Mid 30s, Married, Kids and have hit serviceability wall

Discussion in 'Investment Strategy' started by pinot, 29th Dec, 2019.

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  1. pinot

    pinot Active Member

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    What would you do in my situation (excuse the long read!)?

    Current Situation:

    Aged in Mid 30s, married with 1x dependent. Living with in-laws rent-free in SYD since moving back from VIC at the start of 2019..

    1 x PPOR turned investment in VIC.
    Purchased for 652k in 2013 as PPOR.
    Currently valued approx 850-900k. Loan of 600k.
    Currently tenanted @ 28k pa (moved back to SYD at start of 2019)​

    1 x IP NSW
    Purchased @ 606k in 2015.
    Currently valued approx 560k. Loan of 484k.
    Tenanted @ 26k pa.​

    Combined 1084k debt - loans are IO and almost 100% offset due to a combination of good early career jobs and saving/working hard.

    Next Step:

    In the market to buy a PPOR in Sydney. We prefer a roof over our own heads so don't plan on renting. We want to find our own space to call home and raise our young boy in.

    Lending situation is tough. Our current combined income is approx 170k pa (inc rental income), however as of the start of 2019, the bulk of our income has come through self-employment (via takeover of the family business). We are looking at approx 1250k purchase price, but we're having a hard time with a full doc loan so most likely will need to go low-doc.

    In the near future (I predict the next 4-6 years), I will need to have ~ 4 to 500k equity available, and be ready to take on another loan to acquire the commercial premises we are currently leasing for the business (50k pa). This is needed to secure the longevity of the business. Given the above, I am trying to work out what is the best strategy for now with regards to my existing investments.

    The VIC PPOR has poor yield so unless I'm playing the CG game, then it's of limited benefit from cash flow. The main benefit though is given that lending is tough, I feel like I should try and get finance and buy my SYD PPOR first, using everything I have in the offset accountants to supplement the SYD PPOR purchase. Afterwards, I feel my best move would be to sell VIC property to release the equity (CGT exempty) and have the equity required for the commercial purchase.

    Ultimately, I would like to retire in my late 50s or early 60s with 150k pa residual income from investments but I feel I need to tackle a few short term issues first.

    What would you do in my scenario? Apologies if I haven't filled all the gaps in. Do ask and I'll update OP.
     
  2. Terry_w

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

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    $1mil cash? Could you buy new main residence outright?
    Buy an invest that you might want to move into?
     
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  3. pinot

    pinot Active Member

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    New residence is approx 1330k total buy cost. The main issue I have even with the normal PPOR purchase is:

    1) Need to get finance first! Banks are being a pain. Working through it with my broker and we're looking at low-doc.
    2) No emergency fund if I pour all the cash into the PPOR purchase.

    I can potentially fulfil the purchase if I borrow through family with loan agreements if necessary (if the bank refuses to lend).

    Edit: Regarding purchasing the investment and then moving into it, we wanted to move into our own place sooner than later.
     
    Last edited: 29th Dec, 2019
  4. Terry_w

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

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    Have you tried extending all loans back to 30 years PI and borrowing as much as possible and using cash for the rest? Not ldeal, but it might get you a property.
     
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  5. pinot

    pinot Active Member

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    Hi Terry

    Currently in the process of doing the re-finance to improve interest rates and serviceability over 30 years. I'll get in touch with my broker to see if we're maxed out near 80% as this could provide another scenario to work with.

    Thanks for your advice.

    Do you have any suggestions or advice about preparing equity for the follow-on commercial premises purchase?
     
  6. Trainee

    Trainee Well-Known Member

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    Is the problem equity though? Sounds like if you struggle to get a loan for the PPOR, youll struggle to buy the business premises even if you have a large deposit.
     
