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To pay mortgage or buy IP?

Discussion in 'General Investing Discussion' started by vsdabhi, 5th Nov, 2009.

  1. vsdabhi

    vsdabhi Member

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    Hi All,
    I have received $18937 tax refund yesterday. I need advice. What should I do with that money. We still pay mortgage on our PPOR. One of my friends told me that add 5-6 K and buy an investment property (95% loan, property range $250K-$275K). My wife asked me to pay off mortgage ASAP.
    We ahve 3 IPs. Please advice.
    Thanks
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Depends on whether you think you can make a better return from a new IP than the guaranteed return you get from reducing your non-deductible PPOR debt?

    It's pretty difficult to ignore the guaranteed returns in my opinion - especially if inflation becomes a problem and interest rates skyrocket.

    If it helps your wife sleep better at night, that's even better too right? You can always draw out some equity from your PPOR in the future to make further investments if you decide to do so.
     
  3. AsxBroker

    AsxBroker Well-Known Member

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    Hi VSDabhi,

    You should take into account the rising interest rates in your decision.

    Cheers,

    Dan
     
  4. navjit6

    navjit6 Active Member

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    Depending on how much mortgage you have on your PPOR and whether, you and your wife have the ability to continue paying of your loan if you purchase another IP. I would suggest getting an Interest only loan for IP, and the rent should offset most of the interest payments. Investing is good, so i would say go for it, but it depends on your financial situation. you could also diversify into shares, managed funds, etc etc. where less capital is required
     
    Last edited by a moderator: 7th Nov, 2009
  5. vsdabhi

    vsdabhi Member

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    Thanks Navjit6 but I am not interested in shares or managed fund, I am not so clever to do it, so I will take your advice and buy an IP. My goal is to buy total 5 prop including PPOR before 2012.
    2 more to buy. Thanks.
     
  6. navjit6

    navjit6 Active Member

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    if you have a goal to achieve 5 properties by 2012, go for it and then after that, you guys can relax :) investment property is good.
     
  7. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Hi Navit - I am curious, why 5 IPs and why before 2012?

    I think goals are great, but the motivation behind the them is always more important IMHO.
     
  8. navjit6

    navjit6 Active Member

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    because that is vsdabhi's goal...as he said in the previous post..so i say go for it and achieve it
     
  9. vsdabhi

    vsdabhi Member

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    Hi JudgeDreadz,
    I have learnt that long term goals are best achieved by achieving short term goal. My short term goal is to buy 5 prop (including PPOR) before end of 2012 and long term goals will depend on success in short term goals. I work on mining projects and I want to work FIFO till end of 2012. After that I can work in Perth city and buy more prop with equity and savings. That is the reason. And other thing, property prices are moving up now. So I said to myself, it is right time to buy.
     
  10. KateMelb

    KateMelb Active Member

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    Sounds like a fantastic plan, although the type of properties you'll buy should depend on whether your strategy is capital growth or strong returns. Tax minimisation and whether you'll ever sell (i.e. CGT) will also be factors.
     
  11. Chris C

    Chris C Well-Known Member

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    Happy wife = happy life.

    :D

    I think that now is a great time to sit back, consolidate positions and reflect on everything that is happening in the world before jumping into any new long term commitments.

    Just my two cents.

    Here's the other 98 cents of my opinion... http://www.invested.com.au/85/leverage-strategy-37587/

    :rolleyes:
     
  12. Michealf

    Michealf New Member

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    Get the best of both worlds! Pay the funds into the PPR mortgage to reduce the debt (and increase equity) Then draw down the increased equity and invest in another investment property.
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's a good suggestion.

    PPOR debt is generally non-productive. You don't get any income from it, and the interest you pay is not deductible. Any capital growth you get is a bonus and generally not the goal of the exercise.

    There's nothing wrong with paying down PPOR debt ... that's a guaranteed 7%+ (depending on the interest rates you pay) tax-free and (mostly) risk-free return on your investment!

    You can always borrow against the equity later for further fully-deductible investments.
     
