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buy a house or just invest in managed funds

Discussion in 'Investing Strategies' started by crc_error, 9th Jul, 2007.

  1. crc_error

    crc_error The Rule of 72

    1st May, 2007
    Melbourne, VIC
    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?
  2. tropic

    tropic Well-Known Member

    13th Sep, 2006
    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.
  3. Tzaki

    Tzaki Well-Known Member

    20th Sep, 2005
    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" :D

    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).
  4. crc_error

    crc_error The Rule of 72

    1st May, 2007
    Melbourne, VIC
    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)
  5. Mark Laszczuk

    Mark Laszczuk Well-Known Member

    16th Aug, 2005
    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.

  6. tailcat

    tailcat Well-Known Member

    18th Jun, 2007
    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.

  7. nitro-nige

    nitro-nige Well-Known Member

    8th Mar, 2007
    Reservoir, Melb
    Sorry for the hi-jack but what do you mean by debt recycling?
  8. Rod_WA

    Rod_WA Well-Known Member

    18th May, 2007
    Inglewood, WA
    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!
  9. dkmc

    dkmc Well-Known Member

    24th Aug, 2005
    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
    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?
  10. voigtstr

    voigtstr Well-Known Member

    24th Jan, 2007
    Are there no legs left in the resource boom?
  11. dkmc

    dkmc Well-Known Member

    24th Aug, 2005
    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
  12. bundy1964

    bundy1964 Well-Known Member

    22nd Dec, 2006
    Adelaide, SA
    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.
  13. Simon

    Simon Well-Known Member

    17th Sep, 2005
    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..