Renovating and converting PPOR into investment property

Discussion in 'Investment Strategy' started by VDK, 13th Feb, 2019.

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  1. VDK

    VDK Active Member

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    Good day,

    I have a rough idea of what I am trying to do, but would like to ask the brains trust for advice. The end goal is to end up with a high quality property we can call home, while spending least amount possible. Arbitrary time frame is 5 years. If we didn't want to do a major renovation project on the house, we would not be considering the plan below.

    Given: 3bed/2.5bath property in Brisbane North, purchased for 740,000k, within 10km of CBD and 8 minutes walk to train station, nice neighbourhood, 630m2 block, some $1m+ houses on the street (but 800m blocks).

    When we bought the property, we also put aside around $80k for renovations. Money is currently invested elsewhere and is earning good returns. The plan was to gradually fix things up while living in the property (yes, I know that was a bit silly).

    Since then, we have expanded the renovation plans and are now thinking of doing a complete redesign. The end product would be a house with 4 to 5 bedrooms, much bigger living room and open plan kitchen with an improved layout overall. Luckily, this can all be done using the current building, so the estimated costs are not astronomical. Having spoken to a builder friend, if the work can be scheduled over 4 to 6 months, it can be done for about $150k. To do this, property would need to be vacant.

    We are now thinking of doing the following:

    1. Relocate from the property into a rental
    2. Carry out some minor repairs ($5000 to $10,000) to make it an attractive rental
    3. Rent it out for a 3 to 4 years
    4. Down the track, plan and execute remodelling of the property.
    5. Eventually move back in and live in it as a PPOR

    Alternate plan is:

    1. Raise funds for major remodelling to the total of $150k
    2. Relocate from the property into a rental
    3. Remodel the property
    4. Rent it out for close to 6 years
    5. Eventually move back in and live in it as a PPOR

    I am specifically interested in making sure any tax benefits are maximised, as we do pay a decent amount of tax and have few avenues of tax optimisation open to us.

    Is this approach sound? Which of the two scenarios makes more sense? Is there anything missing? What are the biggest risks and considerations to making this work? Is there a timeline on starting this (ie. before laws change). Would it be a good idea to consider refinancing?

    I haven't done this before, so it would be great to get some advice!

    Thanks
     
  2. Terry_w

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

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    What are the perceived tax benefits you are thinking of, you don't mention any.
     
  3. VDK

    VDK Active Member

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  4. Terry_w

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

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    What a strategy!

    Have you done the numbers and worked out how much the tax savings would be?

    Fixing it up while living in it can be a great strategy as you are making tax free capital gains.
     
    Shire86 likes this.
  5. VDK

    VDK Active Member

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    Location:
    Brisbane
    Hi Terry,
    I haven’t done the numbers just yet, hoping to have a few better defined ideas about possible ways to go before getting into the maths, I am well aware there are many things I don’t know or might not be considering.

    PS: property is in one name only for higher income earner in the 37c tax bracket
     
  6. VDK

    VDK Active Member

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    Could you expand on this?
     
  7. Terry_w

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

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    I wrote a tax tip on here about this. Have a look at a list of my tax tips and let me know if you can't find it