Hi Guys, My first time posting, but I have been lurking over the last few weeks Basically I have a bit of a quandary, I bought in Sydney in 2011 just before the boom and have been paying off the loan (no offset unfortunately) and now I am looking to build a Granny Flat (GF). In addition, if I get the desired approval I will most likely rent the PPOR out too and rent closer to the CBD for work. I hate the 1 hour commute each way, and would prefer to be closer to work for a few years. I have done some numbers and wondering what people think is the best option and anywhere they think I have failed miserable. PPOR Value $730,000.00 PPOR Loan on loan $110,734.88 PPOR % Rate 4% PPOR % Yearly $4,429.40 Potential Weekly Rent $450.00 Agent Fees 5% Weekly Rent Gross = $427.50 48 Weeks Rent = $20,520.00 GF Build/Loan $120,000.00 GF % Yearly on loan $4,800.00 Potential Weekly Rent $320.00 Agent Fees 5% Weekly Rent Gross $304.00 48 Weeks Rent $14,592.00 Typical Expenses Council Tax $1,700.00 Water Rates $1,000.00 Maintenance $3,000.00 Insurances $1,500.00 Total $7,200.00 Yr Rent Combined $35,112.00 Yr Interest Combined $9,229.40 Expenses Total $7,200.00 Profit overall $18,682.60 My Tax Rate 45c over 180,000 So total profit * 45% $8,407.17 Remaining $10,275.43 So would you build and rent them both out and rent closer to the city for $750 per week on would you stay put? Also, does my math look right, I'm not in finance which is probably why I'm in the situation to begin with. lol...
$750/w rent is $39,000 a year... It's costing you $4429+7200=$11,629 a year to live in PPOR. Big difference that that 10k profit doesn't cover.
Yes certainly is, not sure if moving inner west from where I am actually justifies 27k so I can save 1 hour a day in travel... Math doesn't lie, even if your head is wanting something else. lol
There are lots of other factors that we don't know. Do you have other IP's, and if so do you have a lot of debt on those, how old are you, do you have kids, etc. More than 20 years from retirement and with less expenses, I would want some IP's for "good debt" sacrificing cash flow now for a much bigger gain down the track. High asset low debt, I also would want to get some more IP's (especially on your tax bracket) If you are in that situation and want to move closer to the CBD, I would probably look to borrow the max on the PPOR and invest that into another investment property, and also this creates deductible debt on the PPOR which will become an IP so you get that tax benefit along with an extra property growing over the next 20 years of which the renters (plus tax deductions) pay for you to hold. I personally would also build a granny flat because I love easy money lol, but there are considerations, such as if you are younger (and also on this high tax bracket), I would want to go for growth at the expense of cash flow, so I would be much more inclined to increase debt and put the 100k loan towards a 500k IP and let it grow for a couple of decades, but if/when you are in your last say 15 years until retirement, I would be wanting to increase cash flow and lower debt, and a granny flat seems great for that. You need to weigh up what is most important for you though, and what stage of life you are in what you are reasonably willing to sacrifice for the future you.
Hi I am 30, 1 kid and married. Wife's currently not working and like I said not the most finance savvy person in the world. I just know not to get in bad debt but that's probably as much as I know. So in respect to your comment about using money from my PPOR had get tax benefit for investment purposes, how does that work? Please excuse my ignorance.
Sorry my mistake. It doesn't matter whether it is an IP or PPOR - it only matters whether money you borrow is for investment purposes or not. So you can ignore that. I was thinking there might be a way to get a tax deduction on rental income after turning your PPOR into an IP, but that would only work if you had debt that could become deductible debt, but seems like you have almost no debt. The rest of what I said seems unrelated to the specifics of the question. In response to your question, it depends on what you are willing to pay for quality of life vs sacrificing now for more money later on. If you think it is worth it to pay more to move closer in and if you are comfortable with the cost, it's fine. The rest of what I said was getting to the point that it would be wise to consider investing (in shares or property or a business, or a combination). If you invest in property, often you will use leverage, which means borrowing most of the cost of a property. Property increases in value faster than inflation, so when leveraging in this way, the rent generally pays for the interest on the loan (give or take a little), and your return comes from the value of the property going up over the years (which goes up and down in the short term). There are other ways to invest in property but this is the most common way because it is mostly passive. The more you borrow (eg if you borrowed the full 100% of the property cost), the more you have to pay from your own pocket to make up for the cost of the interest on the loan, so the property is making a loss, but since the property is an investment, this loss is tax deductible. So for example you could decide to purchase a 750,000 investment property by taking out a loan on your current property for 20% (150,000) and borrowing the other $600,000 against the new property. You have borrowed 750k and at 4.5% interest this means your interest would be 33,750 pa If the rental income is 20,000 pa, then you are making a loss of 13,750 At your tax rate of 45%, the govt is essentially paying for 6,187 and you would have to put in only 7,562 per year out of your pocket. If the property is reasonably well located, and if it grows (on average) 6% p.a., then you are getting a benefit of $45,000 at the cost of $7,500. If you sell it one day, you will still have to pay capital gains tax, so that $45,000 might end up at 34,000 but still a pretty good return - and this amount is more each year due to compounding. If you have paid off 90% of your PPOR loan as it sounds like, and if you are not leveraging that equity (especially on your tax rate), I would say you are missing out on a pretty big opportunity. But I've gone off topic..
