Sell property and invest? Or sit tight and save? [AUS]

[Ocean_AUS]

I wanted to get some advice here, because we’ve been making things up as we go along and I’m sure we could do better ☺.

I live with my husband and energetic 3 year old, and we’re about to have a baby. The thing is, we’re sort-of working towards FIRE but we also want to live a fun, purposeful life in an awesome location, and we don’t want to wait years to do it! About 18 months ago we realized we wanted to exit Canberra, and worked to move both our jobs online and reduce our working hours. Then 6 months ago we packed up, rented out our house and travelled up and down the east coast in a caravan with our 3 year old (while still holding down our jobs – I don’t fully recommend this, it’s a recipe for crazy).

We’ve found our version of paradise on the far south coast of NSW, and we’d like to slow down even more (while still playing smart financially).

A summary of where we’re at in dollars:

Income:
Partner income: $70-90k per year (own consulting business, covers some of our spending, approx. 3 days per week work)
My income: was $35k (2.5 days per week), now mostly zero for 12 months on maternity leave (ok, there is 18 weeks government paid maternity leave)

Expenses:
Approx $50k per year. These have varied significantly while moving/travelling (hence not detailing them here), but hoping to see them move to $35-40 as we settle down.   

Assets:
1 x investment property. Value $550k (bought for $394k in 2011). Mortgage $256k @ 3.8% (monthly repayments are $1700). Rented for $500 per week (privately rented, approx. $3k in bills/maintenance a year – so currently ). 

Looking-to-purchase-shortly 1 x PPOR. Approx value $500k. I realize that renting could be a better option, but unfortunately most small coastal towns are split into owner-occupiers or holiday rentals, and there are zero long-term rentals where we’re trying to live.

Cash in offset account $200k. (I realize that holding cash isn’t great, but we’ve as yet been too cautious to invest and are now looking to buy).

Debt:
We have a HECs debt of about $30k EACH. Yes, that’s a lot of study time. 

Next steps/ideas:

• Set-up a discretionary trust so that my partner’s company can distribute tax to me as lower income earner
• Max out the pre-tax contributions to super for partner ($25k)
• Should we sell investment property (it used to be our PPOR) and get into ETF/stock investing? Better return? OR should we refinance the investment property and use the extra cash to pay down any new mortgage on our PPOR. Currently we’re thinking to make PPOR debt-free as soon as possible. 
• We’re hoping to do some airbnb through our new place, I’m wondering if anyone has any experience of that and if it might be better to run it through the company rather than in our personal names?
• Also, HECs - what to do?
• Any other tips for young-ish players?

Thanks so much team :)

[Moomintroll]

Ooooh say hi to beautiful Tathra from me! Far South Coast is a beautiful place.

Couple of thoughts:

I would definitely prioritise a debt free PPR over any kind of investing. With kids you need the security, and just the fact that having kids adds so many uncertainties to your life - disability, sickness, special needs etc (our story is a long one involving an out-of-the-blue cancer diagnosis for our four year old, which sucked up all our earning capacity and time for a year - not saying that to scare you but just make the point that kids may suddenly add unforeseen costs beyond carseats and food).

We sold up in Melbourne and moved overseas, partly to have a debt free PPR, and it's made a huge difference not having a massive fortnightly payment to mak. Also between that & not paying childcare anymore, our expenses have plummeted and made a beachside life on low-ish incomes in a chillaxed backwater a much more doable thing. Although we're in beachside west of Ireland, which really puts the 'chill' in 'chillaxed'...

Personally I am delighted to no longer have heaps of our cash tied up in Aussie property. I feel like values will be hit by the various investigations into banks/financial planning and a general ending of the good times that is overdue. So I'm on Team Sell That Investment Property Now. If you got 250k from that and you have $200k you're almost at mortgage free PPR, or at least a very low mortgage.

if you've been public servanting in the Can, you guys must have reasonable super accounts too? You mentioning paying into them but not the values of the accounts now.

I reckon leave the HECS debts and just pay the minimum payments, it's low/no interest.

With Airbnb were you imagining having some kind of extra space/other building to rent? Or heading off in your caravan to free up the main PPR? We do the latter a bit here as we live in a tourist town and it is ok, a bit of work packing up the house and we pay an agency to do the cleans and we head off to stay with relatives.

