Financial windfall - looking to invest

Hi, I sold a company recently and am looking to redeploy capital into some property.
I do not own my own home - moved back in with a family member as I was overseas for the last 4 years.

Complication: I cannot keep pace with the market or whats best for me right now. I greatly value liquidty, but I'm woeful of sitting on the fence and inaction.

Opportunity cost: I'm generating around 8-10% p.a. in passive income via wholesale level investments

Other considerations:
- my new Australian salary is high (assume $260K+ ex. super) and i'd like to make my salary more tax efficient, whether it be through negative gearing, concessional super, or otherwise.
- I don't need to pay stamp duty due to some professional certifications i have
- Right now the shared family lifestyle doesn't gel with me. Significant lifestyle setbacks are taken, particularly in comparison to my overseas lifestyle

Goal: long-term wealth, liquidity, and living in a home within a Sydney suburb (typical prices are around $1.9-$2.5M in the suburbs i'm looking)

Assuming ~$1.2M in available cash, which is a very fortunate position to be in, albeit i worked hard on my company, what would you more seasoned investors advise?

Opportunities I'm considering:
1. Investing in PPOR only
2. Rentvest - Invest in Resi
3. Invest in commercial (pretty much requiring all my capital)

Some sub strategies / considerations under each:
1. Investing in PPOR only
1a. Majority cash purchase, then redraw to invest in existing financial investments
2. Rentvest - Invest in Resi
2a. Rentvest - rent then invest in Resi or commercial

Residential strategies i'm keen to try more on the higher risk side:
a. Buy with majority finance, rennovate/ extend, and hold
b. Buy with majority cash, rennovate/extend, redraw, refinance...



Given all the above, i've been overwhelmed with the many decisions. Consequently, i've not made any decision.

I'd greatly appreciate any input from experienced investors or others who have had to make a similar decision.

Best

Hubert

 

You have to start somewhere.

Often the first decision is the hardest.

Given your strong financial position, I would first buy the PPOR (minimum reasonable deposit) you want and live there for long enough to establish your PPOR status. This has the great advantage of then being CGT free for another 6 years should you decide to move out.

You can then rentvest or invest elsewhere when you gain more confidence, knowing you have the security of a PPOR to return to if you want.

 

PPOR first

 

Buy a main residence borrowing as much as you can, and the debt recycle into other investings - my suggestion

 

The interesting thing is if the op borrows 1.5 and adds all the cash for a 2.5m pporw buy, they will have just the ppor. 120k repayments a year from maybe 180k a year net income. How much additional borrowing capacity might the op have?

oddly it might not as good a situation as, say, someone who kept upgrading ppor in sydney over the last 15 years and reaped the cap gains. Who might have a lower lvr and more borrowing capacity.

 

Thanks for the suggestions. Is PPOR on the basis the PPOR growth will outweigh growth of other investments? Just trying to test the recommendation

Would it not be better to simply rentvest then keep saving / investing or maybe go down the commercial path?

Why are these options less attractive?

 

PPOR is attractive because it's likely tax free when you sell to upgrade or retire, and it provides stability.

If you know how to do commercial well, sure that's great. But would still buy PPOR first. Commercial should be alternates to resi IP and shares, not to PPOR.

Have you considered what would have happened if, 10 years ago, you bought a house in Sydney and just did nothing but rent it out?

 

The worry I have is the opportunity cost. Since i'm in my early 30s, I don't need a big place. I'm eager to build wealth and learn / get experience in property development. I've owned an apartment before and it was a terrible decision, hence my apprehension.

Might be a bit gullible / risky, but i've always been blown away by the inner-city terrace or house rennovations that transform something from old and delapidated to modern and premium

 

No CGT exemption. Will be subject to land tax possibly. Hurts borrowing capacity long term

 

Great position to be able to put something together, I agree that you can get bogged down in the detail of having too many options.

I think the 1a strategy is the most simple / straightforward and lowest risk option. You can buy something with minimal gearing and have plenty of equity to leverage from day one and that could be a combination of residential property and the wholesale investments you are accustomed to.

The PPOR could be a low risk platform to look at the renovation/value added piece. However, unless you've done this before it can be a steep learning curve.

Have you sat with someone to run through the numbers of what is achievable given the numbers, and what you want the end point to look like?

