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Choice A or B...what would you do?

Discussion in 'General Investing Discussion' started by Mavoz, 13th May, 2018.

  1. Mavoz

    Mavoz Member

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    Hi, First time poster..thanks for taking time to read...would greatly value your thoughts!

    We are facing a big decision in our family.

    Scenario:

    We live in the country and own our home (only 16K mortgage to go)

    We also own a house in outer Melbourne...value about 750K...no mortgage.
    (That 750K returns about 18K a year in rental return.)


    We want to extend current country home...will cost about $200K for our growing family.

    We don't like the idea of debt!

    Choice A..Sell House

    .it has doubled since about 2003....house was new...now starting to show signs of wear.

    Pay 200K for extension...no debt...take remaining $450K or so after expenses/gains tax...invest in a wise (not risky) share portfolio/managed fund of some sort. (or maybe a cash positive property)

    Choice B - Debt...but keep house.

    Take a loan out for $200K....keep house in Melbourne.

    Pros of keeping house.

    Melbourne steadily keeps rising in value...mind you the bubble might be starting to ease.

    Pros of Selling:

    It might be time to harvest the windfall...the house has doubled. Having no debt is a nice thing to have...and $450K in investments should bring a wise return...that may be better than the rental return.

    What would you do? Thanks so much for any thoughts!
     
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  2. twisted strategies

    twisted strategies Well-Known Member

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    welcome to InvestChat ,

    please note that i am old ( school ) brought up on the belief rent money ( paid out ) is dead money ... but the reality is , times have changed ( many people need to be flexible now )

    regarding the Melbourne house .. will you ever live there ( say one or more of the family becomes very ill at you have to be close to a MAJOR hospital or top quality medicos )

    if that was the case would you reside in Melbourne and rent ( or sell ) the country home ???

    the cash ( from the property sale) looks appealing especially with a financial downturn overdue .. but heck i have been planning for this downturn since 2013 ( luckily i DIDN'T leave the cash in the bank )

    but currently $400K ( plus ) is hard to place in the share ( or bond) market in a sensible place that returns a fair yield ..

    can you get $18K return ( per year ) in the share/bond market .. yes you can , but the risks are much higher than you would think ( look at the sagas of the four major banks , AMP , TLS , AGL and WOW and that is THE BIG END of the market , not those high risk small-caps )

    the loan for the extension ( using the rental income to help pay that down ) has some appeal but is this the right time to acquire more debt ( with a fair chance interest rates will start rising )


    please tread carefully

    cheers
     
  3. Luke83

    Luke83 Member

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    Personally I would just get a loan to do the necessary reno and pay it off again as fast as you can. I sold one of my IP a few years back because wife stopped working ( to have kids) and I was halfway through a apprenticeship and we needed the funds, Fast forward 8 years and I really do regret that decision.

    You never know what's going to happen in the future so I would keep the house until the money is really needed ( you become unemployed or someone in family gets sick etc).

    Once loan is paid back, I would channel the rent $ into shares looking for larger returns whilst keeping my asset base untouched.
     
    Last edited: 13th May, 2018
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  4. Hodor

    Hodor Well-Known Member

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    18k rental return sounds fairly poor. Is that net of costs?

    What do you know about investing in shares? If you don't like debt the highs and lows might play on your mind.

    What are your goals?
     
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  5. Mavoz

    Mavoz Member

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    Thanks all for the replies...really appreciated.

    You've put the cat amongst the pigeons a bit as they say!

    We have spoken with two separate financial advisers... both have said now might be the time to get out...

    one in particular was quite convincing that returns from Shares would give a far better return in the long run. (Barefoot Investor seems to also indicate the same thing in his book.)

    Factors for us:

    * current tenant is leaving
    * we're not going back to Melbourne any time soon...if ever. (lot to be said for the country..we have a hospital and all major infrastructure + no traffic...and very affordable housing!)
    * by the end of year we'll need an extra 200K for extension..have just outgrown our house.....that would probably take us 10+ years to try and eat down with a single income now. (+ the stress of that hanging over our heads.)

    But on the other hand my natural inclination had always been to keep hanging on to the Melbourne property...

    my traditional argument has always been...once you sell...it is gone forever...and we may never be able to get back into the Melbourne market...but maybe that just doesn't actually matter...

    One particular financial adviser made a very strong argument that shares give a better return...you don't have overheads....in the long run..they actually do much better...even over the property bubbles...

    Finding this quite a tough decision...is interesting people here aren't as positive about shares as our financial advisers!

    There is just something about being totally free....with every penny we earn able to go back straight into investments..rather than to a bank mortgage....

