Strategy change, considering PPOR

Hi all,

I am considering making some changes to our exisiting strategy and would really appreciate some advice from PC's seasoned investors.
A little history on how we have got to this point so that everyone understands our current position.
This really shows how quickly life changes and how your plans need to be adjusted...
Looking back now is a bit disappointing that we missed some big opportunities.

2012 - At the age of 25 my partner and I relocated from Sydney to Newcastle in pursuit of a higher paying income and career development, purchased PPOR in joint names in Lemon Tree Passage, Port Stephens NSW for $290,000.
At this point I was very interested in property investment our plan was to buy a cheap PPOR, pay it off ASAP and then start investing.

2013- Left PPOR as work dried up in Newcastle (mining industry) however I could continue with my employer if I returned to Sydney so we did, we decided to rent the PPOR out and rent ourselves a cheaps property in Sydney until we returned to Newcastle, this also gave us a taste of investing as we decided to keep our PPOR so that we could one day return.

2014- Employment still hasn't picked up in Newcastle but enjoying life in Sydney, hesitant to purchase in Sydney as we thought prices were too high compared to our PPOR (hind site is 20/20) and still planned on returning to Port Stephens. I was now spending a lot of time on Somersoft, reading books, magazines, going to seminars, listening to Podcatss.
Rentvesting was working great for us, we were cashflow positive and we were saving well so we decided to invest further, this time in Logan, Waterford West QLD. Purchased a 3 br for $310,000 rented for $365pw.
The strategy at this point was, as we had low PPOR debt should we return, we could afford to invest and build some equity while maintaining a neutral cashflow to not effect our lifestyle too much or take on too much risk, we planned to purchase multiple houses with the intention to eventually build a portfolio to supplement our income and give us options down the track.

2015- Happy with previous purchase, wanted to invest further in Logan, was open to multiple suburbs but the right house came up in Waterford West so purchased again. This time a 5 br $310,000 rented $420pw.

2016- Got married! Still in Sydney, sick of waiting for a work transfer back to Newcastle and living in limbo, wife had an opportunity to start a business so we signed a 3 year lease on a commercial unit and decided to commit ourselves to Sydney as this is where our friends, family, work and business opportunites are.(weeks after this I received the inevitable phone call from work with the opportunity to relocate back to Newcastle which I had to reject.)
We also realised if we start a family soon we will want to be near friends/family.

That brings us to now, My wife is pregnant and we are expecting in January, nesting hormones are kicking in which I had not accounted for and we are considering the transition into a PPOR, Unfortunately I have now missed the Sydney boom and the last thing I want to do is undo our hard work, sell up and buy a PPOR at the peak...

So currently portfolio consists of-

Lemon Tree Passage Loan of $240,000, Value $380,000, rented $340pw
Waterford West IP2 Loan $236,000, Value $330,000, rented $365pw
Waterford West IP3 Loan $285,000, Value $360,000, rented $420pw

I have $120,000 in offset against Lemon Tree Passage bringing debt down to $120,000
This financial year portfolio cashflow was +$7,000 before tax.
Weekly surplus income of $700pw
Currently renting a house for us in The Ponds for $600pw
income expecting to drop aprox $500pw next year when my wife stops working IN her business.

The way I see it my best option is hold the portfolio and we find a nicer rental property my wife feels happier about.

Second option is sell Lemon Tree CGT free (6 year rule) and buy a PPOR within our cashflow budget, Lemon Tree is actually rising ATM and I could probably sell in summer when the market is likely hotter, offset the money against Waterford West property and wait for the right Sydney property to come up, sounds like some good buying may present itself next year into 2019?

Third option is try and keep the portfolio and also buy a PPOR with the option to sell Lemon tree if we meet financial hardship.

Or what the family keep telling me to do and call it quits, sell the lot, come out with roughly $400,000 and buy a PPOR...I really don't want to do this before seeing much growth...

What would you do in this situation?

