Upgrade PPOR or buy another IP?

I know this is a crazy question to be asking on a property investing forum, where most would scream "Invest in an IP" but please hear me out! Interested in people's thoughts

Our situation: Married, early 40's with a 2yo and another child on his/her way.
1 PPOR and 1 IP
PPOR: small 2br/1bath, bought in 2010, will outgrow this in a couple of years time.
LVR: 45%
Have a good amount of equity due to capital growth over the past few years

We want to have more space in our home eventually.
Our options are:
1. Sell PPOR, and buy a larger 3-4 br PPOR, which will probably be $1.2-1.5m, and most likely taking on a larger mortgage. Delay buying another IP, to when we have serviceability again.
2. Renovate PPOR to make it larger - add another room or two, and another bathroom. Delay buying another IP - depends on how much renos cost.
3. Make do with the PPOR for now, and buy another IP using our equity. Hope it grows quickly. In a few years, possibly sell it to release the funds to buy a larger PPOR, or renovate.
4. Other options I've not thought of....???

What are people's thoughts on these approaches? Has anyone been in this situation?

Thanks for any tips or ideas

 

I'd go with option #3. If you're still a few years away from out growing the PPOR and sounds like it's land I'd invest and revisit the extension or knock down rebuild decision.

Have you compared on paper how the two scenarios look like? Provided you buy well and growth does happen how does it set you apart? How much IP purchasing do you risk by not going down the investment route?

Say if it was $1m versus the $250k of home extension? How does equity growth differ in 5 or 10 years?

Personally the key goal for investing for me and my sis @monalisa was to enable us and our mum and baby bro (not a baby now) into a first comfortable home in Australia. Had we chosen to buy that nice home in 2009, that we couldn't afford...........i think that's all we would have achieved aka golden handcuffs.

So what does success look like for you? @Nightowl

 

4. How about, rent a larger property that suits your families needs for the next stage of your life, turn PPOR into IP and use the 6 year rule, and buy another IP Win, win, win!

 

How about rent a new home to live in, refinance your ppor to LVR 80% and IO, lease it, and use your cash to buy another IP?
I don't think having a big reno is good idea when there are two very young children at home.

 

Thanks for your input @MsAli . Yes its land, approx. 400sqm, not a large block for this area, but still land.

You've asked some great questions. I think a big problem that has made us stuck is that we've been looking to buy an IP in Qld but have got conflicting advice so its confusing, and we can't be sure that suburb X or Y will have good growth. What is more certain is that we know our area, and what we like. So deciding on a PPOR in our suburb our close by is much easier than on an IP in a market we know less about. But of course that's an emotional decision .....

And that's exactly what I fear, that buying the PPOR will be golden handcuffs and tie up all our cash.

 

Thanks jprops. We already turned this PPOR into an IP in 2012 when we went interstate for 2 years for family reasons. This house is not a good IP, the rent we could achieve was low then and I think it would be about the same. I'm not sure we can turn PPOR into an IP twice anyway?

 

Thanks Ouchmyknees.
I agree, doing a reno with a preschooler and a baby is NOT my idea of fun. We already turned this house into an IP for two years. Have been looking up rules about doing this again, will speak to my accountant when I get a chance. But renting the house with the space we need in the short-term is an option to not tie up the cash.... Then we could buy another IP

 

What does your wife think about these options? It takes 2 of you to make it work. If you don't like the idea of renting (like me) then I would scrap that idea. Can I still live in that space for 3-5 years? Kids don't take up a lot space, it's their toys and stuff. If I can live in the same place for 3-5 years then I will devote my time in getting another IP while I can still service debt. Just my 2 cents. But of course you are young and time may be in your side.

 

I'll swim against the stream.

You only live once, and your comfort and that of your family is important now. When it comes to where you actually live everyday, then I reckon go with your heart. Don't postpone life to some imagined ideal future. And don't underestimate the impact another small person will have on your 2 bed home!! Without some space separation one crying child will wake the other! And at 3am...

If you are happy where you are then that is great, but if you can renovate wisely to increase the value at the same time as your comfort, even better.

But if you are not happy, then a move should be considered. It is then up to you and your family to decide if renting with young children is for you (inconvenient inspections or lease non-renewals may be a nightmare) or whether you buy another PPOR.

SOmetimes financial considerations come second.
Marg

 

What sort of a portfolio do you want? Have you figured what's possible for you? Do you have a road map and clarity on whether the sort of portfolio you want is possible for you?

One of my biggest lessons on the investment journey have been to have clarity on what I'm capable of achieving as well as whether that's what I want or something better?

Second, I'd suggest putting together a criteria of negotiables and non negotiables for your purchasing. Read up on our blog on property selection that was put together early on for us to enable property selection. Once you know what you want, you can consider what area will tick your boxes.

The tide lifts all when the markets rise and vice versa. So action would be more important than analysis paralysis / fear that prevents you from taking action.

 

Is there room on the PPOR for a granny flat?
or at least a way to make any extensions " self contained"?
This could give your house an extension AND (more or less) an IP?

 

I like option 3. No point in spending capital unless you have a good reason to, ie investing it OR you really need that space now!

I'd put the equity to work in an IP, and then when the time comes to move/upgrade you can make the decision then.

OR

buy another IP in the area where you want to live that has knock-down/rebuild potential and build what you want when the time comes.

Your needs/want can change as the kids grow up, so I wouldn't make any big decisions on PPOR just yet.

 

I'm the wife . My husband, like me, is open to renting for a few years, if it makes practical sense. It could mean we can live in a house with 3 bedrooms, and be in the right catchment area for the better public school in this area (we currently fall outside it). Can we live in the space 3-5 years?? Maybe but its a push. Not so much the toys but as Marg pointed out, baby waking 2 yo up and vice versa in the middle of the night. I suppose it depends how long the baby can sleep in our room, then what the sleeping patterns of both kids are like in future....

 

Thanks Marg, you put into words a lot of what I have been thinking, hence the dilemma

 

Sadly no, the block of land is small and irregular - it becomes pointy at the end of the block so I strongly doubt there's enough room for a granny flat.

 

Thanks MsAli, I had initially thought we had a fairly modest dream, we wanted 2IP's (we have 1 at the moment) and for them to be buy and hold - good sound investments that would have CG and help us in retirement. Now we are re-evaluating, as we'd like to have more funds sooner

Thanks I'll look up your blog and have a look at property selection. I realise we need greater clarity at this stage

 

totally understand. We have 2 but that phase is over, thankfully.

 

Thanks for your input. I don't think our suburb (In Sydney's Canterbury region) has good IP potential, yield on houses is fairly low, and entry level for houses is too high for an IP - would tie up all our cash. (I may be wrong but I haven't investigated it from an investment angle). We like it as a place to live though ...

 

Guess we still have a few years to go to when they can get out of bed QUIETLY and get their own breakfast and let the parents have a sleep in on Sunday!

 

mine 8 and 10. No, they still come into our bed for snuggles. We dreamt about it and still dreaming about "sleeping in".