a PPOR does produce income... the value of its rent. OK it's a poor income and I too have considered the merits of renting and agree that on paper it would possibly be better, but for the marginal benefits I wouldn't bother. Imagine selling your PPOR now to invest in a heated stock market - the SNAF would be shocking.
Your home is not an Investment
- Thread starter JimmyJames
- Start date
I think PPOR's are potentially a tremendous investment.
They provide emotional security of having somewhere to live. They're a form of forced savings (paying off the mortgage). And, as has been mentioned, they can be used to get funds for IP purchases, or loans for lifestyle purposes.
I've posted this a couple of times before so apologies to those who have seen it already -
If you have a PPOR and you have a mortgage on that PPOR then depending on your marginal tax rate and the interest rate payable on your mortgage, each dollar put in your offset account [linked to your PPOR mortgage] could be earning you as much as 13% pre-tax equivalent (remembering that PPOR mortgages are paid from after-tax dollars in many, not all, cases).
In a low-yield, low-capital gain market (perhaps what we have atm?), it certainly could be argued that parking excess cash in mortgage offset accounts is a very effective use of your money - and with close to ZERO risk too!
There's alot more discussion here, including a spreadsheet that will calculate the pre-tax equivalent earnings that each additional dollar paid into your mortgage (or sitting in a mortgage offset account) earns you.
Mark
They provide emotional security of having somewhere to live. They're a form of forced savings (paying off the mortgage). And, as has been mentioned, they can be used to get funds for IP purchases, or loans for lifestyle purposes.
I've posted this a couple of times before so apologies to those who have seen it already -
If you have a PPOR and you have a mortgage on that PPOR then depending on your marginal tax rate and the interest rate payable on your mortgage, each dollar put in your offset account [linked to your PPOR mortgage] could be earning you as much as 13% pre-tax equivalent (remembering that PPOR mortgages are paid from after-tax dollars in many, not all, cases).
In a low-yield, low-capital gain market (perhaps what we have atm?), it certainly could be argued that parking excess cash in mortgage offset accounts is a very effective use of your money - and with close to ZERO risk too!
There's alot more discussion here, including a spreadsheet that will calculate the pre-tax equivalent earnings that each additional dollar paid into your mortgage (or sitting in a mortgage offset account) earns you.
Mark
When ever I hear comments like that I think Marketing.
A recurring theme in many investment books / articles is a need to denigrate other investments prior to building up the inve3stment that you're trying to promote / sell. Reminiscent of the property / share debate which is point less. Obviously this is where the inspiration for this post comes from.
There are many ways to invest. Personally we've made more money from our PPOR than from any other source, and this includes " active investing " in terms of subdividing it / building / renovating / selling ( capital gains tax ) free.
I don't know another easily available investment that is Tax free. If people know of one I'd love to hear about it.
See Change
A recurring theme in many investment books / articles is a need to denigrate other investments prior to building up the inve3stment that you're trying to promote / sell. Reminiscent of the property / share debate which is point less. Obviously this is where the inspiration for this post comes from.
There are many ways to invest. Personally we've made more money from our PPOR than from any other source, and this includes " active investing " in terms of subdividing it / building / renovating / selling ( capital gains tax ) free.
I don't know another easily available investment that is Tax free. If people know of one I'd love to hear about it.
See Change
Personally I am all in favour of owning a PPOR's and I think they end up being the best single investment most of us ever make. Ask just about anyone over the age of 40 where their net worth comes from and most will say their PPOR. Sure, it doesn’t throw off cash flow but as investors we need both capital gain and cash flow don't we? By default most people use their PPOR for capital gain and their JOB for cash flow.
It's also possible to use the PPOR much more effectively than just buying a place, living in it for many years and paying a 25-year P & 1 loan. For example someone might use an IO loan and use the principle part to finance the shortfall on a slightly negatively geared IP.
Another strategy would be to buy a house with a large yard, subdivide, then sell either the house or land. Then repeat, perhaps every two years.
Tony
It's also possible to use the PPOR much more effectively than just buying a place, living in it for many years and paying a 25-year P & 1 loan. For example someone might use an IO loan and use the principle part to finance the shortfall on a slightly negatively geared IP.
Another strategy would be to buy a house with a large yard, subdivide, then sell either the house or land. Then repeat, perhaps every two years.
Tony
Completely agree See Change.
Just wondering, when you bought your PPOR did you pay the majority of your loan off prior to commencing investing in other areas? And did you then use the equity in your home to invest in other areas.
Either way, this would be in my opinion one of the advantages of buying a PPOR first, working hard to pay off the loan and then using this equity to invest elswhere.
The only problem I would see is if people are just starting out, depending on where you want to live, it can be a large drain on your financial resources to pay off the PPOR first - i think in Sydney that the average % of take home wages used to pay the mortage is somewhere between 40% and 50%. This doesnt leave much left over for other investing for quite sometime.
