THE “PPOR”

Many people will already have exposure to residential property via their principal place of residence (PPOR), and often with a loan against it.

If not, then using your cash savings towards a deposit on a PPOR is a good first step.

Ideally though, you would buy a PPOR and live in it for 6-12 months time, then move out and rent ar place for you to live in, and rent your PPOR out to a tenant.

This approach allows the interest on the loan on this property to be fully tax-deductible, be subsidised by rental income from a tenant, and at the same time allows you to keep it as a capital gains tax (CGT)-free asset for a period of up to six years after you have moved out from it.

If you move back into the property within six years (eg. at a time when the loan is already paid off or much lower), the CGT-exemption continues from this point.

This approach won’t suit everyone however, as many people prefer to own the place they live in, rather than rent it and risk being booted out by the landlord at the end of the lease.

This is an entirely personal choice that needs to be made, and we think either is acceptable as long as it suits your particular circumstances and meets your emotional and family needs.

RESIDENTIAL INVESTMENT PROPERTIES

We encourage people to take things further by investing in 3-5 residential investment properties as well, using cash savings and/or more borrowings.

This may be negatively, neutrally or positively geared, or positive cashflow property depending on your income, circumstances and the type of property chosen.

As part of this, it may be worthwhile buying properties that you could potentially sell to help reduce your PPOR debt early on, “downsize” to in retirement and/or pass on to your kids as an inheritance.

However, we do not advocate buying too many residential investment properties – the main role for this asset class in our strategy and portfolio is capital growth, and this needs to be balanced against the longer-term need for income through exposure to other asset classes that are better suited for this purpose.

But again, this approach may not be suitable for everyone, as the use of more borrowings requires a higher and more stable and secure income from your job and/or business (and ideally a job and/or business that you enjoy doing), and the level of risk involved in doing this is higher too.

WHICH FIRST – PPOR OR RESIDENTIAL INVESTMENT PROPERTIES?

Strategically we suggest you would ideally buy more investment properties before paying down the loan on your PPOR (or, buy the investment properties before buying the PPOR itself).

That way you will have a much larger asset base working for you much earlier on, which will compound and grow over a much longer period of time.

We believe that the capital growth on this larger asset base will in the long-term outstrip the benefits of reducing your non tax-deductible PPOR debt first in the short to medium-term.

Many people still prefer instead to pay down this non-deductible PPOR debt first before purchasing residential investment properties, and we think this is still fine as it is a more costly debt – this is just another personal choice each person needs to make.

DOING BOTH AT THE SAME TIME

It is also worth noting that one can simultaneously pay down non-deductible PPOR debt and borrow against the equity created in doing this to invest in assets where the interest then becomes fully tax-deductible (eg. residential investment properties).

This is done by creating a separate loan or line of credit against your PPOR specifically for this purpose.

To do this though you do need to be comfortable with your PPOR having some ongoing debt attached to it, even if is tax-deductible or “good debt”.

Some people prefer to keep their PPOR with low debt and eventually debt-free as this asset can act as a financial safety buffer if your financial situation goes bad for some reason, and this makes a lot of sense too.

MORE TAX-EFFECTIVE DEBT REDUCTION

Another point worth noting is that it may actually make more sense to pay down your non-deductible PPOR debt either from the sale proceeds of residential investment properties (or shares or commercial properties for that matter) where only 50% of the capital gains are taxed (after holding them for at least 12 months), or by using super pension lump sum withdrawals later in life that are tax-free.

This is in contrast to your current income that may be taxed at up to the highest marginal tax rate.

The proviso to this of course being that you actually pick the right property (or stock) that achieves significant enough capital growth to allow you to do this, particularly if you are investing using cash that could instead be sitting in your home loan offset account earning a relatively high risk-free return instead.

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