1st investment property (maybe)?

Hello guys, Im hoping that this is the correct forum for this.

My wife and I live in Wellington point, the bayside of Brisbane. We own our own home and have lived here for around 9yrs.

We have a dilemma and we are hoping for some advice here if possible.

We have a 4 bed lowset, which currently is worth in the region of $550 and $600k. We have a $374k mortgage left on the house with an off set mortgage. We have around $160k in the off set.

We are about to build in Victoria Point (bayside) and in September-ish hoping to move into our dream home.

The build including the land is around the $780k mark.

There is just the two of us but, the new build features a granny annexe and we are taking the wifes parents in.

That's the back ground.

We were simply going to sell our current house and reduce the mortgage with the equity. But I have been thinking that maybe we should keep the house and rent it out? And rent out to our youngest daughter and husband. (lots of potential implications there also) ;o)

We have moderately secure jobs within local government and a combined salary that would service both mortgages if the wheels came off and rates rose to more "normal" rates.

We pay a shed load of tax and the thought of renting out to reduce our taxable income and provide a nice house for our daughter appeals.

So question is what to do? I realise the markets are due for a readjustment but our term was for a round 7 years when I retire and we hope to downsize. I find myself typing and answering my questions to a certain degree here.

I have no idea about gearing and what way would suit our situation. If we sell theres an immediate loss I suppose. fees etc....

I appreciate we are not a large interesting portfolio case but I guess they have to start somewhere.

Should we sell or keep our primary as an IP???? (its a decent area and we've spent lots on a new kitchen and other bits, shame to let her go if we needn't).

Cheers................ Mark

 

I'll give you a couple of quick tips.

1. I don't beleive in investing in anything to save tax. The only way that you can 'save-tax' is to lose more than you gain. For instance, it's like spending a dollar to save 20 cents (or whatever bracket you are in). Negative gearing I have found works best when interest rates are high and property prices are increasing. In this scenario you can take the hit of $50 p/w when your place is increasing in value for 40k p/a.

2. If you are negatively gearing now, its a bit of a warning sign. Interest rates are really low, and housing prices are not prob not going to skyrocket like they have been - Something to consider.

3. If you were going to convert your current PPoR to and IP, then take the money out of the offset account and put it in an offset account that will be linked to the new PPoR. Whilst it might seem like you are just transferring your money from the left pocket to the right pocket, it will increase the loan size on the IP - which is a tax-deductable loan. $160K @ 4% interest will mean that there is a tax deductable interest component available of $6400 - Nothing to be sneezed at.

Finally, for a longer term outlook, be aware of the 6 year rule. It can be complicated, but it is something to be aware of if you wanted to later sell the IP and potentially save yourself some CGT.

 

My thoughts are to keep both if possible, it sounds like a quality location (I grew up in Burbank).

Things to keep in mind is you will likely get a bit of depreciation due to improvements and this will also be a loss on paper but improve your CF.

Biggest issue is helping your daughter as you should want fair market rent but normally these things are discounted.

The six year rule will only apply if you don't make your new home excempt from CGT which will give you a short term gain but likely the dream home will gain more value so I would tend to put the CGT on the soon to be IP.

When the house becomes an IP I would move your money from the offset to the ppor loan/offset to increase your deductibility which will improve your CF.

Finally seek professional opinions before taking action as I am only going off what I would do and not by any stretch advice.

 

+1 for location! I wouldn't give up Wellington point if I owned it!

 

I certainly agree with Jetstream above, hold onto both properties if possible, as least until you are ready to retire. Also I don't agree with negative gearing, spending a dollar to save 50cents but it does work well in the case of high income earners, people on moderate to average income are best served by a break even or positive geared property. You certainly should consider option 3 above you will want to have the bigger mortgage on your IP

 

@bloomers " Sorry but if I move the $160k so the mortgage is back to $364 is It that at 4% and $14560 tax deductable?? and if so is that each year?? See this is where for me it gets confusing? I can claim that against our income tax?"

Yes, the interest on the $364k will be deductible, and it will be every year that it's rented out. You can claim it against your income tax for sure.

Put the $160k in your new PPOR offset if you're not using it as deposit etc.

 

I believe he means that if you have loans on an IP and a PPOR, you want as much extra money as possible moved from the offset of the IP into the offset of the PPOR because loan interest on the PPOR is not tax deductible whereas loan interest on the IP is, so you want to maximise the loan interest on the IP while minimising it on the PPOR.

I believe there are threads on this forum about some lenders that will take this into consideration and if you have both loans with them, they even change the interest rate so that the one on the IP is higher and the one on the PPOR is lower to maximise tax benefits even further. I have no idea if this is good enough to stand up if you are audited since it does not affect me - you would need to go find those threads to read through them for yourself if this interests you.

