All Topics / Help Needed! / Sell PPOR and start over or convert to investment and rent

Viewing 20 posts - 1 through 20 (of 21 total)
  • Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Hi all, first time poster here, so apologies in advance if this is in the wrong section.

    Firstly a bit of a background on my current situation.

    Myself and my partner are keen to get started in property investing, however, we are in a bit of a predicament in getting started. We have our PPOR in Caversham, WA, that is currently at an LVR of around 90% (unfortunately), due to refinancing following my separation with my previous partner. According to realestate.com, Caversham has an annual growth rate of 15% and a median rent of $450pw. There is substantial development in the area (shopping centres, roads etc). A few months ago I switched to a fixed rate interest only home loan for 2 years just to increase some cashflow.

    Based on my current interest only repayments and some assumed rental expenses, I calculated we could receive a positive cashflow of around $1065pa if we were to rent it out.

    Between myself, my new partner and a rental income of $23400pa from this property, using some calculators on some of the big banks websites I worked out we could borrow between $450000-$520000 to increase our property portfolio.

    If we were to keep this property, it would be our aim to to save a lump some to deposit into the offset account (which is inactive while I am on fixed interest), once the fixed interest period is over to get the LVR down to no more than 80%. We would then keep it interest only, with the aim to deposit at least the principle amount into the offset account every month to reduce the interest payments.

    I am just after peoples input on whether they think it would be a good idea to move out into a rental, and rent this property out as the start of our portfolio, or sell this property with the aim to pocket at least $50,000 after all expenses as a deposit for property and having a better borrowing capacity. I was leaning towards the second idea, until I calculated I have the potential to have a positive cashflow plus really good capital growth. Now I am just confused.

    All input and advice is appreciated.

    • This topic was modified 8 years, 1 month ago by Profile photo of Vardy Vardy.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If you can save tax and increase borrowing capacity then it may be worth considering.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of TheNewGuyTheNewGuy
    Participant
    @thenewguy
    Join Date: 2014
    Post Count: 151

    Have you considered depreciation on the ppor as well? Is the positive cash based on 90% interest? After 2 years what would they LVR be based on your expected growth? What is the actual value of the property now, for example of it’s $1m and you’re expecting 10%+ growth that’s $100k a year while being positively geared. It’d like to make $100k a year without spending anything.

    Profile photo of BuyersAgentBuyersAgent
    Participant
    @knightm
    Join Date: 2005
    Post Count: 338

    In this case the loan set up may suit turning it into IP. Is it fixed interest only or fixed P+I? Either way there is not that much profit in selling so perhaps worth considering keeping it as you say. The infrastructure project development for your area sounds positive but FYI the growth rate of 15% was in 2013 not sure if there is evidence this is currently happening in the market right now. SQM has rising listings and vacancy rates for your area so I would expect a slower softer short term growth picture, not saying you should sell, just take a long term view. You have mentioned buying more and paying down debt. Both are good but at a certain point you will need to choose between putting your extra savings into deposits or into debt reduction. This can change from yr to yr but it is difficult on limited cashflow to do both simultaneously. All the best with it.

    BuyersAgent | Precium
    http://www.precium.com.au
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Thanks for the constructive responses guys, I really appreciate it. My $1065+ cash flow was based on some assumptions, and after getting some quotes and rental valuations done, I’d actually be needing to contribute around $45pw if I was to rent it out. So I actually see it as no benefit moving out and renting it out now, as I’ll only be reducing my savings/debt servicing capacity, as renting myself will cost similar or more to servicing the loan plus other expenses.

    -I just used an estimate of about $7000 for the first year for depreciation.
    -Due to refinancing to keep the place the LVR is around 90%, but hoping after the fixed interest period it will be closer to 80% or even slightly less.
    -It is currently only valued around $500k.
    -The loan is currently fixed IO.

    I think I’m best staying put and continuing to save and hoping for some good growth before I make any decisions on selling.

    Please let me know if I am missing anything obvious here, as I’m only just starting out.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Vardy,

    A few months ago I switched to a fixed rate interest only home loan for 2 years just to increase some cashflow.

    OK, one to take VERY careful note of if wanting to sell or refinance. The “break costs” when ending a Fixed Loan ahead of its natural EndOfLife can be CRIPPLING !! Be sure you KNOW how much it will cost BEFORE you go ahead with any Sale or refinance.

    If the Variable Rate is higher than the Fixed Rate of Interest, then it may not be too horrific. But if Variable is LOWER, the cost to break out will be enormous (way more than you might reasonably calculate – I found this out the hard way some years back).

    One to watch !!

