Strategy for upgrading & investing at the same time

[babysteps]

Hi. I have started reading up on property investment materials available online and books but I still don't know how to apply the concepts to my situation. Different authors seem to have different views on debt on PPOR and investment properties when you upgrade. The only commonality is that it's best to sell off your existing PPOR that has little or no debt when upgrading as leaving it as investment property will have negative tax benefit.

Ok, here's the scenario:

• We have a place in Bull Creek, WA, under my husband's name with no debt
• We are planning to move closer to my husband's parents, and upgrade at the same time
• We have enough savings to cover the cost of the upgrade if we sell this house in Bull Creek.
• The same savings could be used as 20% deposit for probably 3 investment properties.
• Both of us want to invest for long term and reduce the tax at the same time. My husband is paying about 60k and I'm almost 30k a year. So probably 2 properties under my husband's name and 1 under mine?

Here are the options that I could come up based on some of what I understand so far:

1. Sell the house in Bull Creek, use the proceed and savings to upgrade so that there is no debt on the PPOR. Then use the PPOR as equity to borrow for investment properties.
2. Husband to sell the house to me privately so that could become my investment property. I'll use savings as 20% deposit for the loan. The proceed of the sale + leftover savings will go into the upgrade. Husband to use the equity on upgrade for investment property. (This way, we could save on the selling commission for selling, rent out almost straight away, but I'm not certain whether buying the Bull Creek house back would be a good investment as there are better areas to invest)
3. Rather than paying off the PPOR completely using the savings, buy as many investment properties as we could afford with the money. Treat the loan for the PPOR the same way as investment property and only pay off the interest over time.

Here are some basic stats:

• Bull Creek has -6.6% growth this calendar year, but seems to follow the Perth's metro growth trend generally. Long term grow is 11.1%.
• The average days properties are listed on market is 74.
• Houses similar to ours is rented at $400-450pw.

Also, another thing is, should we just get LVR 80% for all our loans or is it better to increase that with mortgage insurance?

I'm going to talk this over this an accountant, but would appreciate if some of you have suggestions on the best course of action. Thanks!

 

[Perth Investor]

Whether you use the cash as deposits, or use it to buy a property outright, it will still get you the same amount of leverage to buy IP's. So I would always work to have the PPOR with zero debt.

I would only go through the motions of playing around with your existing house if it was a brilliant property, with great long term investment benefits. Otherwise I would sell it, pay cash for your new place and then leverage off that to buy new IP's. It's 6 of one half a dozen of the other, if you buy the house off your husband. Essentially it's just an investment property. However don't use any cash towards the purchase, have a simultaneous settlement with the new PPOR, have no borrowings against that, and owe 105% of the value of the old PPOR.

 

[wylie]

Your idea of you buying the house that is in your husband's name sounds like a good one. You will have to pay stamp duty (unless you can avoid it, as it seems some states will allow in these types of transfers) and it will save the selling cost and stamp duty on buying a new IP.

Even if you have to pay stamp duty, that would have to be cheaper than selling and buying costs to sell it and buy another.

 

[INVSTOR]

you'll have to have a written valuation and pay stamp duty if you purchase it off hubby. You'll save on RE fees, and if you have finance approved first you'll be in a really good position to negotiate a good price on your next PPOR (as you don't have to find a new purchaser for your property).

 

[babysteps]

Oh wow. Thanks for the quick response guys!

I guess the reasons why I would buy the property off my husband is not only to save on the selling commissions, but also because the area isn't selling too well at the moment. If I get it, I could probably offload it when the price lift again to find a better investment (hopefully 5 - 10 years). But at the same time, if we sell it now, I could probably find another house of the same value but with a better growth rate that I could keep permanently (> 30 years). So many dilemmas! :S

The simultaneous settlement with new PPOR sounds like a really good idea. Would any lender allow the borrowing of 105% of the old PPOR or is that a special loan?

Thanks!

 

[morg]

Funny coincidence, as we have just upgraded and been in the same dillema.
In Bull Creek too, I might add.
Our decision was to retain old home as an IP because we believe it to be fundamentally a good investment area.
The house was initially purchased in the wife's name and still is. We considered various ways to recycle the debt inorder for it to be tax deductable but found that the extra costs incurred weren't really worth it for the perceived benefits. So wifey now has a debt free IP, however, with no income other than rent, tax payable is minimal. When we can afford it, we can then purchase a neg geared property, if that suits our situation at the time.
I'm all for tax effective investing, but it's not the whole game. If you have a nice tidy house in this area, you won't have any trouble finding good tennants who will pay a reasonable rent to help offset the added interest payable on your PPOR loan. This is the view we took anyway.

Just curious as to why you think this area isn't a good long term pick ?

I see it as a handy location, close to freeway and train station, 12-15kms to CBD, good schools and shopping centres, close to river, Murdoch uni just up the road along with murdoch hospital and the new Fiona Stanley hospital being built.
All seems to bode well for future growth.
Did I mention I live there too

 

[babysteps]

Hi morg!

I'm not saying Bull Creek isn't a fantastic area, my current house is actually quite well located since it's close to the shops, parks etc and is within the Rossmoyne High School Zone (which seems to be a big selling point). But I thought there might be better areas to pick at the moment. Some areas like Shelley and Rossmoyne which normally have a pretty good growth seem to have coped significant price drops, so I'm just wondering whether it would be a good time to grab hold of those ones instead.

 

[morg]

Yep, I hear ya.
We were sniffing around Rossy aswell. Particularly around 2nd ave.
We had our eye on one that was on the market for about 3-4-months.
Wasn't really budging on price though, so we went elsewhere.

 

[Rixter]

Babysteps, being a Rossy boy I know the Bullcreek area quite well.

11% historic CG is very good growth which equates to property doubling in value every 6.5 years.

Unless there is something structurally wrong with your house (which going by your posts, sounds there is not) I would buy your hubby out and keep the property solely in your name for invesment as per option 2 of your poll.

I would use hubby's proceeds from sale to purchase and upgrade into new PPOR, then leverage off the new PPOR for deposits & costs for more IP's - solely in your name & solely in hubby's name.

Look to acquire good quality well located property as fast as you can reasonably afford.

The overall object of the exercise is to build your asset base as fast as you possibly can and then hold for the long term to reap the compounding capital growth.

I hope this helps.