My name is Chris, my partner and i are thinking of selling our PPOR. We would expect to get around 150k profit from the sale in capital gains.
We are currently thinking of perhaps renting and then using the freed up income – now the mortgage has gone- to invest with. Could i use this profit to invest in a couple of properties and make them CF+ starting small? Then over time leverage off them?
Any tips or just a heaps up if im in the totally wrong headspace would be greatly appreciated.
Thanks, Chris.rudolphMember@rudolphJoin Date: 2003Post Count: 23
Is the reason for selling just to get into investing? If so have you thought of getting a valuation done on you ppor and if there is enough equity the arranging for your mortgage to be renegotiated to the higher amount then use this increased funding as a deposit for your next IP.
This way you will have greater property value to get capiyal growth on.
You do not lose money with selling costs.
You stay in your own home.
the increased mortgage's interest will be tax deductible
you can if you want to leave your PPor make it into a rental as well ad then claim all of the interest.
Thankyou for the reply. Yes the reason was to sell my PPOR to make available some cash to invest with. At the moment we are shelling out a mortgage and not realising that capital gain. As for your suggestion this would mean we are paying the repayments on our current loan (approx 380k) plus the extra money borrowed. And subsequently using the increased borrowing to use as a deposit, then apply for more finance to purchase the IP? do i have that right?
Also as you know the 380k mortgage is eating a fair chunk of income away per week, if we were to sell, and rent this would free up more weekly income to invest (about $350 – $400pw). Even if the IP were only slightly negatively geared to start with? as well as available cash to put as a deposit.
Once again im only new to this and any help / advice would be greatly appreciated.
Thanks again, Chris.rudolphMember@rudolphJoin Date: 2003Post Count: 23
Yes you are right you would have a higher interest payment but remember this is offset by your rental income. I you were to sell you still have to live somewhere and pay rent so the extra $350 + per week disappears with no capital growth.
If you want to rent that's fine Also rent your PPoR then it becomes interest deductable and also can claim on depreciation.
It in my opinion is a backward step to sell if you can acheive your goals by renegotiating your mortgage.
I'd be interested to hear other opinions on this
RudolphL.A AussieMember@l.a-aussieJoin Date: 2006Post Count: 1,488
I agree with Rudolph's second comment;
move out of your current PPoR and rent it out. You will have an automatic I.P and all the costs and loan interest will be tax deductible. If it is a newer house than 1987 I would be getting a Depreciation Schedule done as well – it's also tax deductible and will pay for itself in the first tax return; you can save thousands on your tax with one.
You were planning on renting somewhere yourself anyway, so no need to sell your PPoR. The selling and buying costs will eat up a lot of equity un-necessarily.
Restructure your loan to access the available equity in it to use for more investing.
You can still buy two smaller I.P's, and because you are using the (borrowed) equity from your PPoR this will affect the returns – the portfolio may be neg geared, but you will have 3 properties going up in value instead of two.
Thankyou for your replies, i appreciate it.
-If you were to sell you still have to live somewhere and pay rent so the extra $350 + per week disappears with no capital growth.
Reference above, sorry mate perhaps i didnt explain myself enough, at the moment we pay $700 per week in mortgage repayments on a house that is worth- im guessing based on other properties in the region- 550k ish. So if we we moved out and payed 350pw rent then it would free up 350pw to invest. That was what i was saying.
Yeah the house is only 1 year old. What exaclty is the depreciation schedule, i have talked about it with friends is it to do with the fittings on the house?
As for restructuring the mortgages, you are saying just borrow from the available equity in the house to put down deposits on 2+ IP's, then borrowing the rest to settle on them, all the while claiming the interest for all the IP's on tax? is that right?
Thanks, ChrisL.A AussieMember@l.a-aussieJoin Date: 2006Post Count: 1,488
A Depreciation Schedule is a list of all the components of a building (house) and each item is priced and given a "depreciable life".
This means you can depreciate the whole building and all the fixtures and fittings, at different percentages for each item, each year, against you Personal Income.
For example; the building itself is depreciable at 2.5% for 40 years (100%) from date of construction. If the building cost $100k to build, then you can claim $2,500 per year at your Personal Income Tax Marginal rate against your Personal Tax.
Carpet has a "life" of around 10 years I think, so you can claim the carpet at 10% per year for 10 years (100%) and so on.
The schedule is prepared by a Quantity Surveyor at a cost of around $500 (which is also tax deductible) and is given to your accountant who will apply it to your taxable income every year.
The tax savings from all of these "on paper deductions" can be significant, and puts the cream on the top of a good property investment.
Even though you would be paying $350 per week in rent, you will still get a nice rental income on a house worth $550k (check with the local agents on the likely rent).
