Would You Rather Own One Big Property or Have One to Live in and One Investment?

RobotWizard on 02/02/2022 - 02:55

Hi Ladies and Gents,

I currently own a place in Canberra but planning to move interstate(Melb). Now I have options to either rent out this property(tax benefits) or sell it and buy a dream house that I always wanted in Melb.

Property value in current market for the one I own would be roughly $850k-$900k and I owe $450k to bank.

That will leave me with approx $400k-$420k in bank after agent and conveyer fees etc.

I need a bigger place due to family expanding in near future but the ones I really like are anywhere between $1.1M-$1.3M however this can only be achieved if I sell my current property and put some of me savings towards this property.

Otherwise I can buy something around $800k and upgrade it in future if needed.

What would you do in this situation? I understand I might get some hate for this but we all have different preference on how we like to live so please take it easy :)

Financial

Comments

  • screensaver on 02/02/2022 - 03:09
    +13

    I think its better to have one to live in and one to rent out.

    • Drakesy on 02/02/2022 - 12:09

      Australia's property market in a nutshell.

      First step is getting the one to live in for many.

    • dasher86 on 02/02/2022 - 14:21
      +2

      the great Australian dream.
      Not only to own your own house but someone else's too.

  • Hybroid on 02/02/2022 - 03:25
    +5

    I would rather own a large property to live in and keep it as an asset. The hassle & risk of buying a second one to rent it out isn't worthwhile to me personally as I have a decent paying salary job.

    Others may want to buy multiple smaller properties and try to get the rent to cover the mortgage which would make sense.

    • Quantumcat on 02/02/2022 - 06:40

      What if he already owns the investment property and has to buy one property either way

      • Hybroid on 02/02/2022 - 06:42

        Sell it while market is up and buy the dream home asset.

        • Quantumcat on 02/02/2022 - 06:45
          +4

          He is buying in the same market so not achieving anything just because the market was up. To benefit he would have to sell and then live in a caravan for a while until the market dipped (if it ever does). And he's also intending to buy a more expensive house than he currently has so the inflated market will hurt more that way

          • Hybroid on 02/02/2022 - 06:52
            +1

            @Quantumcat: It's a long term asset instead of an investment to flip quick time. So in 10 years time or more, today's market condition won't matter much. House prices aren't going to plummet. Only increase over time.

            • Quantumcat on 02/02/2022 - 06:56

              @Hybroid: Yeah that's what I thought - the market being up now doesn't influence things. You don't think it is better to have two properties than one bigger one?

              • Hybroid on 02/02/2022 - 07:02
                +1

                @Quantumcat: Depends on your end goal. I personally would prefer to buy a $1.5m dream home than split it across two smaller properties.

            • RobotWizard on 02/02/2022 - 08:06

              @Hybroid: Hybroid is correct, if I do purchase a big property there is no way I’ll be selling it anytime soon, also compare to $1.2-1.3M houses I am looking at around outer Melb similar properties would easily sell for $2.5M plus in CBR atm, now sure why market there is so crazy.

              • Quantumcat on 02/02/2022 - 21:25

                @RobotWizard: Market is high in Canberra as it is a nice place to live with good schools, good jobs, high salaries, and little to no commuting.

    • Gotchas on 03/02/2022 - 06:28

      Such bad advice

      • Hybroid on 03/02/2022 - 06:31

        It's not advice. It's personal preference which is what OP asked.

  • garetz on 02/02/2022 - 03:40
    +3

    If interest rates go up you will regret not selling.

    • rektrading on 02/02/2022 - 05:17
      -1

      A +0.25% increase is nothing.

  • rektrading on 02/02/2022 - 05:14
    +2

    I prefer to rent where I want to live and invest in other markets.

    This allows me to change the view when I get bored walking down the same streets.

  • morse on 02/02/2022 - 05:16
    +3

    Best to upsize when market is low and downsize when market is high. That said, who knows if/when the property bubble will really burst or if it will even go down. Surely rising interest rates will have some effect, perhaps not enough though.

    Another factor to consider is how definite you are that you’ll be staying in Melbourne long term. Also if you know which suburbs you’d like to live in. If you’re not sure, probably best to rent for 6-12months.

  • Quantumcat on 02/02/2022 - 06:44
    +2

    I would rather have more houses, the more you have the more you are protected against either dips in one city but not another, or bad tenants (at least you have other places) etc.

    But of course it depends if there is anything you could afford without selling your old place that would meet the requirements of your family. If you can't find anything suitable at all then you might not have a choice.

    Another small factor that may influence your decision is buying a new house anf selling the old one at the same time is a bit stressful - paying two mortgages for a period of time, trying to find a new house quickly to avoid paying more interest than you have to but also being wary of settling for something that's not good enough and having to coordinate moving with the two settlement dates. If you keep the old one you can move at your leisure and then let real estate agents take care of renting it out.

    • pyramid on 02/02/2022 - 07:40
      +1

      But also depends on how big mortgage op can serve…with current outstanding of $400k + $800k(assuming he buys $1mil property with 20,% deposit ). He needs to service $1.4mil loan…plus additional $65-70k for stamp duty etc…

  • MS Paint on 02/02/2022 - 07:19
    +3

    If you can afford to do it and remain financially comfortable then go for it.

