Nice PPOR + 2 cheap IPs vs V.Nice endgame PPOR only and IPs later

Suggest away You would be right. That is scarily accurate. Although what makes it more depressing is actually I would have higher taxes, higher mortgage repayment, and less discretionary funds left over, in return for a much more modest house compared to the example.

Yeah, beginning to think not such a good idea after all.

 

Omg! Here I am, thinking you couldn't be talked out of buying a really expensive home...
You managed to pay off PPOR already and congratulations for that, that is something a lot of people can only dream of (I'm assuming you could be in your early 30's).

If you do decide to either stay in the townhouse and invest (pull out equity and buy investments), or upgrade but more modestly, then this forum really has helped you.
(@orangestreet - well done)

If you move and upgrade that's fine, a lot of people do it. But just think you can get rid of the debt that much quicker and you can be financially free so much earlier if the PPOR is at a more modest purchase price. You won't be tied down and compelled to work - you can work because you want to, not because you have to. Take up a hobby or job for the love of it. Live life on your terms.

Ps. That home builder... I think they sucked you in. You went to the homeworld or (whatever it's called), your family fell in love with it which means you are now compelled to buy it. I'm going to assume, you had no plans to buy one till you went there. Btw, you can find existing homes with massive WIRs or even buy a home and reconfigure it. to include the massive WIR. It is an option.

As per @orangestreet's article, it's easy to want XYZ because you have the income. But then you get stuck and have ongoing expenses that you never previously had when you were on a lower income. If I were you, I'd still keep my PPOR costs down, then save a lot of the remainder (looking for an early retirement). Pretend you have to continue living on your old income.
Because your new income is so high and your expenses are so low, naturally you'll end up with a lot of savings which means you then have the capability to go hard to invest. The investments can support an early retirement for your family... and think about using some of the money to go on holidays and to have great experiences too.

As this is a investment forum... I am presenting you with a different question (this is a different mindset/it's a mindshift). How fast can you get out of the rat race?

 

The flaw of Option 1 and 2 is the huge building value compared to land value. Such properties will not appreciate in value, but depreciate, for a long time, and with a huge opportunity cost of missed investment.

Surprised the current townhouse didn't grow better in the last few years. Could it be the same scenario - too fancy/recently built house with little underlying land value component to drive the capital gains?

I would suggest to talk to someone like James Buyers Advocates. Or just read all their 2017 "market wrap" articles on their website.

I think the sweet spot for a decent family-happy PPOR that also makes sense investment wise is around 75% land / 25% house, e.g. 1.5m land with a 500k 20 year old house on it for a total cost of 2m + 6% duty and fees.

If you're a bit more modest with your PPOR (e.g. 2m) you could probably afford 2x 2m IPs on top of it, rent them out to decent tenants (at that level the people are decent), and potentially have your kids' families live in them 30 years later.

If your family wants a flash home, I think rentvesting is a no brainer - have someone else make your mistake while your (5m?) IP or share portfolio works for you.

In 30 years the Option 2 property will probably be worth around 20m while the 3 good land "sites" will be around 50m.

 

Some food for thought:

Never buy your PPOR because it is convenient for work. Unless you are a 100% sure you will work at the same place for the next 30 years.

You buy your PPOR for location and anticipating your family's needs over the short and medium term. Close to reputable public/private primary and secondary schools, shops and public transport (preferably rail) and last in priority would be how easy it is to get to work.

Are you happy being forced to drive 3 hours a day, everyday, year after year? Remember traffic is only going to get worse as our population becomes increasingly unmanageable. Which is why I suggested a location close to PT.

La Pyrenee - just any other trophy property. Quantity over quality. Doesn't even have double/triple glazing - which I think should be a minimum requirement for any good quality home in Melbourne. Our neighbour behind us has built a similar property. Floor to ceiling windows covering the entire Northern and Western walls of a humongous bedroom. Single glazed. For the past three months, it appears to be mainly used for drying clothes and piling junk.

