PPOR + 1st IP => next step?

Hi All,

first of all, there is some great advice on this forum! so thought I'd see what great ideas might help me..

My Situation:

1st IP

Mid-low $400's unit with 2 bed/ 2 bath/ 1 car owned it for about 3 years with about $40k equity... have good tenants paying $400 per week..it was my PPOR, got the FHOG years ago and the stamp duty exemption - lived in it then rented it out since, got a TDS which is good as the unit is only 5 years old. so been out of it for about 2 years...still only in my name on title... so for another 3 years if sold there would be no CGT payable on this property.

Current PPOR

Now living with my partner in one she bought, worth in the mid $400's 2bed/ 1bath/ 1 car also with about $40k equity...but no tax effectiveness as we both live in it...could do with a new bathroom and kitchen...earning potential of about $370-$380 per week

Our issue:

We are expecting our first child early in 2010..at this time, my partner will stop work and I will be the only income earner for our family...Our current unit is fine for a first child and will do a couple of years, but we would love a family home in about 3 years for the extra room.

What have others done or what would you do in this situation?? We would like to keep at least one of these if possible...

thanks in advance!!

Welcome level3

I'm no expert on structuring and tax effectiveness, plus a lot would depend on your joint LVR etc.

But all else being equal I'd aim to keep both properties if they are both good ones (maybe sell the current PPOR into your name and wear the stamp duty cost, in order to get all the funds deductible ... with the cash the bank gives you use it to pay for as much of the next PPOR as possible.) Alternatively sell it and buy something that is an equally good investment, fully geared, and again use the cash for the new PPOR.

A lot depends whether that's do-able for you guys, but with the new addition coming along it might be a good thing to get into a PPOR that suits your family situation. My gut feeling would be that buying a PPOR that suits a family would be more affordable now than it will be in a few years time.

Cheers
Carl

hi carl

thanks for the advice.. not sure if we can turn this latest property around so quickly.. plus have the selling expenses and stamp duty as well...

we are hoping that the capital gain on both properties is around $50k each in the next 3/4 years...

Level 3,
One strategy that can work if you want to continue the buy and hold strategy and build an IP portfolio, is rent out your partners property as an IP, obtaining tax effectiveness on the borrowings. You then rent for yourselves a larger place for a period of time, whether that be 3 years or even 5 years.

You need to balance or reconcile the financial with the emotional/security element of such a decision but if you are then renting for $400 a week, you will be the tax efectiveness of our loan on your existing property ahead.

Look at refinancing one or both of your properties just before your partner stops working and set up a LOC as a safety net if needed and possibly for your next IP. This is to maximise the amount you are able to borrow on lenders servicing calculators.

The loans would all be IO and if you used such a strategy, I would use an offset as well against one of the properties. You would normally use an offset only against a PPOR but if you no longer have one, then use it against the IP.

It depends on how quick you want to build your portfolio.
Good luck with the decision

so thanks all for your replies...

our little is due in early 2010... so we are keeping both our places -- keeping the IP rented out and staying in the 2nd property....

we are hoping to revalue both properties in late 2012 to see what they are worth by then.. paying more off our PPOR..

The next question is to fix or not to fix..we have considered fixing part of our PPOR loan for peace of mind until Sept 2012.. about the time we will revalue and way up our options..

what does everyone else think??

Hi Level

Fixing isn't a bad idea if you need to accurately manage your cashflow and don't want to get caught out if rates go beyond your buffer. Only you can decide what's right for you, but be aware with some PPOR loans that, should you fix, you can be limited in making extra repayments without penalty. Check with your lender first for any disadvantages if you're looking at fixing.

Hi Level3
Are you living on one wage now? that is putting all of your partners wage into one of the loans. If you are going to have to do it anyway I would start now as if she has already stopped work. So pay everything out of your wage and all of hers goes as extra payments on your PPOR. This will give you a nice buffer by the time bubs gets here and you will already be "in the groove" of living more frugally. rather than start when emotions are all messed up straight after birth!

Fixed is definitely a personal choice that is all about your personal cashflow and your sleep at night factor.

if things get tight you could always put your PPOR in IO or rent it out and go rent somewhere cheaper yourself.

Good luck with the baby....life changing experience

so now we have put all her salary to the offset account on the PPOR..

the investment property is now on the minimum repayments.. hoping to keep this up for the next couple of years.. looking towards late 2012 for a move to a bigger home..might have to look at what both properties are valued at then and perhaps sell one or both to purchase our family home