Maximizing Profit Margins: AI Legalese Decoder Assists in Deciding Whether to Sell or Hold Investment Property
- August 30, 2023
- Posted by: legaleseblogger
- Category: Related News
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Subject: Seeking Opinions on Investment Property Dilemma
Dear All,
I hope this email finds you well. I am currently facing a dilemma and would greatly appreciate your opinions and insights on the matter.
The situation is as follows: I have an investment property which I previously lived in for a few years. After a separation with my former partner, I decided to buy them out in order to avoid selling the property at a loss. Consequently, the property is now rented out.
The investment property is valued at approximately $750,000 to $800,000, with a remaining mortgage balance of $450,000. Considering interest, bills, rates, and other expenses, it is costing me around $700 per month.
Fortunately, I moved out in 2019, so there is still some time before the Capital Gains Tax (CGT) would apply. Furthermore, the property significantly reduces my taxable income and generates returns of approximately $5,000 to $7,000 per year.
On the other hand, I am also a homeowner (Primary Place of Residence or PPOR), with the property being valued at around $950,000 to $1 million. The outstanding mortgage balance on the PPOR is approximately $850,000. Currently, the repayments on the PPOR amount to just over $5,000 per month.
To provide some background context, our combined annual income is slightly below $300,000, and my partner and I have two children.
Now, here comes the decision-making crossroads. Part of me is inclined to retain the investment property for the sake of our children’s future and the potential for passive income when they grow older. However, the other half of me wonders if it would be wiser to sell the property now and utilize the proceeds to pay down our PPOR more rapidly. Presently, we have around $100,000 in our offset account.
Considering the complexity of this situation, I would be grateful if you could provide insights on what you would personally do if you were facing a similar scenario.
Introducing AI Legalese Decoder: Assisting in Sound Decision-Making
In addition to seeking your advice, I would also like to introduce a potential solution that could aid us in making an informed decision. AI Legalese Decoder is an innovative tool that employs Artificial Intelligence (AI) to analyze legal documentation, financial data, and property market trends. By utilizing this platform, we can gain a deeper understanding of the implications and potential outcomes associated with keeping or selling the investment property.
AI Legalese Decoder will provide us with:
1. Detailed insights: The tool processes vast amounts of legal and financial information to offer comprehensive insights into the potential benefits and risks of either retaining or selling the property.
2. Financial projections: By analyzing our current financial situation and the impact of different scenarios, AI Legalese Decoder can generate accurate projections on the potential long-term benefits derived from keeping the property or using the proceeds to pay down our PPOR.
3. Comparative analysis: This AI-powered tool will compare the financial gains resulting from continued rental income against the acceleration of mortgage repayments if the property is sold. It will provide a clear overview of the potential financial advantages associated with each decision.
4. Legal considerations: AI Legalese Decoder delves into the legal complexities, including potential tax implications and strategies to minimize CGT when the time comes. This knowledge will ensure we make informed choices that align with our financial goals.
To leverage the power of AI Legalese Decoder in our decision-making process, we can input relevant data and analyze the outcomes it produces. This innovative tool will serve as a comprehensive guide, allowing us to weigh the long-term benefits of both options and make an informed choice that harmonizes with our aspirations.
Thank you for taking the time to read this email, and I look forward to hearing your thoughts and suggestions on how to proceed. Your insights will be invaluable in making a well-informed decision.
Best regards,
[Your Name]
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****** just grabbed a
***Question 1 – Are you making money?***
It’s not clear what you net out-of-pocket costs are, taking the tax into account.
But using the $700/month figure … that’s $8,400 per year that you’re investing. You need a $750,000 property to grow by more than 1.12% to break even (call it 2% to factor in some other tax consequences).
Plus the mortgage will keep going down in real terms, while the rent (and therefore your out-of-pocket costs) will keep getting smaller.
I’m quietly confident most Australian real estate will grow above 2% per annum. So it seems a positive investment.
***Question 2 – Are there better options?***
Unclear what your CGT outcome might be, but say you sold it and pocketed $250,000 after agents, costs, and tax. Could you invest that $250,000 + $8,400 per annum for a better return.
Let’s assume 5% property value growth (which is lower than the last 20 years, but higher than the 1990s – insert your own assumption, this is just for the math). We’re estimating 2% to breakeven, so that’s 3% surplus on $750,000 is $22,500 per annum.
(I’m ignoring how your cost will eventually be 0%, but if you want to do that math then in a few years your uplift might be the full 5% on an $850,000 property so +$42,500 with no additional costs each year.)
If we subtract your $8,400 contribution from the $22,500 return, you’re left chasing $14,100. As a percentage of your $250,000 nest egg, $14,100 is 5.64%.
Your offset is currently returning 6%, and that’s after tax.
So:
* For this year, you’d get a better return selling and putting into offset.
* Assuming 5% property growth. If you assumed 7.2% (“property doubles every 10 years”, which it doesn’t) then you’d need your $250,000 to return 12.24% to keep up.
* Obviously if you think the property will decline in value, then it’s a dud investment no matter the alternatives
* HOWEVER, I would also suggest doing the math on how quickly you expect your $8,400 out-of-pocket cost to disappear. Once you’re paying nothing to hold the property you get the full benefit of that leverage – if you were breaking even today, 5% property growth on $750,000 would return the same as 15% growth on the $250,000 cash invested.
There’s other nuances around timing, tax etc. This isn’t personal advice, just an overview of the high level ways to run your numbers with your assumptions to make a decision.
CGT will apply. The 6 year exemption only applies until you buy another main residence
Keep the investment property and treat it as your pension in your twilight years. This is assuming you’re not under financial stress paying your bills and mortgage at the moment.
Why not switch to interest only on the IP loan and make extra repayments on the PPOR?
In terms of value, there’s almost certainly going to be a global recession in 2024 that’ll bring down property values, but meanwhile our unprecedented immigration rates are causing insane rent inflation (24% on new listings) and dragging up property prices despite increasing borrowing costs.
I would recommend not selling and just keep negative gearing it personally.
>I moved out in 2019 so still some time before CGT would apply
This is 100% wrong. The six-year rule only applies if you haven’t moved into a new PPOR, otherwise the PPOR overlap is six months.
hold for long term benefits.
350k at 6% would save you $21,000 in non tax deductible debt which is worth about 31k in income assuming your in the 32c tax bracket.
Im going to assume you are basically breaking even on the property as you say its costing you $700 per month but returning 5-7k per year.
So basically you would need the property to grow by approx 4% to break even on the returns you’d get from selling (this also doesn’t include any unforeseen expenses also)
Another option could be sell the current IP pay down the PPOR loan and then buy a new IP with 100% borrowed funds to increase your tax deductible debt, this could make you around $7000 a year better off and break even on this strategy would only be 3-4 years, even better if you were able to secure a new/newer property with better depreciation.
Number 1 question with ips. Do you think it will appreciate over time? Does it have scarcity and desirability as a place to live into the future? If answer is yes then keep. If answer is no then it’s probably not a great investment and you are probably better selling and putting cash into etfs like vanguard or a homeloan. All the other stuff is secondary unless you are in financial stress
So you have an investment property that is giving you less than a 1% return per year 7K/800k and on the other hand paying the bank 6% after tax for your PPOR, what a dream
Sell it before the crash.
Are you sure no taxable capital gain on IP if you have a separate PPoR, unless you want to have taxable gain on the one you live in. There is only a 6 month overlap . 6 year rule relies on only one tax exempt at a time.
See this.
https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence—home/treating-former-home-as-main-residence
Do you believe the govt will pay down its debt over time, or enjoy the classic hyperinflation route of a tradition fiat currency?