Are you looking for a home to live comfortably or do you want to make a statement to your family, friends and the Joneses, if the latter then La Pyrenee will do nicely.

Are your lifestyle expectations way higher than what your salary of 450k can actually afford you?

Service a loan of $2.6 million for the next 30 years. At current interest rates (3.95?) that is around $150,000 p.a. including home and contents insurance.

Your take home income after tax is $265,000 and after servicing your debt, leaves you with ~$115,000. Is that enough to fund and maintain your family's sky high expectations? Refusing to consider any other property after La Pyrenee, seriously?

Just your basic expenses is likely to be in the region of a very conservatively estimated $50,000 (Utilities, rates, groceries, cars, home & garden maintenance). Savings $20-30k p.a. in offest? I'd keep at least 6-12 months worth of repayments in offset. Accounted for rate rises in future and its effect on your lifestyle? Will probably leave you with ~$45k - enough for private schools and discretionary spending?

Not sure what your job is, but I sure hope that you are at the lower/mid range of the normal in your industry. You have to keep your job and maintain/grow your income for at least the next 30 years.

Is there is scope for growth in income and easy to switch jobs at the same or a higher salary? Do you think this is realistically achievable? Are your skills highly sought after and continue to be so for the foreseeable future? Or are you/your skills expendable?

Have you accounted for periods of unemployment/sickness/all those curve balls that life happens to throw our way occasionally?

Your salary of 450K doesn't appear to be that high so as to to afford you the lifestyle you and your family appear to be hankering after. Sorry to be blunt.

 

Yes, you make a lot of sense. This is exactly the advice I needed. I think a more modest 2 mil PPOR + couple IPs would be better option and offer far more flexibility. If circumstances change for the worse, I can just sell the IPs but still keep the house I live in. My salary is stable with a good chance of slowly but steadily increasing. I do want to be close to a freeway though, because no matter where I work, being close to a freeway will get me faster there.

 

Really? People on 400k+ only manage to save 20k/year?

 

Much better thinking.
Know what your repayments on a $2 mill house will be, how long it will take you to pay it off.

Re: Location. Ideally you'd have good road and a walk to trains/trams/good bus services, because you can avoid being the traffic. Or live in a place where you can do this.

Be able to send your kids to local schools with good reputations.
Shops and restaurants nearby (walk or bike ride away) are good to have.

Good luck

 

No point spending $2M (that is not modest, especially if you're financing it mostly by debt!) on a PPOR if you're planning to move out in 5 years. It will quite likely be a losing proposition.

 

You forget the repayments on large mortgages. I guess the principle repayments are counted as savings

 

I agree, I wouldn't recommend the PPOR to be $2mill either (if the OP only has 800k that will still be a heck of a lot of non-deductible debt) but at least the OP is going the right way.

 

It is still very low. We were saving that when we were saving for our first PPOR deposit. I was making 55k in my graduate job (household income of ~80k gross) plus paying rent.

 

Seemed unlikely for the OP given his/wife's lifestyle, hence assumed a much lower figure.

 

Have to upgrade from my 800k place in a poor suburb to a nicer area for the kids to grow up. Just to live in the same kind of house would cost double. So 2 mil really does not buy you much house and land in Melb inner east. A 600m2 with a barely liveable single storey house from the 20s or 50s which might need renovations. Would be minimum that the wife would accept to live in. I honestly couldn't care less what kind of house I lived in (would be happy with a caravan LOL) but don't want her to be embarassed when she invites her friends over, and we do need a bigger place for the kids.

