Buying a really, really cheap PPOR

An oppourtunity has come up to buy a small 2br villa for under 250k. I have no need for a big house etc so a small, cheap PPOR is appealing.

In terms of financial strategy...is living in a cheap PPOR a good way to go?

I know some people advocate for getting the biggest PPOR you can get as all CG is tax free....

But in terms of cashflow, a cheapie feels like it could work?

Thoughts?

Anyone done this?

 

Guess its the same idea as lowering your lifestyle requirements so that you can retire earlier by wanting less.

the risk is if you have a family in the future and want a bigger ppor? Tax free gains help a lot on a ppor upgrade.

 

I've got an IP house that could be brought into the fray if need be?

 

I'd wonder what the 250k house would rent for? In relative terms it might work out even better to rent. Afterall, a 250k house still requires $x to replace a roof etc.

 

There's your answer.

 

Completey subjective, I live in a much smaller and cheaper house than I could afford but it affords me a great savings rate, a great lifestyle and no financial worries. If I bought something for 3x the price I wouldn't have that but in 20 years I could sell the more expensive house and have a tonne of cash tax free to then buy a smaller place. What do you value more having the lifestyle you want now, or having it in 20 years? or Making a lot of money in the future which may make things much easier? I am sure there are a lot of calculations you can do but really i would figure out what it is you actually want and then work backwards to see what finances you need to get there.

 

Wow that's crazy cheap, and sure, why not do whatever works for you.

Personally I am in the high value, high-growth CGT-free PPOR camp.

I think you just need to consider the health aspects of your $250k place. If it doesn't support you living your best life, don't do it.

 

It could be very good because you can pay it off very quick (or better debt recycle the debt) into other property/shares. This will allow you to service more loans quicker and to save tax.

But you won't want to waste the main residence CGT exemption on a cheapie, so an additional strategy might be to buy a bigger faster growing investment property, which you move into at settlement and then out back to the cheapie. You can then rent this out yet use the main residence CGT exemption on this property.

Perhaps buy a third property that is more of an ideal retirement property and rent this out from the beginning. At a certain point you sell the second property CGT free, move into the retirement property and keep the first one and rent it.

 

IMO it'll be good for you, @hammer. Even though I suspect you have a pretty high income, lots of people don't need a huge house and that means there's always a market. Also,
This is from The Millionaire Next Door & Stop Acting Rich and Start Living Like a Millionaire. It may be old but it's still true.

• What is a good rule if you are determined to become wealthy? The market value of the home you purchase should be less than three times your household’s total annual realized income.

• If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s annual realized income.

So many people love these books but seem to miss these incredibly important tips.
I know I put this on another thread but I need to remind myself of these gems too. I currently live in a big beautiful house with a sprawling garden which I love but time has come to move on. There just isn't as much bang for buck as there was 5 years ago in the regions. I think it's only going to get tighter, which means that these modest places will shoot up in demand = value.

 

Compromising on the size and cost of my PPOR would be something I'd be open to but not at the expense of its location....and normally price and location go hand in hand.

 

I’d love to be in that camp too, but I can’t justify $1.2m for a house where I live in Melbourne compared to $600k for an apartment that’s even bigger. In fact, I couldn’t justify it 5 years ago when my apartment was $450k and the local houses were $750k (although I very much recognise the house would’ve been a better buy CG-wise, though back then it was well above my borrowing capacity).

OP: where is this villa? Is it a location you’re happy to live? How much do houses go for in the area?

 

I wonder what interest rates were like when this was written

 

The problem with the millionaire next door is that it presents a particular type of wealthy. Own their own business, american, live frugally.

doesnt mean thats the only way to be wealthy, or that all wealthy are or need to be like that. Also, american property is different. Many more cities with cheaper property. Three times income for ppor wont be viable for new york.

 

Villa is good for retirement, ill health, kids, or being so busy house is annoying.

House is better for family, wealth, 'home', boomerang kids

 

Depends on cashflow.
I'd rather get a fixer upper in a better area than just a cheap IP

 

As I was building up wealth I lived in the cheapest accommodation I could find then as a family man I lived in the house that made everyone the happiest. As happiness is much more important than wealth. But as I was brought up to be frugal And as I now live as a newlywed (2 years) I still believe that you live in the cheapest house that your ego and happiness lets you.
My current house is the worst house in the best street. It only has 3 bedrooms 2 bathrooms and 16 lock up garages. My wife says i only bought it for the garages, but what would Mrs Car tart know? I still suffer to have three cars parked outside in the rain, she only has to keep her Kia Stinger outside.

 

It has nothing do to with lowering life style. It can enhance it , it gives you optionality. Expensive houses can destroy lifestyle, be a noose around your neck. You do it because you want more. The cheaper the house the more equity you have access to and greater the ROE. You can take out equity and put it into super if you want compounding accessable tax free gains, or deductible tax effective investments. Not a great idea selling your house just for some tax free money, then having to pay more for one with taxable dollars while having foregone compounding income. Cheaper house means less expenses , the problem with expensive houses is not the purchase price as that is a one off cost , that can be offset or cancelled by borrowing against it. The problem with expensive houses is the expanding continuing costs such as rates, insurance, maintinence , energy cost, that can easily amount to more than the cost of an extended overseas holiday every year. I dont know why anybody needs more than a 200k house. A 200k house in some places is a better house and gives a much better lifestyle than a 1m house in many places. You can also own a $200k house and rent it out for $400 a week get a tax deduction as one option for your optionality, scaling up and getting multiple houses is another option, while renting a $800k house with high holding costs for $400k a week is another option. It is a no brainer.

 

I don't buy the interest rate approach. Interest rates come and go. No need to wonder what they were like - I can tell you: they were much higher than now.
But that's just the point, if you think about it a bit more. Right now there's a lot of demand for anything and everything on the market outside of Sydney and central Melbourne. Eventually that's going to change too.
Don't get me wrong. I'm the biggest wannabee around when it comes to nice houses and gardens and living close to work etc. I do not want to move from where I am now and have offered a lot of $ for it. Where I've made money though, was when I bought something modest or something stigmatised and made it nice.
Interest rates can go up as much as they can go down and it happens a lot quicker and everyone is shocked 'cause they thought the banks were their friends la la la ......
In fact, I would say that the current basement level interest rates are a very good reason to watch your step if buying now.

 

Yeah, it's a lot of eggs to put in one basket.

 

Around 5 years ago I sold what had been our family home. 4 Bed, double garage, 2 bathroom, entertainment area and pool.
The reason being that my Wife had passed, and our children had long left home and purchased their own homes, so, there was absolutely no need for me to remain in a large family home. Subsequently, I downsized to a villa (PPOR) and was able to purchase the adjoining villa and add it to my IP portfolio. It has turned out to be a terrific decision as I have very little maintenance issues, steady rental income and no encumbrance over either property. It has enhanced my lifestyle immeasurably, allowing money to be freed up for bigger and better toys.
Some people see homes as a status symbol; for me, as long as I have a bed, shower and kitchen I'm happy.