How your PPOR can help you create wealth

Your own home is probably the first real estate investment that many people make. But are closing off and paying off more mortgage payments the best way to make financial progress – or should you invest earlier and make bigger gains? Nina Cuturic's reports

As a borrower, your perception of debt plays an important role in determining how you will manage your loan and when you enter real estate as an investment .

Generally, for debt or risk aversion, stay one step ahead of your mortgage repayments, before you even consider following the path of lending. investment, has a certain degree of comfort and certainty – and it's a wave they'd rather go out until they own their home.

But, while submitting the last monthly reimbursement slip is indeed a capital victory, understanding the full potential of your personal place of residence (PPOR) – even while you are paying it off – could see you making more financial progress important, says Michael Beresford, director of investment services at OpenCorp.

"Investing is necessary to improve your financial situation, and if you take a long-term approach with everything you invest, you will be very successful," says Beresford.

"Your state of mind needs to be adjusted, and this is where a [financial] coach and mentor can help you and hold your hand on this path and allow you to understand what the options are and what will work for you. "

"It's about being able to create your own capital growth, as opposed to the potential purchase of someone else's capital growth "

Beresford adds that the effectiveness of a strategy that catapults your PPOR equity will depend on the location of the property, equity and its provenance, skill of the location ; investor and his borrowing capacity.

That said, building on what you already have is a great way to start as a real estate investor – and one that you may want to consider as soon as possible.

Investing First or Paying for Your Own Home?

When asked why some borrowers are more likely to pay off their home loan before considering investing, Drew Evans, director of Caifu Property, suggests that it depends on their personal attitude in respect of debt. »

Many clients have this mentality where they want to pay off their debt quickly and then move on to the next one, which they will pay off before they get the next one – but I guess for me it comes down to using it effectively your money to make your money work hard for you, "he says.

"If you can put in place a plan where you can strategize between having your own home and then controlling investments that produce cash flow and huge chunks of equity, then you realize that you can actually do both at the same time and get much, much better much faster. »

So what are the options available?

One of the most popular recent strategies is to leave your PPOR, rent it out and rent a property yourself (also known as "rentvesting"). It is at the extreme end of making your money work harder for you. It may seem like you are about to take a step back when you leave your prized home to join the rental pool, but in the long run it can put you in a much better financial situation.

By converting your PPOR into investment property, you can generate a steady stream of rental income and benefit from depreciation and tax benefits, which gives you additional liquidity – even more if you choose to rent in an affordable suburb.

This type of strategy could make you pocket hundreds of dollars, even thousands a month.

It was this strategy that allowed Evans to live in a suburb that he was unable to buy but could rent. He also set the tone for his future buying ability.

"I was very lucky during these five years of rental because I was able to invest in real estate and generate huge amounts of equity as well as flows positive cash while living in a suburb that I could not afford to buy. Says Evans.

"So now, I actually bought the house of my dreams at the border [of Sydney] – and I'm going quickly until the end of next year, I aim to be completely debt free [on my PPOR mortgage] at the age of 33 – using this exact strategy. "

Finding the right balance

Building an investment portfolio that includes leasing your PPOR can be "really powerful," says Beresford, who himself "invested annuities" until the mid-thirties.

"This is the best way to be able to hold more properties and build a larger asset base with more asset value and as little cash as possible," explains he.

"You would like to make sure that the sale of your PPOR is done for the right financial or lifestyle reasons, as opposed to selling only for cash deposits"

"You have the full choice of what you do [with the extra cash flow] – if you spend a little, maybe on vacation or for something related to lifestyle, or put it in a compensation account and reduce the interest on which you pay. your mortgage and also increase your cash reserve for future investment deposits. »

However, Beresford says that the success of this strategy comes down to "the amount of assets you can hold for cash flow".

The investor should also be comfortable with the loss of flexibility he once had as an owner occupier, and although they open up to the scenario of having to leave a rental if the owner decides to sell, this can be managed by signing longer leases.

"The main thing you need to consider, however, is what the costs of ownership are in each different scenario," says Beresford.

"Depending on the amount of your mortgage, and obviously with low interest rates right now, paying off your mortgage versus the amount of rent you would pay is essential. You want to make sure that the rent you pay and the costs of holding an investment portfolio don't strain your cash. »

If rent seeking is not for you, you may consider selling your PPOR and using the profits from the sale to buy an investment property while you are renting property yourself. .

"You would like to make sure that the sale of your PPOR is for good financial or lifestyle reasons, rather than selling it only for cash deposits," warns Beresford.

He also considers that this option is not quite as "powerful" as rent seeking, thanks to which the equity of your PPOR benefits you from investments.

"The only reason you would sell your own home is based on market cycles: the location of this property has just gone through a major boom and you can maximize your selling price, and that doesn’t ; it makes no sense to keep it long term, "says Beresford.

