Money Magazine Feb 2020 Ask the Expert

Steve Greatrex Blog Leave a Comment

Financial Planner Adelaide

Steve Greatrex

Recently Steve was asked to contribute to the next issue of Money Magazine. The final article will appear in next weeks February 2020 issue of Money Magazine.

In the meantime, we thought we would share with you the case study and our response to it.

NAME: Kelly and Dean

STATUS: Home owners who have just bought an investment property.

QUESTIONS: Should we sell our home that is capital gains tax free, pay off the investment property or do we live with a big mortgage for both properties? If we do buy another investment property for around $400,000 to $500,000, where should we look? Is the Brisbane property market sound? And what type of property – an older style apartment or a newer one? Can we afford to buy in a suburb close to the Brisbane CBD? Which suburbs? Or should we venture into shares instead of property?

BACKGROUND:

Kelly and Dean were determined to get on top of their finances from an early age. The 27-year-olds have paid off almost two thirds of their mortgage on a four bedroom home in Sydney’s western suburbs. How did they do it? They are not big salary earners and their parents didn’t give them a leg up into the property market. Instead they saved rigorously, didn’t pay rent because they house sat the pets of people traveling and, most importantly, enjoy a modest life. Kelly, a midwife, and Dean, a handyman, arrived in Australia as 24 year olds only three years ago after traveling for six months. They arrived with $20. They secured jobs, permanent residency and this year bought the house. “I work full time weekend nights to get the most out of the penalty rates. Dean works away a lot for work, finds jobs on Airtasker but he currently has a boss who pays him well for his time,” explains Kelly.

Dean’s handyman skills helped keep their renovation bill to a low $23,000. For that, they upgraded the kitchen and expanded the second toilet into a proper bathroom. They bought an entire second hand kitchen on marketplace for $700 that included the dishwasher. They spent $1,500 on laminated benchtops. “If you are willing to shop around and drive a bit further, you can keep your costs down and buy from clearance warehouses,” explains Kelly. Originally they were going to rent out bedrooms and stay in the house but are opting to travel around Australia and pick up work in regional areas and remote communities as they go. They will rent out the whole house.

With these plans in place, Kelly and Dean were looking at buying an investment property and found one in the same area. It is a fixer upper, says Kelly, and she estimates that they can do it for $60,000. They used their share in the home for a deposit and would like advice on what to do next. “We have worked out if we continue working the way we are, we can have our home in Sydney completely paid off by 2021,” says Kelly. She says this has been one of their main goals to achieve by the time they are 30. “It is something we are truly focused on and would like to achieve,” says Kelly. “Flipping properties was never thought about but it seems this is what is happening at the moment,” says Kelly. “We want to start the process of investing and making a good future for ourselves,” says Kelly.

Is it advisable to actually sell the first property? “Estate agents have said not to sell but rent it. It is a numbers game for us and a $100,000 profit is something we can’t ignore. If we rent it out, there are risks and costs.”

If we do sell the first property should we use that to pay down the mortgage or use that to buy another investment property or properties? They have been weighing up whether to buy an apartment close to the city in Brisbane. “Is this a sound area to invest or should they buy somewhere else?’ asks Kelly.

“Should we put money outside of property and into shares, something we have no clue about?

“Also how does capital gains tax work now that we own two homes and planning to sell the first?”

Kelly and Dean bought a four bedroom house in the lower blue mountains for $650,100 this year. They had saved $250,000 cash deposit towards the home and since buying it, saved another $100,000, taking their mortgage below $300,000.

They took advice from their mortgage broker to not put every penny they had into the offset.

A few weeks ago, Kelly and Dean spontaneously bought another four bedroom house in the same area for $575,000. They estimate that they will spend at least $60,000 on fixing it up.

They have travelled 33,000 kms around Australia in a 2 wheel drive, 21 year old Hyundai Lantra and would like to head off again when they are 30.

ANSWER

Kelly and Dean congratulations on building the equity in your own home and on buying another property. This is a great achievement and shows what can be done with hard work and smart saving.
The things I like about what you have done are:

1) Housesitting whilst travelling. This is a great idea and can also be used by people to save for their first home.

2) Your ‘sweat equity’. Leveraging Dean’s skills to update you own home and now your investment property.

3) Buying older homes rather than a new or fully renovated home. You can get some great prices for these types of homes – it you are prepared to put in the ‘sweat equity’ and can see the potential in the home.

4) Using Marketplace and Gumtree to buy your kitchen – also a great place for furniture.

Many years ago, I was in a similar position to you. I had paid out the loan on my own home. I had purchased a unit with borrowed money. I asked my accountant if I could ‘move’ the debt from my new home to my existing home (and thus get a tax deduction on the interest). The answer was that you can’t move debt around like that.
This is where an offset account may be of use.

Purchasing Brisbane apartments. There are many investors who are badly ‘under water’ in the Brisbane apartment market. This could be a buying opportunity. On the other hand, you will be competing with other landlords to get the apartment rented. And there is little to stop more apartment building.

Now that you have purchased your second property, you may need to digest that first.
Go back to your goals. E.g. do you like your current home or would the new home be better for you in the long run? This is key.

If you sell your current home and it is your Principal Place of Residence, there should be no capital gains tax payable. (However, renting out the property may have some CGT implications for the time that it was rented).

In terms of investing outside of property, consider salary sacrificing or making self employed contributions to super. This should give you tax savings and a longer-term plan for retirement – and may give you some exposure to the stock market.

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