Want to buy a nice house for PPOR.. is now the time?

[drfunk]

Hey peeps

Didn't know where else to post

I'm just wanting some advice as to what the somersoft collective thinks I should do.

As a bit of background - I'm 29 and so is my wife. Our after tax monthly income is ~15000 (me) and ~2800 (her), combined ~18,000 (we currently don't negative gear or do anything fancy tax wise). These figures don't include the ~$1060 per month rent we get in rental income (below).

We currently own 2 houses in Melbourne. 1 as a PPOR in Coburg and 1 as an investment property in Brunswick. Both 3 bed 1 bath, the coburg californian bungalow being larger compared to the brunswick victorian. Both have been valued ~$730k by the bank as of July 2011 (when we changed banks/mortgages). We owe $952k in total (against ~1.46M assets). We rent out the brunswick property for ~$530/week. The Coburg place would probably be rented out for ~$500/week looking at similar places online. We have no other savings (all extra money is just piled into the mortgage)

We would really like to have better PPOR. I am wondering if now is the time to strike for ~1.5million dollar homes, or if we should keep saving and bide our time.

I would prefer not to sell the 2 houses we have already but I am not sure there is much choice. Crunching the numbers I feel we can only afford around the 1M mark before the repayments on 3 properties start to become >50% of our aftertax income (at current low interest rates... meaning we are screwed if rates go back to 9%+).

We are interested in the lower plenty/ eltham/ plenty/ templestowe sort of area (north melbourne) with a large block (preferably 2.5 acres) with a nice house. Most of these properties seem to be in the 1.5-2M mark, they seem like they are stuck in pre GFC pricing... and the vendors prefer to sit on houses that don't seem to sell for 3+ months instead of taking realistic offers.

My end goal is though all this is to be reasonably well off with a lovely house. I am worried if I don't get my hands on a piece of 'luxury' real estate now, that after this GFC era has finished, these sorts of houses will be out of my grasp forever.. I know I am young and I am prepared to wait if this is the better plan.

So after that novel, what do you think we should do? To summarise I don't mind waiting ~3-5 years if this means we will be a lot better off in the long term, but I am worried the 1.5M segment will take off again after the GFC and euro crisis has ended

1) Get the taxes in order, negative gear the rental property, stay in our PPOR and just save for a few years?

2) Buy a new PPOR ~1M, negative gear/rent both current properties (but I wouldn't be particularly satisfied with any new house in this price range.. I like our house as it is right now)

3) Buy a new house ~1M, continue living in coburg and negative gear the new place + brunswick?

4) Sell both houses, buy a 'premium' property ~1.5M and not have any other investments?

5) Sell one house and stretch ourselves for a nice PPOR?

 

[Aaron_C]

Just bear in mind that if you do rent out your houses you will be able to save tax, so your bottom line isn't as impacted. Plus you can go for the Income Tax Withholding Variation so there's less tax taken from your pay packet each fortnight/month to help with the repayments.

Both your incomes are quite strong but the main problem you have is lack of a deposit fora new PPOR. You may get around this by borrowing off your Coburg and Brunswick houses but it might not be enough if you are looking for a $1.5-2m home. Would need to know the actual loan breakdown between the brunswick and coburg house to get a better idea of what your options are.

 

[drfunk]

The breakdown is a little more complicated than that

we have $230k cash in an offset account linked to PPOR mortgage (of $230k)

and an investment property mortgage of $952k... I don't really understand how given the property is only worth $730.. lol. I think it must be secured against both properties and was done this way for tax purposes (although I fell out with my accountant so I never organised the negative gearing aspect.. but I know I need to)

I just simplified it in the first post

 

[Aaron_C]

Hi drfunk,

Are your loans cross collateralised? It seems that way otherwise your brunswick house (Valued at $730,000) couldn't possibly secure a loan of $952,000. You would probably have to untangle this otherwise you will run into problems in the future.

 

[drfunk]

Yes I just rang the bank and they are both cross collateralised loans (both loans secured against both properties).

What problems would I run into with this loan structure? My ex-accountant set this structure up to be 'tax efficient' in their words.. but I assume I would run into problems with working out exactly how much interest can be negatively geared? is this the issue you are talking about aaron?

 

[Aaron_C]

The problem doesn't necessary cause tax problems per se (but it can, your 'current' accountant should help you with this!).

The main problem comes with flexibility to use your properties as you see fit. Since the bank controls both properties together, that means that whatever you do to one property, it can/will impact on the other. It is always best to keep two properties independent because you never want the bank to have full control over all your portfolio's assets. If the bank starts to feel uncomfortable about your position (if they think you are too 'risky'), they will stop lending you money - and you can't take your security to another bank because it's all controlled and held by your original bank. The ultimate consequence of this is when you are forced to sell your assets due to financial stress - the bank will control the sale process and there's not much you can do about it. Seen it happen plenty of times.

Banks always want more security - and cross collateralisation is the most common way to get it. They do it because it avoids a customer having to pay LMI, and because often customers don't even understand what's going on.

So, as part of your plan to upgrade to a new PPOR, I would seriously consider uncrossing your loans so you can do what you want, whenever you want, with your properties.

