Investment plan to pay off PPOR. Feedback please!

Discussion in 'Investment Strategy' started by Btaylor, 28th Feb, 2017.

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  1. Btaylor

    Btaylor Well-Known Member

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    Hi all,

    I am new to the property investment game and am hoping for some feedback from more experienced investors.

    I have a plan to pay off my PPOR sooner as follows:

    - My PPOR's value is $545k and has mortgage of $335k
    - I have placed a deposit on a block of land and plan to build an investment property on it. Total cost: $635k. I am refinancing PPOR to access equity for deposit.
    - I plan to rent the investment out for a while (4-6 years) and then sell my current PPOR and move into the investment property.
    - Hopefully, the PPOR will have had some more growth and selling would allow me to use the capital gain to assist with paying down the PPOR debt. This would mean I avoid CGT.

    Is this a good plan? Or should I just build the investment property and keep it as an investment for the long term and pay down my loan the old fashioned way?

    I plan to build a property portfolio eventually but would really like to smash down my non-deductible debt. Having no PPOR debt would be a big part of financial freedom in my book.

    I have a very stable job and income of $105k pa.

    Thoughts?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Potentially a good plan.

    The new house would be subject to CGT when sold, but this will decrease the longer you hold it.
     
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  3. Anthony Brew

    Anthony Brew Well-Known Member

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    Any reason why you need to sell the current one and reach financial freedom so soon? are you nearing retirement? if not, is there any reason to not just let renters pay it off while you start paying off the new place?
    This is not advice by the way - I am just wondering.
     
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  4. Btaylor

    Btaylor Well-Known Member

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    Yes, I realise the new one would be liable for CGT for the proportion of time that it was rented. I plan to hold for a long long time on that one though. I've bought in the area I want to raise my kids in the future. Thanks for the response Terry.

    Anthony, I am only 28. Just really impatient haha. Once I sell the current PPOR, I would then look at borrowing again for more investments.

    Has anyone else done something like this?
     
  5. Biz

    Biz Well-Known Member

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    Work on increasing your income I say.
     
  6. Btaylor

    Btaylor Well-Known Member

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    So that I can service more debt?
     
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  7. Biz

    Biz Well-Known Member

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    Maybe one day...wouldn't be in a hurry to get into more debt for ips right now...More so you can pay down your ppor faster.
     
  8. Btaylor

    Btaylor Well-Known Member

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    Oh okay. Unfortunately I have reached the max salary for my job. Drawback of being a teacher!
     
  9. Biz

    Biz Well-Known Member

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    Find something to do part time in your 3 months a year off.
     
  10. BB5

    BB5 Well-Known Member

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    My plan is also to get ppor paid off quick as possible too. Not the way I would have gone but I appreciate the overall goal.
     
  11. Ross Forrester

    Ross Forrester Well-Known Member

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    Potentially works.

    Don't forget to factor in the damage that tenants can create.

    When you move back in you often have to do a renovation to live in and the Reno cost is not tax deductible.

    And increasing income if the foremost way of increasing your wealth. Using increased income to pay down debt.
     
  12. Al1979

    Al1979 Well-Known Member

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    They don't get 3 months a year off, only the students do. Good teachers spend most of that time doing reports or lesson planning.
     
  13. Biz

    Biz Well-Known Member

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    Suuuuurrrrrrreee they do ;)
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Many

    The ATO are aware of the strategy too and don't like it. But I am not sure how they could apply Part IVA to the scheme.

    See the discussion under example 10 at:
    NTLG consultative workshop on Part IVA amendments
     
  15. r3ckless

    r3ckless Well-Known Member

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    I'm in the same boat, and weighed up selling an IP to reduce the non deductible debt.

    In the end I didn't proceed /placed on hold as part of the strategy was I was going to buy another IP with the equity. Basically converting non deductible debt to deductible.

    I didn't proceed because of the fact I'll be buying back in on the high side....

    I think if I wasn't looking to replace/get another ip I would probly sell it. But I am 28 also and looking to build up the portfolio
     
  16. HUGH72

    HUGH72 Well-Known Member

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    Sure....
     
  17. Btaylor

    Btaylor Well-Known Member

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    Well I'm certainly not complaining about the holidays.. ;). One downside though is that I always have to pay a premium for flights during school holidays!

    Thanks for your advice. @Ross Forrester , is the average tenant really that bad? Hopefully the house will still be intact..:confused:

    @r3ckless , I know what you mean. This strategy works to achieve the goal of paying down all of my non-deductible debt but then considering my broader property strategy (long term buy and hold), selling any house doesn't seem like a good idea.. It's kind of like killing the goose that lays the golden eggs. Hmmm I will think about it some more but I suppose I don't need to decide for a while!
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Don't forget selling one property to buy another eats up around 10% of the value in transaction costs.

    At the time you are going to move into the new one you just need to do some sums. There may also be cheaper ways to do this such as sale to a spouse.
     
  19. Btaylor

    Btaylor Well-Known Member

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    Yeah the entry/exit costs are also a consideration. Thanks Terry. Maybe I should just stay put where I am am keep piling my cash in the offset. Either way, I think I should be able to pay off the PPOR loan within 10 years.
     
  20. Perthguy

    Perthguy Well-Known Member

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    I have done something similar but not the same. I had a PPoR that I renovated and lived in for a while but then got moved for work. So my PPoR became an IP. I was always planning to keep it long term but them the strata manager got very annoying and the market ticked up temporarily so I got out when I could. I rolled the funds into another IP that I am building an additional dwelling on. A PPoR project will be next year.

    I sold because I was in a bad market but could get out at the right time. If the property was in a good market I would definitely consider if I want to sell. Have you considered debt recycling as an alternative to selling?