What now?

Ahh I get what your saying.....
He and wife were on 'average' incomes however he worked other jobs and overtime whenever possible to boost income(I guess that's where the higher income comes in) Then got lucky with some zoning that went his favour with a Fitzroy warehouse property. Was quite handy with his hands and bought a double fronted home in Carlton north that needed love for a bargain at the time. Then the loans he took out or had remaining to develop other land was paid off with his super.

 

Yes I should have said 6K in costs, rather than 4K. That's my error. However, even accounting for 6K of non interest expenses, if the property is run on a P&I basis, the deduction of @ 6K + the depreciation of @ 17K provides for a deductible loss of 23K. That means an ATO refund of $8510 based on a Marginal Tax Rate of 37% and an ATO refund of $10,350 based on a Marginal Tax Rate of 45%

Against 6K of deductions that means a post tax result of between 2.5K - 4.5K. I believe I said $200 per month could be made as extra repayments, in the post above ? That's $2400 per year, which is basically the amount that a Marginal Tax Rate of 37% will deliver. $375 per week could be achieved with a 45% Marginal Tax Rate. So I stand by the numbers above. ie $200 per month - or close to it - should still be available for extra repayments under P&I .

I don't make these numbers up. I spend a long time getting them right. And I know they're right because countless clients have done tax returns and told me so

Yes the depreciation falls away over time, but there is still over 10K of depreciation in the 10th year, and rents will have matured in that time as well. So lets call that about @ even....

Yes interest rates can rise...and fall....or stay flat for years and years to come.... which is increasingly becoming the more likely scenario. But that is true of any property where debt is involved. So if it affects the cash flow of one property it affects the cash flow of most properties. If you think rate rises hurt a cash cows cash flow..what do you think it will do to a non cash cow? Investors can use fixed rates for periods of 3 or 4 or 5 years to hedge against these things for periods of time. That's the best that can be done. Beyond that, we are all at the mercy of the RBA and lenders. But Ive written extensively about this previously. There is very little chance we are going to see any material rate rises - the RBA and APRA know all too well the delicacy of things over the next few years as the P&I migration exercise is bedded down...

And yes we can even allow 4 weeks vacancy per annum - and the dual occ's would still run @ neutral under P&I rates of 4.2%

So if they run neutral even with 4 weeks vacancy on P&I, I'm afraid you are mistaken that these properties barely run neutral on IO .Just cant be the case.

Dual Occ doesnt have to be your thing. Thats OK. But for the OP, its one path to a passive income that works even without growth, and I would argue it offers a safer path than the alternative - speculating for growth using low /vanilla yielding property reliant completely on big growth - particularly and especially in this credit environment .
Speculating for growth while incurring annual cash flow losses from day 1 that morph into almost certain massive annual cash flow losses after 5 years is an extremely risky business model when there's a credit contraction underway.

Just run the numbers on a "growth "property with vanilla yields - if there is any such thing anymore in the post APRA era - one that yields 4% , and see how that performs under IO during the first 5 years , let alone under P&I conditions over 25 years when the loan re-sets 5 years later. You'll quickly realise there is no chance whatsoever of paying that property off without making significant additional contributions out of your own pocket , leaving you with only possible way to turn that investment into 50K passive income or more- making huge growth, selling, copping the CGT and the reinvesting in something else...

Given the way credit supply is going to affect growth cycles for the next decade and beyond... I know which one I think is the safer, smarter, better way to go

But we are all free to debate these things and form our own views - its what makes these forums so good.

 

Yes I love this forum where people can debate and then learn a lot of things. Personally I like your idea of dual income, positive cash flow, etc. I also agree with your view that future property growth/cycle post APRA is different to pre APRA. In my post I said your dual occ is neutral geared during IO term without taking into accout depreciation. With depreciation, of course it is positive cash flow (please check my post).

Again, I believe the non interest expense is min $7k not $6k, based on the numbers in my post, did I over estimate something? In addition, the way you calculate ATO refund is not correct with P&I set up. The tax deductible is not $23k ($6k expenses + $17k depreciation). Let say the dual occ get $34k gross rent, $7k non interest expense, $24.5k is interest so it is +$2.5k per annum. Minus $17k depreciation then it has -$14.5k to claim tax refund. At MTR 37%, the refund is $5.365k. So it ends up with close to $8k surplus per year. Pretty good compared to the vanilla type properties you often refer to. But since it is under P&I from day one, you need to subtract the principal repayment which is about $10k per annum. So at the end of the day it is -$2k per year not +$2.5k-$4.5k as you claimed. It means the owner still need to use out of pocket money to pay for the mortgage. Rent will rise but so does interest, maintainance, vacant loss, etc while depreciation reduces. So let assume all those things cancel out each other, I still do not see how the property cash flow can assist the owner yo make extra repayment to pay down the loan faster???

