Sell current home or let it out?

Discussion in 'Accounting & Tax' started by davies65, 2nd Dec, 2016.

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  1. davies65

    davies65 New Member

    Joined:
    2nd Dec, 2016
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    Newcastle
    Hi,

    My young family and I are currently living in a home that we are beginning to outgrow. We plan to upsize in a nearby suburb.

    I am considering whether to:
    1. Let it out as a rental property (and buy a new family home).

    2. Sell our current home and buy a different investment property (and buy a new family home).
    Either way, we would like to have an investment property.

    If we were to rent it out, I estimate we would receive around $400/week rent (less say $80/week for management & costs).

    I estimate that we could sell our current home for around $440K (less say 3% agent’s fee). We currently owe $265K on the mortgage.

    I understand that if we convert our current home as an investment property we will only be able to claim a tax deduction for the interest on $265K. Which means the property would be positively geared.

    Would I be better off selling our current home and using the approx. $160K profit to put towards our new family home, then buy another investment property, for maybe around $440K so that the mortgage on the investment property is higher and more of the interest can be claimed on tax?

    ……Either way, we plan to buy a home for around $750K to live in. Also, we already have an additional investment property with a value of $450K and a mortgage of $350K. I figure if we keep our current home and convert it to an investment property and buy a new home we will have to pay maybe $30K in LMI because our loan to value ratio would be around 85%. If we sell our current home to fund our new home we won’t have to pay any LMI, provided we don’t buy the new investment property straight away.
     
    davies65, 2nd Dec, 2016
    #1
  2. wylie

    wylie Moderator Staff Member

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    You will pay the equivalent of the LMI in sales costs on sale of your main residence and stamp duty for a new investment property when you buy another. So you will possibly "lose" $30k whether you sell the main residence or keep it as an IP.

    If you need to pay LMI I'm guessing it is better to pay it for something that you can add it to the cost base, i.e. another IP. I'm not sure of that because I've never paid LMI. But worth checking out.

    If you can hold the family home as an IP without having to pay LMI on the new family home, that would be perfect. Could you borrow from family to avoid the LMI? It wouldn't bother me if the family home that now becomes an IP becomes cashflow positive because that could mean you get to buy something else with an investment loan (another IP or possibly shares with less money needed to get in).

    It just seems to me that you are paying selling fees and buy in fees to change from what could be an IP, to buy another IP with a bigger loan. And if the only reason is to avoid paying LMI, then I see that as "not the best idea".
     
    wylie, 2nd Dec, 2016
    #2
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  3. Marg4000

    Marg4000 Well-Known Member

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    To me, the biggest consideration would be what you think are the capital gains prospects of your current PPOR. If it is in a good area and you think it will gain value comparatively well, it would be worth keeping.

    As Wyllie said, the selling costs would equal any LMI. Then when you buy another IP, you will be up for stamp duty and other buying expenses. Take all that into account.
    Marg
     
    Marg4000, 2nd Dec, 2016
    #3
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  4. Greyghost

    Greyghost Well-Known Member

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    Location:
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    Where is your current property?
    You need to do some cashflow on:
    Overall out of pocket cost to hold the property (forget depreciation and tax back, just the real world cost)
    Cost of your new mortgage and holding costs with new home over and above what this place is costing you

    Then look at the expected growth in your current property over say 10 years.
    Up until now it's CGT free so take its current value, less expected value in 10 years, less some tax on CGT, less the holding costs etc over that time.

    Basically what I'm trying to say is that it may cost you 1% of the value of the property to hold it, but it might go up 4+% compounding per annum, thus your better off.

    You need to split the personal and the investment side up and analyse them independently..
     
    Greyghost, 3rd Dec, 2016
    #4
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