Bought First Home - Should We Move in or Rent It? Help Please

Lns77 on 21/11/2016 - 16:01
Last edited 21/11/2016 - 16:16

Dear Bargainers.. I need your sincere advice here. I've been struggling to take a decision.

I bought my first home off the plan last year in Western Sydney and it is now ready to move in. But my wife doesn't want to go to that suburb as because she doesn't want to change the school for my 10 year old son. She is advising to make it an investment property. If I do so, I will miss $15k first home owner's grant.

I want to know how much I can save at the end of the year via negative gearing & building depreciation if I make it an investment property so that I don't have to regret of missing the grant. Can anyone help me to take a decision?

property cost: $620,000
Bank Interest: $18600 p.a
Expected rental income: $26000 p.a
Strata/water/council: $4000 p.a
my family income: $150k p.a

Please let me know if you need any further information.

Thanks in advance.

Financial

Comments

  • che_97 on 21/11/2016 - 16:07
    +1

    You can sit down and do the math and find out how much each option will cost you. You will also have to consider non financial circumstances (like your son's schooling). Your "home" is where you want to make it.

    • che_97 on 21/11/2016 - 16:08

      Also, the property cost isn't as relevant to the calculation as the monthly mortgage repayment.

      • ns77 on 21/11/2016 - 16:19

        Thanks. Added the amount of interest I may pay for mortgage repayment. As you can see, the rental income is higher than the interest I pay. So only thing I'm hopeful about is building depreciation which may come around $12-13k for first year.

        • virhlpool on 21/11/2016 - 20:07

          That looks like interest only mortgage payment though. Is that why rental income is higher than loan payment?

  • boomramada on 21/11/2016 - 16:10
    +1

    You should talk to your accountant, he could estimate it. You also need amount of interest you pay on your investment loan.
    If you live there for year and rent it, you get to keep your 15K plus less in capital gain tax too :)

  • tomleonhart on 21/11/2016 - 16:21
    +9

    I'll state the dodgy option here.

    Can't one of you move in for 6 months ? Given bank interest is $18600 p.a. That's only $9300 you'd lose even if you leave the place empty for 6 months compared to the 15k grant. Or rent one room out for like $150/week and cover the cost.

    6 months later, you'd move out then rent the place out normally.

    But remember this option doesn't paint the whole picture as we don't know if you guys are renting and how much your rent is. Or you guys are living with parents.

    • garetz on 21/11/2016 - 16:44
      +1

      Why do you think this is dodgy ? If its legal and you can do it, then why not.

      • tomleonhart on 21/11/2016 - 16:46

        I think technically both of them have to live there :P

        • dasher86 on 21/11/2016 - 16:54

          depends who the name is under.
          and obviously renting a single room is consider board and lodgings.

        • virhlpool on 21/11/2016 - 20:11

          @dasher86:

          You mean renting only a single room for 6 months qualifies it as good as keeping it vacant for the reason you mentioned?

        • djkelly69 on 23/11/2016 - 21:20

          Only one of them needs to live there - see page 5 of the NSW FHOG application:

          "ensure at least one applicant will reside in the home as their principal place of residence for a continuous period of at least six months commencing within 12 months of completion…"

  • ramb9 on 21/11/2016 - 16:57
    +2

    Are you sure you want to rent your brand new property out to people who can potentially trash it?

    • mskeggs on 21/11/2016 - 17:52
      +1

      About a third of properties are lived in by renters. Seems it would be hard to have property investments if everyone thinks renters are trashers.

      • virhlpool on 21/11/2016 - 20:16
        +1

        It's hard to believe that many of them aren't though, sheer looking at a few 'always rented out' units that I have seen in Sydney. The same tenants move in their own home and keep it neat and clean. You will be surprised to see how living habits change all of a sudden. Of course not all tenants are same.

        • mskeggs on 21/11/2016 - 20:27

          Have you been a neglectful tenant?

        • virhlpool on 21/11/2016 - 21:10
          +1

          @mskeggs: I haven't but may be my kid has been when I wasn't around. Jokes apart, if that wasn't the case, the units at a decent rent (say $400-$500) wouldn't have been filthy/dirty and poorly maintained. I am not exaggerating but you can inspect 10 units in your suburb in this rent range and you will find that almost 7-8 aren't well kept, to the standard that you wouldn't want to live there as an owner but you don't care just because you are a tenant. I am not blaming anyone (owner or tenant) but unfortunately this is the plight of many houses because for tenant, it's a place for their temporary stay and for the owner it's a machine that generates return on investment.

  • brainactive on 21/11/2016 - 17:09
    +1

    Is your loan owner-occupied or investment? If you apply for a owner-occupied loan, can you live in it for 6 months, then maintain the same owner-occupied interest rate or does it revert back to investment loan rate after you rent it out?