    Don't do it for the flex or to be a slave to a huge mortgage.

  • 87percent on 02/02/2022 - 07:21
    +1

    Where are you planning on living in Melbourne?

    • RobotWizard on 02/02/2022 - 08:09

      So far I’ve been looking at northern suburbs with new houses Craigeburn, Mickleham

      • 87percent on 02/02/2022 - 08:30

        Damn, houses out that way are $1.1-1.3m?!

        • pyramid on 02/02/2022 - 08:46
          +1

          Can't be true unless op is looking to buy palace…

          • RobotWizard on 02/02/2022 - 09:30

            @pyramid: Seen the prices recently? 400-500sqm lands are selling for 400-500K

  • capslock on 02/02/2022 - 07:23
    +5

    If I could go back in time I would have bought one larger property instead of two smaller ones. The larger property would have since gone up in value much much more than the two smaller ones. Oh well you live and learn.

  • skid on 02/02/2022 - 08:06
    +1

    No expert, but I avoid the costs of selling as you've pointed out (agent and conveyancer fees).

    Like Quantumcat said above, multiple locations (especially interstate) spreads the risk a little.

    I think your best option is the 800k + upgrade down the track option. Who says your dream house won't turn out to be $2.0M when you start hunting?

  • renster72 on 02/02/2022 - 08:10
    +2

    Buy the Dream house, use the equity to get an investment property….

    • Quantumcat on 02/02/2022 - 10:03

      May as well keep the existing house as an investment then and not incur real estate fees and stamp duty

      • renster72 on 02/02/2022 - 10:20
        +1

        depends how much you owe on it. if selling to use the money as a deposit on the new one.. you want as much equity in the place you live not the investment property. can Negative gear the interest portion of the investment mortgage. Depreciation Schedule on a new build or a fairly new investment property is good too all depends if OP has a tax problem or not..

  • Jimothy Wongingtons on 02/02/2022 - 08:19
    +4

    All I have is no property and 2 money :(

  • cashless on 02/02/2022 - 08:22
    +2

    I'd much rather have a caravan in the hills than a mansion in the slums

  • bemybubble on 02/02/2022 - 08:30
    +2

    One big property for sure. Don't forget you invest to provide for quality of life. No point having an investment property if you haven't got your own home sorted.

    Don't forget the most important thing too - you're own home will forever be your greatest asset (and will continue to grow too!) :)

  • JIMB0 on 02/02/2022 - 08:53
    +5

    Get the one big house, any capital gains when selling will be tax free.

    • Shazam82 on 02/02/2022 - 10:16
      +1

      This 100%. Some advice that was given to me a few years back was that the best investment is the house you live in due to the CGT tax rules. Also a larger property is more unique it will likely out perform two smaller properties - simple supply and demand.

      You can always buy shares with any surplus money.

      Ignoring the $$$, if a bigger house brings more happiness due to your family expanding - the answer is obvious. Good luck and well done on setting yourself up.

  • TheBilly on 02/02/2022 - 09:11
    +2

    This is such a personal question that only you can answer.

    I personally purchase smaller and cheaper properties but have multiple as I want the multiple income streams for later in life. I don't go hard on the negative gearing. Just find places where the rent and mortgage are neutral. My model works for me because I don't ever intend to sell a property as everything I have can be held long term as it is new, it can be renovated on the cheap as it has a good base or it can developed due to generous block sizes or growth areas. However if I was to get into the game of buying and selling my model just does not work too well as I am kind of stuck to this method due to the taxes associated with exiting.

    On that same token I have seen people successfully do the one house model and they constantly upgrade to bigger and better. For example; starting in the outer suburbs on a cheap property then selling when they make equity then buying in a better suburb or a bigger house and this goes on and on over the years until they are in a $3m - $5m house over the course of that time. In some ways this is better as you don't pay the tax on the property you live in and you are also gaining wealth.

    • Quantumcat on 02/02/2022 - 09:39

      Good point about avoiding taxes when exiting by holding only a PPOR. It would be interesting to do the maths and see if the positive return on the properties you hold onto outweigh the capital gains tax + agent fees etc or not. I would assume they would. Then you have to decide if the net gain is worth always just living in a regular house and not getting progressively more mansion-like. If they don't - then the single PPOR must be the best way to go.

      • TheBilly on 02/02/2022 - 10:00
        +1

        It would be very interesting to know, I personally have never done the maths on it.

        Also I've only been exposed to instances where the houses got more mansion like as they are the most visible examples, it could be that if a person stays in a similarly sized house it is also successful but not really talked about or visible. For me if it was financially worthwhile the end result of being in a single mansion won't suit my retirement plan of being a grey nomad, I would have to sell that mansion to then purchase multiple income streams anyway so better to start that way. Having multiple income streams just spreads risk and feels safer. Where as being tied into one single mansion just seems too exposed to me.

  • RM on 02/02/2022 - 09:13
    +1

    Depends what stage of life you are at and if you want to build assets all your life or enjoy some of it while building some asset (from PPOR). We have friends who have decided either way - nothing wrong with both ways.

