Looking to turn your current home into a cash cow?
I don’t want to come across all doom and gloom here, but there are a few crucial reasons why turning your home into an investment property might not be right for you.
Here are three things to consider before you make your move in the Sydney property market.
Keep your home as an investment property, and you’ll have a lower deposit
Let’s say you own a home worth $600,000, and have a remaining home loan balance of $200,000.
If you keep the property and take out a new loan, you can only borrow up to 80% of the existing property’s remaining balance (without paying Lenders Mortgage Insurance). That gives us $480,000 of usable equity (80% of $600,000)
So if you have $200,000 left to pay, you’ll only be able to borrow $280,000 to put down as a deposit for the next property .
But if you sold the property, it would look like this:
| Sale Price | $600,000 |
| Agent Fee | $15,000 |
| Legals | $2000 |
| Payout Home Loan | $200,000 |
| Available Deposit | $383,000 |
That extra $103,000 deposit can go a LONG way as a deposit!
It might not be Christmas at tax time
There are a number of tax benefits available for homeowners, and a lot of misconceptions too.
Many homeowners have the belief that investment properties are a tax deductable haven. However it’s the purpose of the loan that’s important for determining tax deductability.
Let’s look at an example:
Katrina and Tim own a home valued at $600,000 on which they owe $200,000. They want to purchase a new home for $800,000, keeping their existing home as an investment property. They’ll borrow the full $800,000 giving a total loan of $1,000,000.
Only the existing $200,000 is tax deductable. The new $800,000 is not deductable as the purpose is to purchase a new principal place of residence.
This is not very tax optimised as the majority of your loan is not deductable.
Can you emotionally detach from your home?
When you first bought this property, it was your family home. The risk you run with turning your haven into a financial object is losing out to your emotions. How would you feel if your future tenants damaged your property? It’s hard battle between your head and your heart, but it’s often wiser to just sell your home, financially and emotionally cutting you off from its future with new occupants.
If you really, really want an investment property…
After you’ve sold your family home, purchased a new home and moved in; You can then use that equity to purchase a different property – your money maker – with a fully tax deductable loan.
When is it worth it
After all the above is said, sometimes it’s still worth it to keep your home as an investment. The key reason might be you think the property will go up in value far more to offset the above issues.
Importantly, when considering tax implications it’s best to speak to a professional adviser like your accountant or financial planner.