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sell or keep an IP once we buy PPOR?

Discussion in 'Property Finance' started by Valentino, 23rd Aug, 2016.

  1. Valentino

    Valentino Active Member

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    Let's say we own two IPs and we want to buy a new property that will be our future PPOR.To finance the new purchase, we can pay purchase costs for the new place if we sell just one property. However, is it better to sell the other IP to pay down the non tax deductible PPOR mortgage? This is our reasoning ... I post on here to check if we are on right track.

    choice:
    to sell IP and pay down PPOR loan
    Or
    To keep IP as the IP's CG is greater than the interest we would pay on the PPOR loan therefor after, say, ten years, we would be in a stronger position.

    IP is currently CF positive by $200 pa in real terms, and on paper after dep etc, it's a few thou neg geared. if we sold, we would end up with only 1/5 of its sale value in our pocket. In simple figures, let's say it sold for 500k, once we paid CGT, selling costs and loans, we'd have 100k in our pocket. The PPOR loan would be 550k, and by selling the IP it would reduce to a loan of 450k.

    It doesn't seem much. We can afford the repayments on 550k and would rather hold the IP untiL it was more to show.

    Are we missing something?

    Our strategy is buy and hold plus we've spent a lot on fixing the IP up and just got the IP to a "set and forget" stage. It's never been vacant in three years we've had it and it's increased well in value. So it's a solid investment.

    We bought the IP out of an equity loan on another property, and 30k of our savings.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It sounds like you've answered your own question there :)
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It may be better to seĺl but it will depend. You can also hold on a bit longer for more capital growth too.

    There is also the option of related party sales.

    And dont forget debt recycling before you sell
     
  4. Valentino

    Valentino Active Member

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    Thanks Terry

    I'd love you to expand on each thought!

    - "it will depend" - on what?
    - debt recycling ...this strategy from amp website..." Increase your investment-purpose loan by the same amount that you have paid off your non-deductible loan, and reinvest that increased amount...each year"...
    Can someone explain this giving an example? I almost get it but not quite.
    - what is related party sales
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    See all my tax tips and legal tips.
     
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  6. Valentino

    Valentino Active Member

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    Ive heard it said that it's better to sell all IPs, buy PPOR, then recycle debt by borrowing against PPOR to get IPs. I Gree, and we plan to do that later on.

    Am I missing something: we already own the IP and it's CF neutral, and interest rates are low, so how are we better off if we sell. Ta.

    what if we got a big equity loan out of the IP instead of selling it and kept it as a buffer for ourselves...to cover the PPOR and our other IP's?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends on how much equity you have.

    Ideally you would sell pay down the non deductible debt and borrow to buy an investment. But the transaction costs will be high.

    It may be possible for a spousal sale as this can be done without duty on some states.

    It may still be worthwhile selling if there is a heap of equity. Some of my clients have just sold a $1mil property to a trust and used the proceeds to pay off the main residence loan. Stamp duty was heaps but the interest savings mean it will take about 4 years to break even.
     
  8. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    It sounds like you already know the best course of action. :)
     
  9. albanga

    albanga Well-Known Member

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    Put in 2 weeks annual leave so you can stay home and get through all these ;)
     
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  10. Valentino

    Valentino Active Member

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    Well that's part of the thing, let's say (to keep to whole numbers), we sell it for 500k. By the time we repay loans, CGT, and selling costs we have only 20% of the value left.

    where are they? I looked on your loan structuring website but only saw a checklist. Ta
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Tax and legal section. I have an index of each
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I am just ony mobile but if you remind me later i will post a link
     
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  13. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Consider accessing equity in IPs as a buffer / deposit / costs for new PPOR.

    Suck it and see and if not suitable then sell and palce proceeds in PPOR offset, not in the actual home loan in case it converts to an IP in the future.

    Good quality assets with manageable debt should be held on to imo.
     
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  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    There's a lot of potential variations here, there's probably no ideal solution given people don't usually know things like:
    * What they'll sell for.
    * What they'll buy for.
    * What their tax position and employment will be like in the next 10-20 years.
    * How the market will perform (both rental and capital growth) over the next 10-20 years.

    Earlier this year we had an extended vacancy on an IP. It's in a good location in a growth suburb, is positive cash flow because we've held it for 15 years and there's a lot of equity in it. I'm also going to need to borrow a large sum to build our 'dream home' in the next 12 months. Selling this IP would take care of most of the money needed for that build.

    Seems like a no brainier. Realize the last 15 years of growth in the IP, get the house you really want with very low debt.

    Then I considered that I'd have one less IP, which means I'd have to replace it for my retirement plans and exit strategy. It's in a growth area and I already couldn't afford to buy back in there. The cash flow is pretty nice too.

    The high debt I'll need to take on for the construction project will be fairly manageable within a few years. Simply through increases in rent from my portfolio (including that IP) and increasing income. I also considered how much that IP has grown in the last 15 years and how much it might grow in the next 15 years.

    Tax optimization considerations pale in comparison to all this. I'll just make a few sacrifices and keep the IP. I suspect I'll be a lot better off in the long run having both properties.
     
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  15. Valentino

    Valentino Active Member

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    Thanks Peter - that's how I view it too.