Say for example you got $450 p/w, the nett rent (after all holding costs are considered – around 20% of rent) is likely to be around $360 p/w. Your repayment commitment is now $340 + $350 (your rent you have to pay) which is $690 p/w.
That's around what you are already paying in mortgage payments, and we haven't even considered the tax deductions on the holding costs and the "on-paper deductions". If you are earning good incomes there cold be substantial tax savings.
If you were to get more rent than $450 p/w for your PPoR, and you rented a very modest house yourself for a round $200-250 p/w, you could end up with an I.P and a nice cashflow. On a newer house such as yours, you may also find that your nett rent may be higher as well as my 20% figure includes all maintenance – not really a lot required on a 1 year old house you would think.
With the refinance, you use the available equity for the deposits and purchase costs (around 6% of purchase price) and you can either take out new loans for the balance, or with some lenders they will extend your existing loan on your PPoR to incorporate the loan amount for the new I.P's – you have only one loan for all properties.
That advice sounds a little better than what i was thinking. .
I will take that away and see about the figures, either way ill let you know which way it goes.
Thanks again, ChrisphilrjonesMember@philrjonesJoin Date: 2007Post Count: 3
Ooops – I posted this under another section amd it belongs in here! Sorry about that.
Hi, I'm pretty sure timing has a lot to do with it. I had a property in the uk (my home) which I had for 10 years. Sold it for what I paid for it. Nightmare. After another 7 years it's now worth 4 times as much. Just my luck. I bought a property here in Oz in 2000 for 137k. Gone up in value very nicely! So I'm in luck with this one. Trouble is I can't access the equity – well I can officially, but my parents live there and they want to buy and….. long story but it's painful.
As a newbie (I also don't hear too many of "How I did it" stories), here's how I'm doing it. I have set my goals – income required from CF+ properties, the reason for it, where I want to be etc. First thing I'm doing is sorting everything else in my life that's financially related out – first of all I'm getting all my super into 1 place. My aim with super is to make 20% every year, and I'm currently getting 30%+ each year. Happy with that. I sat down and analysed what I owe (excluding the mortgage) – motorcycle loan, credit card etc. Ranked them into what was costing me most (interest rate). Now I'm hammering those to pay them off. Actually, my CC is the first one to go. Then I'll pay out the bike loan with the CC to take advantage of the 55 days free interest period, and hammer the CC again during that period. This way, I know when I'll be debt free except for mortgage.
My current IP is costing me $500 a month – yes I know, but try upping the rent for your parents, or kicking them out so you can sell it, especially as they're retired. I've agreed with them to up the rent so I'm out of pocket $400 a month. Shortly I'm changing the mortgage from P+I to I/O which will mean negative by about $100 a month. This will be through ANZ Money Saver Residential Home loan – 7.37%, flexible principal payments etc. (It was taken out as P+I because it was going to be my home and I wasn't focussed on investments back then). Then I'll hammer the principal for a few months to get it into a breakeven or even +ve position. During that time I'll be looking for another property. I don't mind taking a NG property for a while, but after getting IP number 1 down to a positive state, I'll use my salary to hammer the second one down to make it positive, plus look at other methods (making improvements etc). Yes I'm working and have to for my strategy to work well. I'll probably be going for 100% loan, IO for future investments, unless I can unlock some equity for a deposit. Then hopefully I don't have to pay the principal down for too long before it becomes CF+.
After reading Steve's books, I know it's not easy – I remember him saying they lived on bread and jam – or something like that. Well, I've done my budget for the next 2 years, keep minimum required for bills, food etc, will put all I can into mortgage, look for opportunities and MAKE them happen.
My goal is to live overseas, but I want a strong financial base here in Oz before I go with property, super and a few shares. I'm aiming for about 20 IP's. I regret buying my motorbike (new not secondhand), but I've decided on how to pay it off quickly. I drive an old car that's reliable and have no interest in renewing.
So I've started. I hate HAVING to work to pay the bills. I want to be in the position of being able to choose to work, start a business etc. First though, I had to have my goals. Now I understand what I want and how I'm going to get there. IMHO and in my case, it's not just property, it's sorting out all financial aspects – debt, super, shares, etc AND property. Now I know when I'll be financially independent, how I'm going to get there, and importantly, why i want to do it.
Cheers and good luck to all!
PhilRealEstateQueenMember@realestatequeenJoin Date: 2005Post Count: 69
Really enjoyed reading your post. Good luck to you mate! That is awesome that you have it all planned out!