  14. GregR

    GregR Reid Consultants

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    I agree with Chris, a happy wife is important.
    I have no trouble with the goals but I think you are very tight on a deposit if $24 or $25k is all you intend to use. There are not many lenders remaining in the market lending 95% LVR, it would need to be a very strong deal and with a the purchase price of $250, you seems to ignore having to fund stamp duty and settlement costs.

    I would first look to put the $18k into an offset against your PPOR, with the effect the same as paying it into the loan itself as far as interest cost is concerned.
    I would question why you are not using an income tax variation form for yourself rather than allowing the government to mismanage my $18k for nearly 2 years.
    Depending on your income and net asset position, I would far rather refinance, set aside a line of credit facility (if you can) and use that to finance the deposit and costs of an IP rather than use your own after tax funds. The effects of using 105% debt and using an offset to reduce your non deductible debt can be a difference of many $'000 a year in after tax cost.

    Good luck with your plans
    Greg
     
  15. TDFawaz

    TDFawaz Tony

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    There are so many factors to consider, it really depends on your financial situation, how much you earn and so many other questions.

    Tony Fawaz
     
  16. vsdabhi

    vsdabhi Member

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  17. GregR

    GregR Reid Consultants

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    Well done on achieving 5 properties by 2011.
    My question would be on your goals, what does owning 5 properties achieve or mean to you? If it is to achieve $x residual net income by 20xx, then whether you need to add to your portfolio or not will be dependent on how owning 5 properties tracks to that.
    Sometimes investors get lost in the process and add properties but do not adequately consider the end goal, so they continue to add negatively geared properties, or even neutral geared properties when they should be considering different characteristics. Alternatively it may mean paying down debt rather than adding debt.

    By saving and investing while you are in a position to puts you ahead of the game, well done and review and reset your goals regularly.

    Greg
     
  18. vsdabhi

    vsdabhi Member

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    We migrated in NZ in 2001 and moved here in West Aust in Sept 2007. We sold 2 properties in NZ and bought 2 properties overseas and 5 in WA. meanwhile our 2 sons got married, our parents and siblings are overseas. Our ultimate goal is to go back to India with family. By working and saving, it is not possible to save enough to return & retire. We learnt from this and other forums that investing in Properties can help us to achieve our goal. So we set short term goal to acquire 5 properties, and wait for growth. We will not need millions of dollars to live comfortable life back home. Within 2 years, we will be able to pay off mortgage on our overseas home. So we will need only $1000 per month to enjoy comfortable life.
    At this stage, we have 1.77M debt. Equity is going up. We will start reducing debt once property price moves in upward direction. We will payoff our PPOR and rent it out and go back and enjoy. (We do not know how long will it take. It can take 2 years or 5 years or ?.) We are 49 now, we still can work for some more years and wait for capital growth). I will update this post, if we have any new plan. Thanks.
     
  19. Dolfinwise

    Dolfinwise Well-Known Member

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    Devils advocate

    My advice is to always ask (and answer) the following question before making an investment decision:

    What if I'm wrong?

    In this case: What if the Australian property market goes backward for 5 years? (We're the only market that hasn't, rising cost of living helped by Middel east unrest, Julia's 3 new taxes etc), current valuations, interest rate increases).

    Ask are you over exposing yourself to one asset case unneccessarily. The diversification advice above is good advice. Paying off non-deductible debt is good advice.

    Ask what happens if oyu get sick or injured or your project closed for some reason such as natural disasters or a new tax etc.

    Another option to look at is Superannuation. Even if you go the property route Super might be the best way to buy more. It may help you avoid CGT.

    I'd suggest at your stage with a number of IPs already getting some professional advice from a Fee for service planner would be wise.

    Just noticed that fianl post. Your going to need some serious Capital gains tax planning if you do decide to sell to reduce debt. Understanding your Superannuation options while you are a resident will help with this.

    Good luck with it.

    Jason
    Note the above is general advice only and should not be acted upon before receiving advice form a licensed professional.
     
  20. vsdabhi

    vsdabhi Member

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    Thanks Jason.