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What property options do we have?

We’re a young family with approximately $60,000 equity in a Sydney beachside unit, which we need to move out of due to space constraints. It is valued at approximately $320,000 and has a potential rental income of $220 a week. Our combined income is $70,000. We want to move to a house that would cost about $450,000 to buy or about $400 a week to rent. Should we:

  1. Sell the unit and buy a house using a conventional mortgage?
  2. Sell the unit and rent a home and consolidate our equity in a shares portfolio or diversified fund?
  3. Sell the unit and rent a home and consolidate our equity in a property investment?
  4. Rent the unit out, rent a home and negative gear the unit?

How do we best evaluate these options and who can help without costing us a fortune?

Unfortunately, due to federal government laws, I can’t answer these directly so you can’t act on my observations, but I can go through each one with you and give guidelines for you to find your own answers.

First, outline the four different scenarios on four pieces of paper or word documents on your computer. Then work through each scenario, keeping as a high priority on what is the cash flow outcome.

On scenario one, go to a mortgage broker and your bank to see what your repayments would be like. And then go to another broker and see if you can get a better deal.

For scenario two, this is a gutsy play and some time over the next few years you could feel sick when the stock market dives. If you can stomach the short-term worries and you buy good blue chip shares or reliable managed funds, you can work off returns around eight to 12 per cent. Taking 10 per cent, your money doubles every seven or so years. The challenge is to pick good funds or shares and survive scary market moves, but many people have used this strategy to build wealth.

For scenario three, you need to look at your tax benefits of this play, the rents and expected capital gain for the area where you want to buy.

On scenario four, you save a whole lot of expenses associated with buying a new unit. This should go into your figures to determine what works best, especially for cash flow.

There’s another scenario worth looking at and that’s selling the unit, buying a new property to rent out, renting yourself and taking the equity and putting it into super so your super is turbo-charged down the line. You then would have assets working for you and your super would be pushed into the fast lane, but you won’t be able to access the money until retirement.

The simple facts are the tasks ahead are hard work and that’s why financial advisers have to charge a bit of money to work it out, but they should be able to find the best way to both make and save you money. Good luck.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, May 27, 2011

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