IP v PPOR - Time horizon questions

Hi all,

I've had a look around and have found similar situations to my own, but was hoping for some more granular advice/thoughts on my strategy options.

I have a deposit of circa $200k and annual pre-tax income of around $200k.

My borrowing capacity is prob around $800k.

My 10+yr objective is to develop an asset portfolio to generate additional passive income.
My 2-4 yr objective is to buy a PPOR in Melbourne, potentially with my new partner + 2 kids ($20k cash; $140k income).
My short-term objective is to get a decent return on my deposit.

So my options as I see them:

1. Buy an IP in next 6 mths in Melbourne (say around $700k), rent out and then use equity to buy PPOR in 2-4 yrs
(Concerned about locking up equity that can't use in future...)

2. Buy PPOR by myself, live in it short-term, convert to IP, then 'upgrade' to larger PPOR with partner in 2-4 yrs
(Having trouble seeing full CGT/tax/transaction costs of this approach? seems to much effort, with limited benefit?)

3. Just keep saving (put cash in term deposit) and buy PPOR in 2-4 yrs with partner
(Concern is lack of decent return on the cash?)

4. Anything I'm missing?

Many thanks in advance for advice.

Cheers

 

If you buy an IP now with a 20% deposit it will lock up 25% of its value
$700k x 20% = $140,000 and another 5% for costs = $35,000

This is $175,000 you won't have for the eventual main residence. This means you will be paying more non-deductible debt. at 4% this would be $7,000 per year

if you reduce this by paying LMI, you will have more cash, but be up on the LMI costs a fair bit.

This is why it is generally better to buy the main residence first, and then debt recycle by paying down its loan, and reborrowing for the deposit and as much as possible for the investment property. You will maximise tax deductions this way, as well as save interest by getting owner occupied rates for at least part of the investment property.

 

OP does mention in option 2 that this first PPOR could become an IP in a few years.
Would suggest it might be better to load up the offset rather than ‘pay down’ the loan in this option. Would preserve the future interest deductions for this option & later move the offset to the new PPOR.

 

Hi Terry, big fan of your posts, first time poster. My situation is similar to OP's and I wanted to understand the details of your reply:

I'm looking at buying my first property soon and aren't concerned whether it's a PPOR in my place of work (Canberra, which I'll probably leave in a year or two) or IP. A minor consideration is the Defence Home Ownership Assistance Scheme I'm entitled to (works out to $3k-$4k per year, however you have to live in it for the first year)

For someone who's taking the Margaret Lomas postive cash flow property approach to investing, do you recommend buying the PPOR first? Since by drawing down on the PPOR offset account I'll get more tax deductions from my IP loans (rather than throwing my deposit at the first IP purchase)?

Please let me know if I've missed anything!

 

Just be sure it's not at the detriment of CG. Most residential 'CF focused deals' I've seen were rarely worth it.

 

Thanks Curoch

Generally it is better to buy the main residenc first so you can debt recycle against it by paying it down and reborrowing for the deposit. This should not matter whether the investment property is positive or negative geared.
You can also save a bit on the interest rate by doing this.
but there are many alternative strategies to consider, some of which I might have written about in my strategies series. see
Terryw's Structuring Strategies

 

Thanks Terry. A question about PPOR:

As an upwardly mobile young professional, I expect to move around a lot for my career (I've had a couple of years in Perth, currently doing several years in Canberra and at that point will reappraise - may do the Sydney/Melbourne move, may even go overseas as I have dual Canadian citizenship)

Is my PPOR defined as the place I have my driver's license and mail pegged to (particularly if I'm overseas)? Or do they expect you to be physically living in the place? My investing strategy doesn't really envision a PPOR as I expect to move so often, but I will be doing myself a disservice by not giving myself a slightly cheaper line of credit? Or is the difference so marginal as to not be worth worrying about?

 

It's not poor but the main residence. This is the place where you primarily reside. You might also be absent from the main residence but still count it as the main residence for up to 6 years while it is rented - for CGT purposes

 

And having a main residence is virtually the only capital gains tax fee appreciating asset a person can have.