To sell or refinance?
There comes a time when many investors have to think about whether they should sell an investment to help pay down their principal place of residence or refinance and reinvest.
Blogger: Paul Glossop, director, Pure Property Investment
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In a previous blog I outlined the substantial capital gains made by Sydney and Melbourne residents over the past three years and how these capital gains could be reinvested to potentially double your money in 15 years.
Now I want to discuss the crossroads that many property investors are currently facing: ‘should I sell and pay down or refinance and reinvest?’
The short answer is that it is really dependent on where you are in your investment journey but I’ll provide a scenario that outlines the benefits of refinancing and investing again.
Over 70 per cent of property investors only own one or two properties and stop at that but with the example below you have to ask yourself the question, ‘why wouldn’t I reinvest the profits?’
In this scenario the investor currently owns one investment property and their PPOR.
Option one: Sell your investment property (neutrally geared) and pay down your PPOR.
Investment property loan amount: $300,000
Investment property sold price: $500,000
Capital gains tax property purchased for $400,000 (25% of profit approx.): $25,000
Agents fees (2%) : $10,000
Closing costs: $2,000
Net profit from sale: $53,000
PPOR current value: $500,000
New mortgagee amount (originally $300,000) using the profits from the sale of your investment property: $247,000
PPOR projected value in 2030: $1 million
Monthly repayments to pay off your PPOR by 2030 (based on 6.00% interest rates): $2,084.33
Total net position by 2030: $1 million
Option two: Hold your investment property (neutrally geared) and continue to pay down pay down your PPOR.
Investment property loan amount (interest only): $300,000
Investment property current value: $500,000
Investment property projected value in 2030: $1 million
Net equity position by 2030: $700,000
PPOR current value: $500,000
Mortgagee amount: $300,000
PPOR projected value in 2030: $1 million
Monthly repayments to pay off your PPOR by 2030 (based on 6.00% interest rates): $2,531.57
Total net position on both properties by 2030: $1.7 million
Option three: Hold your investment property (neutrally geared) access the equity to re-invest in a second investment property (neutrally geared) and continue to pay down pay down your PPOR.
Initial investment property loan amount (interest only): $400,000 ($100,00 line of credit)
Additional monthly repayments (interest only 6%): $500 per month
Investment property current value: $500,000
Investment property projected value in 2030: $1 million
Net equity position by 2030: $600,000
New investment property loan amount (interest only): $300,000
Investment property current price: $400,000
Investment property projected value in 2030: $800,000
Net equity position by 2030: $500,000
PPOR current value : $500,000
Mortgagee amount : $300,000
PPOR projected value in 2030: $1 million
Monthly repayments to pay off your PPOR by 2030 (based on 6.00% interest rates): $2,531.57
Total net position on three properties by 2030: $2.1 million
The brass tacks of the three scenarios is that if you can afford an additional $218 per week (remembering that these scenarios don’t take into account depreciation which could potentially negate the $218 all together) the 15 year benefits of scenario three over scenario one is a staggering $1.1 million.
