Gday All,
Been away for a while but am back now and apologies for not contributing to this forum.
Hoping you all experienced investors could point me in right direction and share your thoughts on what I am trying to achieve.
Our Basic Info
Previously I asked a question on this forum and the link is as below.
https://www.propertyinvesting.com/forum/topic.asp?TOPIC_ID=20042
We haven’t bought IP since then and still are living in unit which is our primary residence. Our equity has grown since my last post and our mortgage is now $ 155000.00. I have @ 60K in redraw. Every thing else I mentioned in my previous post is still same.
Our Situation
We now are at the stage where we run out of space and want to move to bigger place. We intend to buy house closer to Parramatta area which is close to schools and station. Below are few things I can do and need your help in deciding the best way to go as per current market and what my long term intentions are.
1. We find/buy property and move in there making our current PPOR an IP.
2. We sell our current PPOR and then buy next PPOR.
Option 1 is what we are intending to do. We don’t want to sell our current PPOR because we can get good rent on it and possibly we may have friend who can move into our place which will save me agent management fees and I can manage it myself. Also, in next boom we can make good CG out of it (hopefully).
Option 2 is not what we intend to do but if it makes more sense then may go ahead with this option.
Questions for option 1
1. How should we structure our loan so that we get max benefit out of it? Homepath advised me that they will start completely new loan for new property and they both will be completely separate? I am not sure if this is the way to go? However, Homepath does offer competitive rates then anyone else in market.
2. We leaved in current PPOR for more then one year and hence when we sell it down the track, do we have to pay Capital Gain tax? If yes, then what is the breakup?
Questions for option 2
1. How much cost is incurred in selling?
2. The price hasn’t improved since we bought current PPOR and hence I think we will not be making any profit if we sell it now. But then again, we might be able to get more loan sanctioned and can get new property at similar down prince. What are your thoughts?Sorry for lengthy post but we wanted to give you all as much info we can so that we can expect more accurate feedback.
Thanks for your time in reading this post.
Regards,
Hi
Briefly,
You would want your existing home loan to be IO as you would want to put all spare cash into paying down your new loan.The old place can still be counted as your main residence for up to 6 years, but you can only count one place as your main residence. So if you count the old one, and sell it will be CGT free, but if you were later to sell the new one, it may be liable for CGT even if you have lived in it the whole time. Better speak to a good accountant about this.
If you are going to sell, then the agents will charge 2-3%, plus you will have legals, govt charges and bank exit fees. Then if you were to buy another investment property to replace this, you will have stamp duty again as well as legals, loan fees, and govt charges.
Terryw
Discover Home Loans
Parramatta
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Terrryw,
Thank you for your reply and indeed it was brief and to the point. It was very helpful to us as we didn’t know about the things you mentioned.
All Investors/Members,
There has been so far @ 45 views excluding mine and have only one reply. Investors please help us and provide your thoughts.
Thanks,
Hi Munno,
You are ususally best to keep the two loans separate. It makes it easier to distinguish which expenses are attributable to which loans (properties) & therefore which can be claimed on your tax & which can’t. You might save yourself monthly fees by having the loans combined, but you would probably end up paying your accountant more than you would save when they prepare your tax return!
As Terryw said, an interest only loan on your current property would be advantageous, as you can make the minimum repayments on the IP & therefore sink any extra funds into your own mortgage, which is not claimable on your tax.
Some people would advocate drawing any equity down from your current property to use as a cash deposit for your new place. This would have the advantage of possibly eliminating lenders mortgage insurance by lowering you LVR. You may want to check this with your accountant & finance broker, though, because I’m not sure what the tax implications are since the second loan (& property) is going to be your PPR not an IP.
Recommendation: find good advisers. There are lots of really experienced ppl on this site, so see if someone can suggest an accountant etc in your area.
You would be best to sit down & crunch the numbers. Get an adviser (a REPUTABLE ONE!) to help you if you’re not sure how to get everything right. You may be better off in the long term to sell, pump all funds into the new PPR, & then borrow against this to finance the new IP. The money you save in interest could be substantial, depending on the loan amounts, interest, pay-out fees (don’t forget loan break fees if you’re fixed, etc) & the price of each property.
Consider consulting a broker. There are some really good brokers on this forum who might be able to help you or point you in the direction of someone they know. Again, chose a broker carefully. There are good ones & bad ones. A broker might be able to suggest a financier or product to you that you may not have even considered. And a good broker should not charge you for their services! I’m not one myself, so there’s no bias there, but I’ve used both methods before, & a broker is less hassle & usually a better outcome.
Finally, be VERY cautious in putting a friend into one of your IPs. I’ve seen many fabulous friendships end in tatters because of disagreements on what is reasonable & what isn’t. If it was me, I would definately ‘invest’ in the services of a property manager. It’s an extra degree of separation.
Most of all, have fun along the way! [biggrin]
Sorry for the long post, but I hope that has been a bit of help.
Cheers,
E.
Etcetera,
thanks for your reply.
Investors/Members,
There is alos another option where we could buy land and then build home on it. Would this be advisible? What are the costs involved? What are pitfalls?
Regards,
Munno
Hi Munno,
With regards to your 3rd option, buying land and building on it.This is going to sound very obvious but you would be surprised how many people get caught out. If you choose the build option and choose a project home builder (you know 4 bedroms etc etc only 120K or thereabouts), look closely at the inclusion, I mean really closely. Every variation has a cost, even the ones that seem basic, eg TV points in a media room, clothes line, cement (or tiles) at the front door, fan in the bathroom, extra powerpoints etc. Alot of these costs are not made available at the start and only come out after contracts have been signed. Given you are looking closely at costs, just make sure if you chose this option you have factored EVERYTHING in AND get it in writing.