But far south coast has a very limited tourist season - you'd be full up December-Jan, Easter holidays but might struggle at other times, except for long weekends etc.

HTH and look forward to reading your story as it evolves.

[marty998]

1 x investment property. Value $550k (bought for $394k in 2011). Mortgage $256k @ 3.8% (monthly repayments are $1700). Rented for $500 per week (privately rented, approx. $3k in bills/maintenance a year – so currently ). 

Can I ask where who are getting 3.8% from for an investment loan? Asking for a friend, you know.... hehe, that's a crazy good rate.

Set-up a discretionary trust so that my partner’s company can distribute tax to me as lower income earner.

You mean earnings. Be careful here, if his consulting income is deemed to be PSI there won't be a benefit here. And whatever tax saving you get will likely be eaten up in accounting fees too.

Should we sell investment property (it used to be our PPOR) and get into ETF/stock investing? Better return? OR should we refinance the investment property and use the extra cash to pay down any new mortgage on our PPOR. Currently we’re thinking to make PPOR debt-free as soon as possible.

You haven't told the bank you are no longer living there now have you... is that how you've got a PPOR rate for an IP loan?

Refinancing to put more loan on the IP to use to pay down a new PPOR isn't really a great idea. The additional loan on the IP will not be tax deductible, and now you'll have a mixed purpose loan where you will need to apportion interest for tax deductibility purposes. Bit messy.

We’re hoping to do some airbnb through our new place, I’m wondering if anyone has any experience of that and if it might be better to run it through the company rather than in our personal names?

If the company owns the new PPOR, then you don't have a CGT exemption any more. If you own the house, the company can't earn the Air BNB income (unless you charge the company for use of the property, in which case you may lose your CGT exemption). If you rent it directly on Air BNB same deal - you will also put your CGT exemption at risk on your new PPOR, because you are using it to derive income, (which you also need to declare for tax, especially with the tax office trawling through AirBNB and sending letters to owners...)

Sorry to be a bearer of bad news... but trying to save you $$$. All that glitters is not gold.

[JLR]

Sorry, I have no advice, I just wanted to welcome you to the forums.

We have a favourite little spot at Pambula Beach we love, but my husband is also quite taken with Narooma.

Hope to see more of you here on the forums.

[Ocean_AUS]

Ooooh say hi to beautiful Tathra from me! Far South Coast is a beautiful place.

A little bit black around the edges at the moment, but apparently the community spirit is out-of-control and making it a beautiful place to live.

I would definitely prioritise a debt free PPR over any kind of investing. With kids you need the security, and just the fact that having kids adds so many uncertainties to your life - disability, sickness, special needs etc (our story is a long one involving an out-of-the-blue cancer diagnosis for our four year old, which sucked up all our earning capacity and time for a year - not saying that to scare you but just make the point that kids may suddenly add unforeseen costs beyond carseats and food).

We sold up in Melbourne and moved overseas, partly to have a debt free PPR, and it's made a huge difference not having a massive fortnightly payment to mak. Also between that & not paying childcare anymore, our expenses have plummeted and made a beachside life on low-ish incomes in a chillaxed backwater a much more doable thing. Although we're in beachside west of Ireland, which really puts the 'chill' in 'chillaxed'...

Personally I am delighted to no longer have heaps of our cash tied up in Aussie property. I feel like values will be hit by the various investigations into banks/financial planning and a general ending of the good times that is overdue. So I'm on Team Sell That Investment Property Now. If you got 250k from that and you have $200k you're almost at mortgage free PPR, or at least a very low mortgage.

That sounds super tough Moomintroll. I think we are leaning this way - if we sell the IP, we'll have about $50k mortgage on PPOR, which we should pay off in 2 years (faster if I wasn't on maternity leave). Plus, then we're free to travel and rent out our PPOR. We have a caravan (we've spent 6 months travelling already) and could leave the house to make $$ in summer months. We're also thinking of renovating a bus to travel in (my partner is pretty handy). I think we could make $500-800 renting our new house depending on the season.

We've just made an offer on a place in Bermagui, which is our fav south coast town. Narooma is more beautiful, possibly Tathra too, but Bermagui has the most amazing community feel - community run preschool for 3 year old (low $, great environment), hipster cafe, awarding-winning sourdough (Honorbread - try it if you get the chance!). Only downside is I have to drive 1 hour to get to Aldi and get frugal on the groceries.

if you've been public servanting in the Can, you guys must have reasonable super accounts too? You mentioning paying into them but not the values of the accounts now.

