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Own a home using share market?

Discussion in 'General Investing Discussion' started by broadscott, 23rd Nov, 2008.

  1. broadscott

    broadscott Active Member

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    This might be a silly question, but is it possible to build enough equity on the share market to buy a family home? Traditional thinking requires that you buy a first home that is far out of the city/old and renovate to increase your profit. Then step your way up to your final family property.

    I was wondering if it is possible to end up in the same place (or better) by renting (in a location you actually want to live) and investing money that otherwise would have gone on your mortgae into the share market, using a (margin) loan to increase your investment capital?
     
  2. ashwright

    ashwright Well-Known Member

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    Hi,

    I think it can be possible, and is exactly what I am trying to do.

    However my strategy is slightly different. I am trying to building up enough positive cash flow (from dividends etc.) to pay for a house I want to live in. For me I think this will take 15 years. But the advantage is that I will not have to use the equity (which would still be producing income), which I think will leave me in a better position.

    Ash.
     
  3. C3PO

    C3PO Well-Known Member

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    interesting ideas. ashwright do you mean that you are aiming to have your dividends equal mortgage repayments? or do you trade for capital growth and use the profits to buy the house? couldn't quite get your meaning from your post.
     
  4. Chris C

    Chris C Well-Known Member

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    It's definitely possible.

    However you might like to also look into the new first home owner saving plan that Kevin Rudd recently introduced. It seems like a pretty tax effective way of saving for your first home, however the interest you might have earned from such a savings account probably won't be a whole lot given how much interest rates have dropped of late.

    In saying that, interest rates have dropped a lot in the last 3 months and expectations are for them to continue to drop further over the next 6 months, making the mortgage repayments on a small 1 or 2 bedroom apartment not all that more expensive than renting. Of course the downside to this is that you probably can't rely on interest rates staying as low as they will get in the next few months forever.
     
  5. ashwright

    ashwright Well-Known Member

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    That is my idea, to drain the income of the investments to fund personal expenses, like buying a house. And keeping the capital (and growth of capital) as an investment.

    My reasons are that; you have to pay tax on investment income, so you might as well use it for personal use. Debt can be tax deductible, so you might as well use it for investments. I think this is the most tax efficient method of enjoying your investments, while still keeping them.

    I do not like the idea of a non tax deductible mortgage though. Still trying to work out a way around that.
     
  6. Chris C

    Chris C Well-Known Member

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    I don't understand what the benefit is of trying to accumulate enough shares that pay dividends that cover a PPOR's mortgage repayments...

    Why don't you just buy a place close to where you want to live, claim the first home owner grant and stamp duty exemption, live in it for 12 months, then turn it into an investment property after you have moved out and rented somewhere you want to live?

    That way the interest on an investment property is tax deductable, your are earning "dividends" from the rent, you're living somewhere you want, and in a few years time (assuming you are doing as much as you can to pay down the loan) you will be able to move back in to make it your PPOR when you have nearly paid it off so you want have much interest to pay that isn't tax deductable.
     
  7. ashwright

    ashwright Well-Known Member

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    Hi Chris,

    I am not a big fan of buying property to live in (it is expansive), but I can see it has great advantages when you have a family (which I don't atm). I currently rent, near where I want to live.

    So my goal is to build a stream of income from investments, which I can then spend on things I want to spend it on. If this includes a house I want to live in, so be it.

    I am also not opposed to real estate investment. I do not have any at the moment, but plan to in the future. However I think I would consider this from an investment point of view, rather then a place I might want to live in the future. I think considering a property purely for investment reasons, would make it a better investment.

    My main thinking is along the lines: I do not want to sell investments to fund lifestyle, borrowing against investments to fund lifestyle is not tax effective. So what can I do with dividends (etc)? And how much capital do I need to fund the lifestyle I would like from those dividends?

    Ash.
     
  8. bella

    bella Well-Known Member

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    People often start out buying investment properties in order to build up enough equity to eventually buy their home. The only difference in the scenario you propose is to invest in the sharemarket rather than investment property.

    I think it is definitely possible. I think going by long-term figures it is a much-of-a-muchness which will get you there faster. The actual result would depend on the variables involved (eg. how much rent you are paying, interest rates, house price growth, stockmarket growth, the particular shares/property you acually buy, how much you gear).

    However you must be as disciplined in contributing to your portfolio as you would paying your mortgage, and need to have the guts to ride out sharemarket downturns.
     
  9. Chris C

    Chris C Well-Known Member

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    Buying your own home to live in is getting cheaper by the month. Interest rates have already dropped 2% and the market is pricing in another 0.75% drop if not 1% drop for December, not to mention it wouldn't be unreasonable to expect some further, albeit smaller, drops in interest rates early in 2009. This in combination with the recent increase in the FHOG to $14,000 and the currently weak housing market is making housing cheaper and more affordable especially considering rental costs have been increasing dramatically over the last 18 months for the average Australian renter.

