To buy PPOR or IP?

[josh676]

A quick hypothetical scenario.

I am currently renting with my partner for 500 per fortnight in Spearwood in Perth.

We would both like to start investing in our future.

Living in WA as a home buyer you get 3000 dollars FHOG, and a 2000 dollar grant for things like conveyancing if the property is under 400k.

Being in Defence I am eligible for a scheme called HPAS, a 16 k taxed one off payment to buy a house with, as well as a scheme called DHOAS, which for me is a 225 dollar per month payment towards a home loan.

I am in Perth until early 2019.

Plan A) Find and buy a property in WA for around 400k in a good area close to say Curtin Uni or similar. Live in it until 2019 and then when I leave transition to IP.

I would try for an interest only loan with an offset, or if not possible pay the minimum Interested and Principle and use an offset account to reduce the interest component, while maintaining cash that can be used for the deposit on a new IP once I post out of WA.

My understanding is that by doing this I can take advantage of having the loan that is able to be negatively geared while ensuring I have the capital available to take the next step (IP or PPOR in next posting), and basically try and was rinse repeat this process to acquire more properties.

+ No Stamp Duty
+ Defence Benefits allowing me to gain more equity quicker
+ FHOG and the conveyancing payments
- Perth Market seems to be sluggish/going backwards.
- It costs more than renting, but not by very much.
- The extra costs of rates and water rates.
- LMI.

Per fortnight this option would cost 820 at a 4.50 percent interest rate, or 720 taking into account the Defence monthly payment. So 220 more per fortnight than I am currently paying.

Option B.

Save up more money until I have around 20 percent, and buy an investment property somewhere else (Adelaide or Brisbane) that will hopefully experience capital growth.

+ Not too costly assuming 80 percent occupancy.
+ More choice of where to buy
- Stamp duty
- no FHOG, no HPAS payment

I know that this decision could have massive implications on my wealth creating ability over the next 10 - 15 years, and I'd appreciate some opinions from people that have already walked these paths.

 

[josh676]

I understand that rent money is not dead money, as long as you're investing the difference rather than squandering it, and I have fantastic security in knowing that I will never have to vacate this house until I post out of Perth if I don't want to.

My partner and I earn around 95 k combined.

 

[thatbum]

When I was in a similar situation a few years ago, I used my grant and turned the property into an IP after the 6 month live-in period. It actually took 9 months since I bought a place that needed a complete internal renovation, and I was still learning how to renovate.

No regrets there, it was the best financial decision I ever made.

I think there's something to be said about knowing the market like the back of your hand, even if the macro/cyclical conditions don't look ideal for Perth at the moment.

 

[josh676]

When I was in a similar situation a few years ago, I used my grant and turned the property into an IP after the 6 month live-in period. It actually took 9 months since I bought a place that needed a complete internal renovation, and I was still learning how to renovate.

No regrets there, it was the best financial decision I ever made.

I think there's something to be said about knowing the market like the back of your hand, even if the macro/cyclical conditions don't look ideal for Perth at the moment.

This is my thinking, as I know from another post that buying a PPOR first instead of an IP can put you behind, but that calculation to me would appear to be long term, ie it's your PPOR for 30 years, not one that you bought, held for a year or two and then turned into an IP.

With lenders tightening up the lending criteria for investments as well, it seems a way to get the foot in the door?

 

[thatbum]

This is my thinking, as I know from another post that buying a PPOR first instead of an IP can put you behind, but that calculation to me would appear to be long term, ie it's your PPOR for 30 years, not one that you bought, held for a year or two and then turned into an IP.

With lenders tightening up the lending criteria for investments as well, it seems a way to get the foot in the door?

Shrug, well the PPOR vs IP decision isn't really a decision purely based on the financials though. Up to you whether you think you need/want a PPOR for lifestyle reasons.

I personally like renting in a share house for the lifestyle of it. Its just a side bonus that it frees up more cashflow and capital for my investments. If I ever wanted to live in a PPOR, I would probably go and do it as well.

Its a personal decision in the end.

 

[josh676]

My goal is to build up a portfolio, I could keep renting at 500 PFN and invest the difference, or give it a shot buying the first property and living in it for 3 years before turning it into a IP.

Decisions decisions.

 

[bob shovel]

You might need a broker to join in the discussion to do the numbers but the fhog alone isn't s huge money spinner, in 6 months you could get say $400/wk x 26 = 10,400 less pm fees etc etc. but with your defence allowances it may end up even (i haven't done calcs). Why not look into doing both?
Go the ppor first as it sounds like the included allowances are pretty good plus it may sit you both to have the roof over your head. Look to buy the ppor with the plan to change to ip as you said. Get in and do some key reno work to re-val and use equity towards next buy, which will be ip straight up.

need someone with a calculator to work out
1. Rent and buy ip
2. Ppor with benefits then buy ip soon after

 

[HD_ACE]

I Also used all the FHO grants and bought a property, lived in it for 6 months and then rented it out.

The purchase was 100% based on Investment and not emotional as i could live anywhere in Perth. Helped me secure another soon after.

Comes down to your situation and goals.

 

[josh676]

I will be leaving perth in Jan of 2019. So it will literally be a vehicle to further investment.

 

[Zipper]

The current rate with a NAB DHOAS loan in 4.63% after the last interest rate drop. You will have to live in the place for 12 months to qualify for both HPAS and DHOAS. Depending on how many years and trips you have done the level of DHOAS changes. I'm about to tick over to tier 3, which means I'll get $378pm off mine. That level also changes the loan amount subsidised, so sometimes it's a better deal to get a bigger loan for more free money! There are limitations though to the loan. It can only be with NAB, Defence Bank or ADCU and it has to be P&I. I'd recommend purchasing something during your posting cycle; get the max lend, so that you have more to deduct as an IP for negative gearing and get a 100% offset (which I know NAB do). Once you post out you drain the offset and keep it as an IP, and it can either remain as P&I or re-finance and get a new DHOAS loan on a PPOR in your new posting location. If you are planning on doing this, I'd suggest that you take four years DHOAS as a lump sum to help cover the initial costs of the purchase and to ensure that you get maximum benefit from the scheme if you don't plan on using it again.

Be aware though, that if you get posted back to Perth and your bedroom eligibility for DHA matches your property, you will have to live in it of get no assistance. It's a good idea normally to buy a 2bed and then have a few kids before you post back, then you are fine!! Or try and buy IPs in locations that you are not likely to be posted to in future. Have a good read of PACMAN before you make an decisions. And don't have a wife who doesn't want to move to Darwin the year after you buy the PPOR that was meant to be an IP and stay for anther three years!!!! I've paid LMI as I maximised my loan because I was only going to be here for 12 months, three years later... I'm still here and living in a PPOR instead of having an IP and living in subsidised accommodation!!

All in all though, I think you'd be crazy not to take advantage of the free money the ADF will give you. Plus, once you've done it you won't have that nagging feeling that you shouldn't get an IP because you'll miss out on the FHB freebies.

Ensure you have a good read up on the DHOAS site about the tiers and qualification periods too. So many people don't fully understand what it is and how to best maximise the benefits.

 

[ej89]

I've gone the PPOR option.. Have got land in The Ponds and will build for 620k.. Will live in it then turn it into an IP, although with the good rent i'd get it may be worth just renting it out instead..That'll be my long term PPOR and figured i'd get it now rather than 5 years down the track when the house is worth 950k..

Work your numbers.. I'd only go PPOR before investment if you were worried that the area you want to buy to live with be unaffordable when you're done with your investments..