Keeping your old house as an investment property
A common question that comes up for us at Bounce Financial when a client is upgrading their house is whether they should keep their existing house as an investment property.
In this blog, I’ll run through how we assess this and how you can set your finances up to do this in the future.
Is your home a good investment?
Before taking any steps, the first thing to consider is whether your home is a good investment property.
In considering this, you can’t just start with throw away lines like “the Olympics are coming to Brisbane”. You need to get very specific.
How much rent could you achieve for your home? Is it low-maintenance? Is it appealing to renters? What reason will the property go up in value?
Remember that you can buy any investment property and if there are ones out there you believe will do better financially, you’re better off selling your home and buying a property that better suits.
Advantages of using your old house as an investment property
The main advantage of using your home as an investment property is that you won’t incur any stamp duty costs or sales costs to sell and buy an investment property.
You’re also intimately familiar with the pros and cons of your house whereas buying a new house introduces a risk of the unknown.
Disadvantages of using your old house as an investment property
The main disadvantage usually comes from tax.
As a general rule, you want as much of your debt as possible to be on the investment property so that it’s tax deductible.
If you’ve been diligently paying your house down, you may end up in a situation where all of your debt is on the house you just bought (which is not deductible) instead of on the investment property. Once this is done, it can’t be undone.
This is generally avoided when you buy an investment property to rent out as you can better structure your debt.
How do you set yourself up to maximise your tax deductibility?
If you think you might want to turn your property into an investment property, you need to take action from day one regarding your loan structure.
Generally for clients we will recommend that they get a loan with an offset account. Instead of making extra payments on the loan, we suggest that they put all extra payments into the offset account.
If you want to keep your house, you’re going to need to aggressively pay it down (or off if you can) by putting money in the offset account otherwise you won’t have the borrowing capacity to have both houses.
When you eventually buy your new house, you can take the money in your offset account and use it to buy your new house. This will ensure that you’ve minimised your non-deductible debt (home debt) and maximised your deductible debt (investment property).
Interest Only
Another option you may want to consider is to take out an interest only loan. In a lot of cases, these come with a higher interest rate so you may want to balance the benefit of this against the additional interest repayments.
As always, how this applies to you depends on your personal circumstances including how much you earn, how much you’re spending and what your other costs are.
If you’re thinking about upgrading your home and would like to put together a financial plan that compares keeping the property vs selling it, then reach out. We work with clients all over Australia and would love to hear from you.