Just found this forum!

Hi everyone!

I've been googling to get information on converting our PPOR to a IP after purchasing a new PPOR (settlement soon!), and I came across this forum.

I'm new to the IP scene so I'm hoping to learn from all you more experienced investors.

My wife and I live in the far northern suburbs of Perth with our young son and another on the way.

I have some specific questions which I'll post in the correct section (hopefully!) so looking forward to learning lots from the wealth of knowledge you all share.

Thanks and nice to meet you guys!

Cloudz

 

Welcome @Cloudz. One thing you could do now with your present PPOR before it becomes an IP is to stop making any payments of the Principal part of the loan (see your lender / broker if you can pay Interest Only) and don't redraw for personal expenses. You need to leave the debt at maximum for tax deductibility purposes when it becomes an IP.

 

Hi Cloudz. Welcome to the forum! It's a great place to learn about all things property related. Ask away...……...

 

Welcome @Cloudz You will find a wealth of information here & find many experienced investors to learn from.

As @Propertunity said, maximising your deductible versus nondeductible debt should be a key consideration in the circumstances.

Your scenario is why I advocate use of offset accounts for PPOR rather than additional principal payments because if you ever decide, like you have, to change PPOR, then you have cash on hand & can maximize deductible debt without issue.

Welcome to the forum!

 

Hi again and thank you for your messages

I'm not sure where to post actually, so I'll give the info about our situation here and if someone can let me know where to post, I'll cut and past it into the correct forum.

We've lived in our PPOR for just over 8yrs (purchased at $385K in 2010) and were originally paying extra down into the mortgage for a few years until we started putting the extra into offset instead.

So 8yrs after purchase we've now 100% offset the mortgage with the balance at ($220K).

We've just purchased a new PPOR to move closer to my wife and I's places of work and we're using $200K of offset funds for the deposit on the new place. We'll keep the $20K thats left over in the offset against the new PPOR for whatever we need it for.

We still aren't sure if we should keep our old place as an IP or just sell it. Thing is, its worth less than what we bought it for - possibly down in value about $50K at worst, or $15K at best scenario in current market (just my best guess looking at whats currently for sale in our suburb).

We could rent it out for $300pw in a couple of months to a family member or friends who are looking for a place.

My (noobish) questions are:

- If it becomes an IP, does it need to be valued now? If value is at, say $350K now, if we sell in a years time and the value is $385K (what we bought it for), do we need to pay CGT on the $35K? How does this part of it work?

- I get the feeling from whats been said that its best to go IO loan for the IP. Is this the best strategy or would it be just as good to pay it down with P&I?

I've never done this before so have no idea how to structure this or what strategy would be best so let me know what you think and what other info you need to better advise me.

Much Thanks!

 

If you buy and sell in same market the paper loss on original is less relevant because cost of new home will be lower.

Owning a rental property is not without issues. Lots of ongoing costs.

Far Northern suburbs. I would sell it and take the paper loss which is not as bad because you are buying in same market.

Wiser "money" and investment people than me on here. Sell current house. Buy your new place and pay off close to as much as you can. Always good to have a small cash buffer. If you really want an IP probably better options than outer suburbs. You can then use equity in PPOR to get an investment loan to buy IP which will then give you maximum destructibility.

Several Mortgage Brokers on here can give quality advice on loan structures.

 

Terryw’s Ideal Loan Structure

 

Yes, my gut feeling is also to just sell and take whatever loss is incurred. There should be at least $100K equity in the home, so after selling we'll just put that in the offset against our new PPOR.

I'm curious about what others think so I'll cut and past my original post to a new thread.

Thanks for your responses so far!

 

If you were selling current home for $500k you would be happy. Pretty sure whatever you are buying if closer to Perth would be more than $150k extra than you are paying now. So overall in much the same financial position.

 

Welcome aboard

1. I'm not an accountant - but I'd get it valued at the time it becomes an investment
2. Depends on your individual situation. If cashflow isn't tight it might be best to opt for P&I and obtain a lower rate

Cheers

Jamie

 

Thanks guys, it was originally bought as a house to live in with no thoughts to make it an IP, and I admit, I wouldn't buy it as an investment property, its just that since we already have it I thought it may be a reasonable option.

We can actually afford to keep it and pay it off, especially if rented out so a P&I would be fine in terms of cash flow, although my gut is telling me to sell.

The house is 10yrs old but still modern enough that we dont need to renovate, so I thought if we sold now we could avoid any longer term costs that would come up, but of course we are selling in a depressed market. So I'm just in two minds what to do.

 

Why? Good reasons to sell: you need the money or borrowing capacity for something else, you expect the market to stay depressed, you want to diversify.

You want to sell because it hasnt performed well. Would you be thinking the same if you bought a place in sydney in 2010?

 

Thats pretty much the reason, I don't see it moving up for a while and the house has probably lost 10-20% of value since we bought it. Plus on top of that I don't like the thought of any expenses and repairs that may incur in the years to come while its being rented.

Saying that, would it still be a reasonable decision to keep it with an IO loan and just wait the lull out?

 

A 10 year house presents well. A 20 year old house might need a tidy up before sale. Does the street look loved? In another 10 year the street may have more rentals in it and start to look a bit unloved. The street I live in looks terrible with lots of dead verges and ones with lots of weeds.

If Team Billy gets in lots of houses will no longer be attractive to investors only home buyers. If they remove negative gearing.

 

Hi Shogun, It's a fairly average street and actually I think half or more of the houses are rentals.

I have fairly basic understanding of NG'ing now, and from that it seems the only reason to do it is to reap the eventual gains of capital growth of the IP. Otherwise, I don't see any other (real) benefit. Am I seeing this correctly?

 

but are you thinking it will continue to be depressed because it has been for the last couple of years? Or youve actually done some analysis and conclude that the WA economy will not recover?

 

Those are fair questions and although I'm no more of an economist than Mike Tyson, I feel its not so much that it wont recover, but that the economy is just contracting to where it should be, given the absence of all those external drivers that largely shielded us from the last global meltdown.
I'm sure inflation will eventually catch up, but no, I honestly don't see any drivers to propel the WA economy to the heights of 10-12yrs ago...not in the next 5yrs at least. Maybe just enough activity to keep it afloat for now, but I think we're close to the floor. Of course that's just my opinion based on the limits of my observations!

To add though, I started seeing high vacancy rates in rental properties in my area well before news of the mining bust. The vacancy rates are still high and rents have dropped more than 30% since the boom in some cases on my street.

 

Capital gains is how many made money with property in the past. If the street already has rentals then they are competition for potential tennants. Houses in outer suburbs subdivision are very common. Probably properties in other areas with a lot more potential both for renting out or capital gain. Many on here say the time to buy investment properties is not quite now.