The main point I am trying to make is your dual occ is not as great as you claim it to be although it is a good option. As an investor, I want to get the data as accurate as possible

 

Are these other options that as good as or even better than dual occ?

 

I bought an existing property that can be rented as a dual occ with 7.8% gross yield.

 

can you please elaborate on this? I am curious to know why, just from a learning perspective

 

The initial part of that quote is essential. The entire comment I made was "On a separate note purely from a 'grow your portfolio' perspective, completely paying off a PPOR is rarely the wise choice."

The main reason is to grow some wealth with resi you need to use leverage. If you plan to grow a portfolio, rather than paying off your PPOR, you could use that money to leverage into another asset. If all goes well, you'll have a larger asset base growing you more wealth than the interest saving on your PPOR. So it's basically using your captial to leverage into a wider base, rather than going deep into a smaller base with less growth ability. At the end of the day to grow a portfolio, you need a portfolio.

 

But isn't it more tax effective, to pay off your PPOR loan as much as possible and taking out the equity to fund your new IP ?

 

Depends on your situation and where you are in your portfolio expansion.

For most people who want to build a portfolio, assuming they bought an apartment PPOR and then saved up money to either of pay down the loan or buy another IP, the better choice imo would be to leverage into another IP sooner rather than wait and have the market move even higher. Also when you pay off your PPOR and you want to take out equity to act as a deposit, you pay interest on that loan too and you won't be able to get out the entire amount you put in either.

So while paying off your PPOR will save you some interest costs, you won't be able to grow a portfolio quickly not having leveraged into one and if you miss a boom period... ouch.

I'd rather have a portfolio of 2.5m growing for me with an lvr of 70% than a 1.2m portfolio growing with zero debt. You need a bigger base to grow for you asap.

Now I know many folks are ultra conservative and traditional in their thinking when it comes to buying and paying off a home first. That's fine but then growing a portfolio will be much harder in that case.

There definitely is a time and place for debt reduction and it will differ for folks. But generally speaking it's not right at the beginning of starting to build an asset base.

 

opportunity cost. Most people way over estimate what can be done in 3 years but way under estimate what can be done in 10 years. The OP wanted to pay of the loan in 10 years. I think in most time frames it would be better to buy shares in companies. While the a Loan for PPoR may not be tax deductable it may be cheaper than an investment loan, so not neccessarily that big of deal, especially as the loan may also be able to be paid down much quicker by investing. In the 10 year period there will probably be a period where loan can be paid off from returns from a 3 or 5 year time frame. After 10 years of dividend growth annual returns maybe 50% of loan. If consistently buying shares the DCA effect mitigates much of the risk asisted by inflation and growing wages. The chances are good that the loan is paid off in 5 or 7 years and after 10 years there are funds to pay cash for another house.

 

Hi Sackie,

Would it be the case if pp have a portfolio with some equity and then can fund any other purchase (if borrowing allows) using existing equity only.

In this case, there's a redundant need of cash and it should be allocated all to pay down Ppor ?( just put aside the buffer for simplicity)

So I have a small portfolio that has reached/nearly reached the borrowing cap. For any cash surplus from now on, I should allocate to reduce the PPOR debt ASAP right?

Hopefully in 5-7 years we can pay off the PPOR, then I can loan the PPOR with an Owner occupier rate to fund the investment property. Not only for tax purpose but also to increase the borrowing capacity ( I assume clearing 500k PPOR debt should lead to 700k (just random number) increase in investment borrowing capacity as the later comes with rent income?

I think this should be my best approach but not sure if I missed anything?

 

Best to have a good broker look over your situation and give recommendations. There's possibly more than 1 avenue to go down depending on your financial situation and changing FS.

Long story short if you're unable to service anymore debt and don't see that changing anytime soon, then reducing debt in the interim is likely one good idea.

 

Well done - congratulations on paying off your ppor. wish you all the best with whatever strategy you go with