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  7. pinot

    pinot Active Member

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    If I am able to get a 500k loan for the PPR, I am in a better equity position as I won't need to exhaust all my equity on the PPOR purchase (830k equity upfront). If I cannot get loan approval, I will have to seek other methods of borrowing, but it is likely that I will have to use more of my equity (closer to the 1084k upfront).

    By not getting the loan, I am in a worse off equity position so I am trying to work out my best options. I could sell the VIC property to release some equity as this will help me gain the equity I need for the future commercial purchase.

    The main aim of the OP is that I am trying to sense check whether or not this is a sensible approach.
     
  8. Terry_w

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

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    Debt recycle the **** out of the new main residence loan and use this as a deposit on the commercial. Commercial loans are generally a different ball game with the NCCP Act not applying so easier to qualify for. You should seek legal, credit and financial advice on a SMSF acquiring the property.
     
  9. Shazz@

    [email protected] Well-Known Member

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    Hi Pinot,
    Is there anyway you can look to start increasing your income? Without the rental properties, your combined income is $120k per year. I assume you both work for the business?
     
  10. pinot

    pinot Active Member

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    Definitely looking to grow the business. Business alone is tracking towards 120k this eofy, plus 60k from the wife and then 50k on top for investment income.

    Given the serviceability wall, I believe I need to start looking towards income producing assets in more depth, even if it means sacrificing some offset funds and investing in ETF or dividend stocks
     
  11. Terry_w

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

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  12. sash

    sash Well-Known Member

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    Since the yield is poor in the ex PPOR look to sell that. No CGT due to the six year rule. That would free up about 830-880k in capital.

    If you want to retire by 50...you need to do something different...equity and capital growth will be key to your success.

     
  13. pinot

    pinot Active Member

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    Thanks Sash

    Does 6 year rule become compromised if I end up purchasing another PPOR? I believe I have 6 months to sell and be CGT exempt?

    Also, agreed RE: needing to do something different. I have achieved some capital growth with the first PPOR but need generate equity quicker via capital growth.
     
  14. sash

    sash Well-Known Member

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    No sure on that....but it would be very little CGT anyways.....with depreciation and other costs you should be okay.
     
  15. craigc

    craigc Well-Known Member

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    You can only have one main residence for CGT purposes (very limited overlap), so yes it would be compromised if you purchase another PPOR.
    From the info provided it would appear you may qualify for 6 year absence rule at the moment as no current main residence for CGT.
    Check all of the facts & details with your accountant and read up on Terry’s tax tips regarding this to confirm you qualify for this tax break.
    Good luck!
     
  16. pinot

    pinot Active Member

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    I'm waiting for my accountant to return from XMAS break, but in the meantime from what I've read about Terry's tax tips, I could potentially transfer ex PPOR to spouse (under my name at the moment), and purchase new PPOR in my own name and thus becoming CGT exempty on ex-ppor without stamp duty.

    Alternatively, PPOR can be purchased in wife's name and I continue on holding ex-PPOR with some CGT concession.
     
  17. Terry_w

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

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    Unlikely you could transfer without duty now. it still might be worth doing though.
    Don't forget that new loans will be required.
     
  18. pinot

    pinot Active Member

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    In my scenario, the ex PPOR (as of Feb 2019) has been rented out. I am yet to formally purchase a new PPOR but am about to put an offer on one. The ex PPOR is under my own name and I am working out which name to place the new PPOR under.

    Scenario 1
    If I keep the ex PPOR in my name and purchase the new PPOR under my wife's name, should the 6 year exemption rule continue?

    Scenario 2
    If I transfer the ex PPOR into my wife's name, and then purchase the new PPOR under my name as a PPOR, would the CGT exemption apply to my wife on the ex PPOR transfer?
     
  19. Terry_w

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

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    1. Possibly
    2. not unless it was her main residence after the transfer
     
  20. Trainee

    Trainee Well-Known Member

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    Can spouses have two cgt exempt ppor at the same time, even if each spouse owns one property, other than the 6 month if they are selling the previous ppor?