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How to do a cost-benefit comparison of continuing to live in PPOR vs convert to IP and rent instead?

Discussion in 'Accounting & Tax' started by rizzle, 26th Aug, 2015.

  1. rizzle

    rizzle Well-Known Member

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    I'm toying with the idea of converting the PPOR (which has one room rented out), completely into 100% IP.

    I'm wondering how I go about doing a full cost comparison for each scenario. I'm okay with basic accounting but it is getting a bit fuzzy for me when I start to consider depreciation implications (I have a dep'n schedule).

    I want to know net of all taxes/depreciation/expenses etc. what my annual outlay would be in each scenario. If they are a similar amount I will continue with current living arrangements. If they are significantly different I might move into a rental.

    Are there any spreadsheet templates that could give me the answers I need or am I best off visiting an accountant?
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Start with two pieces of paper. Nut out the cashflows for each scenario. Then when all is correct consider the tax issues..Just remember depn isn't a cashflow outlay but it does affect tax deductions. (ie refund) which is a cashflow.

    Rented = income (taxed) or negative gearing etc. Cashflows with be either positive or (negative). Be consistent.

    Also for consider CGT issues for the two alternatives. For that all you can do is use assumptions. Its possible the main residence exemption continues for 6 yrs if you move out. Question is here where you will live. If you rent that is a (cashflow) to factor in v's the stay scenario where you lose positive cashflow from rent and deductions reduce.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  4. thatbum

    thatbum Well-Known Member

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    I thought conventional wisdom was that assuming a 'normal' yield and growth in capital cities, renting (and investing the money saved) was financially superior than buying.
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Most of the analysis I've done would support this. Assuming you rent exactly the same house next door and the rent you pay is the same as the rent you receive, renting yourself and having an IP is usually a slightly better financial result, mostly based on the tax benefits.

    There is of course more to consider though...

    If you were to buy IPs and only later in life buy your dream home, you're probably not better off. The reason is if the market increases over the years, you'd end up paying a lot more for your dream home, which suggests borrowing more and having a lot more non deductible debt over it. The better financial result would probably be to buy your home early, locking in the amount of non deductible debt, then invest on an ongoing basis whilst prioritizing the payment of that non deductible debt.

    Probably the best way to go about it might be to buy the house you want to ultimately live in, but initially rent it out. You move into it when your circumstances warrant. This locks in your own home at a lower overall price, but gives you the immediate tax benefits of owning an IP.

    Then there's also the emotional and practical issues to work out. All this stuff can make your head spin. Sometimes there's no perfect answer.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would be in the early years, but rents rise as do house prices.

    The ideal would be to buy a property, move in, move out and rent next door for 5.5 years.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Interesting I just had a client get a val on their resi SMSF property. Worth $1m up from $600K a few years back. Rent appraisal is now slightly lower than three years ago. In Ashbury in very quiet leafy street near transport. Nice Federation era cottage.

    Valuers indicated that rents are being held down by exceptional and growing investor (over) supply and lower rates translating to lower yields by investors. The days of 9% yields three + years ago are now closer to 4.0%+...And the way some bid at auction you wonder if they even care about yield.

    One of the best strategies is to buy your neighbours home and he buys yours.
     
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  8. 2FAST4U

    2FAST4U Well-Known Member

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    Interesting. It contradicts the traditional 'buy in a suburb you can afford and upgrade' argument that gets peddled to first home buyers all the time. It certainly makes sense though given the yields in capital cities and the tax deductions on offer. I guess the hardest barrier to overcome for that strategy is the psychological effect of people and homes as most people tend to be emotional when it comes to housing. I've tried explaining that to my girlfriend but you get the typical 'but I don't want to rent and what's the point of having a house if we still have to rent another one'.
     
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    There's also the underlying assumption in my argument that you can afford the dream home at the start. In practice it usually doesn't work this way. Most people buy what they can afford to simply get into the market, then later sell and upgrade.
     