    With living in a modest one and renting out another, you will make some more money long term and you will pay off the investment property sooner (from the rent). But the drawbacks are Captial gains tax on the investment property plus the management of the property.

    if you put all in your dream home, you enjoy and treat yourself while you work hard for it. Live your own life…

  • Ocker on 02/02/2022 - 09:21
    +1

    OP needs to check out whether or not there would be tax benefits in renting out the current property.
    It is my understanding interest on the outstanding loan would not be claimable as a deduction against the renal income.
    Reason being the original loan as not taken out for investment purposes.

  • p1 ama on 02/02/2022 - 09:27
    +1

    Look at the pros and cons:

    Pros of having one large live-in property:

    • Do not pay any capital gains tax on sale (this is huge)
    • Savings of transaction costs (e.g. only have to pay conveyancing, agent fees…etc. once)
    • Lower mortgage rates on live-in vs. investment
    • You get to live in a bigger place

    Pros of having one smaller live-in + one investment:

    • You earn rental income
    • You get tax benefits - e.g. can pay for certain things pre-tax, depreciate capital improvements…etc.
    • Diversification - you can have a stake in different states / markets
    • More liquidity - you can sell your investment if you need cash or a better opportunity arises

    I'm sure there are others - at the end of the day, I think what it comes down to is whether you would prefer living in a larger place or earning rental income. FWIW, it also depends on your investment goals. If it is to continue to upgrade to a bigger place or a better location, then not having to pay CGT is a huge difference. Even with the 50% CGT discount, it's still a huge tax event and you can expect to pay probably ~25% or so of your gain in taxes.

    Basically my advice (as an ex-finance professional, but not financial advice) is that if you want something that is straightforward, will not cost you a lot of time, and offers you few additional benefits beyond the returns, then go with one big property. It's when you want to get into the nitty gritty of what you can do with investment properties that you should consider doing the other strategy - but if you're not depreciating your capital improvements, expensing certain ongoing work to the property, other tax benefits…etc. you will essentially never be better off with the large CGT you'll have to pay upon sale.

    • capslock on 02/02/2022 - 09:39
      +2

      Houses in Sydney have gone up $1,100 per day in the past year. Makes rental income and tax deductions look like loose change in comparison.

  • GG57 on 02/02/2022 - 09:54
    +2

    A lot of the focus in this is around the financial aspects, and I can understand that. In my view, there is more to life beyond $.

    If it were me, I would sell the existing property with a view to buying a PPOR in Melb.
    If not familiar with Melb, renting for 6 - 12 months is a good idea, if you can find one.

    The benefits would be less complexity in OP's life at a time when they are looking to grow the family, settle into a new location, perhaps new job(s), etc.

  • Third_Gear on 02/02/2022 - 09:57
    +1

    We were in a similar position as this not long ago. We chose to own the one large property and bought acreage an hour N of Melbourne. Owning the single property was the best decision ever from an investment and life perspective. Our property value has easily doubled dwarfing any possible gains we had in our previous properties. We aren’t motivated by money and prefer to live a comfortable and happy life now as opposed to worrying too much about the future.

  • Richmond Tigers on 02/02/2022 - 10:06
    +1

    I think in Melb you should just go large property. If it were brissy I'd go for a house (in brissy) and a unit on the Goldy.

    • cashless on 02/02/2022 - 10:49
      +4

      If OP was moving to Sydney I'd say go all in and buy one small property, but even that might be a stretch

  • Ghost47 on 02/02/2022 - 11:00
    +2

    Factoring in climate change I think owning one house would be enough of a headache.

  • singlemalt72 on 02/02/2022 - 11:05
    +1

    Depends on your situation, with 6 people under one roof, I have opted for a large property for the peace of mind and comfort when I am home - lived for years in a small 3BR house and I was always tense when I was at home due to lack of space, clutter.

  • Stewardo on 02/02/2022 - 11:17

    Buy two rentals and rent a house to live in yourself.

  • ihbh on 02/02/2022 - 11:25

    Depends on your objective and financial circumstances. If you are financially comfortable, get a nice house in a good location to live in. If you aren't financially comfortable, compromise and get two lesser ones, one to live in and one to rent.

    E.g. there's not much point living in a crap house in a crap area until you're 70 to give your kids a big inheritance.

  • websterp on 02/02/2022 - 11:35

    Sell your property and buy Bitcoin now. Rent till it reaches 100k and cash out and buy two dream properties outright.

    Edit: Don't!

    • jv on 02/02/2022 - 12:33

      Sell your property and buy Bitcoin now.

      LOL… or just bet it on the horses…

  • JimB on 02/02/2022 - 12:32

    Unless you can be certain Canberra will consistently outperform Melbourne, I'd buy a larger house now and then sell existing property.

    Tax free capital gains.

    Plus, in future if you ever buy an investment property, you can borrow 100% on the property and it will be 100% tax deductible.

    If you keep existing property, only $450k loan of $900k property is tax deductible.

  • jv on 02/02/2022 - 12:32

    Would You Rather Own One Big Property or Have One to Live in and One Investment?

    All three…

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