Sell or turn PPOR into IP

Hi there,

I am guessing which way responses will lean, but I'm keen to know your thoughts on my situation.

CURRENTLY
- PPOR is a large 2 bed/2 bath/1 parking unit in an amazing location (Sydney CBD adjacent)
- Have lived here for 6 years since buying
- Only about 40% equity (due to refinancing a few years back)

- IP is a couple of suburbs away, but still considered inner city
- Has been tenanted since buying 2.5 years ago
- Only about 30% equity (due to having IO loan until changing to P&I last year)
We have council approval on new plans and are currently awaiting builder quotes
- Want to build our new family home there and move in by end of next year if possible

So, that brings us to...

OPTION 1 - Hold onto unit as an IP
Unit would only barely pay for itself (or lose us a little money each month due to rising interest rates, strata, etc.)
Won't lose us enough to utilise NG
We'd also need to finance most of our build, meaning we would feel a bit stretched financially for a few years - not our style

OPTION 2 - Sell unit
Between savings and cash from the sale we'd be able to pay for the build without finance
Would end up with a loan for the house that we can pay off within about 10 years (which is typically what we aim for)
Wouldn't have to worry about interest rates, tenants, and various other things that would be stress factors in Option 1
Given the state of the Sydney market, it doesn't seem like we'd miss out on massive gains for at least a few years (but obviously we can't predict or time the market)


I realise that this is mostly about what sort of risk are we willing to take on, and our long term financial plan. At the same time I'm curious to hear others reasons for your recommendations, even if everyone says to hold onto both properties through to retirement - which was admittedly our initial plan, but I suppose we're getting a bit of cold feet at the thought of having over $2M in debt, even if we do have a high household income and reliable careers that should be pretty stable for another 20+ years.

Thanks for any comments and happy to provide clarification where I can.

 

What did you increase the loan on the PPOR for?

 

We refinanced in order to purchase the house.

 

That doesn't really make sense. Sounds like you refinanced and borrowed extra with the extra funds used as the deposit?

Did you split the loan and do you realise that the full interest on this loan or loans won't be deductible.?

 

If we turn the unit into an IP it will likely be positively geared anyway (and it definitely would have been if we hadn’t refinanced), so I’m not sure how it matters or informs our decision as to what we do from this point forward. Apologies if I’m missing something!

 

That doesn't really matter. You can only claim the interest on the loan related to the property being rented.
This this will effect the tax payable which in turn may effect your decision.

 

I wasn’t aware you could deduct interest when the property was profitable.

In either case let’s assume there’s nothing deductible and go from there. No time machine unfortunately!

 

If nothing is deductible then you might want to consider selling the property. This can be worth considering also when the deductible debt is very low.

The reason being that you could use the proceeds to pay down the new main residence and save non-deductible debt.

Of course there are many other things to consider too such as ability to borrow, land tax, estate planning, etc etc.

You could also sell yet keep the property by a related party sale.

 

Thanks, this is along the lines of what we're thinking. Appreciate your input.

Related party sale is actually not something we'd thought of, but probably won't go down that path.

 

This thread may be of interest:
Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it