"Selling your PPOR in this case would allow you to gain better exposure to assets whose value would increase, if your own home is not in a place that you think will grow over time or won't grow as much. »

Realization of a renovation

Selling your PPOR and using the profits to buy an affordable property that needs a facelift could see you make a profit once you have renovated and sold it.

There is also the possibility of living on the property being renovated, in order to reduce the rental costs of living elsewhere. This would give you additional funds that you could use to add more value to the renovation itself.

But depending on the scope of the project, a renovation may also require you to familiarize yourself with the margins and fundamentals of construction and development.

"It's about being able to create your own capital growth, instead of potentially buying someone else's capital growth," says Evans.

“Think big and start small. It's about finding someone who has already done what you want to do and hiring them as a mentor. It's about making sure you don't bite more than you can chew, because, let's face it, development is not an exact science, no matter your experience – things happen . "

The borrower could potentially add more value to the renovated property than what their PPOR would increase in the same amount of time, says Beresford. However, given that a lot of effort, time and money is required to achieve this result, as well as the additional costs that have to be covered by the sale, Beresford says "it is not [an option] that I would recommend to the majority of people ”.

"Understanding the market, doing detailed feasibility to understand the opportunity, and making sure that you get the right timing is fundamental, because there are a lot of moving parts here that can impact the profit you make, "he explains.

"Next, you need to understand how you are going to use the renovated property to further develop your portfolio later."

If you plan to sell the renovated property in order to buy another one that you can renovate and thus continue the profit process, Beresford says that this will result in additional sales charges and potentially a profit tax. capital.

In the case of reassessing the property after renovation to remove equity, he adds: "What you need to understand is: what is the optimal amount of money to spend on the renovation to maximize valuation based on other properties in the area and what sells?

"You also have to think about what the market will do after the renovation [period]," he says. "If the market is not as strong, it will erode your profit and your risk would increase considerably."

Registration of your mortgage

Ensuring that the mortgage on your PPOR works in your favor is as essential as considering the strategies that could allow your home to push you into investing.

"In a constantly changing lending environment, one risk is that people will take their eyes off the ball and feel comfortable with what they have in store. loan terms. They don't review it regularly, "says Beresford.

"We have had stories of clients who have a few properties and their own homes and we have saved them $ 20,000 a year through refinancing simply by helping them keep their finger on what's available."

For borrowers who are reluctant to repay more than one loan, Beresford adds that it is important to understand the difference between good and bad debt.

"The debt on the investment property, for example, brings a large amount of rent and, ideally, a large tax benefit in the pocket of the investor, which is money which can be used to pay down debt, "says Beresford.

However, the situation of each individual being different, he advises borrowers to seek professional advice on the options available to them.

According to Evans, investors should also spend some time figuring out how much they can reasonably afford to spend on investing in a way that prepares them financially.

"I think this is the big change in psychology. A lot of people, when they start for the first time, see the PPOR and the investment debt as negative, and they don't really see what it will do for them in the long term, "explains Evans.

"Borrow no more money than you can afford; be sure to focus on your cash commitments versus your spending; and set up personal buffers and property to make sure that if the "what if" happens, you will be fully protected. "

"HOW I JUST PAY $ 300 A MONTH ON MY MORTGAGE"

In 2012, Dean Zarif bought a three bedroom, one bathroom home in Currumbin Waters on the Gold Coast which was infested with termites.

"I lived there for almost a year while stripping it completely and converting it into four bedrooms and three bathrooms with two bathrooms, during reconstruction," says Dean.

He bought the original house for $ 280,000 and the total renovation costs amounted to $ 80,000. The recently renovated property was sold for a handsome $ 480,000 a year after the initial purchase.

Before starting the renovation, Dean got expert advice from local area agents and scoured countless open houses to learn about local competition and how other properties had approached a move upmarket.

"We finally established a realistic budget, with a 15% reserve for unforeseen expenses, and we made sure to focus on key areas so as not to over-capitalize," says Dean.

"Talking to local agents gave us a good idea of ??what needed to be done to get the best possible sale price."

Dean says that living on the property during the renovation means there are no rental fees, allowing him to focus on the mortgage and renovation fees. There was also no travel time spent going back and forth from the job site each day, which allowed for faster construction, but the challenges were managing the dust and constant debris. He worked on the project for about 20 weeks in total, treating it as his full-time job.

In addition to undertaking similar renovation projects, Dean also converted part of his PPOR in Hamilton, Queensland, to a two-bedroom apartment with separate electricity and gas, which allows him to rent the upstairs section while he continues to live downstairs.

"I receive $ 395 per week for the highest level of my PPOR, and my mortgage is a little more than $ 2,000 per month, so the majority is covered by my tenant upstairs", he says.