In this event, someone may be better off renting and the purchasing IP's and then waiting to the point where they have sufficient assets growing for them supplemented by the income from the investments and then consider purchasing a PPOR.
Either way, a PPOR can definately be considered an investment as part of a balanced portfolio.
Best Wishes
Corsa
Just wondering, when you bought your PPOR did you pay the majority of your loan off prior to commencing investing in other areas? And did you then use the equity in your home to invest in other areas.
Either way, this would be in my opinion one of the advantages of buying a PPOR first, working hard to pay off the loan and then using this equity to invest elswhere.
The only problem I would see is if people are just starting out, depending on where you want to live, it can be a large drain on your financial resources to pay off the PPOR first - i think in Sydney that the average % of take home wages used to pay the mortage is somewhere between 40% and 50%. This doesnt leave much left over for other investing for quite sometime.
In this event, someone may be better off renting and the purchasing IP's and then waiting to the point where they have sufficient assets growing for them supplemented by the income from the investments and then consider purchasing a PPOR.
Either way, a PPOR can definately be considered an investment as part of a balanced portfolio.
Best Wishes
Corsa
The PPOR is NOT an investment. Not only that it’s not an investment it is a LIABILITY. Why?
1. It does not produce income
2. There are not capital gains until you sell, in which case you are without a PPOR and will have to reinvest that or similar amount for new PPOR.
3. It takes money to maintain.
None of these are putting money in my pocket, that is why PPOR is not an investment and should not be considered as one.
Granted, PPOR appreciates in value, as do IP's, so the CG realized is no different then CG realized in IP's. Many other things appreciate in value over time as well. The problem with the PPOR is that one can not realize the CG until one sells, and when one sells one will need new PPOR to maintain similar lifestyle.
When buying PPOR different things are important then when buying IP's. We buy PPOR to gain a lifestyle primarily, and to make the building into our home. The CG is not the prevailing factor in buying PPOR.
Thx
V
1. It does not produce income
2. There are not capital gains until you sell, in which case you are without a PPOR and will have to reinvest that or similar amount for new PPOR.
3. It takes money to maintain.
None of these are putting money in my pocket, that is why PPOR is not an investment and should not be considered as one.
Granted, PPOR appreciates in value, as do IP's, so the CG realized is no different then CG realized in IP's. Many other things appreciate in value over time as well. The problem with the PPOR is that one can not realize the CG until one sells, and when one sells one will need new PPOR to maintain similar lifestyle.
When buying PPOR different things are important then when buying IP's. We buy PPOR to gain a lifestyle primarily, and to make the building into our home. The CG is not the prevailing factor in buying PPOR.
Thx
V
Case in point :
My friends father just sold off 40% of his PPOR land near Ballarat to a major developer. He has lived on it for a long time on the outskirts of the city - raising horses on it.
He got a touch over $2M.
Even Peter Spann would be proud of that land banking effort.
Not too bad eh.
T.
PS: Call it what you want - he got a GREAT RETURN = an investment in my book.
My friends father just sold off 40% of his PPOR land near Ballarat to a major developer. He has lived on it for a long time on the outskirts of the city - raising horses on it.
He got a touch over $2M.
Even Peter Spann would be proud of that land banking effort.
Not too bad eh.
T.
PS: Call it what you want - he got a GREAT RETURN = an investment in my book.
Panic said:
Hi Panic
Whilst i agree with some aspects of your post - ie different factors become important when buying a PPOR vs an IP, that does not detract from the fact that (1) a PPOR can generate Capital Gains (the same as any other investment vehicle) and (2) in many cases, you need not sell to gain access to the capital gain. you just borrow against it to fund either future PPOR or IP purchases or to fund lifestyle.
I still think a PPOR is a perfectly legitamate investment, but I think it is important for each individual to weigh up what else they would be doing with that money or what the opportunity cost might be of using that money for that purpose vs another purpose - ie for me I purchased many IP's before I purchased my PPOR - and even still I did this through a trust so I just rent from the trust - but for others it might be better for them to do it the other way around or some hybrid.
Can you see this other point of view?
Best Wishes
Corsa
Corsa said:
Hi Corsa,
I agree with you that PPOR experience CG and that one can borrow against it. I believe that the point of this post was to discuss the mindset in regards to expectations from IP's and PPOR's.
In general as stated previously, an investment is producing income, or SIGNIFICANT capital gains against the amount invested.
So, in terms of PPOR, it is a liability because it does not produce income and does not produce "SIGNIFICANT" capital return on invested capital, until sold. It costs money to maintain this liability.
There is nothing wrong with accepting that PPOR is a liability. It is a necessary sacrifice that we all make to accommodate our lifestyle.
