Main Residence CGT Strategy

Hi All,

First post - looking for some ideas on how you might proceed if you were in my situation.

Stats:
Age: Me 33, Wife 33.
Salary: Me $130k + super, Wife: $65k + super
General attitude: Very flexible, no plans for kids anytime soon, willing to rent
Goals: Accumulate as much wealth as possible (don't worry, we have intentions to do some serious good in the world once we are a bit older)

Assets:
Main Residence (currently living in it for 2 years)
Value: $1.70M (basic single storey 2 br 1 br , no parking semi in Inner West Sydney, 133sqm land)
Loan: $1.05M
Equity: $650K

Cash (in offset account - primarily the after tax proceeds from some crypto trading)
$700K

Options I have come up with so far:
Opt1: Pay down the loan by $700k, reborrow and dump into an index fund.

Opt2: Borrow another $400k and use cash to buy an IP for ~$1M

Opt3: Sell the current Main Residence and use the proceeds (~$600k), cash ($700k) and new loan ($1.3M) to upgrade to a new Main Residence worth ~$2.5M.

Opt4: Spend $500k cash adding a second storey to existing Main Residence, sell for $2.3-$2.4M and upgrade to a new Main Residence worth $2.6-$2.7M pending a successful reno/sale.

Initial Thoughts
I'm leaning toward Option 3 or 4 as I have really taken to the idea of concentrating wealth in the Main Residence to later do a tax free downsize in retirement. The downsides to these options being the transaction costs of upgrading (selling costs/stamp duty) which would be ~$150k combined. Ouch.

Option 2 sounds less appealing due to any gains being subject to CGT (also, the ability to get a blue chip property in Sydney for this price is limited)

Option 1 is smart from a diversification standpoint and also requires minimal cost/effort. However once again all gains will be subject to CGT down the track.

Keen to hear your thoughts on my options and enlighten me if there are any options I'm overlooking.
Thanks for reading!

 

I was in a similar situation at your age (10 years ago).

Leverage is what you are really lacking. Concentrating wealth in your PPOR isn’t really wealth, it’s just lifestyle and unless you are willing to downgrade at some point, you really don’t have usable wealth.

CGT should be a far smaller concern. With 50% CGT discount, your liability is at most 23% but gains can be massive using leverage.

If I was in your shoes (and have done a similar strategy personally with great success), I would immediately buy an IP using just 10% or as little deposit possible and keep doing until you exhaust your serviceability. With $600k available to be used as deposit, you could potentially buy multiple IPs.

Serviceability permitting, if you could buy 4x$600k properties using your $600k, a yearly growth of 8% on your portfolio could potentially increase your wealth by $180k a year with full tax deductibllity on any losses you make on interest payment (negative gearing) while you continue to modestly live in your PPOR and pay down remaining debt when your income grows or do upgrades with future savings.

 

Thanks for your idea.

What property characteristics are you generally looking for when undertaking this strategy? (e.g. yield%/location/property type etc)

Instinctively, I struggle to wrap my head around the idea of buying 'lower quality' properties but I'm definitely open to exploring it. I love your idea of maxing leverage like that though. I never even though I'd be able to borrow anywhere near $1.8M on cash of $600K (considering I already have $1M of debt).

 

Low price doesnt mean low quality. And vice versa.

 

Good questions.. a new IP purchase doesn’t completely kill your borrowing capacity like a PPOR does. Let’s say you have $1m borrowing capacity and you end up buying a property which returns $xpw, you will probably be able to go back to the bank and find you now have new borrowing capacity number which will be somewhere between $0 and $1m depending upon the value of $x income your first purchase is returning so a good purchase will lead to second and many more.

I follow Michael Yardney’s philosophy on property investing (buy for capital gains and manufacture yield through value addition) and I don’t buy low value properties. I think the cheapest I ever bought was $650k back in 2016 and it’s over a million now.

I don’t buy low yielding properties either. I aim for break even properties with capital growth potential (extremely hard to buy those in Sydney but with some hard work you can still find some in Brisbane).

It’s hard work as the whole magic is in finding that property which isn’t going to cripple your portfolio by low yield but still has future growth potential. Once you learn the magic, you start creating wealth that’s not tied up in your PPOR.

Good luck!

 

Food for thought.

Money (debt) is super cheap right now and will be for the foreseeable future. You can borrow at under 3%, whilst the value of your dollar (your purchasing power) is in free fall literally.

Your PPOR debt is doing nothing for you (you can't claim interest expenses for tax purposes).

Me personally, I am loading up on as much investment debt as I can responsibly handle.

The debt you have today will be the same or less in 10 years time, however your purchasing power will definitely not be, and since hard assets preserve your purchasing power, ask yourself what is the best decision you can make today?

Below is a very simple example of why you need more investment debt.
Money supply has grown 30%+ in the last 12-16 months globally...