What to do? Difference in opinion re our financial future

[wonderwoman]

Hi everyone

I've been following this forum with interest for a while and would appreciate some much needed advice in terms of suggesting strategies/a plan for the future in line with our current situation.

We recently sold our first house, which we were occupying at what I'd consider a very healthy profit after some cosmetic renovations but mostly due to the location and a rise in the market. We have purchased another house in the same area which we are currently renovating but are not living in yet, being fortunate enough to house sit for relatives in the meantime.

My query relates to the future. Whilst my partner is keen on renovating houses to sell at a profit in order to (hopefully) acquire large chunks of money to eventually own our own PPOR outright, I feel that investing in rental property is a better long term strategy to create wealth and eventually generate an income, whilst perhaps downsizing our PPOR in the meantime.

Does anyone have any advice in relation to this and would perhaps be willing to share their own story? We are currently sitting on a mortgage of $425K for our house purchased for $500K and the house has been valued at $550K. Would you:

1) move into the house, continue the renovations and hold onto it, hopefully acquiring an investment property elsewhere

2) sell the house before occupation, using any profit to buy a smaller PPOR and an investment property (I understand there are CGT implications to this) or

3) convert the house into an investment property, renting it out whilst renting ourselves (can't say I'm too comfortable with renting but open to suggestions).

I'm also interested in how much, if any the banks would be willing to lend to us for investment purposes in the current climate.

Thanks, would appreciate any advice.

 

[Peter_Tersteeg]

Hi Wonderwoman,

Your questions are very open ended. Property investment is (IMHO) a long term strategy.

Buying your own home and an investment property will allow you to build up equity in two properties over time, thus creating wealth. If the value of the investment property were to double in say 10 years, it should pay off your home loan. This is a basic strategy that relies mostly on time, but it is simple to implement.

You could continue to buy, renovate and sell for profit. This is probably a bit more risky as it's easy to over spend on the renovations and thus not make any money. As you noted in your post, most of the increase in value was simply from the market rising in value whilst you did the renovations. You also need to consider the buying and selling costs. This relies on worthwhile renovations and picking the market well. A strategy like this can create rewards quickly, but it can also be risky.

Renting yourself can be a useful option. If structured well, you can claim a lot of tax deductions (home office) in the property you're renting, as well as the property you own.

The best suggestion I can give you is that you should spend time researching your options. Understand the implications of each strategy to determine what you're comfortable with. There are plenty of recommendations for books to read, but I'd start with "Creating Wealth Story by Story", Jan Somers. This book uses short examples of many different ways to create wealth and may give you some ideas of where to start.

At the moment interest rates are dropping, so banks are willing to lend people more money in many instances. On the other hand, it is becoming harder for some people as their circumstances don't meet the banks credit policies any more. The best way to determine your borrowing capacity is to contact myself or one of the other brokers on the forum. A brief conversation should be able to determine an estimate of your borrowing capacity, but specific questions do need to be answered to find this out.

 

[wonderwoman]

Hi PT_Bear

Thanks for your reply, I agree my questions are very open ended I guess I am just developing ideas at the moment in order to put in a place a solid plan for the future as soon as possible.

I have read a few books on the topic but can't find much information in relation to how many investors consider owning their PPOR to be important? I think that is the main area of difference between myself and my husband. Whereas I am comfortable in owing on our house, whilst generating investment income, he considers it a priority to pay off the house first.

 

[evand]

Why dont you do both. Keep one, sell one, keep one.......

I have to say tho, the best time for reno to sell is when the market is rising, not when its falling or flat as it is now.

But it could be an ok time to buy, reno & and keep if you dont mind low yields and the possibility of a falling market. Not my cuppa tea tho......

 

[Sunfish]

I think your partner may be right. For my reasons read here:

http://www.somersoft.com/forums/showthread.php?p=484288#post484288

 

[lizzie]

you also have to be careful how often you buy, reno, sell in regards to the ato. i am not sure of the ratio, and believe the actual law is rather vague - but it's something like if you claim cg free income on a ppor more than once a year - ie, buy, reno, sell every year - the tax office will look at you very carefully and may assess the income as taxable.

basically the tax office can decide that you are not just renovating your ppor and then selling - but are instead carrying out a business of renovating and selling.

 

[wonderwoman]

Thanks everyone for raising some good points. Lizzie, you're right in your suggestion, I have a legal background and it's true that the tax office can declare you to be 'trading' in these circumstances, another aspect which turns me right off the buy, reno, sell scenario.

For now I guess it's back to the books to do some research and some thinking about where to next. Thanks again!

 

[nonrecourse]

Just another approach. Since you are keen to invest and your husband wants to pay off the PPOR there is another approach you can take.

If I was starting out again I would be using my super to purchase real estate through a bare trust that your SMSF (D.I.Y. super fund) controls. It should be looked at as a long term purchase and hold.

For example a shop with a residence above gives you two types of rental income. The only downside with this approach is you need at least a 35% deposit for it to qualify for a limited recourse loan with one of the four major banks. If your willing to wait 12 to 24 months there will be lots of distressed sellers.

Your correct in wanting to develop a seperate income stream. Your husband is also right in not wanting to have a PPOR mortgage as you are paying it off with after tax dollars. Your home is not an investment it is a liability.

You can have the best of both worlds if you work together as a team. Good luck.

 

[Patosan]

super to purchase real estate through a bare trust that your SMSF (D.I.Y. super fund) controls.

I have a question on this as my brother was thinking of doing same. If a trust buys a property the negative gearing income tax discount is lost, of course the losses are kept and can be offset against future profits, but this doesn't help those who want to fully utilise neg gearing. Isn't this the same in the case of DIY Super Trusts ?

If so then you'd want to keep IP within the trust neutral or positively geared ... which is not easy for those starting down the investment road. So is my thinking on this correct, this is the first time to ask about Super trusts ?

 

[Peter_Tersteeg]

Hi Pat,

There's really nothing in a SMSF trust to negative gear, as this is as much a tax minimization strategy as it is an investment strategy. Also keep in mind that the lenders generally allow LVRs from 55% to 70% so losses within the SMSF are going to be minimal (despite the lenders charging an arm and a leg to SMSFs).

Serviceability also works a little differently for these loans. Instead of payslips the lenders simply want to see that you've been making adequate regular contributions to your super to ensure that any shortfalls are covered. This could be the 9% employer contribution. If that doesn't cover it, then evidence of additional contributions need to be shown.

 

[Buzz]

Wonderwoman, thought you might be interested in an article in the latest Your Investment Property Magazine. I know this year has gone fast but boy when I received the Jan 09 edition of this mag last night I was dumb founded.

Regardless one of the articles profiles a buy reno sell investor, great article with strategy specifics. Personally I have kept all the renos we have done so I have little to contribute to that strategy.

All the best
Jane

 

[james_w]

you also have to be careful how often you buy, reno, sell in regards to the ato. i am not sure of the ratio, and believe the actual law is rather vague - but it's something like if you claim cg free income on a ppor more than once a year - ie, buy, reno, sell every year - the tax office will look at you very carefully and may assess the income as taxable.

basically the tax office can decide that you are not just renovating your ppor and then selling - but are instead carrying out a business of renovating and selling.

3 can get away with 4 times in queensland after that your classed as a trader