$470,000 in Cash. Pros and Cons of My Two Options?

poiuy1234 on 20/03/2019 - 01:16

I have $470,000 in cash and have been dreaming of purchasing a ~$750,000 house in a great school zone and renting it out while I continue to live in a modest rented apartment. I planned to renovate the said house after 5 or 10 years and either selling or moving in depending on my circumstances at the time.

However, an opportunity has come up and I am able to build a brand new dwelling for around $500,000 in a not-so-great-area and one where I would not necessarily want to live in. I would rent the place our while continuing to live in my modest apartment. However, because of my savings, it would mean that in a few years time I would start incurring interest and therefore paying tax on the interest earned. I see this as a not so ideal situation.

The second option would save me money initially but will not appreciate in value as much as the first one would. Also, the second option would not provide me with a place I’d love to live in. And, for some reason renting a brand new home doesn’t sound like the smartest thing.

What do you all think? Am I overthinking this? What other benefits are there if I go with the second option? I must say that the main reason behind me considering option 2 is because I’ve struggled to find a house that suits my criteria.

I am in Adelaide, 36 and single.

Financial Investment

Comments

  • spackbace on 20/03/2019 - 01:27
    +5

    Buy villa/unit or something you can live in, closer to budget, in a nice area (for you) until you have a need for a house, if ever?

    Why pay rent, and have to deal with inspections, and the place not actually being 'yours' if you can avoid it? You have the chance to be rent/mortgage free!

    • poiuy1234 on 20/03/2019 - 01:46

      Thank you. I appreciate your feedback.
      In all honesty, I don’t mind renting. I travel a lot and am rarely home. I also have a housemate and don’t have to worry about declaring their share of rent/bills as income. I also don’t want the responsibilities that come with having a garden/backyard, right now.

  • jjjaar on 20/03/2019 - 01:34
    +14

    in a not-so-great-area

    You can never change the area of the house. You can always change how a shitty one looks in a great area. You know what you want to do.

    There are no benefits to the second option.

    Agree with spackbace, look for something you want to live in in an area you want to live.

    • poiuy1234 on 20/03/2019 - 01:43

      Thank you. You’re right. However, I’ve been sitting on my money and paying tax on the interest I’ve been earning while the house prices continue to rise. I’m finding the process of finding an ideal house extremely stressful to the point that I’ve given up on it and am worried I will never find it. If I decide to build, however, I will not have to do any searching and I will just trust my dad to find a property to demolish, and build two dwellings on. So basically, it’s an easy way out.

      • jjjaar on 20/03/2019 - 01:50
        +3

        I’ve known several people who have built and they have spent a lot more than initially quoted. And it was never easy.

        If your dad is the builder maybe that will go smoothly, but if you have to contract out it wouldn’t be as easy as you think.

        I think building is much harder than buying but I’m just going off what I’ve seen other people do and struggle with.

        • poiuy1234 on 20/03/2019 - 01:56

          Cheers for that. I have built before and while it is extremely stressful being an owner builder there are a lot of savings to be made. My dad is an experienced builder so I trust him. I am just unsure of what the best financial move for me would be once I start having to pay tax on the earned interest. I guess I could purchase another (cheap) investment property but I’d much prefer to have one amazing property over multiple not-so-ideal properties.

          • jiberz on 20/03/2019 - 08:02
            +5

            @poiuy1234: A house is a depreciating asset. Buy something in a place with the most potential growth of the land.

  • sahh on 20/03/2019 - 07:23

    Can you buy an apartment you want to live in first? You will still have a chunk of savings for a house in the future.

    Also the amount of tax you pay on the interest would be way less than the amount you currently pay in rent I’m guessing?

  • 4tran on 20/03/2019 - 08:42

    Maybe even buy a older house with a big land in a nice neighbourhood and down the track to either expand, demolish and build 2 or more dwellings. House prices are falling so it is becoming a buyer's market. There are many options

  • Ryanek on 20/03/2019 - 09:29

    Location, Location, Location.

  • dw121212 on 20/03/2019 - 09:42
    +1

    Now is not the time to buy, maybe in 12 months.

