Hi.
I'm Sonny, 32 with one child. I have been thinking about purchasing another residential property but i'm not quite sure if I should wait it out a bit or not.
Here is my scenario, I have a PPOR (3br, 2wc, lounge etc) in the eastern suburb of Melbourne which now has $250k owing on it. We also have a commercial property which we bought last year and atm there is $315k owing and I have chosen to pay both interest and principal because I prefer to pay off the debt as much as i can.Our goal is quite modest in that we are quite happy with our living standards but the investment are mainly to serve us when we are in our mid 40s. As we wish to own maybe two investment properties that are fully paid off so they can be our secondary income.
Can I ask what would be a better strategy for me?
1. Continue to pay as much money into both properties for the next 3-5 years and then use the capital and equity available to purchase more investment/s.
2. Buy another property NOW using the capital an equity that is already there in fear that house prices may go up again.
Regards
Sonny
Good question, but the anw lies in how risk adverse and financially comfortable you are.
1. If you buy NOW you have the possibility of riding the capital gain wave should the property go up in value— however you may struggle financially as the property is most likely -ve ( given your capital growth strategy) especially if any of you lose your job or have another child etc…
2. I/O with an offset is the preferred way of setting up a “investors” loan; however if your more comfortable with an P & I that’s fine as well- if it makes you sleep better at night then no harm done…Both has it’s pro and cons
3. Now if your strategy is to own 2 property outright before your 40; then a capital growth strategy is what you need to aim for- purchase in good location, with growth drivers…..however you may consider a +ve property in the bag of mix to “support’ the income and financial.
One things for sure, you most likely would NOT be holding the currently property forever, you need to know when to sell- to realize the profit.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
I agree with Michael – the question comes down to your own individual risk profile and what you're comfortable with.
I can understand the motive behind wanting to pay off both debt as soon as possible – but you really should consider paying off your PPOR before reducing the debt on your investments. This will save you money.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
https://www.propertyinvesting.com/weekly-update/31-08-2011
Year on year fall in Melbourne is -5.0%
I would be seriously considering cashing out of any property for the time being not buying more.
Jack
First thing I would do is convert commercial property to I/O and (because you want to pay things off) put the money you save into your own home. This will have a similar net effect but is more tax effective.
Are there any plans to buy a 'bigger, better' home elsewhere? The answer to this also has some bearing on which way you approach things at the moment. If there are plans to buy a 'bigger, better' home somewhere else then I would suggets you consider an offset account structure above paying off either properties.
Do you buy another property now?
Depends upon your overall LVR and cashflow situation.How much will owning two properties outright realise you? While you have a target in terms of number of properties the more important detail is will two properties give you sufficient rental income to live off?
Westpac is currently suggesting a couple need about $54K/annum to be comfortable (assuming their home is paid off)
JackFlash wrote:https://www.propertyinvesting.com/weekly-update/31-08-2011 Year on year fall in Melbourne is -5.0% I would be seriously considering cashing out of any property for the time being not buying more. JackCheers Jack.
You've heard it first hand people. Time to sell up – Jack has spoken….for the 12th time.
It's getting old – surely there's a property hating forum that you can sign up to.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Michael
I think I'm not that comfortable with risk but that's not to say I wouldn't take big risk it it means there would be massive gains in the end. As for financial I think I'm ok and my job is stable.
It's good that you have mention investment strategy or lack there of as I have no real plan at the moment except for wanting to own outright two property by mid 40s. I bought the first investment property on that basis that I had a good job and we were financially comfortable. I would like to have more properties but i guess I might be going about this all wrong as I'm one of those people who hates debt, which when I got the loan for the investment property I opted for the P $ I so that I could pay it off asap.
But as you have suggested that most investors prefer Interest only with offset account, can you tell why is this so popular?As for purchasing property in a good location, the prices that are on offer seems to be pretty high around 500-600 mark around the Melbourne East suburb.
Jamie:
Hi Jamie can you tell me why is it better to pay off the PPOR first instead of investment because I seems to be getting a different advice from my accountant which suggest that I pay more into the investment as it can be negative geared and better for my tax.
Please explain. Thank you.
Derek wrote:First thing I would do is convert commercial property to I/O and (because you want to pay things off) put the money you save into your own home. This will have a similar net effect but is more tax effective.Are there any plans to buy a 'bigger, better' home elsewhere? The answer to this also has some bearing on which way you approach things at the moment. If there are plans to buy a 'bigger, better' home somewhere else then I would suggets you consider an offset account structure above paying off either properties.
Do you buy another property now?
Depends upon your overall LVR and cashflow situation.How much will owning two properties outright realise you? While you have a target in terms of number of properties the more important detail is will two properties give you sufficient rental income to live off?
Westpac is currently suggesting a couple need about $54K/annum to be comfortable (assuming their home is paid off)
1. Can you tell me why is it more tax effective to put more money into home instead of the commercial property?
2. Yes thank you for asking as I've forgot to include this in my initial post. We plan to buy a bigger house which SHOULD be our then final PPOR which we might also rent out the place we are staying at the moment.
3. I don't think we will live off the two property as the money generated by them will be used for paying of other investment I might have down the track and the income that I have from my own business will be for my family.
Regards Sonny
GetRichOrDieTrying wrote:1. Can you tell me why is it more tax effective to put more money into home instead of the commercial property?
2. Yes thank you for asking as I've forgot to include this in my initial post. We plan to buy a bigger house which SHOULD be our then final PPOR which we might also rent out the place we are staying at the moment.
3. I don't think we will live off the two property as the money generated by them will be used for paying of other investment I might have down the track and the income that I have from my own business will be for my family.
