Long time lurker, first time poster I have an investment property as follows: - value of about $1.2m to $1.25m - rent value about $800 per week - it was my PPOR for 10 years until 2 years ago (purchased for $600K in 2009) - rented for the last 2 years and probably increased in value circa $50K (subject to capital gains tax) - loan is $300K (i.e. $900K+ equity) - interest rate of 3.15% - my last tax return showed a net positive cashflow of $23,000 (rent of $41,700, expenses of 18,500 which included $10,600 of interest on the loan) Personal details: - 41 years old married, 2 year old and one on the way - both household members are in the top tax bracket - large seven figure mortgage on the PPOR with a 2.81% interest rate - I plan on working for many years to come My thoughts: Based on the low LVR in the IP, it is not tax effective and I think the return is very average. I feel that I should sell and then invest in: - a balanced portfolio of shares - a cheaper IP (or two) with a high LVR of 95% to maximise tax benefits and hopefully buy in an area which has a better yield, opportunity for capital growth or both - super?!?! Or I could just dump the equity against my PPOR which I never plan on renting in the future. My questions: 1. Is there any reason why I should keep my IP? Based on the LVR, I don't see it ever making sense. 2. Where do I go if I want to pay someone for professional wealth creation advice who is not just trying to pedal their products? Thanks in advance Dave
Sell it, debt recycle your PPOR and buy two cheaper $350/400k properties at 100% plus closing costs and then debt recycle the rest into shares when you feel the market meets your risk appetite
Good post and great situation to be in. My only concern for you is having such a large PPoR mortgage. However, you have plenty of equity in the IP with strong cash flow and you've already bought a PPoR with a young family which is usually a hurdle with such safe LVR/cashflow IP in tow. So provided: 1. You are happy with the seven figure mortage, have stable jobs and do not believe you will have trouble continuing to pay it given current interest rates (you can probably do better on that 2.81% TBH), taking into account your wife's upcoming time off work/maternity leave, to whatever level that is. 2. Aren't afraid of debt and your risk profile suits. Then I would be keeping the IP and using the positive cash flow and equity to invest in further property or shares from equity redraw, provided you're not currently using the net $23k from the IP to fund your PPoR loan. You could always sacrifice some of this net gain into super for a lower tax rate, but at 41 I think you could probably afford to take a little more risk than that. Broadly, I wouldn't be selling that IP but I would be looking to harness both the equity and cash flow to boost my situation. Unless you are looking to derisk, selling will just throw away some money for no real reason and essentially carry similar risk if you want to reinvest anyway. You can still do this and keep the property, which appears to be performing well! You can always sell at a later date if things get tight with your PPoR mortgage and that is likely the biggest 'threat' if you're planning to go down to one income. Just make sure you have a cash buffer so that if things do go south, you don't need to fire sale the IP and can take a bit of time to run a proper sales campaign. Liquidity, liquidity, liquidity is the name of the game when managing your risk on decisions like this. Having to make hasty decisions is where it can really go wrong. Keep this in mind...when looking back 20 years, how often do you hear retirees say "I really wish I'd kept that property/bought that property when I had the chance" compared to how often you hear them say "Geez I really wish I still didn't own that property I bought 20 years ago..." - Andrew
Just on this bit, dumping the equity onto the Owner Occ won't make that equity tax deductible so no benefit. I'd focus on paying down the non deductible debt, maybe debt recycle that Owner Occupied loan - seek specific advice around that.
Look forward, not back. Only sell if there are reasons you feel the IP won’t perform well in the future.
Why do you think the returns are average and what numbers would this or future investments needs to achieve to satisfy you? 7% CAGR, 3.3% gross yield on current val seems good to me. Feels like tax consequences are at the forefront of your mind
I would be tempted to sell to pay down the PPOR debt as its non deductible. You can then purchase investment property/s and build your portfolio.