    Benny

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Thanks for the advice Benny. That has been one thing worrying me. At the moment the variable rate is the same as it was when I went fixed, so it will be just over $1000 to break the contract. I guess other than speculation, I won’t really know until settlement if I did choose to sell. Another reason I think it might be best to hang on to the place for now.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Due to refinancing to keep the place the LVR is around 90%, but hoping after the fixed interest period it will be closer to 80% or even slightly less

    It is only the interest on the loan associated with the purchase of the property that is deductible against this property. So if you have ever increased the loan or used redraw the interest on this portion won’t be deductible against this property’s rent.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Due to refinancing to keep the place the LVR is around 90%, but hoping after the fixed interest period it will be closer to 80% or even slightly less

    It is only the interest on the loan associated with the purchase of the property that is deductible against this property. So if you have ever increased the loan or used redraw the interest on this portion won’t be deductible against this property’s rent.

    So, when I refinanced to buy my ex-partner out would that be considered a loan to purchase the property, or redrawing equity? At the time it, it was valued by th bank $65,000 more than I originally paid for it. Just considering there was a change of title from both of our names to just my name.

    • This reply was modified 8 years, 1 month ago by Profile photo of Vardy Vardy.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Vardy – no. The ATO considers this a loan for a family law settlement and that the interest is not deductible. You should seek advice on getting the relevant portions right and then split the loan. You original 50% of the loan may be still deductible though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Thanks for that Terryw. What kind of professional would I need to seek the services of to get the loan split into the relevant portions – accountant, lawyer?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    A tax agent or a lawyer could assist. Tax agent would generally be cheaper. Perhaps the one the does your tax return.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Terryw, that has got me thinking. If I was to rent it out and then sell it, would I pay CGT on the original purchase price, or the price used for the seperation settlement?

    I’m assuming the original purchase price, as that would make it in line with the interest deductibility you made me aware of, but just thought I’d clarify.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If it was a transfer under a family law settlment then it will probably be as if younwere the owner from the beginning. If it was not a family law transfer then you would have 2 different interests in the property. The fist 50% and the second 50%. They would each have different costs bases.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    It was a transfer under a family law settlement. That sounds like it would be easier to deal with, just more CGT though. Sounds like it might just be easier to get rid of it while it is still my PPOR.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi Vardy,

    If I was to rent it out and then sell it, would I pay CGT on the original purchase price, or the price used for the seperation settlement?

    Since this was your PPOR, there would be no CGT to be paid. BUT, if turning it into an IP, then get a valuation at the time, as you may be up for CGT down the track (from the time it was made into an IP though). So original purchase price should not even come into it…..

    And, if you went on and rented while you had this old PPOR as an IP, then you won’t be claiming a new PPOR, so this one (now a rental) may remain CGT exempt for up to 6 years – so still no CGT to pay upon sale.

    But hey, lots of checking to be done. That is how I think it works – there is quite an option of lots of savings for you – check it out with your adviser.

    Benny

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    Thanks for that Benny. I’ll definitely be seeking some further advice on this once I know what course of action I’ll be taking.

    Profile photo of sonipatsonipat
    Participant
    @sonipat
    Join Date: 2016
    Post Count: 5

    Hello
    If you have outgrown your current residence or want to move for other reasons, you have a few choices to make, such as selling or renting out your home. If market conditions are favorable, you could sell the property, cashing in your equity and making a profit. If getting your equity out of the property isn’t a must, you may also consider using the house to generate income as a rental property.
    Thanks.
    sonipatpropetry

    Profile photo of VardyVardy
    Participant
    @adamv
    Join Date: 2016
    Post Count: 10

    HelloIf you have outgrown your current residence or want to move for other reasons, you have a few choices to make, such as selling or renting out your home. If market conditions are favorable, you could sell the property, cashing in your equity and making a profit. If getting your equity out of the property isn’t a must, you may also consider using the house to generate income as a rental property.Thanks.sonipatpropetry

    That’s pretty much my predicament, I’m unsure what will be best. I want to eventually relocate to Melbourne for family reasons, but in the mean time, if I was to rent the property out and rent a property locally for myself, it would cost me more to rent than just staying in the property on my current IO loan repayments. I know it isn’t really ideal to just be paying IO on your PPOR. While I’m still living in the area, whether I am living in the property or not, I’d still be benefiting from the same capital appreciation, but by living in it, I will have better cashflow.

    I know it may seem I am answering my own questions, but being a newbie to all of this, I’m just worried if I am missing something.

    Profile photo of TheNewGuyTheNewGuy
    Participant
    @thenewguy
    Join Date: 2014
    Post Count: 151

    Hi Vardy

    Looks like you’re getting plenty of advice. I’ll just add that CGT is only a problem when you sell and you can gain access to that equity as well through LOC’S etc which are tax free. So it’s not just extra rent you’ll get. For example if you’re positively geared you can get a LOC against the property for $X (say 50% of the equity gained that year) and use the rent to pay the interest (it’s not tax deductible or income tax free though). Eventually you can live this way.

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