Strategy: Rent where you live and Buy Investment Properties

Discussion in 'Investment Strategy' started by Terry_w, 25th Nov, 2015.

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  1. Lacrim

    Lacrim Well-Known Member

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    Great post Terryw! My thoughts exactly - it still surprises me to a degree how I occasionally get funny looks from people that know I have several IPs....like "You own multiple IPs but don't own a home - why not???"

    If I could contend with living in an affordable suburb then I'd consider buying a PPOR and reno-ing the way I want it but where we live, the average house costs north of $2 mill. Renting makes a lot more sense.
     
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  2. Lacrim

    Lacrim Well-Known Member

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    You know, I'd love to give some of my stable tenants a 10 yr lease PROVIDED I could negotiate an x% a year increase. But equally, I'd like the flexibility of terminating that lease if they ever breached the conditions - if only resi worked like commercial leases.
     
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  3. thatbum

    thatbum Well-Known Member

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    You'd be able to do that on a 10 year lease anyway - provided the breach was serious enough.
     
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  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Actually from the bank's perspective your servicing in this scenario may not be better, you may not be able to borrow more, it really depends on a number of variables.

    It doesn't really matter if you're renting or residing in your property, the banks will treat the loan the same way (assuming the loan is the same amount, same rates, same repayment type). This doesn't make a difference unless there's a difference in the loan.

    Lenders look at the rent you charge and assume you only receive 80% of that amount. The other 20% goes towards vacancies & property management. If you were living in the property, there's no reason to load extra holding costs. This favours the scenario of living in your own property.

    On the other hand, the affects of negative gearing may swing the equation the other way. This is trickier as not every lender includes negative gearing in their calculations, and where it is included, the benefit can vary depending on the cash-flow position of the property and your personal income.

    There's no simple answer to this question, it depends on a number of variable which change from one individual and property to another.
     
    Last edited: 26th Nov, 2015
  5. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    My point was I never see 10 yr leases on oz resi property. I don't think the res tenancies act in NSW at least allows for it. Not sure about other states. Perhaps @Terry_w or one of the other legal boffins can confirm.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  7. Elimarie

    Elimarie New Member

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    When renting instead of residing in PPOR, what percentage of rent is deductible if running a business from home?
    We are looking at renting a property that is bigger, has a pool, newer kitchen and granny flat (we don't need the granny flat though). We would then rent our own home out. We would probably have to pay about $100 more than we will receive.
    We only owe about $110k on our property and have about 30k in redraw (so owe 80k) so it will end up being positively geared (should get $350 week rent).
    Should I take out some of the redraw portion (I need about 15k for SANF) and buy AFIC shares?
     
  8. Hanison

    Hanison Well-Known Member

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    @Terry_w

    Did I read on here or on somersoft that you had written or were writing a book on all this tax type stuff ?

    I would be interested in such a book.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes but i have gotten side tracked. Ibwill try to finish the one on loan structuring soon.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I cant answer the should question but if renting you should be able to claim a portion of the rent for part of the property associated with your business. There are various rules about this so seek advice.
     
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  11. piN00b

    piN00b Member

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    If my PPOR is already paid off, this plan won't be as good, right?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You would be paying tax on the rent and be paying rent without after tax money.

    But there may be other strategies to consider.
     
  13. D3xx

    D3xx Well-Known Member

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    I imagine you could "sell" your PPOE to a trust? handling the money and establishing a new investment loan for the house would be difficult i expect.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes it would be possible but both cgt and stamp duty would apply as well as loan wxit and entry fees and new application as weĺl
     
  15. Cactus

    Cactus Well-Known Member

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    This is what I am doing, but I plan to have my cake and eat it too. Once I can afford a home where I want to live I will do a side by side townhouse and sell one live in one. Then I will do a second side by side in my family trust and will sell one keep one. The one I keep I will rent from the family trust to myself at commercial rent, and then I will rent out my PPoR for the 6years.

    An alternate strategy I have heard about is selling your PPoR to your family trust but retaining a life interest in the property. Then when the trust sells the asset it sells the house for original value and the lifetime interest for the capital gain. Not sure how this works exactly would have to research it.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Good one Caltan.

    Any purchaser would purchase with the life interest in place. This would reduce the market value of the property.

    Watch out for Part Iva
     
  17. dante678

    dante678 New Member

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    Thanks to @Terry_w for this great tip. I have a PPOR worth $440k (at least that was what I paid five years ago), a loan balance of $251k on a P&I loan for this property, with $50k in an offset account against this loan. I am thinking of converting the PPOR to an investment property and renting a new residence closer to work. My question is, should I speak to an accountant first? Do you recommend speaking to a mortgage broker about the conversion of the loan? I am reluctant to speak to a financial adviser because they cost a lot and my affairs are not that complicated.
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yeah forget the financial advisor for this stuff. Speak to a tax agent for the tax advice and a broker for the loan advice.
     
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  19. KayTea

    KayTea Well-Known Member

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    I'm hearing you, Matt.

    We are currently debating this strategy as a possible way to move forward. But the idea of possibly having to move every year or two (or even sooner), is a real issue for me. Also, quite often, furniture purchased to fit/work in one house doesn't work in another, and there is the wear and tear on constantly moving it (my poor TV cabinet copped a hiding during the last move).

    While there are clearly a lot of financial advantages to doing things this way, sometimes the psychological benefits of other options are just more important (for some people) - we have to live now; it can't all be about planning for the future.
     
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  20. vjsingh

    vjsingh Member

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    Trying to follow this example, could you explain where the $16k shortfall in expenses that the income doesn't cover comes from?