Buying 2nd Property - Insight Wanted

[Deactivated] on 11/11/2016 - 09:52
Last edited 11/11/2016 - 10:27 by 1 other user

Hi guys,
I know this is a bargain website but there are lots of smart people on here AND i'm just after some opinions (i understand this is not a financial planning forum haha).

I currently live in a property which my wife and I purchased for $470k 2 years ago, we still owe $380k on it. We have $150k+ saved in an offset.

We want to start a family eventually, but need a bigger home in a more central location. This house we currently live in was purchased with the intention of renting out long term to pay itself off.

My question is, if i want to buy another home for say $1M, can i keep this current house, rent it out and move into my new purchased home? Will the bank see my equity and savings and be happy to lend me $800k or should i sell my current property (valued at around $600k), pay off my $380k debt, consolidate all debt into my new home and then happy days ever after?

If so, what are the tax implications like negative gearing etc if i keep the current property and borrow for another?

Thoughts? What would you do?

Also, can anyone recommend any good financial advisors?

Cheers peeps

Poll Options

  • 32
    Rent out current home and borrow for new one
  • 1
    sell current home and consolidate
Financial

Comments

  • cypher67 on 11/11/2016 - 10:12
    +3

    You really need to be talking to a financial adviser, way too many variables in play like your current income, spending habits, liability etc. Boils down to what you can afford and your risk appetite.

    • [Deactivated] on 11/11/2016 - 10:14
      +1

      Yeah i thought as much. The general vibe is to never sell though right??

  • lehatu on 11/11/2016 - 10:45

    Hi, i'm an investment consultant.
    I do need a lot more information to say but with what you gave here what i think:
    You have around 150k of "accessible" equity from the current house, combine with 150k cash you having now, you can either get an LVR 90% using the equity alone or 80% plus the saving and i do think the bank will be fine lending you more (need your income + assets to say this)
    Feel free to send me a mess.

  • Looking4Bargians on 11/11/2016 - 11:05
    +1

    I am in same situation mate. Will be Renting out current home and borrow for new one

  • geoffs87 on 11/11/2016 - 11:26
    +2

    First off - congrats - awesome achievement saving up enough for a second property!

    I did this about 18 months ago, and have just helped another friend through it.

    Its likely the rental income will support some of your new property.

    Ask yourself:
    1. is the interest saved off the (600-380 = ) 220k greater than the rental income (less interest and outgoing expenses) and any relevant tax benefits from keeping the equity in the investment property.

    1. Will rental income likely rise, will interest expenses rise, will property values rise/fall etc. I prefer to have 1.6m rising at 5% per year, than $1m… think about leverage, but also think about your own risk acceptance.

    2. will your income rise in the future, to which you will wish you held onto the investment property, to save having to drop another 25k or more on stamp duty etc when you go to buy your next investment (and also wishing you didnt spend 20k on agents/advertising from the sale of your 1st property),

    The bank will most likely loan you the mil for the new property, using your cash and equity combined (given your circumstances are permitting). Why not give it a run, and if you find it tough, or need cash/tenancy issues or just don't want to be a landlord… you can sell at anytime in the future, no need to rush into selling now if the bank will give you the mil.

    Of course, all of this is mentioned without taking into account your personal circumstances, and professional advice should be sought before making any decisions (for which i am not a professional, just an interested spectator:) )

  • [Deactivated] on 11/11/2016 - 11:31
    +1

    this is great advice guys. What would I do without you?
    Yeah i'm going to aim to keep this property and buy another in around 12 months time - its a no brainer by the sounds of it.

    My question is - with my current cash and with keeping the property in mind, should i be trying to build up my offset/savings balance right now until the next stage or should i be trying to smash out the $380k debt?

    I think leaving the $380k as it is and let the rental income pay that off for me would be best, try build my offset balance to $200k+

    • lehatu on 11/11/2016 - 11:45

      Don't think about offset or the debt too much, they are the same but not the same. But putting money into the offset pay off, why?

      1. Putting money into the offset account OFFSET the money in the mortgage, so you pay less interest anyway, plus, you can take it out anytime
      2. Paying more debt than your normal payment normally incur a cost (depend on the bank) which i am highly against it.

      So just putting money into the offset, so you pay less interest, build up your equity through time and build up the offset account then BAM, take it out whenever you need it to invest/buy more.

