Status check + classic pay down IP or Invest question

Hi guys, just looking for a sanity check on 3 possible investment strategies that I'm thinking of executing in the next two years for a spare $10k I've saved up.

I'm living in a 4 bedroom, 1 bathroom house (PPOR), renting out two of the rooms earning $1.3k monthly income after vacancy/maintenance costs.

Strategies
Right now I'm thinking about doing one of the following within the next two years:

1. Pay down mortgage asap (not looking to sell house in the short term given current market conditions, plus I like the area I'm living in);
2. Save up to build a second bathroom/ensuite; or
3. Invest in VAS/VGS ETFs/something that I think will beat the 4% mortgage.

I'm liking the second option most because it will allow me to rent the fourth room out without any clashes for bathroom/shower use = happier housemates, more income. From experience, renting out the fourth room should get me an extra $700 income per month or about $8000 per year after vacancy/maintenance. However I'll need to extend my house to build the bathroom - I've done minor renovations, but never something like this - internet says it will cost $20-$25k, so ROI looks good. I'm likely to be able to save for this within two years.

Some extra info

• $500k remaining on mortgage @4%, $800k equity on the house. Principle + Interest comes to about $2.6k per month.
• No SO, enjoying the bachelor life (at least for now and the long term), no interest in having kids.
• Earning 65k income before tax at a new job (took a pay cut but salary is expected to cap higher in the long term). Side income projected to add $4-$6k p.a. (varies).
• Savings: $3k emergency fund + $10k (majority in short-term 2.15% CDs).
• Debt-free (hence the low savings).

If things don't add up, this obviously isn't the full picture but it's what I'm comfortable with sharing.

Would appreciate any constructive input.

Thank you.

Edit: grammar

 

If you are asking this question it shows you don't understand debt recycling. You can do all that more effectively if you pay down the loan on the main residence and reborrow to invest.

In fact by not doing this and investing you are basically throwing money away.

 

Oh I'm definitely aware of debt recycling and I'm very much looking forward to July

 

Please disregard my previous message as I realise I sounded quite arrogant!

I'm definitely not an expert on debt recycling. At the moment I think I'm already pretty highly geared due to the mortgage as you can see, so not looking to take on any more debt yet given my earnings.

Thanks for the input though, will re-evaluate my equity position in greater depth.

 

No offense taken, but I think you still don't understand because debt recycling doesn't entail taking on any further debt, but just converting debt from non-deductible to deductible.

 

I see - i thought debt recycling was more than converting debt from non-deductible to deductible - i.e. you would need to borrow on your equity to invest in income-producing assets. Despite my equity position I don't think I should borrow any more yet as i won't meet the minimum mortgage/interest on my current investment loan, unless/until my income increases.

The majority of my debt is for investment purposes and is thus deductible and I think I've maximised my position on deductibility - the only part that isn't deductible is the portion of house I'm using.

Assuming that as much of my debt is for investment purposes as is commercially and legally possible, would you still disregard option 2 in favour of 1 and 3? Option 2 would increase my income and thereby increase the destructibility of my loan interest (3 housemates living on my land now instead of 2)

 

This would be merely borrowing to invest. But you could use the excess income to pay down non-deductible debt faster so I guess it is sort of debt recycling.

But if you have any non-deductible debt at all and don't pay it down but use cash to invest you will be losing out to the tune of $4,000 in extra deductions to every $100,000 in debt (assuming 4% interest rate).

 

Do you need to have your LVR below 80% to start debt recycling??

Currently at 95% LVR

Cheers

 

No

 

THANks terry for all your insights and reply..

I have sent you a private messAge..

Merry Xmas

FRitz

 

Do you have the link to debt repayment schedule ...showing how extra payments can reduce the loan term (as above ) ?

 

Pick any extra repayment calculator from google @Beano I use infochoice , but there are plenty of others to choose from . Plug in your debt. Plug in your interest rate . Plug in your loan term. Plug in your extra repayments .

 

Is there a one picture summary?

 

Not one you’d understand

 

Yesenia I just not educated....Youse smart

 

@Terry_w

This might be a silly question....

If you've hit the serviceability wall, can you debt recycle?

If you can't and you had excess cash, would it be wise just to pay down PPOR loan?

 

A person can debt recycle if they have a loan as debt recycling is not about borrowing extra but converting bad debt into good debt.