Buy Premium PPOR Strategy

Hi Everyone,

I was looking on few strategies to improve our family lifestyle and in the same time have a retirement plan. I would like to know your opinion and advice on my plan below (apologies if it’s too long) and interested to know from your experience and results by using PPOR strategy. I have also few questions regarding Purchase + Renovation Loan options when buying un-renovated property.

At first, I considered keeping our PPOR and buying IP in the area we want to live and in a later stage move in to the IP and transform our PPOR to IP. however, it’s not possible to get the rent we need to cover the loan repayments, as well we will need to use all our equity and saving available which will leave noting for backup, which is a recipe for disaster.

The second option is to sell our PPOR and buy Renovated Premium PPOR with the full borrowing capacity 2m, or Un-Renovated Premium PPOR with the full borrowing capacity and Manage the Renovation our self’s.

This option renovated or Un-renovated will allow us to achieve our goals by improving our lifestyle by living in Premium PPOR straight away (or after Reno). capital gain on premium PPOR will take shorter time to reach minimum goal of 4-5m equity (loan paid in full). we won’t need to deal with IP rent and instead of concentrate in bringing income. in terms of the loan serviceability we have 2 years worth of repayments paid by my company profits as director/dividends income, plus will have 500k in available equity to pay from year 3 and so on. (in the last 5 years we had in our area 8% capital gain increase, we made 550k CG profit after we only used 50k of the equity funds in this account). Living expenses will be paid from our annually income.

Furthermore, by renovating and managing it, this will allow us to get a higher value house in the same cost. we can stay and live in it and pay off the mortgage or wait for at least 1 year, when is good timing sell it, cash out pay part of the non-deductible debt on the mortgage and do the whole process again. see the numbers below for buy 3m PPOR renovated strategy.

Questions:

• What is your experience and results when used PPOR Strategy?
• Per my position and assets, what is the pros and cons using PPOR Strategy?
• What kind of loan do we need or recommend for Purchase + Reno + bridging so we can buy first?
• Any other comments, suggestions, calculation regarding my plan?

PPOR Sale Proceeds 1.18m

Purchase PPOR 3m

• Total owe after settlement $1,975,000 Interest @3% P&I repayments 100k pa
• Equity available to be used for anything we need $425,000
• Company Cash available 200k (after pay 2019 Tax on 280k profit before tax)
• Bridging Loan, buy first and sell within 12 months
• 3 Loans Structure - Home loan, Company Loan 70k and Equity loan with free offsets account.

Payment Plan, Tax Deduction, interest saving and other

• Living expenses - pay from annual income
• Home loan - first 2 years use Company cash as Director/Wife/dividend income and any extra income left after living expenses
• Home loan - Year 3 and after use Equity account for the shortfall, will last for 4 years payments if using 100k pa. (if capital gain increases 1.4m in 5 years and we take 100k each year we still in gain of 900k. As well we still pay P&I which will reduce loan principle).
• After 5 years we can do revaluation and have more funds available due to capital gain increase (based on 8% capital growth rate we had in existing PPOR, see attached screenshot). or can sell and buy new property if we want.
• After 12 months we can claim occupancy expenses 2 bedrooms and storage (and maybe depreciation depending how old is the property) will reduce Tax.
• Having Company Cash in the home loan, “dedicated company offset account” for 2 years will help reducing interest fees and increase principle payments on the loan.
• If selling PPOR over 2m and buying below value can reduce the loan.
• If company getting big projects like 2019 in the future will allow paying part or all of the home annually repayments without using the equity account.

Thank you

 

I wouldn’t be predicting 8% growth year on year for the next 5 years.

 

what would you predict the capital growth year on year for the next 5 years in sydney eastern suburbs and why?

 

Sydney's house prices can go backwards or sideways.... nothing much happened 2004-2009. Actually from the ~2003 peak to about 2005, many homes in Western Sydney lost around 25%.
So I'd assume it's flat for the next 5 years and anything above that is a bonus. We already had a huge boom.

 

The problem with focusing all your exposure on PPOR is that you cant easily access the equity, it produces no income and interest is not deductible. Say it does become 5m in 10, 15 years. What do you do then? Sell? And live where after being used to living like that?

 

Hi Homeland
(that is a great show btw)

What do you mean by this?

 

I don't have a crystal ball. But the general consensus is that things are going to be a bit tougher for most post covid so banking on an 8% return each year for the next 5 years would seem hopeful. And if you do not get that return are you happy to stay put for another 5 years beyond that until you do?

 

Nobody can make accurate predictions like this at the best of times, expecting them to do so now is fraught. What are your estimates and why? Suggest you focus on a range of other pros and cons to (known ones) to make a decision like that rather than a 5 yr prediction.

 

Probably 2% pa. might be the go now - a conservative approach.

 

8% p.a. growth! Even the spruikers only use 7% in their sales pitch

Am I understanding this correctly, you want to use equity to pay the loan repayments? Using debt to pay debt?
I'm assuming you've had a broker/banker run a serviceability calc?

 

Selling a PPR then stretching to buy your next more expensive PPR is the classic strategy. Its is probably cleaner and a more immediate lifestyle enhancer than building wealth via a bunch of IPs.

Though you're more exposed as no income being generated from property.

 

Ouch! Why are we here?

I'm sure you're right though. Doesnt make the investment spreadsheet look very good.

 

I think growth would be low, on average, over the next few years.
But it does beg the question at what point will it no longer be worthwhile investing in.
Would you still invest in Property if Growth is say 2% p.a.?

 

Not sure who is your broker but had no problem accessing the equity, the bank i'm with put all the available equity in IO offset account to be used for anything i like to use. if plans working 10-15yrs and i reach my goals, i can retire, use the equity to invest and enjoy life!!

 

Q for the brokers. 5m ppor, little debt. How much cashout is available?

 

Not a broker, but surely you'd need to add income to that equation to work out serviceability?

 

No one knows, but in the near term, we are almost certainly in for price falls, rather than growth. I reckon bluechip ppor's might hold up better than investor stuff and new developments though. We've had an amazing + run in Syd and Melb, but as you know Australia's economy basically just got hit by a meteor. On the upside, there might be some cheap assets to had from steaming crater, if one has cash when the time comes.

 

When you release equity it is a new loan though, only way to release equity with no debt is to sell.
IO is the LOAN, offset account's don't have interest as they're not credit.

 

Sound reasonable prediction however if looking closer your comparison is a bit different between the two cycles in terms of the events and location.

This cycle we have the COVID19 event which is equivalent to a war (unemployment, economy on halt, increase debt..etc). but it looks like we are coming out quicker then we thought and if it will come back again we can use tools such as technology to isolate the infected but in the same time keep the economy, business, education..etc going. this mean the economy will recover and we will learn how to live/deal with it as we always did. furthermore this is an event that happen every 100yrs if comparing apple to apple history show that after war the big boom is coming and new cycle will flip. i'm not an expert and can't predict what will happen but do like to be an optimistic and think positive, Time will tell.

Regarding the location the property is situated in sydney eastern suburbs which i heard has been generally stable.

Just my 2 cents,

Thank you

 

Per my OP we are selling the PPOR with 12 months bridging loan and refinancing. the offset will be linked to IO loan. cheers