      • Sex on 11/11/2016 - 12:15
        +2

        Agree with lehatu. Keep the money in the offset because when you use your property an investment, the interest payments are tax deductible.

  • kati on 11/11/2016 - 11:59

    I would chat to a decent mortgage broker rather than a financial consultant.

  • Skramit on 11/11/2016 - 12:02
    +1

    You basically need to do some number crunching to work out a "total maximum amount of debt" you are comfortable to live with.

    That will dictate how much more you need to save (if any) before buying the new $1M property.

    Also factor in rental vacancy for a % of the year, factor in interest rate rises and the potential for losing your or partners income for a period of time when you start a family or lose a job :)

  • Trying2SaveABuck on 11/11/2016 - 12:13

    You need to either talk to a Financial adviser or put a lot more detail in your post ie current income of you and your partner when you intend on having children, current investments and liabilities etc

    only thing i can say is dont talk to a bank they will try sell you a bunch of junk. Get a independent adviser who gets paid by you and not commission for sales from 3rd party lenders.

  • JetLi on 11/11/2016 - 12:43

    It all depends on how much financial stress you can handle, I guess there's no harm in keeping it and renting it out for 12 months and seeing how it goes, you can always sell it in 12 months time if things become too difficult financially.

  • Steptoe on 11/11/2016 - 14:13

    Is your current loan Interest Only? Might be something to consider.

    Offset as much as you can against the undeductible debt of your PPOR.

    Just be careful about Cross Collateralisation when getting the new loan.

    http://propertyupdate.com.au/what-you-should-know-about-cros…

  • 5hri on 11/11/2016 - 19:24

    I would suggest to talk to a good mortgage broker to understand how the lending process would work. Banks will generally look at your 'loan serviceability' i.e. Ability to pay the repayments and savings to be able to pay the deposit.

    Financial adviser would more likely help with your investment strategy.

  • [Deactivated] on 11/11/2016 - 20:00

    Thanks ozbargain community. I will be doing all i can to keep this property and buy a 2nd PPOP to live in whilst generating rental income from this home.

    The challeneges will indeed be when my wife stops working to have children however having two properties long term will be worth any cash flow headaches in life.

    Thanks again, appreciate all of your insight :)

  • OzFrugie on 11/11/2016 - 20:33
    +2

    Kind of in similar but not quite the same situation.

    Planning to buy a 1M property but in 2-3 years time with 80pct LVR which will be rented out because otherwise the interest incurred from 800k loan is quite substantial and not deductible.

    The plan is build up the money in offset against current ppor then in 6 years time or so move to the property and hopefully would have some nice amount of cash say 300k and put it in the offset linked to the 1M property. Interest on 500k effective loan balance will be more manageable then 800k being non deductible assuming rate won't go up dramatically.

    So if u dont need to move to the 1M property straight away, you may want to rent it out first and build ur offset account so that the interest payment will be more manageable.

    But of course if ur comfortable with the interest payment incurred by 800k and being non deductible from the get go, then go for it

    • [Deactivated] on 12/11/2016 - 07:41

      This is a great strategy and one that does indeed concern me also. The thing is, we need a bigger house as we currently live in a small duplex far from the CBD (an hour drive).

      You are correct on the interest for the 1M property however thats the price i must pay if i want to have a second income one day once this property ($470k) is paid off…of which the $600 per week rental yield following the positive gearing will contribute to the 1M PPOP repayments…

  • SaberX on 11/11/2016 - 20:35
    -2

    Nobody but yourself can back where you think property will go i.e. your either witht he crew who thinks it will come back down to earth soon in the near future, or it will always eventually go up.

    But one thing is for certain, if your current properties circa 450k. I don't see it being great practice moving into a $1m home. Surely you could do a 500,600k home, and still have 400k less debt which you can either therefore pay less interest on, or get a 3rd (investment) property.

    It's abit of a sacrifice for not having your Mansion, but to me it makes more risk-reward sense. If you don't care and just want a big, poshy castle, go ahead. After all you can't put a price tag on it, but it does increase your chance of being in financial stress if, things go sour. Which, I assume your in eastern states, is a possibility - but then again I come from a more negative property view of the future.

