Downgrade PPOR to free up investment $$?

Has anyone sold their PPOR and purchased something smaller/cheaper in order to reduce/clear their mortgage - thereby freeing up income for investments?

I have a house with a modest mortgage. I hate the maintenance required for a house. I have been thinking to sell it and purchase a townhouse (which I know is a silly move in terms of capital growth). But the mortgage would then be wiped out completely, and if I get a townhouse in a group that has a pool - the kids would have the use of a pool that I didn't have to maintain and clean. And without a mortgage - my mortgage payments could go straight into investments.

Cons - less capital growth (most likely a LOT less).
- body corporate
- can't downsize later in life (would already be downsized).
- cost of selling and buying approx $30k! (stamp duty and selling commissions).

Pros - no mortgage
- more money free for investments
- pool
- less maintenance

I know most upgrade their PPOR throughout life - is it crazy going the other way?

 

Nothing is crazy, it all about your circumstances and life style you want to lead.

I have a diff strategy now, I upgrade to more prime expensive home over time closer to CBD with big block, and all my money is in the stock market, stock market return powered my upgrade and paid off mortgages and keep it locked it in house tax free.

So I just grow to more expensive home and larger stock portfolio over time and lives off dividend
My home is just storage of tax free asset, I can lives off the dividend from shares so I don't need to unlock the equity in my home.

 

@PandS - you are super lucky (have worked super hard) to get to the point where you can live off dividends and still have an expensive upgraded house. Awesome work.

I assume you had a high income to start with and perhaps a second income in your household? Unfortunately I have neither of those. Admittedly I also didn't know much about investing when younger and didn't know that I should learn about it.

I love your strategy. But it's not possible for me.

 

Downgrading is a potentially good strategy, but another issue is the CGT free nature of the main residence. One strategy is to sell the main residence on retirement tax free and move into an investment property and the larger the capital gain the greater is the CGT you don't have to pay.

 

Stamp duty is a killer in these type of strategies.

 

@Terry_w - yeah that is a good point.
I have friends that only have a house - but it's a HUGE house and they put everything into it.
Their plan is to sell on retirement and downsize and use the remaining money to live on.

 

But, downsizing temporarily maybe an option. but as neK says the stamp duty is the killer.
Keep the house, use the 6 year rule and rent?

 

Thank you for your suggestions gentlemen.
I think I might have to just buckle down and pay the house off and buy a blow up kiddy pool for the hot summer days.

 

Have seen this among a few people we know.

Main issue seems to be that the person becomes used to living in a large house in an upmarket suburb, and the thought of downsizing becomes unappealing. Most are still living in their expensive 5 bedroom houses and are asset rich but cash poor, know they have to move but reluctant to do so.
Marg

 

@Marg4000 - yeah I can see that happening with my friends too. They love Wynnum and will not like to live anywhere else. And selling the house that is super close to the water for something smaller and further away - they are not going to like it. A further problem for them is that they keep redrawing each time they have paid off a decent chunk. The latest was a trip to the US for the whole family.

 

@sharon would you consider keeping your PPOR and living in a smaller rental?
There would be a lot of variables to see if this would be a positive way to go but it would mean you still get the CGT exemption on the house for another 6 years and may open up some options.

You might downsize and realise it’s a mistake, this way you would still have an option of going back to your house.

 

I think there might be a cheaper solution to having a pool for the kids: public pools where the entry fee is about )3-4/p ( can buy a 10 entry pass) or go to the beach.

We downgraded from a large house inner city to a townhouse walking distance to the CBD, not quite downgraded from the cost aspect but space aspect and ‘upgrade’ the lifestyle. Keep the old house and rent out.

You could rent a townhouse and rent your old house out as Terry said for 6 years without paying capital gain tax if you decide to sell.

 

....OR one other option would be to draw equity out and invest into IP, since you mention not much loan to pay off from PPOR?
BUT read this book first and see if this strategy makes sense to you and would suit your life style or what you wish to achieve?
How to Achieve Wealth for Life
I think this is the book where they illustrate whether to hold just PPOR one property or buy one IP extra! I have read this long time ago so cannot rememeber if that's the one...but we can always learn, right?

 

Just bought the book on kindle and re-read, yes give it a go @sharon...
It was great to refresh some previous knowledge, it is worded in simple plain English and makes sense, but the question is whether it will suit your lifestyle or what you wish to achieve? Some here on this forum adopt a different strategy as there are many ways to invest into property and may not agree with the passive strategy adopted there. However, it illustrates a concept so you can understand....that's all!
It is pointed out that selling and reinvesting is quite costly exercise where it could cost up to 20% of property price (Capital gains tax, selling and buying cost plus stamp duty, etc...).
My family member in BRI did just that what was suggested in the book, changed to IO loans BUT invested saved principal from P&I loan into an IP (Note the BUT, it is important it was not used on personal spending as some people withdraw the funds for lifestyle instead of investing, so that is the key!).
However, you need to buy well located IP and have the time for this approach, unless you could add some renovation?
Hopefully you will at least read this book, so let me know what you think about it, thanks?

 

Hi @sharon

I agree with @Anne11. Chris Gray has a saying that the beach is free to use and the council maintains the park for you! Kids will survive without a pool. To my mind, it almost never makes sense to buy an inferior property for either investing or lifestyle.

Also, stay the course with investing (I am sure you will). Not everybody needs to retire at 45. Retiring later in life but still being comfortable and independent is just as noble and worthwhile. It takes while to get the compounding ship to generate speed. But it will happen. When it does, you will be glad to have made the start that you have now.

It is a long life. Plenty of time for you to not only catch up but also luxuriate in all the benefits you will derive one day.

 

@MWI - I am not interested in investing in property. I know - this is a property forum. But I spend most of my time in the 'Invest Chat' section.

@Anne11 and @orangestreet - I think you are both right. I need to forget the pool idea. We have been spending time at public pools and the beach over the last years and I have to accept that this is normal/all good.

I think I just go through patches of feeling like I should be doing more. Investing more. And trying to think of ways to do that. At the moment the mortgage takes up most of the $$. I really just need to buckle down and pay that off faster.

 

A friend of mine, recently retired, bought a "eco cabin" at South Stradbroke in the Couran Cove resort. Paid $100k, it is just under the $200 a week for water/electricity/rates and he has no maintenance, rents his house out in Brisbane that he owns and will use the 6 year rule as the property at Stradie more than likely won't see any real capital growth. I have seen people do what you are suggesting, but in the long term, it hasn't worked out as a good strategy.

 

@sharon we do what we can do. My kids grew up without a pool. I could never get my head around why I would want to clean and maintain one when there was a free beach/ocean pool not to far away. Your home is an asset too not just a mortgage. You are on the right track, paying off your property asset and accumulating share assets as you go.