Sell existing PPOR and buying a house with granny flat potential

Discussion in 'Investment Strategy' started by Bluechips, 7th Jan, 2018.

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  1. Bluechips

    Bluechips Well-Known Member

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    Hi folks,

    Happy new year!

    We purchased a house and land in Sydney two years ago along the new Northwest rail corridor, the value has gone up by 100k ish.

    As we are sitting on the couch during the holiday, and trying to figure out the strategy for the new year, we realise selling this PPOR when the fall comes in and use the CG to purchase a 800-900sqm block in a middle class suburb (budget of 1-1.2mil) later on down the track when Sydney's price stagnates or even dips further in the next couple of years will actually be a very good strategy.

    Our thoughts on this plan:

    1. We have all seen the boom in the last 5 years and it is surely not gonna continue on in the next few years. Corrections will come but the extent is yet to be tested out with lots of factors e.g. interest rates, population growth, lending policies etc. Based on our observation, 5-10% correction is likely for some suburbs, well some are already having dips in the similar scale. As our PPOR sits in a new suburb, the little CG we have gained might get evaporated too... we rather cash out now then wait for the next opportunities.

    2. Some middle class areas, like Hills, have had really good growth, and some purchases people made during the peak are quite silly... less than 2% yield for example. There will be some bargains when people have cash flow problems... it will come when their I/O term comes to an end and as I know of, quite a few people used overseas incomes to help with their borrowing capacity, which is now pretty much ignored by major lenders.

    3. If the number works out well, building a granny flat will change a negatively geared asset into a positively geared asset with 4-5% yield. This is phenomenal in Sydney!

    Of course, there are always risks associated with any plans...

    1. Granny flat is subject to Council approval. We have no experience on Granny flat... Please share some insights on this if you have relevant experience!
    2. Price dip in Sydney may not be significant enough to make this work. Then we might have to later on buy a similar property like what we are going to sell... but with higher stamp duty (we had stamp duty concession).

    Opinions please! Appreciate any of your inputs. @sash
     
  2. mikey7

    mikey7 Well-Known Member

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    So you want to sell when the 'fall' happens, but then buy again during this fall.

    So, you're not making any money by selling and buying in the same timeframe.

    Let's saynyour current house is $1mil, and you're looking to buy one at $1.2m.

    Selling current house will cost you 2.2% in real estate fees = $22,000 + marketing etc, call it $25k to be a round number.

    You then go buy your new house with GF. Stamp duty is going to be $52,000 + conveyancing + any bank fees + removalists etc.. say $55k to be a round number.

    You've just spent $80k. There's 80% of your capital gains.. lost.

    If you sell, and 'wait' for the dip - how long are you going to wait? Are you sure the area you want to buy in WILL dip? What if it goes up?

    Can you build a granny flat at your current place? If you bought a new place with a granny flat.. surely the purchase price would reflect it..

    Just some thoughts I'm spewing out..

    I live in The Hills.. I don't see it dipping any time soon, especially with the new train just around the corner.
     
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  3. sash

    sash Well-Known Member

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    If you are going to do this do it sooner than later....there maybe very little gain left if the market changes fast...my hunch is it is changing quicker than people think.

     
  4. Bluechips

    Bluechips Well-Known Member

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    Thanks Mikey! Yea the new train line is gonna boost the local economy. But how much can it still go up tho? My plan is only gonna work if I can get a bargain for the new purchase, say 100k less than 1.2 mil. So effectively, it will be 200k cheaper.

    The low yield is a bit of concern for Hills don't you think so? Cash flow is not gonna be enough if some people are forced to take P and I for their mortgage and main challenge they will face is they can't refinance to get a cheaper rate due to the lending policy change.

    Another reason we r thinking abt this plan is we want to change the growth asset to a cash flow asset so we can hold it long term.
    No one has the Crystal ball...Only time will tell.
     
  5. Bluechips

    Bluechips Well-Known Member

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    What makes you think this way @sash? Just experience or last quarters data?
     
  6. sash

    sash Well-Known Member

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    Lets say on the ground research and what I am hearing.

    The other option is stay put...pay as much off it...and keep it for next cycle..whilst moving to your ideal home at some stage...no hurry the market ain't going anywhere for years....
     
  7. mikey7

    mikey7 Well-Known Member

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    But still.. is it worth your time and money to purely buy a house with GF potential?

    You lose $80k by selling and rebuying.
    Then the extra mortgage repayments on another $200k = $8,000 (IO) @ 4%.
    Rent the granny flat out for what? $300/wk?

    If the new house doesn't have a GF but only 'potential'. There's another $80k to build a GF.
    So you're down $160k and $11,200 in extra mortgage payments (IO)/yr.

    The GF at $300/wk would basically cover the extra mortgage repayments. Hardly worth the lost $160k, time and effort?

    Again, purely spewing out ideas.
     
  8. Bluechips

    Bluechips Well-Known Member

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    Or we can possibly do an equity release and keep the money to wait for a market crash on apartments lol. I'm more pessimistic on units...I haven't seen much occupancy for those newly completed ones....But if the yield becomes good when it crashes unit is not a bad option...
     
  9. sash

    sash Well-Known Member

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    Trouble is equity releases are also shut due to APRA constraints.

    You are thinking like what I am thinking...but you know what I am hearing that apartments might do ok as the demand for them is huge in the right areas it might be older houses which feel it this time.....and poorly located apartments.

    The older apartments are gold everyone I know wants one of those old ugly buildings with low strata fees.
     
  10. Bluechips

    Bluechips Well-Known Member

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    The demand for apartments might be high in eastern suburbs and lower north shore. But mid to outer skirt is gonna be a bit of worry...Havent done a calculation but gut feel is the price has to come down 30% to make it worthwhile investing considering strata and other fees...
     
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  11. sash

    sash Well-Known Member

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    Yep agree with your assessment of locations...and also the 30% drop. Some have already dropped 10%....even more as developers realise they are holding stock as people can't settle.....
     
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  12. Terry_w

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

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    This is not necessarily the case. I am doing one now for a few hundrend thousand.
     
  13. Bluechips

    Bluechips Well-Known Member

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    It's based on everybody's circumstances I think. Depends on the total loan amount you have, the overall LVR and of course the income...
     
  14. Terry_w

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

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    Of course it is.

    Cash out restrictions make it hard, but it is not impossible if you have equity and can still service.
     
  15. Bluechips

    Bluechips Well-Known Member

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    Guys just an update on the house with granny flat potential that I was looking at....Under offer with 10k higher than the asking price. Not a bargain yet...Sydneys market is not gonna collapse just yet...With the rates still at record low, don't think we will see a big market crash.