Equity question.

Any advice appreciated!

I'm currently paying off own home and two IP's with approx. $220,000 equity between own and one rental property. Toying with the idea of turning own home of seven years into an IP and purchasing new home. Any ideas if current equity can go into new home or other useful tips?

Cheers in advanced,

 

Equity question

Hi Timbo,

Great question; You can use the equity in the property to purchase a new home.

If your turning your current home into an investment property there are a couple of things to keep in mind;

Firstly, just because it was a great home for you doesn't necessarily make it a great investment property. While you are probably emotionally attached to it make sure the numbers work as an investment. For example my grandparents house was beautifully built as he was a master carpenter, but as an investment the return due to the cost of upkeep made it unviable as an investment.

Secondly the balance of the loan when you finally turn your current home into a Investment Property is the limit of the loan you can claim for negative gearing if that is important to you.

If your really want to hang onto the property long term, consider selling it to a trust to create asset protection for the equity. While the initial cost might seem prohibitive the clarity around ownership, any loans and the asset protection can be well worth the investment.

regards

 

Hey Timbo,

Best thing to do is turn your existing home interest only ASAP and do NOT pay any extra into the mortgage. Unfortunately the equity paid, whilst technically can be released isn't going to be tax deductible - as purpose of funds would be for you to purchase a new principal place of residence. In essence you'll have a highly leveraged personal debt position, whilst a lower investment loan position - not desirable in terms of tax.

Where possible it's generally better to run on an interest only setup with offset account to avoid these scenarios - but we're always taught to pay down debt, which sometimes may not be in our best interest such as this scenario.

if your existing investment properties aren't interest only, I'd also suggest they be switched over so any excess cashflow can be directed into an OFFSET account for your future PPOR mortgage.