 

[drfunk]

Both loans were seperate until July 2011 when it was all rejigged to be more 'efficient' so ... sad face

guess we're getting off topic a little

 

[Aaron_C]

Mortgage insurers don't insure any loan above $1m. So you can only borrow a maximum of 80% of the $1.5m property, so you need $300,000 cash and your serviceability has to satisfy the bank.

 

[Macca]

Is that normal in Melbourne ?

A property valued at $730k renting for $530 a week.

I would expect it to be up around $700 for a reasonable return, guess I won't buy any in Melbourne any time soon.

 

[hobo-jo]

I would suggest considering the current fundamentals for the Melbourne market as outlined in a recent report from Unconventional Economist on MacroBusness:
http://www.macrobusiness.com.au/2011/10/melbourne-housing-valuation-report/

 

[Jaggannath]

I would get an accountant in to sort out how much you can borrow, and then engage a buyers agent to find something that suits your tastes and budget.

Tell you what, I'd love a monthly income of $18000, I'm working my **** off for $2000/month

 

[pieman]

I would suggest considering the current fundamentals for the Melbourne market as outlined in a recent report from Unconventional Economist on MacroBusness:
http://www.macrobusiness.com.au/2011/10/melbourne-housing-valuation-report/

I would suggest not buying in to the doom and gloom end of the world scenarios as well positioned quality homes will always be in demand in Melbourne.
If I had listened to the D+G brigade in 1995 when they were telling me to "keep in cash as there's a big depression due at the end of this decade" I wouldn't be sitting in a fully paid off 2 year old 5br house in Melbourne's bay side.
As always, due diligence and managing an acceptable level of debt/risk is the key imho.

 

[Samwise]

This is a lifestyle decision as opposed to an investment decision, so nobody can answer it but yourself.

FWIW we recently chose to upgrade our PPoR rather than jump into IP at the moment (for lifestyle reasons).

Cheers, Sam

 

[Thesnowyforest]

What do u do for work?

 

[CHam]

Another area that you may want to look at is Donvale. Plenty of large homes around on good land that are not outrageously priced. And in some cases a bit closer in than Eltham, etc.

 

[contrary]

It really depends on your personal preferences. No one can predict the future. Are house prices in Australia overvalued? To me they are, but who knows, they could go up further for another decade. We haven't had a recession for 20 years but history suggests that one will occur at some stage. Maybe 2 years, maybe 10 years or even 20.

I make my decisions based on my assessment of the current sitution and my current needs. I make about 300k a year. I live in a house worth 700k. I drive a car that cost me 35k. I would rather invest my savings in my business rather than a bigger house or a more expensive car. I can't believe what people will spend on a house compared to their income. I spend about as much time in my house enjoying it as I do in my car, such is the state of traffic in Sydney. I have actually chosen a place so my commute time is half an hour each way but 1 hour a day when you are awake 16 is a lot of lost work time. Personally, hiring a driver so I can read or sleep in the hour I spend in traffic every day is probably going to make a bigger difference to my quality of life than getting a bigger place or a bigger back yard.

Personally, I will hold out for a 2M place until there is a recession. If there isn't one then I'll keep living where I'm living (a 3br townhouse). My parents raised us in a smaller place than where I live, so I can't see why I wouldn't be able to do the same. If you have kids, go to a park. If you have too much junk rent some storage or give it away.

What you do with your savings is a personal choice. I prefer to invest for increased income so when we have our second child, I won't have to work as much. The big house is like an expensive watch. I might get one if it was on sale, but otherwise I'm not fussed. I have a $300 seiko watch which to me looks pretty nice and has worked pretty well for the last 10 years so why do I need a more expensive watch?

 

[Shadow]

I would suggest considering the current fundamentals for the Melbourne market as outlined in a recent report from Unconventional Economist on MacroBusness:
http://www.macrobusiness.com.au/2011/10/melbourne-housing-valuation-report/

I wouldn't pay much attention to what 'Unconventional Economist' Leith van Onselen from Macrobusiness says.

His nonsense has been debunked many times.

Leith has been pretty much discredited and exposed as a manipulator of data to suit his doom & gloom agenda.

Just Google his name.

 

[JIT]

What you do with your savings is a personal choice. I prefer to invest for increased income so when we have our second child, I won't have to work as much. The big house is like an expensive watch. I might get one if it was on sale, but otherwise I'm not fussed. I have a $300 seiko watch which to me looks pretty nice and has worked pretty well for the last 10 years so why do I need a more expensive watch?

Because the house (PPOR) is CGT free, so in some ways it makes sense to get as much PPOR as you can afford.

 

[warrenkh]

re

Unless you have a large deposite.
Taking aside the loans that you already have.
Just say you have a deposit of 500,000 and need to borrow 1,000,000.
On a interest of 6.75%, would be extra $67500 a year of interest. Which then translate to an extra spend of $5625 of interest repayment per month after tax.

I know you are earning quiet alot. But would this $5625 (+ more if you take into account house maintenance, stamp duties, and prinicpal repayments) affect your living standards since you are middle upper class. Plus, I always believe one need to have some buffer for the times when you are sick.

Warrenkh.2011