Super:
Me: $80k
Partner: $30k (he's not into public servanting or working for any kind of boss :))

With Airbnb were you imagining having some kind of extra space/other building to rent? Or heading off in your caravan to free up the main PPR? We do the latter a bit here as we live in a tourist town and it is ok, a bit of work packing up the house and we pay an agency to do the cleans and we head off to stay with relatives.

We've just put a final offer in on wacky house 1 street back from ocean, 300 sq meter floor area (2 storey), 'renovators delight'. We're thinking to turn upstairs into living area for us and downstairs into 1-2 rentable flats. Actually, we're hoping to find some couples or families who might want to join us in a co-living experiment. We've been exploring living in a sort of community, and are finding that more rewarding than living on our own as a nuclear family...

[Ocean_AUS]

1 x investment property. Value $550k (bought for $394k in 2011). Mortgage $256k @ 3.8% (monthly repayments are $1700). Rented for $500 per week (privately rented, approx. $3k in bills/maintenance a year – so currently ). 

Can I ask where who are getting 3.8% from for an investment loan? Asking for a friend, you know.... hehe, that's a crazy good rate.

Set-up a discretionary trust so that my partner’s company can distribute tax to me as lower income earner.

You mean earnings. Be careful here, if his consulting income is deemed to be PSI there won't be a benefit here. And whatever tax saving you get will likely be eaten up in accounting fees too.

Should we sell investment property (it used to be our PPOR) and get into ETF/stock investing? Better return? OR should we refinance the investment property and use the extra cash to pay down any new mortgage on our PPOR. Currently we’re thinking to make PPOR debt-free as soon as possible.

You haven't told the bank you are no longer living there now have you... is that how you've got a PPOR rate for an IP loan?

Refinancing to put more loan on the IP to use to pay down a new PPOR isn't really a great idea. The additional loan on the IP will not be tax deductible, and now you'll have a mixed purpose loan where you will need to apportion interest for tax deductibility purposes. Bit messy.

We’re hoping to do some airbnb through our new place, I’m wondering if anyone has any experience of that and if it might be better to run it through the company rather than in our personal names?

If the company owns the new PPOR, then you don't have a CGT exemption any more. If you own the house, the company can't earn the Air BNB income (unless you charge the company for use of the property, in which case you may lose your CGT exemption). If you rent it directly on Air BNB same deal - you will also put your CGT exemption at risk on your new PPOR, because you are using it to derive income, (which you also need to declare for tax, especially with the tax office trawling through AirBNB and sending letters to owners...)

Sorry to be a bearer of bad news... but trying to save you $$$. All that glitters is not gold.

Sounds like you are exposing some holes in my understanding of things Marty998, and I appreciate it.

We haven't told the bank that our old mortgage/PPOR is now an IP. Should we have? (And yes 3.8% isn't an investment mortgage rate). Do you know if that impact on tax deductibility at all?

I think we have come to feeling that the smart thing to do is get out of the IP, even though it's been ticking over nicely, and aim to be debt free on PPOR in next 2 years (or keep a small mortgage that we use to kick-start some investing?).

Appreciate that airbnb will affect CGT. I was wondering about how it worked with the renting personally vs company, and I see that it all needs to be arms length... so might as well do it in my own name. At this stage we're thinking of buying a large house and renovating into at least 2 apartments, as having a passive income stream from the property is more important to us in the short term than CGT.

[Ocean_AUS]

Sorry, I have no advice, I just wanted to welcome you to the forums.

We have a favourite little spot at Pambula Beach we love, but my husband is also quite taken with Narooma.

Hope to see more of you here on the forums.

Thanks JLR! We're in Narooma at the moment, I think it's one of the most beautiful spots I've ever seen. The water colour just remains exquisite all year round. However we're trying to move to Bermagui, because it's got a much stronger community and family vibe. Maybe because the highway doesn't run through it? Haven't spent much time in Pambula yet, but the whole coast is pretty gorgeous :)

[Frugalroogal]

Hi Ocean AUS

Firstly congratulations on making a move to increase happiness. It’s very easy to get stuck in a rut and stay with the status quo.

Will you be returning to your remote public service job after mat leave or will you become a SAH parent?

