Buy, rent out, and then use as PPoR?

Hi folks,

I'd be grateful for some advice on a specific scenario that my partner and I are considering.

We don't own any property yet, but we about $500,000 in cash for a deposit and have been approved for a loan of up to $1.6 million (30 year variable). We're planning to go overseas for a year or more, and so we're thinking about buying a property before then, renting it out while we're overseas, and then potentially moving into it as our Principal Place of Residence when we return, or at least some time in the future (probably).

Does this seem like a reasonable strategy? What are some of the mistakes, challenges, and obstacles we should be aware of? What would be the advantages?

If we do go this route, how should we structure the loan? Interest only? Principal and interest? A mixture? What might be some of the financial / tax advantages and disadvantages?

By way of explanation, the reason why we're considering this approach is partly because we're going overseas and don't want a house sitting vacant, and also because it might enable us to buy something more expensive than we'd otherwise consider. We're happy having a small and modest home now (and even renting an apartment, for example) if it enables a bigger and nicer home in the future.

Any and all thoughts are most sincerely appreciated.

Thanks,
FFTB

 

If possible, move in yourself before heading OS, this way you can make use of the 6 yr CGT exemption

 

Thanks Sandyfeet. I know there's a post from Terry about this, so I'll go take a look at it now and be right back with some questions.

 

Okay, I read through TerryW's post about the 6 year rule, but I'm still a bit unclear.

Does that mean that I have actually physically live in the property as my PPoR for some time before renting it out, in order to take advantage of the 6 year rule? If so, for how long? I don't see the answer in Terry's thread or the text of the relevant act (INCOME TAX ASSESSMENT ACT 1997 - SECT 118.145 Absences).

Or does it mean that I just can't rent it out and claim negative gearing initially. If so, for how long?

Thanks!

 

Hi FFB

I thought I made it clear in my thread that the legislation doesn't haven a minimum time frame. Yes you must live in the property before you can be absent.

See also my 2 recent strategy threads which are similar to your situation:
Strategy: Rent where you live and Buy Investment Properties

Strategy: Rent and Maximise CGT concessions to Pay off the Home loan sooner

 

Hi Terry, thanks so much for your response, and for all your outstanding contributions to the forum. I spent the weekend reading most of them and learned a lot. Thank you truly, and thanks as well for your patience with and support to those who are learning (like me).

So, just to confirm - could I live in the property for 1 week - or 1 day - to fulfill the requirements? What evidence would I need to provide?

I just read through the two strategies you shared in your post (rent where you live and buy investment properties, and rent and maximize CGT concessions). Brilliant advice. Thank you.

Just to be 100% clear, can I negative gear my PPoR during the six year period in which I am allowed to rent it?

Sorry to be slow... this is the first time I've ever considered anything like this and I'm doing my best to get up to speed as quickly as possible.

 

The legislation says it must be the main residence. This is a question of fact - it either is your man residence or is not your main residence at any period of time. You may have to prove to the ATO that it was the main residence if you are audited. You could do with with
- address on rates, letters, licences, electoral roll
- photos
- stat decs
- stat decs from family, neighbours etc
- electricity usage
etc

While you are absent you could claim all the normal costs associated with the property, no different to other investment properties.

 

Thanks so much Terry. That's going to present some challenges and require some smart thinking, as I'm really not sure we'll have time to genuinely live in it before moving overseas. We have yet to purchase and we are expecting that the move overseas will take place in January or February. Hmmm....

Great news that we can negative gear while absent.

 

My question would be why do you want to buy now? Why not wait until you return from OS?

Where are you based? If Sydney or Melbourne I would definitely say wait until you return as the prices are already cooling and will likely continue to do so over the next 3-6 months.

 

Hi Albanga,

Good question. There are really three main reasons why we are considering buying now, instead of waiting:

1. We have $500,000 cash available for a deposit and want to put it to good use
2. Though the market does seem to be slowing we continue to see price growth in our target areas, and don't want to end up paying more a year from now and missing out on value growth
3. We'd like to be able to rent the place out while we're overseas, have someone else help pay our mortgage, and take advantage of negative gearing

Does our strategy make sense? Is there something that we're missing in our thinking?

Thanks!

 

We're in Melbourne

 

In QLD at least, there is a significant increase in stamp duty for OO vs IP

 

Just some points to consider in reply to yours:

1 - This is all well and good but you just need to be certain investing into a property is the best use. If you invest now and the market cools then that is a very bad use of the money versus the easiest option sticking it into a term deposit (regardless if you need to pay tax on the income).

2 - All I can say is do your research and be as diligent as possible. A PPOR purchase is an emotional decision and you may be seeing things differently (you may also be right).

3 - Again this all comes down to if purchasing now is your best option. One should never purchase based upon "negative gearing", if that is your strategy then you really need to step back and start from the start regarding your property education. And the theory "someone else pays our mortgage" I think is a flawed one. If your property is negatively geared it is costing you money each week which means you are relying on capital growth to offset that loss. So yeah someone is helping to soften the blow but if no growth then the tenant is not helping you to pay down your mortgage at all.

Apologies if all that seems abrupt, just from someone reading your post I don't believe you are purchasing now for the right reasons.
If it were another area that was on the up then I would say it makes sense but in Melbourne I think you would be much better positioned to stick your 500k into something else, let it build and when you come back you will likely find prices have dropped and you have more money due to the interest that's built over the year.

 

There might be a small window if you do buy soon and before you fly out but as long as you have evidence to show it was your ppor

Change your details on the electoral or your drivers licence, both online and easy. There are others things you can (whether you physically sleep there is up to you ) you'll be leaving the country so it's not really an issue what the addresses are. And check out aus post for mail redirection once you fly out

 

Hi Albanga, thanks so much for your insightful thoughts, and for your willingness to be honest with me. I genuinely appreciate having my thinking challenged, and am going to have to consider carefully.

Regarding Melbourne specifically, do you really expect prices to go down, or rather for growth to slow?

 

Glad to offer my advice and obviously the best thing you can do is your own diligence.

Regarding Melbourne then yes I personally believe prices will halt or drop slightly in the coming 6 months. I believe the outlook for growth over the coming years is far less desirable than some other states as Melbourne really is at the peak.

My advice to you is you are trying to mix an investment with a lifestyle decision and that can be dangerous, especially when considering it over such a short time frame.
A PPOR is an emotional decision and one where I personally would have a profit down the list of desirable in my criteria for purchasing it (sure in ten years time I would like the price to have doubled, but when purchasing I would more be focused on good schools for my kids, public transport.etc).

If you want a profit and in such a short time frame (1 year you mentioned you will be abroad) then I think you would be far better positioned to stick your money elsewhere (term deposit, blue chip shares.etc). The other thing is you may change your mind about where you want to live in that year?