  • Euphemistic on 12/11/2016 - 09:30
    +1

    I kept my first home when I bought our second. Problem with that was that I couldn't maximise the loan on the first home and reduce the loan on my second to maximise the tax benefits. I only had $130k owing on it while there was $200k on the second. I was paying more interest on the primary residence than the rental which meant paying more interest in after tax dollars and also meant that the rental was positively geared. In itself a positively geared property is a good thing, but when you are paying interest on a home loan it changes the equations.

  • WT on 12/11/2016 - 10:47

    Need option for "dont have kids"

  • HeWhoKnows on 12/11/2016 - 12:09

    This is definitely the WRONG place to get such advice.
    You are asking for tax advice, financial planning advice, loan/mortgage advice and asset/estate planning advice…OMG! Nobody here is qualified.
    You will be advised by "know-it-alls" do-gooders that know absolutely nothing in reality and you will hence get the wrong advice.
    Don't be a turkey.
    Go speak to your bank and your accountant if you want solid sound advice.
    In the end its really what you can afford.
    Its always good to hang onto property and build a property portfolio if you can afford it.
    Note: The rent you will receive will be taxable and generally all outgoings for that property will become tax deductions.
    See here: https://www.ato.gov.au/General/Property/Your-home/Renting-ou…
    Hence you will need 2 loans to separate the tax deductible interest from the home loan interest.
    As such you wont be able to combine your collateral into one loan - best to speak to your bank. They have wonderful ways of setting up loans these days to get around this issue.

    • Euphemistic on 13/11/2016 - 07:39
      +3

      As much as it is not the correct place to get correct advice, it is a good way to kick off the investigation. Start with some random opinions and you might just learn enough to ask the right question to the professionals. Sometimes a professional is too busy trying to upsell to you that they don't take into account your actual situation and if you ask them that one special question you get some real advice.

      Personally I think that most financial planners are insurance salesmen under a different title. An accountant is not someone a lot of people need to use and it's hard to get proper advice from a new accountant. The banks don't really provide financial advice, but tell you how much you can borrow based on your income and assets.

      • HeWhoKnows on 13/11/2016 - 13:52
        +1

        Yes and No.
        1st para agree 100%. Except you get lots of nonsense too so becomes incredibly confusing.
        Your 2nd para is very subjective and also somewhat incorrect.
        Only an accountant can provide you with the correct tax advice for your personal situation.
        Tax office is helpful for generic questions.
        Banks will advise how to best structure your loan in any given situation so best to talk to at least 2 of them.
        In this case our friend don't need to talk to a financial planner but if you have a good honest one they can steer you in the right direction. This is what our friend requires - direction

  • ROTJ on 13/11/2016 - 10:24
    +3

    DON'T smash down your current $380k loan. If this current property will one day be rented out, you will want to have as much debt as possible left on this property's loan….with the debt on your new $1m principal place of residence to be as low as possible. ie if you pay down the $380k loan to, say, $230k … that will be the level of debt you can claim tax deductible interest on in the future. It is a common mistake that people think they'll be able to re-draw/transfer balances between their old home loan and new home loan to try and get the loan higher on the property being rented out. Even though your mortgage broker may suggest it…for tax purposes: no can do.

    • HeWhoKnows on 13/11/2016 - 13:53

      Absolutely correct! Thank you for clarifying.

    • [Deactivated] on 16/11/2016 - 20:11

      Great advice. I was thinking about this - keep the debt and let someone else pay it off while increasing my offset on my new house. It all comes down to how much debt i feel comfortable with but at the end of the day, gotta have debt to make money eventually right…

      • geoffs87 on 09/12/2016 - 13:18

        this is my strategy. Pay interest only on both my investment and ppor - as one day the PPOR will likely become an investment. to maximise tax benefits, i don't pay principle off any property, keep it all in offset. I then use the offset cash as the equity for my next purchase.

  • mb5802002 on 13/11/2016 - 12:31

    I'm in the same situation as you are (actually your's is a bit better as my 2 BED unit stays on the same price for last 6 Years, don't know why). had this conversation with all OZ bargains community and they have gave me such a good advise. I believe you can get some idea from it too: https://www.ozbargain.com.au/node/271582#comment-4102047

    • [Deactivated] on 16/11/2016 - 20:22

      Thanks this is great. I'd be looking at deducting interest and whatever I get from the tax man i can put straight onto my PPOP big loan. Scary but financially a great decision (scary if tenants wreck the joint and need to fix things) but that's the risk in playing the game!

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