Purchase another and rent out ours or sell?

Hi,
This is a problem that is vexing my husband and I for some time.

We have a 3 bedroom home with $80K equity (valued at $370K), too small for our three kids. To renovate would cost about $120k to add a second storey as we have building restrictions to extend (water etc) and it would be overcapitalizing in or present area.

We love the area, but to purchase another home nearby would cost about $500-650K.

We have a side debt of $75K (personal loan) from a failed business.
My husband's yearly income is $78K net, mine is $31K net (wage earners-permanent).

Any advice would be great. Do we put up with our situation, sell or purchase another and rent ours (about $370/week)?

We had spoken to a certified accountant, but he seems intent on selling us finance and is gloomy about our prospects.

Thank you

Hi Lisa

Firstly, are you sure you'd be overcapitalizing? Though some homeowners are fearful of this, you must factor in the time that you intend to live in the area and what your needs are. Current value of your PPOR $370K plus extension $120K is still less than $500K, which you're citing as the price bracket ($500-650K) you'd need to upgrade to. I wouldn't consider this overcapitalizing.

Secondly, if you did move out and rent your current PPOR, it sounds as though the anticipated 5% yield could almost cover your repayments? Would renting or moving in with family/shared house situation enable you the opportunity to kick that personal debt in a year or two? I would be making the eradication of that debt a definite priority in your situation.

Lots of scenarios to consider and you really need to consider the merits of all of them, both financially and lifestyle-wise.

Thanks,

Yes that debt is a nuisance.

Where I live there is a lot of home units and businesses being constructed around us ( we live in Wollongong near the beach). People behind us are going up, but not on our street (loads of traffic, the streets behind us are more quiet).

We have looked at renting a larger house, and renting out opur home.
But there is the fear of leases being not renewed while we are renting, and wasted money on rent.

fan of buy an hold unless unlocking the equity in cash can make a better return

Lisa,
I would agree with Jacque, get rid of the personal debt as soon as possible.
If the house is too small and you have considerable debt on it already, consider turning it into an investment property and then rent yourselves.

You need to make sure (as best you can) that you are renting a long term investor property that you are not going to be kicked out of. You often can rent far cheaper than maintaining a mortgage on a PPOR and associated property costs. Even renting another property at $370 a week, you may be $2k to $4k ahead pa.

I would do the numbers to see what best suited you financially then consider the emotional content.
Good luck.
Greg

Thanks everyone for your sensible replies.

Because of the construction around us, the thought of investing more money into the property (and absorbing our debt) is daunting as we have noticed it is more busy and noisy here. It's hard to see what the area will be like once its all completed.

There have been properties up for lease from time to time near us; would renting and renting our home be wasted money?

James, what did you mean by your comment?
Thankyou

Hi Lisa,

This is my first post and I registered because your situation is very similar to ours. We are stuck in a small house and a growing family, but purchasing in our area is only possible by taking on a much bigger mortgage. We don't want to stay in our area forever, only until the eldest finishes primary school ...hence our reluctance to extend or buy another house in this area (we have already moved twice in the last 7 years into "dud" houses that have required massive renovation to make livable)

The rent PPOR and rent elsewhere looks promising. I used an investment calculator spreadsheet I found online and it says I'd pay $600pa more in tax but would have $4K pa income from rent after expenses. This would go some way to subsidising our rent, where we could rent a larger house, closer to school. This would put us $60pw week worse off overall, but emotionally we'd be in a better place...

Hope your situation works out. Msg me if you'd like the spreadsheet with the figures I used...

Cheers

Welcome to the forum.
I would be interested to look at the calculator to see how it compares to what I have put together.
If your tax will increase by renting, it implies that you have a low debt level on your home now. If that is the case, then you may consider whose name the home is in and whether it makes sense to transfer ownership to the lower income earner to reduce the marginal tax rate (I don't know SA stamp duty laws re transfer).

Have you considered the depreciation and building allowance (if any) aspects in your calculations?

At days end, it is about the financial numbers and the emotional aspect. As you know, there is significant lost costs by selling and moving, so if your existing PPOR will rent well and has capital growth prospects, why not keep it and rent somewhere that suits your family rather than take on an increased mortgage. If tax becomes an issue due to the existing small loan, consider refinancing and purchasing another IP to mitigate that.
Good luck
Greg

Thanks for the response Greg.

The spreadsheet is a 'locked' proprietary (found it on the web - need to look for an 'open' one) so it is hard to see what formulas it uses - but it does appear to account for depreciation. I have attached it if it helps.

The tax increase is ~$500 per year, which is not crippling... I could reduce this to $0 (break even) by transferring all but 1% of my share to my spouse. Our repayments are about $230pw now..

Overall it seems to be a neutral situation financially as long as we rent for no more than we get rent for our PPOR... The advantage is in 6 years time when the kids finish school, we can still sell our old PPOR without CGT. I just have to get used to the idea of renting, never having rented in my life. Not sure how the rent inspections are going to go with kids in the house!

Attached Files

rent-ppor-rent-elsewhere.xls (64.0 KB, 8 views)

When thinking about selling and purchasing a different property, a good way to get that in perspective is to imagine selling your house and buying the same house back again.

So you sell your house for $370k, and buy the identical house for $370k. But you're out of pocket $12k in stamp duty, $7500 in agents fees, $2k in legals, say $2k for moving, add a few more incidentals and you're at $25k.

So there's a lot of "frictional" costs in jumping from one residence to another. Put another way, you can save yourself $25k by not selling/buying -- imagine whacking that $25k off the top of your unproductive debt !

My advice would be to put up with the current situation for a couple of years. Slash your discretional expenditure (pizzas, pokies, smokes, new shoes, whatever you can that doesn't impact the kids too much) and get that $75k paid down as quickly as you can. Then renovation actually sounds like a pretty good option, particularly if you can put some sweat-equity into it yourselves.

The rent/rent option sounds attractive, but bear in mind agents fees, insurance, rates, advertising fees, repairs and periods when the property is not rented. These can be large and sometimes unexpected hits. For safety, reduce expected income by 25% and see if the figures still stack up.