Query-Buy House for PPOR or Invest and Rent

Question Please:
I live/work in Sydney and own a unit that is being sold in a group sale to a developer.
I also own 2 other units, one approx. 40 yrs old that is Positive geared and one that is approx. 4 years old that is Neutrally geared.

If the Group Sale deal goes ahead, I will potentially have approx. 1.1million to use for my next home in a few months time.

As I need to work in Sydney, would you think its best to buy a House with the money from the sale and get a loan to pay it off, or buy a cheaper unit or property somewhere out of Sydney to rent out and generate some income and use the remaining few hundred thousand plus the positive cash flow to be able to buy another house as I would like to stop paying strata fees and have my own house in Sydney one day though realistically for a house in the area I want to live, I will need to pay at least 1.7 million.

Or just buy 2 properties with the money and rent in Sydney instead, the thought of never being able to buy a house in Sydney does scare me though.

Keen to hear others opinions and advice please.

Thanks,

 

Ok thanks.

 

Just a thought, invest the $1.1m in index tracking shares with a 4% dividend.

Your dividends would be $44,000 a year, which gives you $846 a week to go towards your rent. Then you have the capital growth on top (if you trust Vanguard's interactive tracker, it's reasonable to assume 5% growth over the long term).

If this idea appeals to you, the vanguard thread (maybe called bogelhead) and LIC guide would be a great to get more information.

 

Thanks Kat,
I'll check it out.

 

Consider the tax consequences. If you buy another investment property you will be paying tax on the income and not have the main residence CGT exemption. Land tax also possibly.

If you buy a house to live in you will get the exemption and have a $1.7mill asset growing tax free. It will be exempt from land tax and you can also debt recycle by paying the loan down and reborrowing at owner occupied rates.

Another option is to do as above, but move out of the new house for a while and negative gear it yet still keep it exempt from CGT. This might not be worth the hassle of moving though if you have a large sum of cash as it would be positive geared probably if you kept your cash in the offset account.

 

Nice idea... would it be smart to start buying the LIC and index funds at this point in time? ASX may slide quite a bit because its been in the bull for quite sometime now

 

Whether to live in a PPOR or rent is an emotional as well as a financial decision.

It’s all about priorities, some are happy to rent, some prefer to live in a property that they own.
Marg

 

I am assuming if the group sale goes ahead the profits you make from it will have been worth it. So good luck with that.
If you get 1.1 mill from the sale, maybe it's ok for you to buy that 1.7mill property.

I'm assuming you are not old based on what you wrote, and you won't have CGT to contend with (or else it would take out a big chunk of profits). With a new PPOR, I suppose if s#it hits the fan, you could always sell it. I think it will be in an area of Sudney people want to live in, so there's comfort in that regard. It doesn't mean it won't go down, but you would have other people wanting to buy it at the time you sell - particularly upgraders.
In any case, I don't think you need to rush to buy right now - the market in Sydney has slowed. And maybe also see what you can buy with a slightly lower budget too - maybe you'll find something that will suit?
Properties are not selling so fast and perhaps vendors will be more willing to listen to offers now.

 

I'm not qualified to answer that question, but I have a couple of thoughts:

1. If you're purchasing for the dividends, then you'll likely be more interested in ensuring that the yield on the dividends is the rate you're aiming for. E.g Purchase LICs when they're at 4% or greater yield (I'm aware of the yield trap - just providing an example).

2. If worried about purchase price, follow Warren Buffett's advice and dollar cost average. This involves a set value of shares at a specific interval. E.g $5k each quarter.

I hope that's helpful and doesn't appear condescending.