  10. mcarthur

    mcarthur Well-Known Member

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    Very interesting idea!

    Good leverage, but probably not best for CGT though?
     
  11. chylld

    chylld Well-Known Member

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    This was our original plan, but the benefits were remarkably small due to land tax and much lower yield (compared to our old PPOR). So we moved straight in :)
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Could be done with siblings too.
     
  13. ac_shev

    ac_shev New Member

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    Sorry for hijacking this thread. I am having the same question so I thought I would make use of an existing thread instead of creating a new one on the same topic.

    We are currently living in a 2-bedroom unit in Sydney and thinking of renting out our unit while renting a bigger place for our two kids. This would be our interim phase while waiting for the Sydney market to slow down before buying our next home. We'd like to determine the financial implications of this move- if this results in too much out of pocket for us we will keep waiting out in the unit.

    We are going to see an accountant to go through all this but would like to get ourselves educated to have a better understanding of the process.

    We bought this unit (built in mid 60’s) in 2012 for 345k and we spent around 40k renovation at the time. Although we haven't done a evaluation but we have seen two bedroom units in our area going for 560-600k in recent sales. We have 'technically' paid off the loan with our savings in the offset accounts.

    Both of us work. I am on 130k and my wife is on 33k while on maternity leave which will go back to 45k when she goes back to work.

    I did have a go at the numbers and below is what I came up with.

    In our current situation we pay a combined taxes of 39k and our combined take home after taxes is 124k.

    Option 1) We rent out our place as is at 450/week

    Rent income is 21.6k (48 weeks rental) less ( 2k strata+1k council rates+ 2.5k agent fees+ 2k repair +4k depreciation – this is a figure I got from using some online calculator) = 10.1k positive

    Together with our incomes, we would take home 131k after taxes.

    Option 2) We refinance to max out loan on the property say at 80% of 560k i.e 448k on 4.6% interests only and take the money to put in to our saving bank account with 3.4% interests

    Rent income = 10.1k -20.6k mortgage = -10.5k

    We would take home 127k after taxes.

    So looks like 1 is our best option which will help us reduce the rent we would have to pay ($600/week) but option 2 would give us the available funds for the next purchase

    My questions are

    1. Do my numbers make sense or have I missed anything? My numbers seem to indicate that we would only take back around 45% of your rent even before taxes.

    2. What’s about CGT if we do really need to sell the unit to fund our next purchase? If we have the place revaluated now assuming at 560k, would the CGT be calculated based on any increase from this figure or from the originally purchased figure at 345k? The bank offers free valuation if we refinance but we are wondering if this valuation by the bank will be accepted by the ATO

    3. Does the depreciation figure seem reasonable? Personally I thought it seems quite low for the renovation works that we did.

    4. Is there anything to watch out for if we refinance as we would like to avoid 'contaminated' loans and to maximise our deductions.

    As we are very inexperienced in this area, we would love to hear what other people think and are open to any ideas/advice
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    ac - If you increase the loan and invest into a savings account the interest will not be deductible. You would also create a mixed loan unless you split.

    Have you considered the effect of putting money into the wife's name when investing or parking in accouts as her income is lower and therefore tax rate lower.

    Should be no CGT if you sell within 6 years unless you rented it out before living in it

    Do the figures with you movig out and removing all the cash in the offset and placing it in a savings account in the wife's name.
     
  15. ac_shev

    ac_shev New Member

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    hi Terry,

    Thanks for the quick reply. So we can only claim the interests against our current loan balances after we remove all money in the offsets?

    At the moment, we have about 220k in our offsets against 220k current loan balances. If we take all this out to put into my wife's account. This would see us break even on the rental but gain 7.7k on interests.

    We would take home 129k after taxes.

    If we increase our loan but use all the money to deposit for our next purchase, can we claim the interests on the increased loan balance as deductions?

    Thanks
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, but only if all the current loan related to the purchase of the property

    No, as private expense.