Is it a great vehicle to raise capital for investments - YES.
Thx
V
Corsa
We did a subdivision and built on one block on previous PPOR and as a result of that we were able to buy current PPOR ( now approved for subdivision and about to start building ) with no mortgage. We then got a LOC and used that as deposits for our subsequent portfolio.
Since we bought we've had it revalued ( up 250 K ) and increased the LOC. The LOC and money we've made from our IP's will pay for the new development ( doing it all this time ) and the story will repeat.
If it was a comparison between buying an PPOR and holding it for 30 years while paying it off on an P& I loan the story may be different , but there are other ways.
See Change
We did a subdivision and built on one block on previous PPOR and as a result of that we were able to buy current PPOR ( now approved for subdivision and about to start building ) with no mortgage. We then got a LOC and used that as deposits for our subsequent portfolio.
Since we bought we've had it revalued ( up 250 K ) and increased the LOC. The LOC and money we've made from our IP's will pay for the new development ( doing it all this time ) and the story will repeat.
If it was a comparison between buying an PPOR and holding it for 30 years while paying it off on an P& I loan the story may be different , but there are other ways.
See Change
We moved out of a rented unit to finally move into our first PPOR to try and test this point for ourselves in December 2005.
So far:
1. OK, it's good not having to worry about a landlord
2. Suddenly I seem to be very busy on non value adding changes around the place (e.g. changing globes to lower wattage - thought 500W per room was a bit much....)
3. Suddenly carrying out many minor repairs (things that landlord repaired previously, or on our IP's, wouldn't worry about until major overhaul)
Interesting experiment so far....
Cheers,
The Y-man
So far:
1. OK, it's good not having to worry about a landlord
2. Suddenly I seem to be very busy on non value adding changes around the place (e.g. changing globes to lower wattage - thought 500W per room was a bit much....)
3. Suddenly carrying out many minor repairs (things that landlord repaired previously, or on our IP's, wouldn't worry about until major overhaul)
Interesting experiment so far....
Cheers,
The Y-man
It might be an investment. But only if you are going to take action. If not then it is only on paper and a conceptual value. Unless you use the equity or sell up, downsize and invest the rest then it is only an on paper 'profit'.
Yes you can buy in 1984 and be able to sell in 2006 for $300,000 more than your original purch price. But I believe the stats show that downsizing doesn't always occur.
Jewellery/Art is an 'investment' too. Can be worth more than you paid but are you going to sell or is the sentimental value too much? Of course you can't borrow against the items I just mentioned like property I realise that, was just an example.
Maybe a ppor is like a brain. How much of an asset it is depends how you utilise it. Structurally mine is probably similar to Einstein's but how much will I achieve? He applied his very well.
Yes you can buy in 1984 and be able to sell in 2006 for $300,000 more than your original purch price. But I believe the stats show that downsizing doesn't always occur.
Jewellery/Art is an 'investment' too. Can be worth more than you paid but are you going to sell or is the sentimental value too much? Of course you can't borrow against the items I just mentioned like property I realise that, was just an example.
Maybe a ppor is like a brain. How much of an asset it is depends how you utilise it. Structurally mine is probably similar to Einstein's but how much will I achieve? He applied his very well.
kierank said:
Well, I guess different points of view. That is why the CG part of the investment definition has the "SIGNIFICANT" wording.
As none of the above mentioned collectables produce income (which I like much more then CG) and actually cost to keep/maintain, in my book they are liabilities, or as you said at best case collectibles... but not investment assets.
Thx
V
i definately consider my ppor's investments. we started with reno'ing dumps, taking the tax free profit, moving into another dump, reno'ing, taking the tax free profits etc etc ... until now we completely own a large, comfortable house with ingound heated pool and 26ft boat, two cars and no debt. bought in 2001 for $400k, recently valued at $700k.
we could've stop there i guess and lived from paycheck to paycheck, but instead we got a loc for deposits on ips. some of the ips we develop and sell off to pay down the loc, but it is always on tap for when we see a "deal". thanks to the house we now have 10 ips and now looking for some land for a small development - all before 40.
none of this would have been possible without our orginal ppor reno'ing plan and subsequently having our ppor mortgage free.
but - the best investment of all with our ppor is freedom. freedom to do what we want, when we want and how we want in my own home. bliss.
we could've stop there i guess and lived from paycheck to paycheck, but instead we got a loc for deposits on ips. some of the ips we develop and sell off to pay down the loc, but it is always on tap for when we see a "deal". thanks to the house we now have 10 ips and now looking for some land for a small development - all before 40.
none of this would have been possible without our orginal ppor reno'ing plan and subsequently having our ppor mortgage free.
but - the best investment of all with our ppor is freedom. freedom to do what we want, when we want and how we want in my own home. bliss.
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