 

BIAS.There is an echo chamber of bias confirmation here. People dont understand there is a world outside Sydney or oportunity cost. If you look at the last 10 years useing leverage to purchase RIP in Sydney had massive opportunity cost You would be lucky if are getting 6% gross YOC and after capitalizing cost would not have even doubled you assetts or have any surplus cash flow Where as my commercial which was also PPoR until 3 years, increased 400% and is giving a NET yeild on value 10 years ago of 17%. I also derived income in a way that gave me the active asset reduction and no tax to pay on it. There ia also no land tax to pay. I have sold down 3 times kept loan as I have oodles of equity bought some great companies originally growth had 1000 and 2000% growth on some, rebalanced into some dividend shares like @ 15% YOC. bought some RESI and leveraged again into shares resetting base cost.

 

While all your ideas seems great IMHO, ONLY YOU can make a decisions on:
1. What do you wish to achieve from your RE?
Here you need to be very specific in $ terms, or place to live, etc...
I wanted our RE to substitute our gross incomes of around $25K and $20K many, many, many years ago.... once we surpassed that we altered our RE investment strategy and started playing Monopoly in real life.
2. What RE investment strategy will you employ to achieve 1. above?
Once you decide on 1. above you can then strategize and perhaps read some of the investment success stories on what and how others have invested to achieve their goals?

 

Haven't done so just yet. I suppose a desktop research exercise could find me some people who have gone down that path, but i'd love to meet and learn from others who have done rennovations of the type i'm looking to do. I know some builders, but they haven't done these types of renos.

Thats partly why i'm here also hah

 

True true. But it does come with the benefit of negative gearing immediately if it is so, and i'm keen to reduce tax on my income. How does it hurt me long-term?

Are you saying I hit my borrowing celing quickly?

Another - I suppose the PPOR option kills two birds with one stone - no need for a rental + residential investment that i can add value to. The issue is that the areas i want to live in e.g., inner west / inner city suburbs are ****ing nuts in pricing and that does kill my immediate term passive income of ~9-10% p.a. somewhat

I need to understand more about debt recycling though. Is it possible to recycle debt if a portion of the property e.g. 20-50% is financed already?

There seems to be a bit, but that may be valid. I would greatly appreciate any links to any reliable data sources breaking down PPOR or perhaps speak with an expert here.....

 

Of course....

 

If you move in, establish it as the main residence and move out you can start claiming costs as soon as you are out of there.

Renting will hurt your borrowing capacity long term as rents increase each year, usually, while your payments on the main residence will be reducing over time.

You can debt recycle any debt that is non-deductible as long as there is redraw on the loan or you can refinance to one that you have redraw on.

 

Can you please elaborate on this? I've paid well over $100k in stamp duties and I had no idea there's a way around it.

 

1. Got it! Thank you - so long as its 3 months or more if i understand ATO rules correctly
2. Definitely - I think its a short-term (12-18 month) solution. I have been out of country for a while, so i had also intended to do it to test suburbs before i buy.
3. Very helpful, thank you - will keep this in mind with financing options

One other Q that i'm unsure of and would likely need paid advice on is what is the right amount of cash to put into a property, particularly if i'm looking to rennovate.

Ah sorry, long hours and i was brain fried. I meant LMI - so not a material saving, but a saving nontheless hah!

 

Probably as little as possible without incurring LMI

 

If I'm sensible, and I go after another IT contract gig, I'd be in a similar financial position to you. I'm thinking about a PPOR too, and I've been considering a few options.

Option One: Buy a property outright.

I was up in Sydney a fortnight ago, and I took a look around a townhouse or house in Glebe. It subsequently sold for just over $1.1 million. The trade-offs were that it was a strata property, and it didn't have parking. But it doesn't need any major work, maybe a bit of fresh paint to tidy it up.

It's probably not big enough to raise a family in, and you're at the sort of age where that's a possibility. But if you don't have kids, it'd probably be reasonably comfortable for the foreseeable future, and it wouldn't cost much.

Option Two: Take out a mortgage.

You could afford the house you want, assuming it's $2 to $2.5 million. Would that cover your needs for the foreseeable future, particularly if a family comes along? And how secure is your job? ($260K as an IT contractor is riskier than $260K as a manager in a large company, for example.)

If you borrowed $1.3 million, repayments would be around $8000 per month. Would you be comfortable with that?

The attraction I could see with this is that you would essentially sort housing for life, and not necessarily need to move again, which would save you a fortune in stamp duty. The downside is that you'll be paying an awful lot of money and carrying quite a bit of debt for what is likely a relatively small property.

If you want to renovate, my father is rebuilding a two-bedroom house in the UK to downsize into. His budget is circa $400K, but he's got contacts in the building trade and he's in a cheaper area than inner Sydney. I generally estimate around $500K for major work on a small place, and that would include new kitchen, bathrooms, and fitting a lot of insulation.