All the best
Tammy[biggrin]Hi Munno,
Just thought I’d add my thought here for you. Some the same as others…Option 1.
Q1. Maximum benefits – talk to a good accountant and get advice with regard to anything to do with ATO.
Keeping the house is good option if the rental yeild is ok. If you do choose to put in a friend, do it through a rental manager at proper rental returns with the normal procedures in place to increase rent as needed & property inspections etc…
Q2. You won’t pay CGT on a PPOR if you sell it after a year of living in it yourselves. If you change it over to an IP and sell within the year after it is a rental, you may – not sure -check with accountant. If the property is bought in your own names, you will receive a 50% discount on CGT, that will be divided between the names on title. It will depend on income what the rates will be on that portion.Option 2.
Q1 Costs incurred in selling will be around 3% for commision on sale, solicitors fees etc. Check with REA for their rates of commisiion.
Q2. If the house hasn’t increased in sale value but the rents have risen, then this could be a potential property to keep & rent out. To find out what your rental yield is: weekly rent x 52 divided by value of property x100= rental yield %age.
Note: Rental yield – if higher than rate on the loan ,will normally be a positive cashflow propertyOption 3.
Building a home
Take careful consideration with the first one. Timeframes are always longer than first expected…costs are normally higher than budgeted…and then there is always something else not thought about.
However building a home can be a part of the journey to learning more about the investment world…Whatever you choose to do…enjoy & good luck with it. Keep everyone informed on your progress.
Cheers…Di Burns[strum]By the way, never be sorry for long posts…we love them. We all learn from them too![happy3]
Tammy & fbd1,
Thank you both for your reply.
I think we will keep current property, rent it out and will move in to new property. However, as per fbd1’s formula, out rent yield comes down to 5.2% and hence it will be negatively geared. I can’t sell it now as we won’t be able to recover the amount we invested so far.
Looking at my figures, do you all think that we should buy another property of @ 360K or considering current economic downfall play safe and try to finish off existing mortgage asap.
In above strategy, it is also possible that we won’t be able to buy house in Sydney if we miss the boat now.
What are your thoughts?
Regards,
Thats a good question.
Personally, I wouldn’t be worried about the boat leaving for 6 months. Interest rates are going up, spending is down, at least for the next quarter, therefore its possible things could come down futher.Any other economic enthusiasts have theories?
Hi All,
Just wanted to give you all an update.
We signed contract for 3 bedroom house over weekend and are in cooling-off period now.
Our existing unit is all renovated except bathroom. Once that is done, will rent it out. Will pull out all equity from existing mortgage and put it in new property. Existing will become interest only and new one will be principle & interest.
Fingers crossed. Now, the hard part, pay off mortgage for years and make banks more richer[angry2].
regards,
Munno
Good on you Munno for taking actions.
I guess going down the path of option 1 suit you as long as you’re getting good advice from accountant etc.
Has a valuation been obtained for the old PPOR before making it IP (refer to ATO site on the issue)? A quantity surveyor may come on handy for claiming depreciation to make the yield more attractive.
Lenders are just the necessary finance vehicle – use them to your advantage. The value of a good mortgage broker can not be underestimated; and they do not normally ‘directly’ charge you for their advice in leveraging strategies. Ask and you’ll get.
It would then be wise to do the proper due diligence and run the advice through your accountant, and a legal advisor, for structuring a wealth creation plan from there, if you have not done so already.
Wishing you well.[thumbsupanim]
CTI guess it’s too late now to put my 5 cents worth in this conversation.
But did you considered Option 4 – to rent a property to leave in and by a second IP instead?
In this case you could clime all deductions of both IPs.
If you run a home based business you still can claim the portion of your rent/relevant household expenses of tax.This what works well for us. Until we will have sufficient passive income of our PCF IPs we’ll leave in rented houses.
The positive thing is this way can leave were we like and were it is convenient for our business and invest were we can get profit (The area were we like to leave doesn’t have many choices for the positive cash flow investment).
The negative side it that you have to leave in rented home, not the one we own.
But we plan to retire young and we plan to do what it takes.
Cheers
Lesia
[evo]
http://www.vmstreamline.comctaing,
How do I get valuation done? How much am I looking at to get valuation done?
Also, can you please elaborate on your suggestion to have a look at ato site before making existing PPOR an IP.
I have booked appointment with my accountant regarding structuring best strategy.
In regards to using mortgage broker service, I did called one who was referred to me by friend and when I advised him that my lender is Homepath, he basically backed off and advised me that he can’t do better deal then Homepath offers. With Homepath, I will have two separate accounts and loans, one will be IO and other will be I&P. Not sure how it can be structured any better.
Your thoughts on this matter would be greatly appreciated.
Regards,
maxolau,
Indeed that is 4th option but not for us and we don’t have business either. It is a good way though for people having circumstances similar to yours.
regards,
Munno, I’m still green in investing topics. Although I know the basics I cannot tell you where to go for valuation. Do a search on this forum may be a start. Ditto as well to pointers for making PPOR to IP.
My accountant asked me to steer away from property investing as there are better alternatives. Make sure the accountant is knowledgable in the area. As they say, horses for courses.
As for brokers, maybe seek terryw in this forum, he’s got heaps of leads.
All the best
CT
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