I pretty much would go ahead with what @Anthony Brew says. Pull equity from your home, buy an IP or maybe two with that released equity as a deposit (probably buy interstate). Go ahead and live (rent) in the inner west. So you'll have two or three IPs (western Sydney plus 1 or two others). You can go with building the granny flat but note it won't add to your land holdings but wil help with cashflow. Again, generally speaking, borrow as much as the banks will allow for the purchases (including the GF) and leave as much cash as you can in offsets. All your borrowings for your IPs will be tax deductible. Assume you'll rent for at least a while, then when you do finally decide to have a PPOR, throw the offset money into the deposit and/or into the offset of the PPOR. I would still put minimal cash into the PPOR deposit (lending environment may become more difficult in future but I think but banks are more likely to lend a bit more generously for PPORs than IPs going forward) and keep the remainder of your cash in the offset - you will have much more flexibility if you do that. Ps. Very well done on the home you have... Pps. I'm not a broker and I'm not licenced to give advice!
Thanks for the replies, I think I'll definitively be getting in touch with my bank to get some of that equity out for another house. But now starts the hard part, looking for property that will grow at 4-6% a year. South West Sydney has a lot going for it, in terms of airport being built and a logistics park being built in Holsworthy. But prices have already increased so much, not sure if there's more growth left. Will keep researching.
I'd look interstate. It's not difficult to do. If you look on the forum a very large proportion of Sydney investors on this site have IP/s interstate now.
A couple of things If you don't know about property cycles, check out some information on that. they are important to understand. If you are planning to buy and hold for the long term (20+ years), then buying when the prices are "expensive" isn't great but it might not be that bad provided it is well located and in a high demand area because it should do well over a long period. However "expense" is a vague term, I would say that 2 years ago it was expensive in Sydney, but it has gone up a lot since then and now is also "expensive", so that word is not really helpful. However buying right at the peak of the property cycle is something to watch out for, which is why Gockie is encouraging looking interstate because Sydney looks like it is close to the peak and looking like the 5-7 years flatline/correction period of no growth is not far off. From what I have read it is all cyclical - Sydney booms first (which we have seen the last 4-5 years), then people can not afford it and head to Melbourne which booms there (which has been booming for about 2-3 years) and many people seem to be predicting it to be not too far off the peak, and after that Brisbane (which has been rising for a couple of years but has not "boomed" from what I understand and some people think that is the next location to boom). Having said that, the more in-demand the location, the better your long term growth would be on average, so since Sydney is the biggest economic powerhouse of the country, that would often be my preferred location. Melbourne is the next one, the rate of migration to Melbourne is the highest in the country so the outlook seems good to me. Brisbane is next, and while I am not sure you will get the same growth as Sydney/Melbourne there, you get a higher yield and can purchase more properties and end up with a similar return. So when purchasing, you need to weigh up the position in the property cycle with how you think the location will do in the term you are planning to hold your property and how it fits into an investment strategy. Don't be afraid to purchase interstate. I live overseas right now and I purchased in Sydney a couple of years ago while living remotely, and going through a purchase in Melbourne remotely right now even though I have never been to Melbourne. Do your research first and get a good team (broker, BA, solicitor, etc) to help you with the purchase and you will be fine - just be sure to select each of the team yourself, not a ready-made-team from a company trying to sell you their own properties because they are working for someone else and not for you. Edit: also beware buying apartments. Some are ok. Some are not. It goes back to supply and demand - in Sydney's east and inner west it is often ok because you can not increase supply of land and there are already tons of apartments so it is not as if you can just make new land or convert lots of houses to apartments to increase supply and cripple your capital gains returns, but buying apartments way out in Fairfield or in most of Brisbane does have this problem so in "general" try and look for a house unless you know clearly why the apartment you are looking at is likely to be ok. Take your time and do some reading on this forum and you will soon come to understand all of this and be in a great position to make better decisions and ask further questions. You (and me too) lucked out finding this forum - there are a lot of intelligent and very experienced property investors on here.
