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PPOR strategies

Discussion in 'General Property Chat' started by Jess Peletier, 27th Oct, 2015.

  1. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I was having a chat in another thread about how the lending environment has changed and why it's now much more important if you want to make quick progress to use your PPOR to actively further your portfolio.

    A PPOR can be a major hindrance to growing a portfolio b/c of it's impact on servicing - often it's a large debt with no income or negative gearing benefits to offset it - not bad debt necessarily, but lazy debt that will drag on your ability to invest. Because of this, anything you can do with your PPOR to increase the income, reduce the debt or enable some deductions is going to be beneficial.

    So you may need to make your PPOR work - building a granny flat to lease out maybe, buying something you can live in while doing a decent reno and sell CGT-free, splitting off the backyard and selling to reduce debt, or building units for cashflow and deductions - all these things are going to make that debt work so much harder than just sitting there being home.

    It might make home less relaxing, but sometimes you gotta do what you've gotta do to get that PPOR paid off and/or the debt recycled into deductible debt.

    I'd love to hear what people have done with their PPOR to achieve any of the above?
     
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  2. srirang

    srirang Well-Known Member

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    We've just been paying it down as quickly as we can. Also considering AirBnB hosting at the moment.
     
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  3. bob shovel

    bob shovel Well-Known Member

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    Is there a rough guide to how much a ppor could be holding you back? Just to simplify it with an example?? I understand every situating is different. Is the lazy debt treated similar to a credit card. Pictures help explain things too :p
    Say.. A 400k ppor will prevent you borrowing $x, or buying that 300k ip you had in mind.

    we were considering buying a ppor to reno and simply -to not be renting, but atm we can stick out renting for another months to help boost our borrowing power
     
  4. Barny

    Barny Well-Known Member

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    you and your mates buy a ppor each, rent it out to each other. You live in there's, they live in yours. Assuming they want to live in the same type of home and location.
    Most first home buyers I know end up buying cookie cutter homes in similar locations.

    Would this work?
     
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  5. Joshwaaaa

    Joshwaaaa Well-Known Member

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    We sub-divided the backyard off, built in the back then sold the existing currently living in the new build. Has worked out well for us, but is defintly not a long term place we want to live. Minimised CGT which we paid on the existing at sale and dropped our debt level while increasing equity all while getting to live in a brand new house rather then the old 1960's build
     
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  6. Joshwaaaa

    Joshwaaaa Well-Known Member

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    Dont let the ATO catch onto this
     
  7. chylld

    chylld Well-Known Member

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    I just turn the current PPOR into an IP and buy a bigger PPOR :D (wonder why my nd debt is growing...)

    Google "rent swapping". Generally a scheme utilised for the purpose of gaining a tax benefit with unsurprising results
     
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  8. bob shovel

    bob shovel Well-Known Member

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    Nice one! I like it. Just set some boundaries and time limits up front or an exit plan just to cover any potential issues
     
  9. Scott No Mates

    Scott No Mates Well-Known Member

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    Probably need to cast the net wider -: 3 or 4 mates to make the linkage more difficult to chase ie: A leases to B; B to C and C leases to A.
     
  10. Redom

    Redom Mortgage Broker Business Member

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    If you think of it as a 'you've got to live somewhere' - its either a rent or own equation.

    From a borrowing power perspective only, renting is likely going to be better for you.

    Owner occupier debt (all debt) is generally loaded and assessed at around 7% P/I, potentially over a shorter loan term. That means a $300,000 O/O debt has an 'assessed' expense of around $2.1k p/m (around 500p/w).

    In contrast, if you rent at $500 p/w, the bank won't load this any further and will take a $500 per week number.

    So renting will generally assist your borrowing power more than having O/O debt. $500p/w rental cost will likely get you a better living arrangement than a $300k 100% financed O/O debt.

    Definitely not reason enough to rent, as its just serviceability that i'm talking about.

    With an increasing number of lenders capping negative gearing/not using it post APRA changes (Westpac e.g., CBA at higher LVRs, etc), the differential between investment and O/O debt may not exist under some lender calculators. Overall when building a portfolio though, it does make a difference as plenty of lenders will include it.

    Note that this excludes the 'deposit' side of lending. Most i deal with get their deposits from lazy equity held in their PPOR. Renters are less likely to have this over time.

    Cheers,
    Redom
     
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  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    @bob shovel Here's a hypothetical, rough and dirty example - of course it will vary between lenders but this is about average.

    PPOR worth $500k with $400k debt @ 4.5% - Actual monthly payment would be around $1500 IO. Bank treats it as a liability worth $2891 b/c they look at it as though it's P&I over 25 yrs. With an IP it's the same but you have rental income and neg gearing to offset it.

    If you were to rent a similar house instead of own a PPOR, the bank would treat that rent as an actual payment - approx $1650/mth assuming a 4% yield.

    That's a $1200/mth difference in servicing. 6 months ago it didn't matter so much because there were so many lenders looking loan repayments at their actual rate rather than loading it up, but APRA has put an end to that now so your PPOR is really costing you significantly more in terms of servicing than it used to. Before, especially with the low rates, the impact on servicing was similar to renting, now it's really not.
     
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  12. Biz

    Biz Well-Known Member

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    Sell your house and live under a bridge.
     
  13. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I can see a new book coming out of this - "The Millionaire Hobo". :)
     
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  14. D.T.

    D.T. Adelaide Property Manager Business Member

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    Maybe that's how @hobo got her name?
     
  15. Barny

    Barny Well-Known Member

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    Google "rent swapping". Generally a scheme utilised for the purpose of gaining a tax benefit with unsurprising results[/QUOTE]

    Ato has to prove you set this up to avoid tax. Good luck to the ato in proving it.
     
  16. hobo

    hobo Well-Known Member

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    I prefer overpasses to bridges - less flooding risk. :p
     
  17. ZachAnsel

    ZachAnsel Well-Known Member

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    We did what Redom mentioned, run the numbers with our broker.

    Then we decided to rent somewhere else, and rent out our PPOR.
    Turn out, it was great decision since our PPOR better yield return & cash flow positive.

    We also end up renting in better suburb, very very close to amenities & infrastructure. We don't have non-deductible debt & better serviceability. We made this decision 2 years ago, and able to purchase 3 IPs since then

    Win win solutions
     
  18. bob shovel

    bob shovel Well-Known Member

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    Thanks @Redom and @Jess Peletier great summaries!
    I was thinking along the lines of repayment vs rent if equal shouldn't change things to much but it's the way it's treated behind the scenes. Makes sense to look at the loan amount not just the repayments... Even though it's not ideal for investing!

    We'll stick to renting for a bit longer yet. We just dont like walking on egg shells being tenants, but from the stories you hear we shouldn't worry!
    We were looking at a fixer upper house to live in ~320k vs renting 400pw. The ppor would be very poor condition to the new place we're in now plus it would chew into cash renovating. I did just find a nice run down 2bedder on 10 acres but need to put the fun stuff aside and concentrate on ticking the serviceability boxes
     
  19. D.T.

    D.T. Adelaide Property Manager Business Member

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    You're very mistaken - it's up to you to prove it to them. Review this post from Paul the accountant, from another thread:

     
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  20. JohnPropChat

    JohnPropChat Well-Known Member

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    Why not just rent to a stranger. Renting to mates comes with obligations.
     
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