    • mskeggs on 21/11/2016 - 17:52

      The bank doesn't know what you are doing.

      • brainactive on 21/11/2016 - 18:57

        So if the OP takes out a owner-occupied loan (which is considerably lower rate than investment) and rents it out for the duration of the entire loan, there is no penalty at all? This doesn't sound right, there must be some mechanism (perhaps a clause somewhere saying borrower must declare if circumstances change?) in place to prevent people from doing this as it will save borrowers a fair bit (and no one will take out investment loans).

        • mskeggs on 21/11/2016 - 20:26

          There may be a clause in the loan, but the bank doesn't know what you are doing, and have no practical way to find out (or, I argue, any particular motivation to do so).
          I have ended up renting out my primary residence twice without refinancing, and truth be told, neither time did it occur to me to advise my mortgagor.

        • tomleonhart on 21/11/2016 - 21:22

          The main reason why people apply for a mortgage as an investment loan is because lenders then factored in the rental income as part of their serviceability. If you have more than 1 mortgage, unless you are earning lots of money, you will need rental income to assist you with proving serviceability for the second mortgage.

          Without the rental income, many investors simply won't be able to borrow.

          Also don't forget, owner occupied and investor loan had practically the same rate up until last year.

        • brainactive on 21/11/2016 - 21:39

          @tomleonhart: Ok does that mean provided one passes the serviceability test, getting an owner occupied loan is the best way to go?

        • virhlpool on 21/11/2016 - 21:44

          @tomleonhart: Another reason could be - If you are claiming any benefit for the first investment property (if there's any offered by government), don't the state govts verify if the loan type is for investment property or owner-occupied one?

        • Thenarrator on 02/10/2017 - 17:27

          @virhlpool: Do they?

  • thechemist on 21/11/2016 - 20:34

    Before doing a calculation for you it would be good to know the split of the 150K income

  • thechemist on 21/11/2016 - 21:08
    +3

    Firstly I am based in Melbourne but tax laws are the same and sorry about the long reply

    I am using an assumption of even split of income at 75K each

    Rental 26,000 but after cost Net it works out to be two thirds there are cost e.g. strata, lease/management fees, empty between tenant. Net rental more likely to be $17,300 less 18,600 (assuming interest stay same or fixed rate). Depreciation more like $15,000 as I assume the build cost is 300K with 320K for land component (obviously depreciation gets less and less as the years pass)

    So tax loss of $17,300-$18,600-$15,000 = $16,300 and you guys are on 32.5% tax rate (assume you guys earn same amount and keeping it simple) that will be $5,300 benefit. $5,300 benefit of tax on Net cash loss of $1,300 ($17,300-18,600)so you will be net cash up $4,000

    As you can see property investment is all about capital gain so first thing I would do would be to move in so you can get the 6 year CGT exemption for renting out your primary residence (Best to check with accountant with what you need to do e.g. change electoral details and how long to live there for as some accountants say a few months is OK). Your loan payments will be tax deductible on the day the property becomes available so make sure you email the agent about your house being available a few days before interest payment date

    Other notes:
    1. You will still have to pay rent at your current place (obvious but not to be forgotten)
    2. Will your wife ever want to live there as if she never does then probably best to find something else she does (bit weird but it happens)

  • thechemist on 21/11/2016 - 21:32
    +1

    Bought First Home - Should We Move in or Rent It? But my wife doesn't want to go to that suburb. I think you have answered your own question but it I am sure it would make a great bachelor pad

  • Apothecary on 23/11/2016 - 13:33

    If it makes you feel any better the first home owners grant has been reduced to $10000

    • djkelly69 on 23/11/2016 - 21:13

      If he exchanged last year he is still entitled to the $15k grant.

  • lehatu on 23/11/2016 - 16:01

    Did some quick calculation and see that you'll get around 3k7 tax back and the property is negative gear so in total you're getting around 5k8 back each year or 110$/week

  • djkelly69 on 23/11/2016 - 21:24

    OP - I would assume you also claimed the stamp duty concession (First Home - New Home scheme). If you don't live in the property, this is another ~$6k you will have to pay/pay back.

    Also, extremely unlikely at this stage, but land tax could be a consideration in future depending on the land value associated with the unit and/or future purchases.

  • askme69 on 01/12/2016 - 19:24

    and this its what's gone wrong with Australia.

    When I was growing up, the only other property someone had was a holiday home.

  • mano45 on 08/12/2016 - 12:12

    Hi , I am an adviser. If you want to discuss more about this private message me. regards,
    Manny.

  • Dont Care on 02/10/2017 - 22:44

    you need to include the amount you are already wasting on rent in your calculation.

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