker.
Cons: Regional areas have already seen quite a large price increase recently. Capital gains will not be as high in regional areas.

I’m leaning towards option 2 as I think it fits my personality and risk profile the best, but I am worried about suffering a large negative cash flow requirement paying for the NG properties and not seeing any significant capital gains for a number of years. If this is to be the case, would I be better off simply relentlessly paying off my loan and buying in a few years time? Or are there still capital gains to be had?

Sorry for the long post, what does everyone think? Have I overlooked any other options?

 

[peelsman]

bare in mind that although you can "redraw as much as possible to purchase a house" you will not instantly be able to claim a new greater amount of debt on the flat as a deduction. You will only be able to claim the interest on 50k. You would be better selling the unit (taxfree gain) and then buying new PPOR, setting up LOC and going again for the ip's or setup an offset account on your debt on the flat and when it comes time to move withdraw the amount from the offset to help with the new PPOR thereby having as much debt as poss. on your flat.

HT

 

[Law]

Thanks for that peelsman, I was wondering how the tax department would consider that. I think the best course of action would be to set up an offset account on the unit loan. That way I can use all the funds to purchase a house and get max NG tax benefits when the unit becomes an IP.

 

[shazza]

Wack that $100K quick as you can into your home loan. When you say the loan is fixed until April - do you mean home loan or have you got the $100K in a term deposit? Hope you're getting a decent interest rate.

FYI - something I've come across that compares the rate of interest on your home loan the rate you have to have your money working to make it worthwhile NOT paying off home loan:

[Julie Berry, a financial planner with Bridges Personal Investment Services, says a higher rate taxpayer would need to earn 13.6 per cent on an investment for it to equal what's on offer from a mortgage with a 7 per cent interest rate.

Where your marginal tax rate is 31.5 per cent, your investment needs to earn 10.2 per cent.]

As to your strategies, read heaps of books and forum posts, see a good mortgage broker and then make an educated decision.

cheers Sharyn

 

[stickysandwich]

Law,

Doesn't seem like you need much advice. Maybe you can keep giving us some!

Stickysandwich

 

[Law]

Shazza,
The only reason why the 100k isn't in my mortgage already is because the unit loan is at a fixed interest rate until April, because of this I am only allowed to pay 10k extra per calender year in additional principle payments. The money is currently in a bank account earning 5.25%, not ideal I know, I'm just waiting for the fixed loan term to end. As already discussed I will probably end up putting this in an offset account.

And as for me giving advice, I appreciate the comment Stickysandwitch, but if there's one thing I know, it's that there is a great deal I don't know.

 

[quiggles]

One piece of good advice is to talk to an accountant and in your case a mortgage broker about options. In a general case, I'd be very much tempted with a 100% offset loan, which has the same effect on your cashflow as paying down the loan, but then can be used on the PPOR later, as you appear to understand.

Do you have any other SAFE investment opportunities which offer a higher rate of return? You sound like you have a terrific handle on saving and are really taking action.

Congratulations, keep trying and keep learning. You WILL make mistakes, it's important to keep going.

Tip: read the investor resources and investor psychology forums. They have a lot of value.

 

[johnnyb]

bare in mind that although you can "redraw as much as possible to purchase a house" you will not instantly be able to claim a new greater amount of debt on the flat as a deduction. You will only be able to claim the interest on 50k. You would be better selling the unit (taxfree gain) and then buying new PPOR, setting up LOC and going again for the ip's or setup an offset account on your debt on the flat and when it comes time to move withdraw the amount from the offset to help with the new PPOR thereby having as much debt as poss. on your flat.

HT

The other drawback of using an offset account is that you still can't access the equity in the property. One way to do this would be to set up a HDT which buys the unit. You then get all of the available equity to purchase your new PPOR, and the interest on the loan (which you have taken to buy units in the trust) is fully deductible. The disadvantage of this is the transaction cost, specifically stamp duty (there will not be any CGT as it is your PPOR).

John.

 

[DD1]

trust buying

Wasnt there somewhere a post that directed to another website that made it clear(qld anyway) that to have property in a trust the land tax threshold is $170k and an individual is $275k. So watch other costs too on setting up and then using HDT's. Some lenders charge $1-1.5K to read trust docs prior to loan approval. For small investors with not a huge base a HDT may not be the type of thing to use just yet.

Buying as an indiviual also has sale CGT implications as a trust does not get the same discount on Cap Gains Tax, nor do company structures.

Just a thought.

DD1

 

[quiggles]

DD1,

On your last point re CGT I don't believe that you are correct. There's a number of steps but effectively CGT realised within a trust is taxed with the concession that relates to the beneficiary (i.e. none if you are distributing to a company, 50% if to an individual).

Happy to be corrected on this , BTW.