 

If you are serious about getting the best outcomes, you need to delay your gratification. Hardest thing in the world to do...I get that. But borrowing power isnt what it used to be, and even with a 450K income you simply wont be able to own a PPOR with big debt and a multi property portfolio - not unless you build your business model correctly. Its all about setting your business model up to ensure you can borrow what you need. That means delaying the PPOR and getting stuck into Investments as the first step. Dont worry...you dont need to delay your PPOR gratification forever...just a few years... its literally a case of building the right business model and letting it go to work for you. It will get you exactly what you want. But it requires discipline and a little bit of patience- ie delayed gratification.

Very simple actually. Anyone can do it. It works by using very specific types of investment properties and dividend reinvesting for debt reduction. The INV properties need to generate strong pre tax deductions (from negative cash flow and depreciation) and strong after tax surpluses. This will reduce the tax you pay on your 450K income, and then add extra net/after tax income . So they need to be new properties such as NRAS or Dual Occ.

Using NRAS as an example.... each NRAS property will typically generate 7-8K of pre tax losses from cash flow. ( because you are accepting 20% less rental income) Sometimes the figure is more, but 7-8K is typical. Then allow @ 10K of depreciation. Thats 17-18K. Imagine owning 10 of those, valued at 400K each for example. That is a $4 million asset base generating 170-180K of deductions against a 450K income. Each NRAS property will also generate a 7-8K after tax surplus . Thats 70-80K extra net income.

So instead of earning 450K taxable. You now earn 450K, of which 270-280K is taxable... and get an additional 80K in tax credits. Net result is 530K of income with only 270-280K being taxable. This will provide you with a lot more net cash flow per annum. Use that surplus income to start aggressively paying down the $4million of debt

Fast forward a few years. You will still own the 10 properties, but you should have reduced quite a lot of debt , so your borrowing capacity position should be dramatically improved. Now go and buy the big PPOR. Use the surpluses to attack that debt. Pay it down as fast as possible. Fast forward a few more years. PPOR paid off. Investment properties particlaly paid off, but all properties retained. Turn your attention back to paying down the investments ...it might take another 15 years but who cares? You have 11 properties, including your PPOR for life... retire early with a big home and a big cash flow.

This is exactly the approach I have used. I now have an expensive PPOR and a 15 property portfolio underpinned by large CF+ surpluses . In a post APRA environment where equity means nothing until you sell, and borrowing power and holding power is all that matters until then , this is how you use a large income to get the big PPOR and the big portfolio. I couldnt have done it if I had blown all my borrowing power on the big PPOR first. You wont be able to either. So you can have some of what you want now.... if you cant delay your PPOR gratification. Or you can have all of what you want within a few years if you can delay your PPOR gratification.

 

Yes unfortunately there are a lot of people with high salaries but also high expenditures/poor financial literacy, myself included who aren't able to save much. Trying to educate myself.

 

Based on this and what you just wrote.
I would like you and your wife to read "Mr. Money Moustache". (Google it).
You might pick up a few tips on spending and saving.

At the moment retirement is not a goal of yours, you/your wife wants to keep up with the Joneses. Many people drive very ordinary cars, live in unfancy homes but they have no pressure and live very easily. Very quiet millionaires. And on the flipside, there are people up to their ears in debt, overcommitted to housing and car debt etc just so they look like they are wealthy to friends and family.

Read the blog... I'd rather be a member of the "retire early" tribe myself!

 

You need to educate your wife first.

If she is embarrassed having friends over then may be she needs a new circle of 'friends'.

We have rented a large 2 bedroom apartment our entire working lives.This is even when we were taking home AUD 750k p.a. I retired at 40 in 2009 (the year we arrived in Melbourne) when my kids were 14 and 7. We first rented a tiny 2 bedroom apartment in Kew, paying $360 a week until 2010. When hubby joined us, we moved to a 3 bed townhouse for a year.

We bought our PPOR in 2012. No mortgage.

 

Why not just rent near your work place, find beautiful house and move in. Then use the rest of your money to invest. Use equity of your owned home to start buy some propery in blue chip area

My boss earned xxx million a year and still rent a apartment.

Just me 2 cent.