I have $1m and nowhere to live - Buy & rent or Invest?

Wife and 19yo son want to live near their work and friends in an area of Sydney where a house price would be around $1.3m and a Duplex (half of the pair) around $950k.

I don't want to borrow any money for this family home and I am faced with some options.

1. Do I buy a house and this would be an investment property now, in a growing area further west for $870k and leave $130k in my bank account?

*To do this however, I would have to rent the house out for approx $650pw and use that money to rent a house in the area the family want to live. Rentvest in other words but without borrowing any money.

I am concerned that if I do this, I will be faced with capital gains tax one day if I sell and that will be a loss of thousands. This investment property will also add land tax that I will have to pay. As well as Insurance and Council Rates.

2. Buy a duplex in the area they want to live in for $950k and just live in it?

My concern here is that a duplex doesn't seem to go up in value as well as a house does and as the years roll by as the duplex gets old, If my duplex neighbour doesn't keep his side well maintained, it will affect the value of my side of the duplex. Duplexes have their con's. They don't seem to be as much of a good asset than what a self contained house is.

My other concern is that the area I would be buying a duplex is reaching it's 'maximum' growth for duplexes for a while, where as the house in option #1 above still has room to grow hence the lower price tag. Of course I can't predict this but it's my gut instinct.

Any advice for my little dilemma here?

Thanks in advance..


-Frank

 

I wouldn't discount the duplex. In future years, lots of people will be buying duplexes. Freestanding houses are too expensive. I also think if your duplex is worth near a mill, surely your neighbour would also be somewhat house proud too?

 

Invest the $1m in LIC returning 6-7% franked and use that to pay the rent in the area for a year or two then buy the house with a relatively small loan. I know you dont want to borrow but if you are short 300k then I would rather buy the house with a small loan than a not quite what you wanted duplex

 

Just another thought though.... he's a 19yo son. When is he likely to move out?
Anyway, hard question... you could borrow 400k odd to buy the house you want in the area everybody is happy with. Or buy no house. Or buy elsewhere and to rent that out as you said. If its Sydney there's no guarantee of further capital gains in the next couple if years....

So... tough decisions....

 

Hi Dave,

Problem with this is that the house will go up in price too much here in Sydney if I wait another 2 years to buy. I'm worried about another 2 months the way prices are going here right now..

-Frank

 

He wants to move out as soon as I can help him with a deposit on a unit.. Few years away possibly 2 years.

-Frank

 

Hi Gockie,

I hear what you are saying.. I just feel a bit uneasy paying for a duplex which seems to be about 75% the cost of a house. They are quite expensive I think for what they are especially the ones that are close to $1m.. Thats a lot of money I feel for a duplex.. Its like the builder is making all the capital growth... Am I being overly fussy?

-Frank

 

It all needs further thought. But I will say, don't buy an IP without a loan. If you do buy it, borrow 80% (or more) of it. Save your cash for your PPOR. Your loan on an IP is tax deductible....

 

I wouldn't be buying anything in Sydney at present

 

Prices may not move in the next 2 years... but we can't say for sure.

In this case, the duplex makes more sense to me... you don't need to spend the money on the bigger place. Maybe better to be able to help your son out.

Edit: or follow @Cimbom and @DaveM's suggestions. Perhaps there's more downside risk than upside in buying in Sydney now. But no crystal ball...
I know it's nice to own a slice of Sydney but it may not perform in the next couple of years, we have just had a massive boom....

 

You just gave me an idea..

What if I put down $200k deposit for the $850k out west house where we don't want to live.. and borrow $650k.. I will have $800k to invest in lets say LIC at 6% like what DaveM said.. Returning, $42k per year..

This $42k could be used for me to pay rent as well as chip in paying the loan.. It would almost not cost me anything out of pocket.. ??

If I ever want to make this my PPOR all I have to do is sell the LIC and pay the loan off.

In effect I'm just using the bank's money to hold this future PPOR which would at the time be an investment property.

The only drawback is the capital gains tax payable form the period that I purchased and when it becomes my PPOR.. Which if this happens in say within 5 years in Sydney, CG wouldn't kill me I can't see property going up like it has last 5 years. Something I need to consider.


-Frank

 

Invest where you will get the best return over your investment timeframe. This might rule out Sydney.

You PPOR needs to be considered an investment - but not only an investment.

How do you find yourself in this situation ? Have you just sold something ?

 

The million dollar question....

Does Sydney just keep going for another 4 or 5 years

or

Does it stop and pull back and maybe deflate for another 4 or 5 years

You can read what many of us think in many threads here.

 

Do you have experience with LIC/share market?

capital invested in LIC does not necessarily mean it will be the same value when you want to sell, It will depend on market at the time of selling.

Share market can be volatile. I am no expert but investing 800k in LIC sounds wonderful in a bull market, may want to do some homework on this, and yields sound good, but protecting capital is also important.

I think there is also a strategy of buying in dips, not sure whether 800k in one hit is wise at market price?

 

I actually think the shares idea is very solid if you invest for 5 years or longer. It should be paying dividends the whole time.

I'm in agreement with others on the risks of investing in Sydney right now.
It's the bigger risk imo.

 

Just do what I do Frank pal, listen to the wife!

 

What if you just get the unit and your son and wife can stay there during the week?
But they're working so it's probably better if they put in their own money and make their own decisions. Innit?

 

Just make sure your time frame is at least 10 years if purchasing lic's.
If you need to sell out prior you might not get your capital back as the market can and does drop.

 

Yes sold my PPOR and also a bit of an inheritance landed me with around $1m and now it' like, where to from here with the family home situation.


-Frank

 

Frank, @datto might be able to help with some local PPoR and IPs, and maybe get a Commodore or 2 thrown in.

Problems are solved, holiday to Bali for you guys and a slab for Datto (and maybe a new set of tyres, depending on the quality of real estate referral...)