buy a house or just invest in managed funds

Just wondering what people here think is best to do.

I used to own property but sold it off a few years ago.

Currently I have all my money invested (and geared at 55%) in managed funds, shares, property, etc etc.

With house pricing going up and up and up, is it better to buy something now, which I can afford and rent it out (as I live at home now) with the view to live there in the next few years, or is it better to commit the same money into the managed funds and grow my assets that way. but that will mean I will either have to rent in the future as house prices will run away, or I will have to sell down a larger portion of my portifilo to buy a similar house today.

Currently I have about 110k of my money in the markets geared.

I would look at buying a $270,000 house, so would need $30k deposit, $15k costs, so $45-50k to buy the house, and then I would assume it would cost me $5000 per year negative gearing to keep. so essentially I would be putting 40% of my net worth into the house.

My original purpose for the managed funds was to reach $500,000, so I could invest it for income and replace a good portion of my income. I'm also commiting $1500 per month to it currently. But I would say in 7 years time when I would reach that goal, the same property wont be $270,000 but $450,000.

So I guess the end result will be I can buy a house cash! but will have nothing left for income

What are peoples thoughts?

 

Hi CRC,

It's a hard choice since we can't tell the future. I would go for a property and you can still -ve gear it since you live at home.
On the same time you still can have your manage fund just with lesser amount. More diversification, it's a better risk management I think.

 

I do both, my holdings in Navra pay for my property portfolio.. and leave me with some graveyto play with.... getting pressure from the missus to go look at Melbourne housing...

Having said that, my property holdings let me invest in the fund and has had consistant growth... hence the pressure from "she whom must be obeyed"

I don't think it realy matter what vehicle you use so long as you have your destination in mind when you set out, I use proerty for growth and Navra for income. You do need both eventually (growth and income).

 

When I had my property I was showing a loss of $10k per year, since Navra pays about 15% PA income, your telling me I need about $70k in Navra to balance out the mix? (or 50k with gearing)

 

Hi crc_error,

If it was me, I'd buy the house and use debt recycling to get rid of the non-deductible debt. You can have your cake and eat it too.

Mark

 

It all depends upon where you get the 70K from.... Remember if you take it out of equity, you need to allow for the interest repayments. 70-80K with 50% margin loan should give you sufficient free income after all interest repayments have been take care of.

Tailcat

 

Sorry for the hi-jack but what do you mean by debt recycling?

 

Debt recycling = use income from investments etc to pay off non-deductible debt as quickly as possible, and set up a line of credit etc against your PPOR, and invest that money instead.

This way, you convert non-deductible debt into deductible debt (very prudent from a tax perspective).

As you pay down the PPOR loan and it grows in value, the equity grows and is available to you as a LOC / equity loan.

By the way, in case you're wondering, a PPOR is a principle place of residence, and generally in this forum is assumed to be the property you own and live in (or the bank owns!!!), rather than the place you rent and live in.

Non-deductible debt? PPOR plus personal loans and credit cards (in reverse order of pay-off priority!).

One more thing, don't be ashamed of hijacking - it's one of the best ways that newer forum members come across older threads that have good stuff in them!

 

interesting question CRC_error
Are you living at home with parents? rent free??

or are you renting???

Something to think about
I'd use a 20% deposit and say 54k plus 15k costs
By doing that you avoid Lenders mortgage insurance which may be around 4-5k correct me if im wrong - which is a big saving on your capital

Id move in the house for a short period say 2months
Then move out and rent a similar house , or live at parents (I dont know your situation)
You can rent out the house and get deductions

That way you keep it CGT tax free if you move back in with 6 years - ask your account about the CGT 6yr rule

Check if you can pick up the FHOG - you have owned previous houses but check the fine print - at one stage if you owned them prior to when the GST came in, as IP, then you could still get the FHOG - probably cant get it now

so that leaves you roughly 45k in the stock market
but do you want it in the stockmarket- if you plan to pay off you house there will be no point as you timeframe is too short


In 3yrs when your property goes up - you can movein, extract the equity into shares at home loan rates not margin rates, - that portion of the loan will be tax deductable, - you could generate franked income from the shares
and use that to pay off the home loan

there are many options to the structure here

I dont know if you can follow my haphazard points



to distill it

what are your thoughts if you buy house now
put in 30% - 40% deposit (thats guaranteed return on your money - not hoping in 3yrs the shares are up) - we all know the stock market is at its peak. Who knows if it will keep going

40% deposit is 108k

like you said at 40% deposit - it will be neutrally geared if rented out
move in in 3yrs - and still be CGT free
by then its likely that the house may be worth at say 6% growth rate
376000
80% of that is 300k
take off your original loan of 162k=
138k available to extract and invest at tax deductable rates
that 138k could be put into a conservative portfolio
or something to ponder
navra funds - and margin it at 50% to get around 280 invested
If by then navra funds have proven themselves and are still getting 15% return - then you may get 7% income to cycle into your house
Not that i'd do that or recommend that

I think you will create more wealth with this strategy
again its due to higher and safer LVRs with property, and less downside
In the end you will have the best of both worlds and diversified so you wont miss a boom in the share or housing market

What do you think?

 

Are there no legs left in the resource boom?

 

who knows?
Logically we are in a great position
It doesnt look like we are out of keeping with earnings
BHPs a great stock and I hold some
I cant pick the top before it drops and dont try to speculate too much like betting my house on it

 

It's a bit like picking the top in the housing boom, many people said it was reached 3 years before it happened and missed many opertunities.

You can think the market has peaked, but only once it has become history you are proven right or wrong.

I do like the idea of owning a house and converting the debt into good debt along the way.

 

If you see property as a long term investment then there are no tops, just cycles which reach new highs.

long term to me is 20 years + and that is what I invest for these days. With age comes patience. 20 years ago I didn't even know if I would still e alive today let alone be mindful of a financial plan to take me through to retirement. I wish I had thought different..