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Buy PPOR First Then Invest?

Discussion in 'General Property Chat' started by House, 29th Aug, 2016.

  1. House

    House Well-Known Member Premium Member

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    Thinking about how APRA have made it more difficult and the timeline of saving deposits, costs etc to buy future IP's.

    Always thought it would be best to buy IP's first due to tax deductibilty and increase serviceability but looking at figures and a different scenario came to mind- pay down a $600k PPOR with the partner but as quick as possible (8 years) and then use that full amount to start the portfolio.

    If both were on $75k it would be about $120k combined after tax which is about $2,250/wk combined.
    P&I repayments on $600k home ($528k with 12% deposit) at 6% for 8 years= $1,600/wk
    Weekly surplus= $650/wk or $325/wk each to live off which is pretty reasonable given the goal.

    By year 8 the $600k has been paid off and is now available to fund IP's, reno's etc but now have $2k/wk+ and no mortgage which will help serviceability. Not accounting for any growth in the house value itself, taking in a tenant or 2 (if worth the tax consequences) or extra value gained from a reno.

    Besides possibly paying a bit more for the IP's in 8 years time, how viable would this strategy be as an alternative? Would it be worthwhile looking into?
     
    Last edited: 29th Aug, 2016
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    It could work - it's a viable strategy.

    Not having a ppor debt or making rental payments is an awesome way to bolster serviceability.

    Like you said though - properties may increase in value over that period.

    Cheers

    Jamie
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes I think it is worth reassessing the strategies because of the serviceability issues. Before it was good to never pay down the PPOR loan because it may become an investment, but these days I think getting rid of the debt quick is good.

    One alternative:
    1. Buy property, IO, keep money in offset and keep renting. Claim negative gearing expenses until the point where you will be paying more tax and then move in.

    or

    2. as above but move in first and then out again so you can claim the 6 year rule.
     
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  4. Cactus

    Cactus Well-Known Member

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    But if the property market moves say 75% up in that 8 years you would have been better renting and buying 5x IPs rather than paying down debt. Then after 8 years selling 2-3x IPs to buy PPoR outright.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But you could be doing both - you would only have 20% tied up potentially.
     
  6. House

    House Well-Known Member Premium Member

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    Indeed but going on previous cycles, it's usually fairly flat for 7ish years after the boom so wouldn't expect much upward movement in Sydney. And if they move 75%, I'd expect the home to move at least 50% so it'd be worth about $1m.

    I'd rather buy the 5 IP's first but given banks are now assessing at P&I rates, paying down the PPOR could be more beneficial. Few different scenarios I'm working out but had never thought a $600k home could be paid down so quickly so though it was worth questioning.

    Could you please explain that one?!
     
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  7. dabbler

    dabbler Well-Known Member

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    You could do that and just aim to buy once Sydney & Mel has turned and wait till it is in favor again and buy what you can before any next possible cycle.
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Say your borrowing capacity is $1.2mil and you have $200k cash
    You pay $100,000 deposit and borrow $400,000. PPOR
    You live in it and pay it down asap

    Immediately you have it down to $300,000
    You withdraw (structuring carefully) $100k and use it for deposit for the IP1 worth $500,000. Total debt is $800,000

    You continue to save and pay down the PPOR until you have another $100,000 to redraw. Your non deductible debt is now $200,000 and you have IP 2 worth $500,000
    Your total debt is now $1,200,000

    =

    Alternatively you rent

    IP 1 $500,000 val with $400,000 loan
    IP 2 same
    IP 3 same
    Total $1.5 mil val with $1.2mil debt.

    You end up with the same number of properties this way, but by buying the PPOR first you have one exempt from CGT.

    Therefore there renting where you live and investing is not that essential.
     
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  9. Cactus

    Cactus Well-Known Member

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    Agree. Post indicates one or other being option. Of course you could move into one of the 5 IPs sell two and pay down.

    Depend a little on values where you want to live and values where you invest. In my case these are wildly different.
     
  10. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    I'd think the investments can be at least neutrally geared at these current rates so buying your PPOR and buying IPs at the same time (or soon after) can still work if the banks will lend you the money. The IPs don't have to cost you anything ongoing so you can still try to smash down the PPOR loan. You just have to come up with the deposits.

    Of course if the market is flat you can take your time, no rush.
     
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  11. Cactus

    Cactus Well-Known Member

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    True and with multiple IPs paying into your offset on PPoR the debt recycling factory is in full swing.
     
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