 

you seem to think the Sydney market has peaked. If this is the case it may not be a good time to buy amain residence in Sydney.

selling one property and buying another would likely use up 10% of the property value too.

What is your borrowing capacity like?

 

I'm no expert though Terry, I've been calling the Sydney peak since mid 2016...I am just going off the general PC beliefs.

Yes I don't like the expense of exchanging properties, on a positive I would not be paying CGT going out or LMI on the way back in but still throwing money away...

My investor borrowing has hit the limit but this has been in my name only up to this point, with the wife's income added may have a chance.
Lemon tree passage has had a negative impact on my borrowing as it's in both our names (joint and severed liability)

Father in law is a broker and would probably help out in the case of PPOR, could see if anyone will lend before considering selling but this would leave me feeling pretty exposed in a high LVR position. Especially with investor loans heading north at the moment.

 

Don't forget you can sell at any point in the future too.

 

Im going to come from the perspective of not necessarily choosing the best financial option. I have 3 children under 5 so know what your wife is feeling in regards to nesting and having the perfect home for your future family. The importance of this once your children arrive is underestimated. If holding your properties is going to hold you back from feeling content and happy then sell them and get your home that you can turn into your own. You have made money and if you buy well your PPOR should also increase then once you re all settled you can invest again!

 

Historically the Sydney market has performed well. Even if it is at a peak, I would expect the market to stagnate rather than fall.

If you ever want to buy a PPOR in Sydney then I see no advantage in waiting. Having a PPOR is an emotional as well as a financial decision. Moving is never easy, and uprooting a young family at the decision of a landlord would be a nightmare.

So I would suggest buying in Sydney, a property you are happy to live in for at least 5-7 years, preferably one you can renovate, or add value to while you are living there.

If you decide to sell an existing property to assist financing, take a cold hard look at the capital gain prospects of each, and sell the one you believe has the lowest prospects. Don't let CGT influence your decision too much.
Marg

 

Your family are right, having less non deductible debt is the key thing for your next move to ensure cash flow is optimised. Assume your PPOR will have non-deductible debt your next best move is debt recycling to rid yourself of the non-deductible ledger quickly.

General info only not advice.

 

Could you do it all?

Buy a (relatively) cheapish PPOR in Sydney and do equity splits out of your IPs so you essentially have little to zero deductible debt and lots of deductible debt?

With the right advice it might be a possibility?

 

IMPORTANT

Doing splits out of your IP's to purchase PPOR does not make that debt deductible. Hence the it's reason best to get professional advice as you pointed out

 

Sadly it doesn't work that way It's the use of the funds that determines deductibility rather than the security.

 

Thanks for all the input,

I don't think there is a right and wrong here...I agree to keep non-deductible debt to a minimum, at the moment I don't have any!

I really like the thought of having a place to call home, but somewhere we are going to be happy for 5-7 years is going to be a property on a large block in the Kurrajong-Blaxlands ridge area...roughly 1.2m which means $800,000 loan, assuming future 6.5% interest rate P&I $5,412 p/month or $1,353 a week.
Current weekly surplus cashflow is $1,382 if you include our $600 pw rent.
That's really just too close for comfort, I want a great home for my family but not at the risk of financial hardship...And this probably leaves us bogged down with a mortgage for years without the cashflow to reduce the loan period, and my goal would be to reduce non-deductible debt, investing would go out the window...

If I did go down this road I could however get creative and as suggested buy a property with value add potential, also many homes in this area have granny flats or second dwellings which could boost cashflow.

As for IP equity splits debt being non-deductible when used for PPOR. We had previously planned with a successful property portfolio we would have the option to purchase an income producing property with IP equity as part of my wife's business for health retreat/holiday accommodation and have a second dwelling on the property which we would live.
This is complicated but I believe if structured correctly a large portion would be tax deductible and this is still a realistic option in 5-10 years if we were happy to rent that period.

