How does the property portfolio one day lead to dream PPoR?

I have recently been trying to flesh out a long-term strategy as I get closer to buying what I hope will be the first of many IPs. However, there's one thing that still stumps me; how will this said portfolio help me to buy the PPoR I will want to live in down the track? For reference, I am 20 years old and so have time on my side, but the sort of property I look at now as my dream is in a nice suburb and probably around 2.5M. If I rentvested for 15 - 20 years and then looked at buying that same property, it would be valued around 6-8M at least. If I have continued pulling out equity from previous IPs to buy more IPs, I will have limited equity free to buy a PPoR.

Does there come a point where rentvesting is not the best option because that affluent suburb with a house on a 550sqm will just compound out of reach even for investors? And so it's best to knuckle down and purchase?

Selling down the IPs and paying CGT doesn't seem very attractive - I thought maybe after say 10 years and 10 properties that I am best to stop pulling out equity to reinvest for 5 or so years and hope that in those years I have a few million dollars in usable equity to pull out so that I might have a 2M loan instead of 5M? However, I'm unclear on the tax part of that; if I pull out the equity of an IP for personal use (PPoR deposit), does that then make the debt non-deductible? My understanding is that the debt is considered deductible or not based on the purpose the equity is pulled out for, not what security is being used for the loan.

Would appreciate someone's thoughts / strats on this subject!

 

First thing first, ie ppor first if you can.

 

I thought rentvesting was always a more efficient investing strat? Having a loan (which I certainly wouldn't qualify for now even if I wanted to) on a 2M property would tank my borrowing capacity meaning I couldn't invest at all...

 

in my opinion, the days of rentvesting to get a better ppor are long gone. specially if you rentvest in comparible location. the high rents all over the place and servicibility cap/borrowing cap are basically a killer. the only exception here is if your future ppor is a far less expensive place, i.e. you rentvest and live in sydney, but future ppor will be in adelaide/hobart (today environment).

the most proper way to "climb" the ladder is buy ppor straight away, add value, and then either sell to buy better one, or refinance. you "waste" stamps/costs but you dont pay cgt. so if you buy well, u can gain 4-500k in a decade, instead of ~ 66% of it. basically. u also will very quickly run into servicibility cap, so property selection is very important and if goal is getting your dream ppor then no point having 3-4 IPs first, u wouldnt be able to borrow.

good luck!!!

 

Thank you for the input - Yes, this has been what I have seen so many others do, continue to buy their way into the place they eventually want to live. So here is the prediciment, it seems "rentvesting" and buying a property portfolio will eventually give passive income, I'm sure if I start now and retire in 40 years, I'll easily have 200k before tax passivley. Or, I buy a PPoR and value add, sell and buy better till I live in my dream home, only that won't pay me a cent, it will be a dead asset that makes no yield but worth big bucks. I.E. cashflow or dream home. Yes, I suppose in option two I could start to invest later down the track, but big opportunity cost loss. Tough descions!!!

 

In my opinion cash flow is important after you have stopped working, whereas while young it's best to build wealth. You could buy a whole bunch of dud apartments in the middle of nowhere very cheaply, positively geared and excellent cashflow or just high yielding small rural homes with little prospect of growth. But these won't build your wealth base. Sure a house with high land value in a sought after capital city location may have poor yield forever, but that doesn't mean the rent won't increase significantly as the value of the house shoots up, which also adds to your borrowing capacity. And then when you choose to stop working you could buy a whole swagger of low growth high cash flow properties. I have a few friends who bought a unit in Parramatta who wished they'd bought a house, despite the cashflow. That first ppor can set you up where the cgt free wealth builds and follows you through life whether you keep it til retirement or sell and buy another ppor.

 

u comparing apples to oranges though - if you get ppor and upgrade and upgrade, you arent loosing opportunity cost. your ppor is your biggest investment. it will compound just as your other IPs. and if u do it correctly, u end up with low LVR (because u would add value). 5x properties of 500k vs single property of 2.5M.... consider also buying/selling costs etc.
property isnt great vehicle for cashflow. u need to build wealth with property and transition to better cf investments, but u can only do that if your ppor is paid off, since rent is a big kicker.

 

As far as I know cash flow is the only way to build wealth, even rich people need cashflow to further build wealth. You wont go broke making profit. Rents do compress if you get high growth. You still need income to access CG and leverage. It is leverage which builds wealth, The biggest benefit of houses is the depreciation you can claim and tax deductions which reduce tax . Most PPoR's wont give you tax deductions but some can, you may need to earn 800k to buy a 500k house this is the reason you dont pay CGT you have already been slugged, CGT on an investment can be nil and probably only about 8% if you use concessions and deductions available. There are high cash flow rural properties that have way surpassed Sydney in Growth ,one place I suggested 3 years ago Lake Boga has doubled in price just since then, and like 10x in about 15 years. Cash flow is important before you stop "working" because that is the time to build assetts if you understood compounding you would know that, debt compounds too.

 

As with shares or rentvest, I have known no ones reaching 10mil net in my circles and around, but many just from ppor, properties and hardworking in their careers. So cashflow is from your jobs, and net build from ppor and properties and then retirement to cip.
Each to their own, but our children are also interested in properties but they started in sol and btc, not shares.

 

One 2.5 m property may not give you much cash flow, but 5x 500k could give you regular large chunks of cash, you could sell down at opportune times, maintain cash flow with rental increases, take out chunks of cash double it again by investing in companies, if you manage to spend it all sell down again. You can do this by tranferring the loan security to remaining property or paying down loan from returns from capital from previous sale.

 

Very few people buy their “dream” home as their first property. A $2m property is generally not considered for first home buyers.

Buy the best PPOR you can comfortably afford as soon as you can - get on the ladder. Preferably get something in a good location but a bit run down, you can add value with repairs and renovations while living there. Rent out a spare bedroom (or two) if you want.

Then in 4-5 years you can sell and upgrade.

 

I like this idea the best and it’s what I would consider.
Pretty hard to buy a 2M PPOR first up.

 

That's true, but you only need to buy into an inflated market. If your PPoR has appreciated, so has every other house in the area...

 

Yes of course a 2M wouldn't be a first home, I could never dream of servicing that. I understand leveraging off the tax free PPoR and upgrading. So then, in this scenario, when if ever would you begin to property invest? After say 15-20 if I have bought and sold PPoRs until I had the one I'm happy to live life out in, would you then begin borrowing against what equity exists in the property to property invest? This seems feasible to me, only that most people look back wishing they'd invested and seems counterintuitive to wait all those years to secure PPoR and then invest...

 

Dream PPOR needs cashflow and ability to buy high priced resi in a competitive environment with preapproval and latent equity to tap on short notice.

medicos, business owners and people with large CRE portfolios . What you don’t want to be is a PAYG earner with lots of non deductible debt or debt attached to low yielding assets

 

Makes a lot of sense - Nobody is buying 6M in Kew or 9M in Albert Park with a loan from their job income, they're likely investors or making lots from business. For reference, this is the sort of property I look at as ideal, by no means a mansion, but still very nice.

 

Yeah..have a large IP portfolio c/o the good ol' days but starting now, I would:

1. buy a PPOR - the best you can afford in a location you like, which could act as a downsizer
2. use equity in 1. and upgrade to a better/bigger house (if you need to)
3. debt recycle 1. and 2. into blue chip shares/ETFs
4. max out your Super every year
5. any spare cash once 1, 2, and 3 are taken care of, plough more money into shares/ETFs