Should I retain my current house as an Investment Property when upgrading my home?

This is a question we get a lot. Let's break it down for you.

Firstly, the decision may be made for you based on your mortgage serviceability.

When you apply for a home loan for your new home, banks will assess whether you have enough equity and enough cashflow (based on your living expenses and an estimate of the rental yield of the planned investment property) to be able to afford both properties.

If you do, only then can you move on to the analysis of whether you should:

Why keeping your exiting home as an Investment Property could be a good idea:

• You have already paid stamp duty on this property. Therefore, on a like for like basis compared with purchasing another investment property in the future, this may be advantageous. Additionally, you also avoid selling costs such as agents fees.
  

• If you and/or your partner are on a high marginal tax rate, you may benefit from negative gearing. Negative gearing allows you to use investment property losses as a deduction against your other taxable income to reduce your overall tax. It is important to note, this strategy is only worthwhile if the property has strong capital growth.

Why keeping your exiting home as an Investment Property may be a bad idea:

• When you purchased your initial home, it was likely purchased for lifestyle factors, rather than investment purposes which can be entirely different things. For example, if your initial home was an inner city apartment which allowed you to be closer to the city: an an investment property it may be a poor option as these types of properties often have low capital growth and the net rental yields can be diminished with body corporate costs.
  

• You may have paid down too much debt, which may limit the tax deductibility as an investment property. This is a common mistake people make. Whilst paying off non-deductible debt is usually a good strategy, it isn't if you have possible plans to turn the property into an investment later.

  
  

  Instead, if you have extra savings, you should allocate them to the mortgage offset account rather than directly into the loan. That way, you still benefit from the same interest offsetting, however, when you purchase your new home, you can move that cash into the new primary residence offset. This therefore, allows more deductible debt on the investment property.

As Financial Planners, we can help guide you on the best decision to make. For instance, we often complete long term modelling and projections to determine if you should retain the property long term as an investment, based on the need for cashflow of your other goals.

For example, a common goal of client's may be to send their children to private/semi-private high school which can add significant cashflow pressures. Therefore, in these situations, sometimes it is best not retain the investment property (which are also often negatively geared), and instead build up greater savings in the primary residence offset to be used for later education costs.

If you would like help making your strategy decisions:

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The purpose of this blog is to provide general information only and the contents of this blog do not purport to provide personal financial advice.  We strongly recommend that investors consult a financial adviser prior to making any investment decision. The contents of the our blog does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this blog is given in good faith and is believed to be accurate at the time of compilation.