  • tabz on 20/03/2019 - 11:25
    +1

    I think you already know that the first option is better for your situation. These are the pro's of the first option vs the second one that you listed:

    First Option

    • Good School Zone
    • Greater potential to increase in value compared to the second option
    • You can see yourself living there

    Second Option

    • Cheaper

    In regards to this bit:

    I planned to renovate the said house after 5 or 10 years and either selling or moving in depending on my circumstances at the time.

    This is where things get a bit tricky. If you plan on eventually moving in AFTER having this as an investment property (IP), you will be hit with a partial Capital Gains Tax (CGT) if you ever decide to sell down the line. Here's something to consider: There is a 'six year rule' if this property is established as your main residence (MR) when you first purchase, meaning if you lease it out in the future, you are exempt from CGT if you sell within 6 years of renting it out.

    Here's what I would personally do. I'm no expert, and this is a discussion forum, so take this with a grain of salt:

    Purchase the ~$750,000 house from option 1 with a 20% deposit to avoid Lenders Mortgage Insurance, and with an Owner Occupier Loan (they tend to have a lower rate than Investment loans). Get an offset account (NOT a redraw facility), and put the remaining funds there. Don't put anything extra on top of your mortgage repayments, instead put it all in the offset. Live in the property as your MR for whatever the minimum requirements are to be exempt from CGT. After that, do whatever you want with it. This way, you're setting yourself up to more options down the line, whether you want to rent it out, sell it, or keep living in it.

    • deveshwar0 on 20/03/2019 - 13:00
      -2

      I don't think the 6 year rule is applicable anymore.
      I believe that the ATO wants the capital gain calculated proportionally to the purpose, so if you had the property as an investment half the time, then you pay CGT on half the capital gain.

      • poiuy1234 on 20/03/2019 - 21:42

        Wow. I did not know about this change. I will look into it djebter. Thanks again for the heads up!

      • drfuzzy on 21/03/2019 - 12:41
        +1

        This advice is wrong. Speak to an accountant.

    • poiuy1234 on 20/03/2019 - 21:42

      Thank you for summarising it all so well. What you’ve suggested is exactly what my dream and plan was. However, what I failed to mention in my original post is that finding the house in option 1 is affecting my mental health and well being and is the main reason why I’m even considering option 2. I know that not everyone will understand but that’s just where I’m coming from unfortunately.

  • Illian on 20/03/2019 - 13:24

    Follow your heart, you can't ever be happy just following your head. Done.

  • bigticket on 20/03/2019 - 13:37

    Have a look CGT. Your option will result in tens of thousands, if not more in tax when you sell.

    There is a 6 year exemption if you move into the residence for 6 months(I believe).
    I would seriously be looking at the tax implications, whatever you do.

  • elgrande on 20/03/2019 - 19:36
    +3

    Oh the challenges of house hunting with $470k!

  • horsome on 20/03/2019 - 22:06
    +2

    A $470k deposit on a house in Adelaide would give you many options. You must have very odd criteria or high expectations or both!

  • firestint on 20/03/2019 - 22:41

    Any reasons you haven't bought the $750k house yet? Having $470k sitting in bank is just not good given the extremely low interest rate we have today and you're probably better off investing the money a long time ago.

    I say go with option 1 if it's within your borrowing capacity, for (1) higher potential in capital appreciation (which is the main point of investment properties) and (2) better tax benefits compared to option 2.

  • iand on 20/03/2019 - 23:42

    I wouldn't buy/build a house for at least 6 months wait until after the election and see what Shortarse is going to do once elected remember he promised to make housing more affordable which I think is poly speak for make your house worth less if you own one and he has also said he's going to look at capital gains and negative gearing which will probably lower the prices again

  • [Deactivated] on 23/03/2019 - 07:07

    House prices bubble popping right now look around you. Australia feels like Ireland pre-GFC. If in Sydney just drive around Rhodes and North Ryde and Mascot. See how many lights are on at night?

    Spread the cash between multiple accounts as only $250k is government Guarantee on deposits. Use to be $1M.

    Banks will do a bail in, if defaults rises and your cash is at risk, ie they can and will take your cash to prop up their books and there is nothing you can do about it.

  • cashless on 26/03/2019 - 13:11

    Grandad gave me the three rules for buying property.
    Location, location and location

  • [Deactivated] on 04/04/2019 - 14:16
    +1

    when someone from a forum offers you 20% ROI risk free smells like Bernie Madoff anyone!
    Run Forest Run.

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