 

I don't see Lemon Tree Passage as having any reasons to have any decent growth over the next few years. Is there a reason why you picked here for your Ppor to begin with?

 

The reason we picked it was simply we really liked it there, 1100m2 block 100m from water, I was 20 minutes from work.
Best value for money in that area.

Stockton would have been a much wiser purchase in hind site but we weren't too worried about capital growth, preferred to start off with a cheaper loan and pay it down.

The area has actually done alright in the last couple of years...and has boomed previously, check out what happened 2000-2004.

Obviously it's isolated location and infrastructure limitations are always going to have a huge cap on any major gains, but I still see good value for money and lifestyle and would expect its growth to follow Stockton and Nelson bays patters at a lesser rate.

I had wondered if first home buyers concessions might boost the area, what are your thoughts?

 

Yeah you have some fair points, hard part with lifestyle properties they don't nessicary make a good investment. If Sydney's where you desire and you can add value I can't see how you can go wrong long term.

My thoughts are first home buyers are wanting new right near we're they grew up. I don't think they will have any impact on the outer ring of Newcastle house prices.

 

I used to own an IP in 2319. Complete dog of a property, rookie error. My advice is to get out while the going is good because when the market goes cold it goes reallllllllly cold there. I've seen properties sit on the market for literally years there.

Tom is right, the area has no drivers for growth and really nothing going for it and to top it off it is full of bogan feral tenants.

 

Haha I was waiting for you to chime in Biz I know your glad to be out of tanilba bay, I agree 100% the first 2 years we had disaster tenants but the current ones are 3 years in and perfect, got lucky.

When we bought I recall days on market being around 300. It's now down in the 80's.

 

I opt for 2...sell LTP when you can due to no tax.
Also important is the 'days on market'..I say monitor this closely if you have intention to sell... currently Domain say's it's 120 days. You said LTP is rising/booming, but 120 days is high IMO, and could stretch out to 200+days in a fallen market, not good if you need to sell. Sydney has peaked but still average about 40-50 days on market..

 

Reading what has been posted, sounds like putting LTP up for sale now or in Spring/summer is a way forward. (And I'd suggest getting prepared ASAP or waiting for the lease is up if you really don't want to disturb the tenants/presentation might be better if tenants aren't there). It takes time to prepare and present a house for sale if you want the best price. Anyway, my justifications for selling are:
1. You'd still get the 6 year CGT exemption (I'd want to take advantage of that). You said you had 2 years of feral tenants and 3 years of good, so it sounds like year 6 is coming up. One option is though, you can return to live in to reset your 6 year status.

2. It sounds like when the market gets cold, it really gets cold. It sounds like properties are currently selling faster than they have been but it's not like Sydney. It mightn't be a bad time to sell soon, knowing how bad it could be. And you don't know if/when the market will soften again. Particularly with APRA changes, I'd think the investor market will be thin on the ground, which means less buyers. I think FHB still have other more preferred options in the Newcastle area.

3. LTP is quite far out on the North side from Newcastle so it won't be the first choice for tenants working in the heart of Newcastle either.

In regards to new PPOR Sydney - 1.2 mill sounds like a lot and will take up all your money going forward. I really don't like that idea. If you buy in Sydney I'd still like to keep it more affordable for you. Don't buy the dream home until you build a lot more equity.
What about something under the 700k mark in the lower mountains on 1000+sqm land?
Otherwise keep rentvesting.

 

I'd sell LTP. Better opportunities elsewhere. You can still buy a home elsewhere that will give better CG than LTP. Of course lifestyle choice is one big factor for you.

 

hey jesseT
sounds like you are really working hard for yr familys future-Well done!
IMO I would rent in the nice area your family wants to live or find another cheaper area (IE QLD ?!!)
The keep on yr plan of investing in cashflow !
Possibly sell one if its not in a current growth area and that will give you possibly 2 deposits for more cashflowing properties in more growth area ,but emewmber it will be a lot harder to borrow now.The idea of using yr wifes name sounds like it may help