    Decisions..decisions! Thanks...really value people's thoughts on this!
     
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  6. Hosko

    Hosko Well-Known Member

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    Something you have no doubt thought of but interested in your thinking.
    When you say country home, does this mean a home 60km from town or a house in a country town?
    If it is a house in a country town, any thoughts on spending $150k ($200k that the extension would cost less selling and moving costs) on a bigger/newer/more suitable house up the street or across town and moving?
    If it is a country town you would probably get a sizeable upgrade for this sort of money, no?
     
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  7. Hodor

    Hodor Well-Known Member

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    You can make arguments either way. Holding costs of property and tenants can be a pain. The leverage people use with property is something that distorts opinion. People are happy to borrow 90% on property but not 50% on shares (which I wouldn't do!). Leverage is something most planners shy away from. Property can have extended flat periods and falls however.

    Be careful of high planners fees. 1%+ pa is a joke but common .
     
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  8. twisted strategies

    twisted strategies Well-Known Member

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    shares can be quite fickle ... i have roughly $400k in the market , and the well timed buys are supporting the fund manager darlings and ' blue chips ' ( with a share-market downturn reasonably possible in the next 2 years )

    by the same token the extension will increase your asset potential but also your maintenance costs

    with the Melbourne tenant vacating does put the sale potential in a different light .. any change of a PLUS to that $750k ( hopefully after costs and taxes )

    IDEALLY i would be looking at interest-bearing securities ( say 20% of your cash ) but for the life of me i can't find suitable ( risk v. reward attractive ) places to invest in that sector myself , currently .

    please take care
     
  9. Luke83

    Luke83 Member

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    is interesting people here aren't as positive about shares as our financial advisers!

    If we where getting 1% off the top of your income I'm sure we could be a lot more pro shares also...

    Sounds like your really not keen on another mortgage, what if you sold the Melbourne place, done your Reno's, cleared your existing loan and purchased another IP closer to home? You could then try your hand with shares with little risk with your rental return plus what ever you have spare.

    We only have the one IP now, its important to us that we keep it should something ever happen to us (divorce, redundancy, illness, etc) so we are now trying to pay down last of mortgage to get Debt free so I can push a head with my shares. Yes you can get better returns with shares but you can't live in it so we will always keep a extra House around to play it safe. Also i must ask, how would you feel if you sold the house, tipped everything into shares just to watch the market crash on you? I don't know your age and what level of risk you can personally handle, me I like to play it safe and make sure even if I get divorced I will have a roof over my Head.

    On another topic, good to see another Barefooter on here.
     
    Last edited: 14th May, 2018
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  10. Mavoz

    Mavoz Member

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    Thanks all...greatly appreciate the replies. I did some more investigation today on the whole Capital gains tax scenario...selling costs...etc.

    Also have thrown figures into loan calculators and spreadsheets etc....

    The long and short...with my laymans understanding...you can probably make an argument for both!

    Return wise...in the coming years with a 225K mortgage we'd only clear about 12K income after loan and expenses...but with shares I'd hope for maybe 5 percent...which works out at 24K...and a completely paid off place of residence that we can enjoy with our family and kids during these next 10 - 18 years while they are with us.

    Obviously the Melbourne home would grow in value (based on history... 29K a year so far...but then you'd hope that the shares would also appreciate to some level as well)

    The other great idea we've thought about...and you mentioned it too Luke (thanks!) is to just go back into another property...maybe something like a town house off the plan to avoid stamp duty....6 year guarantee...less maintenance than a 4 bedroom house.....in a region like Bendigo...close to Melbourne... We could nearly swing cash for that + build our current extension....and then every dollar saved beyond that...throw straight into shares. It feels like a safe option...one that gives a level of security + an opportunity to enjoy a nice family home at the stage in life where the space is most useful...with 3 kids! (Currrently we have one bathroom..and 3 bedrooms for our soon to be family of 5....so it is appealing to do a little bit of an upgrade swap)

    At the end of the day we are thankful for our family...and have no need to be 'Rockefellas!'...but probably makes sense for us to place a bit back into our family living experience while we've got everyone at home during these next years..rather than just thinking of retirement nest eggs. Thanks!
     
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  11. twisted strategies

    twisted strategies Well-Known Member

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    on current ( share ) prices 5% div. return is not as easy as you think .. let's be conservative and say 3% to 4% as a possible target ( many companies are facing shrinking margins and higher costs )

    i have never been to Victoria so will refrain from commenting on property there .

    good luck on whatever you decide
     
  12. Mavoz

    Mavoz Member

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    Ok... thanks...good to know...I'll adjust the figures back to 3%...am quite aware we may experience some form of monumental crash at some point...but realise this could equally affect property prices...with people mortgaged to the hilt...anyway...thank you.
    That 3% return figure does bring the keeping the house option back very much in the running...rental seems to bring about that...even with paying off a mortgage factored in!