 

Right so then, please bear with me here, but the property here would easily return $500pw rent atm.
But...Id like to offer the rent to my daughter and son in law for $350 so that they can save more. But Im guessing that would be virtually impossible? If I showed $500pw....even if I only took $350pw that would give me $26000 roughly pa. the interest deduction at $14560 would leave me quids in still?

Im thinking I need to be neutrally geared as a minimum?

Is there a way I can make this work.

Either way guys, thanks for all the input. This forum exceeds my expectations already. And I appreciate all advice is general in nature.

 

If you want to rent it to them at a discount for their benefit (at your loss), wouldn't it make more sense to just sell it to them so they can put money into it as a long term benefit for them?

The best way to get someone to save money is to give them "good debt" that forces them to save - and provide a big benefit along with it.

Just a thought..

 

Another example of how amazing parents are to their kids.
I would declare the right income. Take into account all interest expenses and also depreciation benefits and check where that lands you financially in tax year 1. With that information adjust the rent in tax year 2.

 

I recommend against being rubbery with the truth with tax, the consequences are too severe to warrant it. If it's worth $500pm, and you only charge $350pm, you can only claim that portion of the interest and costs, which makes the maths more complex. Still doable if that's your priority, but perhaps you're better served charging close to full market rent, and then helping out in other ways from your after-tax income?

 

I think there's nothing illegal in charging under market rent.

 

I understand helping your kids but I find the more you help your kids the more assistance they will need.

Why not charge them $500 pw and then hand then when they look at buying their own house you could if you wanted to give them a bonus to their deposit. E.g. $100 pw for each week they rented so their in theory rent is $400.

I personally wouldn't give them anything but advice, unless you are mega rich (which I am not and doesn't seem you are either). Your daughter and her husband have at a guess 20-30 more years to retire compared to you (great earning capacity), so you need to maximise your income. End of the day they will likely get your estate anyway...

If they can only afford $350 pw, let them go rent something for $350 and go get yourself a tenant for $500 otherwise you are gifting your daughter and her husband $7,800. Your job as a parent is not over but they need to find their own feet.

My parents never gave me a discounted rental however they did give me an education and the ability to make my own decision. Not that you should/can compare but before I was 25 I had moved to Melbourne (from Brisbane) bought my first property (in Melb) and when I 30 I held two properties worth ~1.5M (PPOR & IP), married and have 1 child (avatar picture). My parents haven't given me any money or helped me with any repayments. Life was tough but easy, I and my wife still went overseas (Europe & NZ) along with numerous interstate travels. Mostly to Brisbane to see M&D, last trip was last weekend/Easter and my next trip will be in May to see the state of origin.

Yes our life would be 'easier' if we were to live at discounted rent or rent free but I wouldn't appreciate money the way I do now.

End of the day it is up to you but I personally would look after myself/yourself first because by doing this you are looking after them (inheritance), there would be nothing worse than losing everything you have worked hard for which in turns makes them lose their inheritance.

 

can you be debt free in 7 years?
you want to own your own home outright without a mortgage going into retirement.

It makes life hell a lot easier

 

If you charge your kids under market rent, you could have some problems with the ATO.

Instead, charge them market rent, but to help them, set some of it aside and gift it back to them to help with their first home purchase. There's a long list of reasons why this would likely be a better arrangement, including it forces the kids to save.

 

Thanks guys, all valid pointers.

Big Will. I hear what you're saying and agree with what you say. My wife and I had help when our first house was handed back to the bank in 1999. We avoided blacklisting with some help from the wifes parents. I think that painful experience did effect us and likely made us more careful and frugal, but at the same time aware of tough financial situations for our kids. But I take on board what you say.

Today I hear Brisbane property market has taken a quarterly hammering. (

More uncertainty. I am still keen to keep my PPOR though.

As an aside..... Our roof desperately needs a roof restoration of around $5000 tiles all porous to a point and lots broken and ridge tiles no longer bedded properly. If I am to rent this out in a couple of months should I hold on? Would I be able to claim it?

Wife wants to sell this house. Its becoming harder to convince her to keep it.

 

I'm not saying there is, there absolutely isn't. The trouble will arise with the suggestion of telling the ATO he rented it for $500/wk when he didn't, and if he does it by the book he needs to only attribute the discounted percentage. They should talk to an accountant like Paul

Agreed Peter

Get in touch with an accountant who understands property. I recommend Paul from Price Financial, he posts on the forum

 

So how much can I expect to pay for a property savvy accountant?

With just one property it must be cheaper?? And excuse the ignorance but I'm assuming that by engaging such an accountant at tax time he or she would be filing both the wifes and my own general tax return as part of the deal? ie. Does this run separate to the yearly standard income tax return?

Cheers