Thanks for the replies. Some more info specifically addressing some posts is as follows: Yep, sounds like a plan. As above, putting the equity against my PPOR is a short term step until I find another IP and some other assets. Agree with your second sentence. Looking forward, I calculate that I pay $10,424 tax every year under the current scenario. If I had closer to 10% equity on the IP rather than 75% equity, the IP would have a net loss of $4,573 which would save me $2,058 per year in tax. Over 10 years (ignoring the reducing debt, interest rate changes and compounding interest on the saving), that is a difference of $124,820. I also believe that apartments in the area where this is located have already seen their best years for capital growth. To be honest, I haven't given either much thought. Google tells me I should aim for 4% yield and the bulk of the CAGR was achieved in the glory years in Sydney from 2013 to 2017. As above, I think the capital growth will slow in the area the apartment is located. ^^^ This is where I am at. Can anyone sense check my calculations that I used above. Current IP 90%+ debt loan amount $306,000 $1,100,000 income $41,714 $41,714 non interest expenses $7,859 $7,859 interest expense $10,690 $38,428 Net rent $23,165 -$4,573 Tax payable $10,424 -$2,058 Edit: I attached a file as the above does not display in table form
Thanks for the detailed reply, comments below: Yep, I'm ok with risk due to the equity and her maternity leave is unbelievable. I year off work will result in 6 weeks of lost income. I think this doesn't take into account the tax benefits of a restructure (sell then buy) to move the large debt away from the PPOR to the IP. I think this is what I plan on doing now. While we have a large buffer now, we plan on spending circa $200K on a renovation. While I have a family fallback safety net that could spot me short term, I don't want to have to ever use that card so a restructure to free up some of the $1.25m and have circa $1m in debt funded investments would free up some buffer and liquidity. I could always drop $800K on property and $200K in diversified shares to keep liquidity. True, but I am sure someone has also said, I'm glad I restricted my investments to reduce my tax liability!
Get some tax advice on that, you'll likely find this mixes the use of the loan and therefore the tax deductibiilty of it.
It does and it doesn't. I did consider this obviously as it's one thing people often get wrong, and it's great you're considering it. However, because money is so cheap at the moment, your large PPoR debt is a potential issue, but isn't necessarily an issue if you can afford to hold it and control a higher absolute value of asset base by using the positive cash flow from IP 1 to invest further. Given the direction the market is heading, I wouldn't be rushing out to completely restructure my base given the costs involved in doing so (sales and stamp) and the cost of money. It it highly possible that the growth you see might be greater than the tax benefits minus the transactional costs. You can always do this later if/when money gets more expensive. You should be targeting overall wealth and restructuring your investments that will give you the best potential for growth. The Australian market is heading north, no question about it so if you completely restructure for tax reasons now and pay costs along the way, to save X amount of tax, you have to ask yourself if that benefit will out weight the benefit of leaving things how they are for the shorter term and using cash flow to fund a larger portfolio. Generally, you shouldn't invest to save tax, it should simply be a consequence of holding. Wealth creation via capital growth is the engine, cash flow - assisted by tax savings - is the oil in the engine. It is very difficult to get the full picture on forum posts but in any case, it sounds like you're on the right track. You probably need someone to assess the viability of your asset base specifically (type of property, location, etc) and do the calculations on that. - Andrew
Update: Sold at auction over the weekend for $1.45m (well above my estimate of $1.2m - $1.25m in my OP). Thanks Covid. As a recap: - Bought in late 2008 for $600,000 - Put in about $75,000 in renovations - $22,000 stamp duty at time of purchase Therefore circa $753,000 profit in 12.5 years which I guess is about 10% return per year (there will be some capital gains tax to pay on the past two years). My gross yield was 2.86% rather than 3.3% which seems on the low side. I'm happy with the capital growth, and as mentioned before, I don't see huge capital growth potential in future years (I'm sure this has been said before...) Once settlement happens, equity will shift to my PPOR, then I will be on the hunt for some property which I can structure with 100% debt. I'll see you all over in the "where to buy and investment property" thread!
Well done on the sale. My comment was going to be to consider eventual sale. We've just reconfigured two large blocks into three and built four townhouses. The capital gains tax on one of the big blocks would have been huge (purchased $156k, value before reconfiguration was $980k). Second block was purchased later, but gain on sale would have been $450k so tax would still have stung. By building four more IPs on the same block, we now have the ability to eventually spread future sales over six tax years. It cost a motza to do the build of course. But we now have much increased cashflow, bigger debt, but much more flexibility on eventual sale. Perhaps whatever you buy, keep this in mind. Two or three lower value properties can be sold over different tax years. One better quality IP will one day be sold in a single tax year and the tax will hurt.
