37 - fully offset my apartment, now what?

[loo]

I purchased a 70's brick 2 bedroom apartment back in early 2018. Probably overpaid a bit (paid almost 700k) but it's in a great location in the inner south-east of Melbourne, with only six on the block and it's facing the street at the front. Managed to lock in 1.84% for the past two years, which allowed me to save up a considerable amount of funds. As of last week my entire mortgage has been offset. I'm earning around 125k p.a (I'm 37 and single).

I'm a little unsure as to what my next move should be.

Do I:

a) Invest any future income in stocks, ETFs, etc where I can probably make a 6-9% annual return on

or

b) Sell the apartment and buy a house (minimum 1.3M in the areas reasonably close to work)

or

c) Keep the apartment and buy a second apartment as an IP (yield on apartments is around 4ish %)

Even though I really like my apartment, I don't want to miss out on capital appreciation of land, something a house would allow me to benefit from, while apartment prices creep up much more slowly. That being said, because I'm single, paying off the loan would be slow, and meanwhile I'd be incurring an interest expense at around 6% or so.

I was hoping people could offer me some much-appreciated advice.

 

[sj123]

@loo Option D - Given you like the apartment and it seems to suit you and your lifestyle and wanting a house only for capital appreciation of land why not keep the apartment and stay in it and then invest in a cheaper house in different suburbs (or even different cities) that will provide the capital appreciation of land you’re seeking. You don’t need to buy a house and live in it - in fact unless you did some form of house hacking it is more inefficient and provides a worse return to do that (as a single person)

 

[clarabel]

@sj123 Yes this makes sense.

Keep the current property. ( zero point in giving away the transaction costs/expenses.)

If it's offset and the original loan is cleanly for the one purpose/property you can rent it out and deduct interest as valid expenses. Also the rental income increases your borrowing power.

Or buy another property. (Caution about using cash and increasing non deductible interest on your PPOR.)

Buying property: Apartment or house, which one etc. Is a different decision.

Talk to an accountant to confirm this in your case:
CGT is not an issue until you realize the profit, then with current rules you're only taxed on 50% which is effectivelyhalf tax at your then personal tax rate.

Property has very different leverage characteristics when compared to other asset classes, especially shares.

The easiest way to look at this for yourself is do a spreadsheet, estimate purchase cost, loan amount, interest, other expenses and tax effects. For 1 year, then project out one year at a time to 5, 10, 25, 20 years. Allow for various events and changes in the variables.

What works for you should become obvious during this process.

 

[loo]

@sj123 Because it wouldn’t be my ppor I would be liable for paying cgt on any gains made. That be said, it’s true that the interest payments would be tax deductible. That being said, I’d imagine it would be more tax efficient to be living in the property which is more likely to experience the most capital gain.

 

[iseetheunseen]

@loo You know stocks attract cgt too right? Like that’s the price of making money

 

[mufudzi]

@iseetheunseen I am with you. Cgt isn't bad at all. If you have to pay cgt you made money.....

 

[esj]

@loo Investment is a positive asset, PPOR is negative. If you're content where you are, invest to expose yourself to the risk and just enjoy life.

 

[loo]

@esj I'm a little confused by what you mean when you say that PPOR is a negative asset.

 

[larryrock]

@loo I usually see it as neutral. While it does provide a benefit (a roof over your head) it also costs a LOT of money and doesn't earn you any.

 

[parade_de_satie]

@larryrock units would be neutral yes, but houses more positive, depending on the suburb of course.

 

[resjudicata]

@loo you seem quite adverse to CGT, there are ways to use the equity in an investment property while still avoiding a CGT taxable event.

you might need to look at more factors than purely "likely to experience the most capital gain" when assessing your most tax effective course of action.have you mapped out different choices and then compared the numbers?

without actually crunching the numbers and based on your interests in land appreciation, Id lean towards recommending you investigate further, a house as an IP if you believe in growth of an area, the loan interest will be deductible, and then unlock the eventual equity through leverage to acquire further properties in the future. no realization of Cap Gains blah blah all that property lingo stuff.

CGT is nothing to be afraid of and should not be the sole contributor to a wealth generation plan.

but personally I would go the stock market route.

whatever course you take I would highly recommend much more reading and calculating prior to action. you have time.

 

[olaitan]

@loo Yes, but who says the areas you want to live would be good investments?

 

[yyzead]

@loo Find a house where you would like to live, and buy that as an investment property, then when you are ready, move into it.

 

[resjudicata]

@loo Never sell the investment prop. Use it as collateral to borrow more. The Rory Weston way. Maybe start a family trust first.

 

[cassiet2001]

@loo Are you planning to eventually get married and have kids?

If you set up a family trust, and purchase your IP under the trust, eventually if you sell and you have a wife and 2 kids over 18, you can split the CGT between all 4 parties.

Alternatively it's a great way to pass on generational wealth. Everything else works the same, the trust distributes earnings to each trustee who then includes it on their individual tax.

 

[jesusismyfirstlove]

@loo How’d you pay it off on$125k a year and only purchased 4 years ago? Say you put down 20 % and loosely left $500k as the mortgage- that’s $100k a year in 4 years… on $100k a year salary?

 

[pilgrimschild]

@jesusismyfirstlove That assumes they started with zero cash outside their deposit/fees, which would be pretty financially irresponsible.

 

[raebee]

@pilgrimschild Why?

It would be financially irresponsible to put their emergency fund into the mortgage. Or not have one at all.

But to not have any other cash left after deposit/fees isn't irresponsible.

 

[pilgrimschild]

@raebee Ah, generally the emergency fund is cash. That's what I was getting at.

I would assume their fully offset mortgage includes their emergency fund in the offset.

 

[raebee]

@pilgrimschild I took you comment to be:

If you don't have deposit, + fees + emergency + extra cash you are financially irresponsible. (As a bit of emergency fund is a given)