If you are not moving back to Canberra anytime soon and if your ex PPOR is not a good investment property I’d recommend selling it. PPORs are generally bought with different goals in mind to investment properties and don’t always make good investment properties.

Have you thought of a long term lease as an alternative to Airbnb? This is what we do and I think it’s a lot less hassle eg not having to clean between guests and you don’t have to furnish the flat. We’ve always done this without a real estate involved to help maximise return. Check online for NSW standard leases where you just fill in the front page and both parties sign.

HECS - don’t pay it off any faster than you are required to. It’s indexed to CPI and repayments adjust to your income. You will most likely need the money you would have otherwise paid to extra HECS payments for your new PPOR and renos.

[Frugalroogal]

Also I meant to say that if you are after info about trusts Aussie Firebug has done a podcast and a blog article about the pros and cons.

[Moomintroll]

Ooooh then say hi to that chilly-but-delicious ocean swimming pool! Love having a dip in there with the snorkel mask on. In fact bizarrely, we once saw a confused looking fairy penguin in there!

I echo the congrats on moving to a better life for your family. Community, nice preschool, beautiful beach - sounds like bliss!

Speaking of family, i know your kids are tiny, but have you checked out high schools? Might be something to think about in regards to selling up the place in the Can - I've got other hippy friends who left the Can for beachy chillaxed life in Tassie but then came rushing back once their eldest hit 12 because they realised options were so limited in Tas and there was just no beating Lyneham High/Narrabundah College etc.

When we first left Aus we did the 'rent out your family home' thing and were super scared about telling our bank. We finally did and they didn't change the terms of the loan at all and we had stressed out for nothing. This was two years ago though, might have tightened up more since then.

We also got caught by the CGT thing on our PPR (i had claimed for a home office) but it ended up being, as my accountant described it, 'bugger all CGT' - about 8k on a $1.05m sale. What you do need is firm time stamp values on the house when you started and ended doing the CGT-causing activity, so any valuations from banks, estate agents etc come in useful.

Have you done any super calculator things to work out where your accounts will get to in x years under different scenarios? Might be worth having a play to work out any minimum levels of contributions you feel you should be making to hit whatever target you would have by age 60.

[Ocean_AUS]

Will you be returning to your remote public service job after mat leave or will you become a SAH parent?

Hoping to avoid returning to my remote job (no longer public service, still in Canberra though) AND to avoid being a total SAH parent, which I estimate will start to send me crazy about 6 months in.

At this stage, moving away from using a trust and just assisting my partner in his business & managing rental/airbnb (which is in my name only), which should even out some income.

If you are not moving back to Canberra anytime soon and if your ex PPOR is not a good investment property I’d recommend selling it. PPORs are generally bought with different goals in mind to investment properties and don’t always make good investment properties.

It's probably a reasonable rental actually, and we did buy with that eventuality in mind, but I think we've been convinced by Moomintroll and others about the joys of being mortgage free and also not having ALL our money tied up in Aussie real-estate.

We might consider long-term leases (the house is so big we'll prob have two downstairs studios), but we also want to create a sort of co-living community, so still figuring out the best way to draw in the right people for that! Our Canberra property we rent privately/ourselves and I have also found this to be better financially for not too much hassle.

Definitely not paying off HECS faster, that's been the consistent message :)

[Ocean_AUS]

Speaking of family, i know your kids are tiny, but have you checked out high schools? Might be something to think about in regards to selling up the place in the Can - I've got other hippy friends who left the Can for beachy chillaxed life in Tassie but then came rushing back once their eldest hit 12 because they realised options were so limited in Tas and there was just no beating Lyneham High/Narrabundah College etc.

Firstly, I want to see a fairy penguin! I have swum with the seals in Narooma, which was unexpected and totally exciting, but haven't seen any penguins yet.

The high school thing is an excellent question - both options are 30/45 minutes away, so not ideal from kids perspective. Better options are in Bega I believe. I think we're hoping that by high-school age we might be set-up to do a bit of "school of the world" aka living in other countries for fair portions of the year.

I think we're leaning towards selling, but given the chaos currently happening (baby, bought new house, changed towns etc) we'll sit on it for a year before we make a decision.

Super contributions/forward calculations is an awesome suggestion, I will definitely do that! But maybe not in the next 10 days, I think I'll be having a baby :P!