FHB Strategy & loan structure

Hey seasoned veterans of PC

So iv now purchased my first home with some guidance and advise from you guys and am now looking into the future and trying to figure out the best strategy and loan structure to move forward from here on my journey.

The goal is to purchase another property as an IP and start building a portfolio the most cost & time effective way when its feasibly possible.

When my first home is built & complete i will be moving in for the required time to take advantage of the first home buyers grants & schemes available after that time period is over everything is up in the air and i will do what is required to move foward with the goal.

I assume my options are
1. Stay in PPOR and pay down debt & use equity to purchase a IP should my servicing ability allow me.
2. Turn PPOR into IP while renting a place for myself for tax & savings purposes to try get to the point of being able to obtaining the next property

Current situation is ill be taking on a 600k loan
my current salary is 125k i have no other debts & no children

What other options am i missing..?
Is my thinking all wrong..?

Appreciate any thoughts and advice

Regards

Jem

 

There's potentially a big difference between 1 and 2 lifestyle wise. That seems to be a big personal decision really - I'm not sure financial considerations are what you should be applying.

Maybe decide that first and then that can help shape the next investment move?

Personally I'm a rentvestor and probably will be for quite a while, which has helped me with my investing for sure.

 

By 'new home' do you mean new to you, or is a brand new as in newly constructed?

I think you only have 2 broad options being
a) live in it, or
b) not live in it.

but many suboptions and variations of the above.

Moving in and out and renting it using the 6 year rule to avoid CGT can help save tax and this in itself is a form of debt recycling. At the same time save as much as you can in the offset account and once the property is no longer negative geared move back in and debt recycle. You can even debt recycle before moving in.

converting the non-deductible debt into deductible at owner occ rates will speed up things and hel borrowing capacity.

 

Thanks for your reply @thatbum lifestyle wise it doesnt really bother me its more so i want to make the decision based on the best way to go financially.

cheers

 

Thanks for your reply @Terry_w iv read so many of your posts your an absolute gold mine of knowledge i appreciate what you do here.

sorry the house is being built so it will be brand new, i have now edited post to state this.

So your saying option 2 is hands down the most financially viable way to go about things. In this case what would be the best way to structure the loan from the start knowing i would be turning this property into a IP in the next 12months.

appreciate your time.

 

In that case there is a trap for young players

Once you move into a new house when you later rent it out you can no longer claim depreciation on fixtures and fittings. So you might need to consider what this could add up to and compare it to the benefits of geting the grant. It is probably going to be not that much, but the potential benefits could be more than the grant if you were to just rent it from the beginning without moving in.

if you do go into option 2 ideally you would borrow 25% from parents and 80% from a bank. Avoid LMI if you can- especially as you will be living in it. But if LMI applies you could still deduct most of it if you move out and rent it.

I would still consider paying the loan down quickly, or perhaps money in the offset in case you change your mind about moving back.

for the next one don't use any cash, pay down the first if you have to and borrow against it - assuming you will not live in the 2nd one.

 

Thanks @Terry_w when you say i wont be able to claim depreciation i assume that is only for the year i am getting the grant and living in it? if i move out and rent it the following year/years i could claim depreciation right?

unfortunately i wont be able to get any help from "parent's" but LMI shouldnt be a issue as i have a reservation ID for the FHLDS provided everything goes to plan.

cheers

 

Nope. The property will no longer be new if you live in it.

 

Interesting thanks for that info you wizard, so i guess this is unavoidable in my instance as i will be using the FHLDS and am required to live in it.

Would it still be financially better to turn it into a IP after the year is up and rent somewhere else cheaper for myself even without being able to claim depreciation or would it be much of a muchness and not worth the effort and perhaps better to just pay down the dept as fast as possible to build equity to buy the next place.

Then try for IO on the next place to pay down the non deductible debt as fast as possible?

cheers

 

You will have to run the numbers.

 

Cheers mate appreciate your time, will need to look into becoming a client to someone like yourself closer to date to work things out.

Regards

 

can you elaborate on the rules here terry? Can depreciation be claimed where:

1 buy a new property, rent out from day1.
2 buy new property, live in for 12 months, then rent out
3 buy older property, rent out from day1

Does previous use test only relate to the current owner, or does it apply to the previous owner? Ie in 3 is there a difference between the property being the previous owners ppor or ip?

is there a difference if you buy a new property with appliances installed and if you buy it new but without appliances and install them the day after settlement?

 

If Jem builds a property and rents it out straight away he could claim depreciation on all the fixtures and fittings such as aircon, hot water system, garden pumps, carpet, door bells, oven etc etc

On a new build this could be $10k or more per year over the life of the item. Some items have life span of 10 years.

But the law changes a couple of years ago mean that if a property has been lived in you can no longer claim these costs as the items are now no longer new.

So by not living in the property the tax saved may exceed the value of the grant.

But you also have to consider the 6 year rule and not being able to use if until the property is the main residence at a later date. This will mean the property will be subject to CGT if sold later - which may end up being small depending on the circumstances as 3rd element cost expenses will significantly reduce the amount

A QS might be best to respond as I have made up those figures above. @BMT Tax Depreciation @Depreciator

 

Okay, let's look at the depreciation difference between a new property that is rented out immediately, and one where somebody, anybody, lives in it before it is rented out. It's a common scenario with first home owner grant recipients.
The 2017 rule change means that depreciation on 'used' Assets cannot be claimed but needs to be deferred. (Assets as Terry notes above are things like appliances, hot water, floor coverings etc.)
Depreciation on the building itself is NOT affected.
Looking at some hypothetical numbers:
Build cost including Assets = $250K.
The Asset component of that might be $15K - I'm assuming a modest house. That $15K is the cumulative value of the appliances etc.
The net build cost ($250K - $15K = $235K) depreciates at 2.5% = $5,875 per year.
How quickly would that $15K in Assets depreciate? If the Low Value Pool is used, as it nearly always is, around 80% of that $15K would be claimed in the first 5 years. The remaining 20% would dribble away over the next 5 years.

 

Awesome thanks guys, freaking love this forum so much, very grateful to be apart of this community and cant wait to be able to give back, you guys are amazing!

Cheers