Regards Sonny
Hi Sonny
Because the loan on the commercial property is deductible it means you can claim all of the interest you incur on your tax return. Any extra payments you make off the principle are not deductible. Eg monthly interest bill of $800 & you are paying $1000/month you can only claim the $800.
Depending upon your taxable income some of the $800 will be returned to you as a tax deduction.
Given you will be moving into a 'bigger. better home' at some stage in the future you will need to borrow some money for this purchase. All of this will be non-deductible debt.
Non-deductible debt is hardest to pay off as there is no assistance from the tax office.
Under this situation you are better off placing your principle payments ($200 above + principle payments currently made on your home) into an offset account.
When you find the new home you can grab all of the money in your offset account and use these funds as deposit for the new home. If you borrow funds against either your existing home or the commercial property to buy the new home these additional borrowings will not be deductible.
GetRichOrDieTrying wrote:Hi Jamie can you tell me why is it better to pay off the PPOR first instead of investment because I seems to be getting a different advice from my accountant which suggest that I pay more into the investment as it can be negative geared and better for my tax.
Please explain. Thank you.
As Derek said above:Interest on investment debt is tax deductible
So as you're paying down the principle on this loan – you're effectively reducing the amount of interest you can claim (because the loan amount is getting smaller with each repayment).
Because you have a non-deductible debt (your family home) you're better off paying down the debt on this first and then move onto paying down your investment loan.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Quote:Under this situation you are better off placing your principle payments ($200 above + principle payments currently made on your home) into an offset account.When you find the new home you can grab all of the money in your offset account and use these funds as deposit for the new home. If you borrow funds against either your existing home or the commercial property to buy the new home these additional borrowings will not be deductible.
Oh man. I'm so glad you explained this to me as I never knew this before.
So in my case it would be best to re-finance both loans to be interest only with offset account so that the interest on the commercials can be tax deductible and the principal from the home will then be used for the new PPOR.
But I have two more questions though.
1. If my loan term is 15 years and during this time I'm only paying interest only while the money from the offset is used for other matters then what are my options?
2. So by having an offset account/s on different loans you can use that money to funds you next invest while still having the benefit of tax deduction on the existing loan right?
Hi Sonny,
Many investors do use the I/O strategy for the reasons mentioned above + it also improves their cashflow situation. In the example above by $200/month. If this suits your situation yes it would be advisable to coonvert your loans, where possible, to interest only loans.
Just be aware that some lenders may need/want to doa full re-assessment. Bear this in mind if your financial situation has changed significantly since the loans were first written.
1. At the end of the 15 yrs you may convert your loan to P & I, sell the property & pay out the loan/s, refinance with another lender to I/O so you can extend the I/O period. All options will be dependent on your situation at the time.
2. The key purpose for the offset account is so you can grab the money and use it towards your 'new home' without there being any effect on the deductibility of the funds in either the offset account (no deductibility at all times) or the core loan on the property. By way of comparison if you had $100K equity in your existing home and wanted to use this as a deposit for the new home the $100K is not deductible becuase you have used the funds to buy your home.
Hi Sonny,
If your accountant has told you it is best to pay off your investment property while still having money owing on your PPOR then it is time to get a new accountant. I don't mean to be rude but getting bad advice like this can cost you lots of money in the long run.
Cheers,
LukeJamie wrote:You've heard it first hand people. Time to sell up – Jack has spoken….for the 12th time.It's getting old – surely there's a property hating forum that you can sign up to.
Cheers
Jamie
I think I’m mightily outnumbered by the buy buy buy crowd.
So I take it your expert advice is to buy into a falling market. I can see why you’re a mortgage broker and not a financial planner/investment advisor. Mind you with your investment philosophy you would do well at BoA, Fannie May or Freddie Mac. Oh that’s right they’re all mired in inextricable debt and will need bailing out again.
Jack
People always need somewhere to live. End of. There will be peaks and troughs in the market just like any other. But the variations just tend to be less dramatic than those of the stock market. Of course, if you buy with a bad LVR and something happens and you are forced to sell, it might not end well. But buy in at 80% LVR, it is unlikely you'll have your back to the wall.
Bricks and mortar, people. They've long been the "safe investment" for a reason.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
luke86 wrote:If your accountant has told you it is best to pay off your investment property while still having money owing on your PPOR then it is time to get a new accountant. I don't mean to be rude but getting bad advice like this can cost you lots of money in the long run.Luke
Good pick up Luke.
Sonny, your accountant's recommendations in one of you earlier posts just don't make any sense at all. You really do need to revisit your accountant to get this clarified – and if the position doesn't change you need to know why, or seek another accountant.
Agreed. New accountant required. Your accountant clearly doesn't get it.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
LOL I was thinking the same thing when you guys were explaining things to me but i didn't want to sound rude that's all.
Well at least now I'm a bit more informed than I was yesterday thanks to people on this forum.
It seems I will have a meeting with my banker and seek out some new loan options with offset facilities to somewhat future proof my needs.
Now just gotta save for another property.
See you at the end of the rainbow how ever big or small they are.
JacM wrote:Bricks and mortar, people. They've long been the "safe investment" for a reason.I’ll be sure to pass that onto the Irish, the POMs, the Greeks, the Spanish, the Yanks, the Europeans and the 100’s of Aussy mortgage holders going under every month. They obviously haven’t heard yet.
JackJackFlash wrote:So I take it your expert advice is to buy into a falling market.No Jack – I would much prefer to buy into a market that's reached it's peak.
Move on Jack – it's getting old.
There's nothing wrong with having a different viewpoint – but I think you'd agree that the way you go about it is wrong.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
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