    My mate and I recently (late October) bought an investment property about 2km from Brisbane CBD and given the recently interest rate drops it is not far off being positively geared already, with only a 10% deposit and not taking advantage of stamp duty exemption and FHOG. My point being that if many investment properties are quickly becoming positively geared then that means that as a renter in the current market you are essentially paying off someone elses home loan, which raise the question, why not just take advantage of the FHOG while it is at $14,000 and pay off your own home.

    You'd only have to live in it for 12 months to gain these benefits then at then end of 12 months you could hopefully turn it into an investment property which wouldn't be too far off being positively geared itself, assuming interest rates stay lowish.

    Well you just need to weigh up whether the rental income earned from the place being an IP rather than PPOR is better than claiming stamp duty exemption and a FHOG of $14,000 is better.

    For example if you buy a place for $400,000 (you'd have to pay stamp duty on top of this) with the intention of making it an IP and were able to rent it out for $400 per week (please note these are just rough figures) the yearly rental income would be around $20,000 roughly with interest on $380,000 @ 7%pa for the year coming to around $26,600. Leaving you with a $6,600 shortfall you'd need to cover, but which could claim some of back on tax.

    However, if you were to claim the FHOG and stamp duty exmption you'd effectively be saving $14,000 with the FHOG and probably another $14,000 would be saved from your stamp duty exemption PLUS you wouldn't have to have paid rent all year. This would more than likely work out to be a lot better if you intended at the end of the year to move back out into the rental market and turn your PPOR into and IP assuming that when you moved back into the rental market you were paying less rent than what you were renting your place out for.

    When you say tax effective, are you referring to negatively gearing some investments such that the dividend/yield of your investment is short of covering the interest costs of funding that investment, making the difference a tax write off, under the premise that the growth (capital gains) in the value of the investment will justify the yearly shortfall?

    If this is your intention, I just have a couple of words of warning, in the current economic climate investments being based on growth in value are probably quite risky. I mean you only have to look at the stock market, or even property prices over the last year to realise that investments that are made purely on the premise that they will grow in price are inherently dangerous. I'd saying I'm not alone in suggesting that where possible investments in the short term should be based on good cashflow rather than price growth, and as such negatively gearing investments to make them tax effective is extremely risky.
     
  10. ashwright

    ashwright Well-Known Member

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    Hi Chris,

    On this point, I am merely talking about borrowing to fund lifestyle, ie I borrow $20K per annum to live off, as not been tax deductible. I was not talking about negatively gearing. In fact negatively gearing (in the long term) is against my strategy, as it means there is no income stream from the dividends (it is all going to pay off the loan).

    Atm I am trying to be as close to neutral as possible.

    I take your points about the FHOG and stamp duty exemption. Another one to keep in mind is Capital Gains (ie no tax on PPOR) and the 6 year rule.

    Ash.
     
  11. broadscott

    broadscott Active Member

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    My strategy would be to instead of borrowing $700K to buy a home to live in (which is realistically what we would have borrow to live where we want to live) would be to invest the money I would spend on the mortgage repayments in the sharemarket. The main draw back I see is that by borrowing and buying a house you start off with a large capital investment that you see the capital gains on. Whereas with shares it would take you longer to build that much equity since you could only borrow against the savings/investments you have (personal loan or margin loan) and no bank is going to let you leverage up to an LVR of ~90% (ratio of a home loan - with mortgage insurance).

    This way interest on your investment are tax deductible also, unlike on a home loan.
     
  12. Sacko

    Sacko Well-Known Member

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    Ashwright,

    It's my understanding that it is posible to turn the mortgage on your PPOR into tax deductible loan via the use of an LOC. As I understand it you set up a sub-account (IO) and draw down say $20k of equity in your PPOR to purchase an investment (shares / Managed Funds / Deposit on an IP) and the interest on that $20K is then tax deductible.

    Then instead of buying additional shares / managed funds with your investment budget each month, you funnel your them, your usual repayments and the investment returns back into the main account, which is linked to the PPOR. This creates additional equity, which then draw down to buy another / additional investment, which increases the tax deductible portion of the LOC. By repeating this process, over time the whole of original home loan for the PPOR is turned into a tax deductible loan.

    In times of rising house prices you can boost your investment portfolio by getting the PPOR revalued each year and then also draw down that additional equity, although this will also increase your repayments as your loan has increased.

    I would suggest that you can therefore do both, as you have the security of owning your own home whilst building up an investment portfolio. An important point to remember is that at some stage you will still have to pay back the home loan. This can be done over time by keeping up the payments once the PPOR has been converted, selling some of the portfolio or perhaps as lump sum from Super once you reach your presevation age.
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's not really changing the purpose of the loan so much as paying it down and redrawing it for investment purposes. No different (except perhaps in timing) to the scenario of buying a PPOR, paying off the loan, and THEN borrowing against that PPOR to buy investments at which point the loan becomes tax deductible.

    That being said, there's nothing really wrong with the approach.
     
  14. samaka

    samaka Well-Known Member

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    I probably sound like a shill for Macquarie by now, but yes you can.

    Anything on this page with a rate of 10% or less means an LVR of 90% or more:
    https://www.macquarie.com.au/emgonline/portal/web/guest/collateralRates