IO IP vs owning an IP

Discussion in 'Investment Strategy' started by WB, 13th Oct, 2019.

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  1. WB

    WB Member

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    Hi all

    Looking for your thoughts on IO vs owning an IP. I have read a few threads on the forum and it seems many are against the idea of owning an IP, though I must say I finding it hard figure out whether it does or doesn't suit my financial position and I have no idea where to start running numbers against scenarios, I have failed to find a comprehensive online resource to do this. And it might be time to do a tax strategy session with my account....

    I currently have an IO mortgage on one property (3 years since I bought), my offset helps keep this property positively geared by a small amount each month - but I feel like I need to wait 20 years to see if it's been a good investment and reap the capital gains (it has gone up a wee bit since buying)...so in a way I feel like it's been a bit risky, and is a long term strategy.

    I am looking at a second property, buying outright (no mortgage) in a small town that has a rental yield of 7%. The idea of having an asset paid off we can use for equity for a PPOR in Sydney, and income each week (albeit taxable) straight away sounds really good. Though I'm wondering, other than paying tax on the full income is there any other downfall? (Its not a mining town, more tourism and farming so I'm confident the property will at least hold in price and appreciate over time).

    Interested to her your thoughts and experiences.
     
  2. Trainee

    Trainee Well-Known Member

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    Even if you assume 7% price increases on resi property (which is high), in ungeared dollars shares give a higher return.

    In the early stages, you dont have much assets to work with, so gearing magnifies your returns (it can also magnify your losses). How does someone with 100k ever afford a million dollar property? Start with gearing to a 500k property and get gains on 500k instead of 100k. Possibly.

    Tactically, though. You buy the country property outright. Make 7% a year rent taxable. Refinance to buy PPOR, none of the interest is deductible. But if you take out a 80% loan, the interest is deductible and you can keep extra cash to buy PPOR later,

    Not saying buying the country property is a good idea. Personally would not touch it because of (opinion only) lack of capital gains.
     
    John_BridgeToBricks likes this.
  3. Sackie

    Sackie Well-Known Member

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    Comparatively speaking how many stocks lost value over the last three years? How many businesses went bankrupt in that time period? Your investment is still standing.

    Investment risk needs to be put into perspective imho. Don't forget 3 years is peanuts when looking at the performance of a long term asset like RE.
     
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  4. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    WendyB, what can you tell us about the small town? As Trainee says above, small town investing likely means higher risk (of vacancy) and little if any capital gain.
     
  5. Beano

    Beano Well-Known Member

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    Is the small town with quite a bit of tourism and close to the farming areas Brisbane ?
     
  6. WB

    WB Member

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    Hey guys - thanks for your responses. I have been calling around realestate agents to confirm vacancy rates in the area. Have also been thinking (and researching) about Airbnb'ing the property. It's a wine region.
    Been researching like crazy today, analysis paralysis setting in... hahaha
     
  7. WB

    WB Member

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    Agree - it's a long term hold, I have the patience :)