    If anyone has got any tips on what is a good property investment...would be interested. Thanks!
     
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  13. twisted strategies

    twisted strategies Well-Known Member

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    before my health took a downturn , i was looking at Northern NSW ( New England Tableland area in preference to the coast ) non-Adelaide South Australia but also Tasmania ( small towns )

    i live in QLD and frankly construction standards up here leave me massively disappointed ( as does the infrastructure )

    there may be still some good land deals left in QLD but political risk is high in this state ( and so are flood risks are land deemed usable )
     
  14. kum yin lau

    kum yin lau Member

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    Hi, did you realise that your fear of debt had led to a small dilemma? You had been doing it back to front.

    why have a mortgage on your home but not on your investment property?

    A lot depends on your tax situation. You might want to look into debt recycling so that you get the best of both worlds.

    There's nothing wrong with what you want to do. Just get the best financial outcomes. At least you're doing spreadsheets.

    Your situation is a good one. With some tweaking, it'll be a great one.

    Be VERY careful about what financial advisors tell you.

    Good luck,
    KY
     
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  15. Mavoz

    Mavoz Member

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    Thanks KY...yes that is a good point about where the mortgage is....ideally it would be on the investment property...but that happened because we made the decision to move from the city to the country...so the two things suddenly reversed. Mind you it brought all sorts of other benefits...ie. we could live in a house worth about half the price of the Melbourne property..thus bringing a bigger rental income stream. (Not to mention all the other savings like travel costs...toll roads...health...time!)

    Anyway that is possibly an argument for selling...it would give the opportunity to have the home we are living in completely paid off...and then if we do go back into property...we can get the mortgage on the investment again.

    ...am certainly very cautious about financial advisers...if we do sell...it is indeed the age old question...property or shares! Ideally would aim to spread the eggs in different baskets...

    Thanks for posting! Much appreciated.
     
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  16. twisted strategies

    twisted strategies Well-Known Member

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    one or the other ( shares or property ) not BOTH ???
    .. say a modestly priced house/unit NOT on Melbourne ( or Sydney ) and some useful $$$ to invest

    cheers

    ( there was a reason i was looking at rural/country-town properties ,on a cash down basis )
     
  17. monk

    monk Member

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    If you're still wondering about shares & don't like advisers(same here)then could be worth your while to purchase Peter Thornhill's book "Motivated Money".Can only buy online at motivated money.com,costs about $30.00.Best investment book I've ever read!
     
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  18. kum yin lau

    kum yin lau Member

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    hi, I understand now. your Melbourne home started off as your PPOR.

    In that case, selling is a good option. the only danger is how you manage the sudden influx of cash.

    if you're super conservative as you appear to be, the paul Clitheroe way is not bad. i'm a high risk investor and would gear up to my eyebrows if anyone would lend to me.

    $250000 down payment for another investment property. I personally would buy the worst house and rebuild for profit. maximum tax benefits and growth. the thing is i'd gear up to 80% and absorb some negative gearing. So my loan amount would be in the region of 700 thousand which means my new investment would cost 950 thousand.

    So my finances would look like this:
    $200000 for improvements to country home.
    $100000 for shares.
    $50000 cash
    $950000 new investment property with a $700000 loan

    your fear of debt makes the 700 thousand loan look daunting. Most of us on this forum would laugh.

    you can protect yourself by choosing property that's not likely to tank therefore buy something that's solid middle class. your 18 thousand per year is very low yield.

    if you spread out over 2 properties, then your risk is lowered and your yield improves. Two houses 425 thousand each. you still have a 100 thousand leeway.

    bendigo, mildura etc. I'd always looked at Mildura but didn't do it and watched the prices go up!

    Hope this long post gives you some ideas.

    Do your own due diligence. What I say here is not advice because I do not know your situation.

    Good luck,

    KY
     
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  19. twisted strategies

    twisted strategies Well-Known Member

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    ** Most of us on this forum would laugh. **

    not me i took money very seriously right from my first year at school ( pocketed the bus fare and walked it .. it was only about 2 miles )
     
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  20. Terryw

    Terryw Well-Known Member

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    Do both?

    Sell 50% of the property to your spouse - they could borrow to buy it. structure it so CGT is minimal. Use the proceeds to pay for the reno and buy the shares.
     
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