Property Ladder known as an old term of wealth building
Ever wondered what it means to climb the property ladder? In the opinion of many, climbing the property ladder is something that happens overseas or especially in the UK. The concept of buying a home, adding value and improvements to it and then selling and purchasing a larger, more valuable property is the way they invest.
During the Easter break in our hotel, we had Foxtel, and I found myself getting sucked up into Property Ladder and Location Location, the UK property shows that I used to watch when I lived in the UK. What struck me this time was that we were programmed to think that working your way up the property ladder was the way to create wealth. Interestingly enough, I was finding that the effort, expense, and hassle these “inexperienced” property renovators were undergoing actually made no sense to me. They were often having to give up their high-paying jobs to make a small profit to flip a property or renovate to a great standard to sell it as they could not afford to live in it and enjoy their hard work of a new renovation–only to sell it and purchase another “renovator’s dream” to live in again. Not a lifestyle many of us Australians would subject ourselves to when we value lifestyle above all else.
I simply can’t see the sense in this from a lifestyle perspective.
In Australia we are a lot more spoilt, having a system that incentivises us as investors while still getting enough growth and value in renovating our own properties without over capitalising.
With the costs of selling and stamp duty on new purchases, investors tend to purchase multiple investment properties instead of moving up into a larger home. Having a multiple property portfolio is the more considered route to wealth creation. Those that grow into a larger family home consider keeping their original home as an investment instead of selling it. However, those who do choose this as a strategy have a number of things to consider:
- Is this an older property that requires ongoing repairs and maintenance – like a Queenslander for instance? This can cut severely into your investment profits.
- As an older home is there much depreciation claimable? This can affect how tax-effective the investment is likely to be and how much tax you’ll get back.
- Is it in a growth area, close to infrastructure and in a good location that will continue to provide capital growth over the long-term while balancing a good rental return ratio?
- How much of a loan do you have on it? As this was originally your principal residence, you may have paid a lot of principle off your home. If you have, then having a low loan on your investment property vs. a new higher loan on your new home is not ideal.
- Firstly it won’t be as tax-effective, and secondly your new principle home mortgage may be larger than you could manage. Often a bank that lends you additional money against this property to purchase a new property could result in this new loan portion not being tax-deductible. You may be better off to sell your home, purchase the newer one, and then use the equity remaining to purchase the RIGHT kind of investment property like a brand new property with high depreciation, growth, a higher loan, good tax effectivity, and a 4% plus rental yield.
- The banks also have the right to secure your additional payment in your redraw account as paid in full as part of the loan as soon as you mention turning the home into an investment property. This can be detrimental, especially if you planned on using these redraw funds to fund your new property purchase.
- There is also a six-year rule that you may want to investigate if you want to move from your home into a rental property in another city or try a new suburb first. You are able to select which is your primary residence within a six-year period if you are renting your original home out. You have up to six years to rent this out before having to pay capital gains tax (CGT) on the property for the period it has been rented out. This is useful for those who have gone to live overseas for a long period or moved to a new location/mining town for work. Here is more on this rule. http://bit.ly/19Mo433
The best thing to do is seek good advice from a financial planner, mortgage broker, or accountant to ensure you can maximise turning this old property into an investment.
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