Use of PPOR as an investment property

[KathyArthur]

Hi, we're considering our first investment property and am after some advice as to which way to go. We're in our early 30's and have just paid off our PPOR. We are thinking of purchasing a bigger PPOR for approx $550K and then renting out the property we've just paid off. Anticipated rental would be $300-$350/wk and if we were to sell this house, it would sell for around $480K-$500K. Some questions that I would love answered are as follows:
1) Can we borrow against the property that we've just paid off so we only owe say $70,000 on the new property that we're thinking of buying.
2) Should we sell the existing PPOR and buy a unit instead for say $320k in a good rental area eg St Kilda, VIC (rental return of around $250/wk), with the view of starting small and then purchasing another in 3-4 years.
3) Another strategy is to stay we're we are, extend for around $60K as we only really need one extra room and buy another a house for say $380K in a growth area with the possibility of putting two townhouses on the block down the track.
I earn alot more than my husband and I am also planning to have have another baby in 2-3 years which will mean a reduced income for 12 months. We currently have 1 child. Not really looking capital growth but more of an income so the place pays itself off over time.

 

[Project1080]

Hi, we're considering our first investment property and am after some advice as to which way to go. We're in our early 30's and have just paid off our PPOR. We are thinking of purchasing a bigger PPOR for approx $550K and then renting out the property we've just paid off. Anticipated rental would be $300-$350/wk and if we were to sell this house, it would sell for around $480K-$500K. Some questions that I would love answered are as follows:
1) Can we borrow against the property that we've just paid off so we only owe say $70,000 on the new property that we're thinking of buying.
2) Should we sell the existing PPOR and buy a unit instead for say $320k in a good rental area eg St Kilda, VIC (rental return of around $250/wk), with the view of starting small and then purchasing another in 3-4 years.
3) Another strategy is to stay we're we are, extend for around $60K as we only really need one extra room and buy another a house for say $380K in a growth area with the possibility of putting two townhouses on the block down the track.
I earn alot more than my husband and I am also planning to have have another baby in 2-3 years which will mean a reduced income for 12 months. We currently have 1 child. Not really looking capital growth but more of an income so the place pays itself off over time.

Do a search as this has been covered in a number of threads previously. If you buy a new PPOR and rent out existing, you'll be worse off as interest payments won't be deductable.

Strategies 2 and 3 are up to your personal preference, but if you're having another baby soon, a unit may not be the best option. If you like your current place and it's in a good area, why pay costs of moving. Lesson number one in property investing is never sell unless you have to-just money down the drain IMHO.

Before you take the plunge I recommend you read the following two books at the very least: Building Wealth through Investment Property by Jan Sommers and How to build a multi million dollar property portfolio by Michael Yardney. Both are a must for beginners.

Project 1080.

The project: 10 IPs in 80 mths.

 

[Propertunity]

Hi, we're considering our first investment property and am after some advice as to which way to go. We're in our early 30's and have just paid off our PPOR.

Congratulations on one hand - you have been very disciplined and on the other hand - a slap on the wrist for having a bunch of equity that is not being leveraged into other investments.

We are thinking of purchasing a bigger PPOR for approx $550K and then renting out the property we've just paid off.

That's fine EXCEPT from a tax perspective. You'll have an IP with almost no deductions (no interest claimable) earning a good rental that will be taxed in your hands. Then you'll have a high personal mortgage that is completely non-tax deductible.

1) Can we borrow against the property that we've just paid off so we only owe say $70,000 on the new property that we're thinking of buying.

Yes you can but the tax situation remains as described above. Borrowing against the property you just paid off is non-tax deductible as it is for personal use.

2) Should we sell the existing PPOR and buy a unit instead for say $320k in a good rental area eg St Kilda, VIC (rental return of around $250/wk), with the view of starting small and then purchasing another in 3-4 years.

Dunno - no-one can say. Selling the PPOR attracts costs of REA commission. But it is CGT free Buying a unit attracts Stamp Duty and a return of $250 pw is not that good for a $320K investment @ only 4% yield.

3) Another strategy is to stay we're we are, extend for around $60K as we only really need one extra room and buy another a house for say $380K in a growth area with the possibility of putting two townhouses on the block down the track.

I like this option the best.

Not really looking capital growth but more of an income so the place pays itself off over time.

Well that cuts out Option 2. All you'll get out of St Kilda is CG

 

[BayView]

Hi, we're considering our first investment property and am after some advice as to which way to go. We're in our early 30's and have just paid off our PPOR. We are thinking of purchasing a bigger PPOR for approx $550K and then renting out the property we've just paid off. Anticipated rental would be $300-$350/wk and if we were to sell this house, it would sell for around $480K-$500K. Some questions that I would love answered are as follows:
1) Can we borrow against the property that we've just paid off so we only owe say $70,000 on the new property that we're thinking of buying.
2) Should we sell the existing PPOR and buy a unit instead for say $320k in a good rental area eg St Kilda, VIC (rental return of around $250/wk), with the view of starting small and then purchasing another in 3-4 years.
3) Another strategy is to stay we're we are, extend for around $60K as we only really need one extra room and buy another a house for say $380K in a growth area with the possibility of putting two townhouses on the block down the track.
I earn alot more than my husband and I am also planning to have have another baby in 2-3 years which will mean a reduced income for 12 months. We currently have 1 child. Not really looking capital growth but more of an income so the place pays itself off over time.

Any money you borrow out of your existing property for a new PPoR will not be tax deductible.

I think option 3 would be the lowest cost solution right now, and with good "add value" prospects down the track.

You will also add value to the current PPoR with an add-on if it is done correctly. Maybe not immediately, but certainly to cover the cost of the reno I'd say.

 

[Learnings]

even if the repayments arent deductible, shes got around 400k in equity sitting there.

Would be crazy not to utilize that to perhaps extend PPOR, then purchase a IP elsewhere.

 

[Lukey13]

Another option might be to sell at full market value your current PPOR to yourselves - I'm pretty sure this can be done in a trust or in personal names. You could then use this cash to pay for your new PPOR.

In effect you would be maximising deductible debt by having the large loan against your old PPOR/now IP and having bugger all debt against your new PPOR, depending on the difference in price between your current PPOR and proposed one.

The costs involved would be the relatively minor selling and buying costs (legals) and then the more significant stamp duty on purchase.

However, depending on your circumstances these might be worthwhile expenses and certainly a better option than having a large PPOR loan and nil IP loan.

I'm considering this option for my situation by means of selling my half-paid-off PPOR to a Family Trust (which I will use for business income) in order to access the equity for a new PPOR and to be able to hold onto my current place so I can do a dual occupancy in a few years time.