Ive been through a similar scenario myself, sorted everything financial, get it all in order, and set goals so you know where you are going to be at any given time. It sure helps when you have to go to work, at least you know now you are working for something, not just working to pay bills and lifestyle expenses. It definately changes your outlook, and anyone serious about property investing needs to get all their finances sorted out pronto, because if you cant manage your own finances, your going to struggle with an investment property!
Anyway, I wish you all the best, and here's hoping all this planning pays off for us all hey? Which it will, because Ive read the Secret.philrjonesMember@philrjonesJoin Date: 2007Post Count: 3
Thanks for the comment. Yes I'm sure we will get there with hard work! Actually the motorbike I mentioned isn't too bad – I use to go to work everyday no matter what the weather, and it costs me $15 a week in fuel. No parking fees. So that's great. I'm doing lots of other things to help – as daft as it sounds, I take advantage of the off-peak hot water cycle! (11pm to 7am) i.e. At 11pm every night I switch on the hot water, and when I get up in the morning I turn it off. It sounds like a pain, but after a while I just got used to doing it. (I can do these things as I live alone – and there's still plenty of hot water. I've seen a big reduction in the elecy bill, and my water bill is down to below what I supposed to be using. The effect is that I'm using less money on those and able to put more into paying off debts and investing. Currently replacing bulbs with those funny shaped low watt ones too. After I pay out the motorbike I'm actually thinking of swapping it to a large-ish scooter and getting rid of the car. The scoot (I've ridden a few already) will become my sole transport, and then I can stop paying rego and insurance for the car when it's sold. I already know what my tax return will bring and that's going straight off the CC.
Yes my outlook has totally changed and I have definite goals and reasons. It certainly helps me concentrate on doing it. Without that goal I've just been drifting along up to recently. Now it's all clear! Thanks in a great part to Steve's book, this web site and peoples stories/comments. I've read some comments about the 0-130 and 0-260 properties books perhaps it not fitting with the current economic climate, but I don't mind. It gave me food for thought, gave me a push, and most of it is still relevant. Yes, I sure wish I have bought another 10 IP's in 2000 when I bought the first one! Timing eh?
PhilSteve McKnightKeymaster@stevemcknightJoin Date: 2001Post Count: 1,763
I am asked a similar question quite a lot.
Personally, I prefer the idea of selling up and using equity to get started on the premise that you buy back in using pofits later.
With careful planning and the right training I am use that you could do well.
Indeed, the way I began was to rent and use the money that would otherwise have been eaten up in a home equity to invest with.
I hope it works as well for you as it has for me.
All the best,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
Success comes from doing things differentlyelkamMember@elkamJoin Date: 2006Post Count: 722
Also something to consider in your calculations is that if you turn your PPOR into an IP rather than sell it, you can rent it out for up to 6 years (as long as you are renting and haven't bought another PPOR) and it still maintains it's CGT free status. You can even move back in before the 6 years are up and then move back out and start another 6 year period.
If you decide to go the route of pulling equity out of your PPOR for deposits on other IPs (irrespective of whether you move out and make it an IP or not) go to a good MB who will help you set up all loans so that they are all stand alone. Also one who is savvy about property investing may be able to advise you on structures (trusts etc) or in whose name to buy the IP's.
Thankyou for your time, i know its in short supply for most of us in current times, maybe even steve??? lol. I have spoken to a realestate agent and am advised that ill be looking at around $420pw to rent my current PPOR.
A have taken into account what everyone is saying – this forum, friends etc..- and although i understand all the tax deductions and ability to restructure my lending position, i still cant help but think to have the cash and not the debt is the best way to go? this way i have more cash each week to sink into other properties, even if they are negatively geared to start with.
Say for example i make for arguments sake 150k after everything from my current house i then could put a larger deposit down on the first property making it CF+, i know this may not be the best return on my money, but at least that first investment is paying for itself as well as a small passive income, that leaves me with the rest to use on a smaller growth property as well as the invested equity in the first. Also per week as i was paying $700pw in mortgage payment im only paying $350 to rent this now leaves me with the other $350pw to sink into the second smaller IP and possibly a reno?
I just think being into more into debt especially as a new investor is the way for me right now. THis way allows me to move forward with what i can see as some flexibility.
I definately appreciate everyones comments they are a real help. As always any thoughts would help.
Thanks again.DaviddanaeMember@daviddanaeJoin Date: 2005Post Count: 64
Don’t sell. Just refinance. I’m personally leaning towards the notion of capital growth not cash flow. If you have 150k equity in your PPoR, the bank will lend you over 115k as a line of credit. I would use 70 – 80k on a deposit and use the remainder of the funds available making up the short falls in the rent for the next 3 to 5 years (or until the rent is covering the mortgage payments). If you go interest only, its all tax deductible.
Hope this helps…