Hello there,
My husband and I have three properties:
1. Bought in 2005 for 209,000 and getting $240pr wk rent
2. Bought in 1999 for $155,000, mortgage now at $90K, valued now at $300K, currently rented for $260 pr week.
3. House we're currently living in: bought in 2006 for $235K, we owe $226K, & are paying $350 pr week interest payments.And now for my question:
Would you sell House 2 to pay out House 3 so you could be debt free, and then use that equity/profit to reinvest?
Or would you sit tight, keep paying the interest on House 3…and what…I'm not sure?!Looking forward to your responses,
MoneyhoneyIt all depends on your outlook, short and long term…I'm personally a fan of paying off a house, but why the PPOR, why not the IP? Wouldn't that make it cf+ AND with the equity, buy another..remember selling and paying something off just transfers the equity…I hope this helps!!!
Here is what you could consider in Canada.
1) Set up a re-advanceable mortgage on your primary residence – a secured line of credit on your home which increases with 1 dollar with every 1 dollar you pay down on your mortgage.
2) Take all of the revenue from the two rental properties and apply 100% to your home mortgage. (since you are already paying the interest on your mortgage, the additional payments of $500 per week will go straight to principle)
3) Use the line of credit to pay your costs on the rental properties. (since this is now borrowed money for investing, it is tax deductable)
4) Don't sell a revenue producing asset.I don't know the tax laws in Australia but this strategy will put a couple thousand into your pocket every year here.
Why?
By using this strategy, you are able to convert personal residence debt into a tax deduction (this is called "The Smith Manoeuvre" in Canada).Hi MoneyHoney
Congrats on the I.p's and the PPOR..
There is not enough info to analyze all the possible scenarios and what the out come of choosing any of them would be….
lower your $500 weekly income to $240 and remove the $350 repayments ?
Would it be better to refinance and extract all the equity over both IP's and reinvest in more income producing properties ?
Sorry I can't be of more helpIt is hard to know what to do in these situations isn't it.
House 2 has doubled in about 8 years. If you hang onto it for another 8 it could be worth double again. By selling it you are getting rid of the goose that lays the golden eggs! it is also positive geared and probably making you about $100 pw which can help pay the interest on the PPOR loan. The rent will keep rising too, helping you more and more.
But, you have to pay tax on this rent, and cannot claim the large interest on your PPOR loan.
So work out all the costs associated with selling such as agents legals, CGT etc. The work out all the costs associated with buying a new property to replace this one – which you may do later.
Then work out how much you would save if you paid out the proceeds into the PPOR loan. How many years would it take to make this cost back?
If you really want to keep and sell at the same time, you could sell to a trust you control. This way you avoid agent's fees and you get to restructure. Or if the property is jointly owned, one person could borrow to pay out the other and put the proceeds ont he PPOR loan while being able to claim more for the existing property no 2.
Also consider, if you are going to use a trust, ways to minimise CGT. eg. you could sell part to a trust now and part later – making CGT payable over 2 years (you may have a lower income in future, so less CGT). You could also lease option it to your trust etc.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Based on the figures you have provided (need more) my guess is that both I.P's are neg cashflowed, but I.P no.2 is probably closer to pos cashflow than I.P no.1.
If the properties qualify (built after 1987), and you haven't already done so, you should get Depreciation Schedules done for both properties straight away. This is a tax deductible expense and will pay for themselves in the first year's tax return. The D.S will save you many thousands of dollars in income tax over the years.
This may tip property no.2 over into pos cashflow after tax, and maybe create a neutral cashflow over both properties.
If this is the case, then I would not sell either I.P, rather, keep paying the minimum monthly interest on their loan/s.
Then plow as much cash into reducing the PPoR loan as you can afford to decrease that non-tax deductible debt.At this point in time you have 3 properties all increasing in value and increasing your wealth and equity for future investing. Congratulations!
I know the non-tax deductible interest on the PPoR is a pain, but at least you have 3 properties, while most of the planet have, at best; one.
If you can improve the cashflow through the above, and you can service your PPoR loan comfortably, then continue on as before and work on getting your financial position solid enough to buy again.
Your loan structure can have a big effect on your ability to cut down your debt too. Speak to one of our esteemed Mortgage Brokers on this site (hopefully they will put in a post for you) to evaluate your structure and see how it can be improved (if it is needed).
One final option would be to move out of the PPoR, make it an I.P (we have done this), and rent somewhere nice for yourself. You would have to run all the numbers to see, but you may find that to do this will end up providing you with further tax deductions as all the holding costs of the PPoR suddenly become tax deductible when it becomes an I.P, and your rent on the place you move into would no doubt be cheaper than paying off your own PPoR, as you don't have to pay any rates or building insurance on the place you rent. All those costs associated with your PPoR become tax deductible when you turn it into an I.P.
You would also automatically have 3 I.P's, and you may find you will have extra cash to plow back into the loans after doing this.
Most people won't do this option due to the emotional attachment to the PPoR. They also think of renting as money down the drain; it's a necessary cost of living. Cable tv is money down the drain; and they still put bloody ads on the channels. Sorry; I digress.
If you can get past that mental barrier, you are really on your way, and you can always move back in down the track. In fact, if you move back in before 6 years as an I.P elapses, your PPoR will not be liable for cap gains tax if you ever decide to sell (but why would you?). That's a good deal.
I have had 4 PPoR's, working on no.5 – just another house. I've loved them all, but have no trouble moving on; especially if the next one is better than the last. (it's the actual moving that I hate).
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