Strategy: Rent where you live and Buy Investment Properties

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

Join Australia's most dynamic and respected property investment community
Tags:
  1. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    4,982
    Location:
    QLD/Australia Wide
    I don't think anyone has said an Interest Only loan increases your borrowing capacity have they?
    The way it works is if you have an interest only loan (5 years) then the lenders calculate your ability to repay the Principal over the remaining P&I term (25 years) so Interest Only loans actually reduce your total borrowing capacity vs a 30 year P&I loan which calculated as paying the debt off over, well 30 years instead of 25.
    IO loans are not 'fixed' during the interest only period unless you specifically get a fixed rate loan, the IO period is typically 5 years.
    All home loans, whether P&I or IO have a buffer applied in the servicing calc to allow for future rate increases, at the moment it's 2.5% added to the actual interest rate or the lenders base assessment rate, whichever is higher.
    Investment savvy is meaningless buzzword, your broker has explained it correctly, I just think you've misunderstood
     
    Last edited: 21st Jan, 2021
    Terry_w likes this.
  2. jaybean

    jaybean Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    4,752
    Location:
    Here!
    Maybe he's all talk, I don't know as I don't follow him. But rentvestment as a concept is totally valid, it just has drawbacks to consider. Also you need to consider what's happened in the last 6 years since this post was written - interest rates have dropped to a level no one ever expected, which changes things a lot. Rentvestment still has merit, but it just needs to be more carefully considered these days. It is by no means just hot air.
     
  3. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    You might be mixing things up here.
    IO loans DO affect serviceability more adversly that PI loans. A 5 year IO loan with 25 PI remaining will be treated as a 25 year PI loan from the beginning. This will have a higher repayment than a 30 year PI loan.

    It doesn't matter if fixed or not.

    Based on what you have written I have no clue as to how good the broker is or not.
     
  4. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    A lot has happened to rates since 2012. Standard variable rates were around 7.39
    see History of Interest Rates in Australia - InfoChoice
     
  5. MWI

    MWI Well-Known Member

    Joined:
    17th Jul, 2017
    Posts:
    2,287
    Location:
    Lower North Sydney NSW
    Investing elsewhere while living still at home is great with kids becoming adults to take advantage of that. My family and some friends have taken advantage of that.
     
    Elle Ar and James.Syd like this.
  6. Curious2019

    Curious2019 Well-Known Member

    Joined:
    27th Sep, 2019
    Posts:
    217
    Location:
    VIC
    Rentvesting can be a great way to get your foot in the property market door. This is how we started 3 years ago. Last month however we bought a PPOR - with a loan fixed for 1 year at 2.09% and 90% LVR with no LMI (CA) our mortgage repayments are only $10 more per month than the rent we are paying and it’s a better house! While we were keen to be rentvestors for a while, when this opportunity came up it was too good to pass up! I think the key to successful strategy is to be adaptable and adjust when the circumstances change. There might be a slight hit to our serviceability for a short while, however our income has increased significantly in the past year, so I am anticipating our serviceability will improve when we lodge our 2020 tax returns.
     
    Propto, lirenxn, James.Syd and 4 others like this.
  7. gkp

    gkp Well-Known Member

    Joined:
    1st Feb, 2016
    Posts:
    87
    Location:
    Adelaide
    Regarding rentvesting and CGT. Below is a scenario I am considering and have the question about CGT.

    1. Stay in the current PPOR. Borrow money to buy an IP.

    2. Move out of the PPOR at step 1 into the IP and make this IP as PPOR, stay in it for 13 months.

    3. Move out of IP to a rental property around good schools.

    4. Move into the IP within 6 years making it as PPOR again. If I sell this property, will there be CGT applicable or not ?

    5. Once selling IP, move into the PPOR mentioned at step 1 and then then sell it, will there be CGT applicable or not ?

    Thanks in advance.
     
  8. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    It could potentially apply

    If could potentially apply in part or full, but not in full if you have claimed the exemption on the other property.
     
  9. gkp

    gkp Well-Known Member

    Joined:
    1st Feb, 2016
    Posts:
    87
    Location:
    Adelaide
    Thanks Terry.

    Because the IP has become my PPOR, wouldn't it be exempted from CGT ?

    When I move into this PPOR and stay in it, this is the only property I have and can't I claim the CGT exemption.
    Is it because I can claim only 1 property ever for CGT exemption.
     
  10. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    Nope. If you move into an IP it can never be exempt from CGT.

    Nope. If you have claimed one property as the main residence during a certain time period, you cannot claim another property as the main residence for the same time period - and neither can your spouse or minor children.
     
  11. HonestShiba

    HonestShiba Well-Known Member

    Joined:
    17th May, 2020
    Posts:
    666
    Location:
    VIC
    Am I misunderstanding or is this an unfair comparison?

    You're comparing someone with $1mil in debt, with someone who's renting and has no debt.

    A more accurate comparison would be:
    1. Someone with $1mill worth of private, mortgage debt (Owner occupier)
    2. Someone with $1mill worth of private, mortgage debt (investment debt). Earning $600 p/w in rent, and renting a place next door for $600 p/w.
    In this scenario, is there really a difference in borrowing power? Definitely can't imagine it to be a $700,000 difference.
     
  12. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    in that scenario it would probably be better serviceability by renting, but over time rents increase as repayments on loans decrease so it will gradually shift to being worse renting.
     
  13. Redom

    Redom Mortgage Broker Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    4,607
    Location:
    Sydney (Australia Wide)
    Nicely pointed out, thanks. No this wouldn't be nearly that different as your utilising the borrowings to leverage. I.e. if you include the OO as part of your total portfolio than you don't actually get that much more debt reinvesting.

    Some don't classify any OO decision I make in my investment or portfolio (despite its positive tax treatment). I generally live in weak investments relative to my property investments which are made with a completely different lens. Which brings to light a different and interesting perspective too, 'rentvesting' benefits include being able to allocate capital and additional borrowing power into better investment vehicles.
     
  14. jaybean

    jaybean Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    4,752
    Location:
    Here!
    Also bear in mind back when this was first posted, things were different:
    • Interest rates were a lot higher
    • Interest rates for IP's vs PPOR's were the same
    I don't know how much this affects your serviceability though. I assume it's greater than 0, but less than the original example.
     
    Terry_w likes this.