INVEST IN CHEAPER SUBURBS

While you certainly got out at the peak, it’s not always a good idea to sell and not buy in the same market, mostly due to the uncertainty around the future value of property. In your case, though, it looks to me as if you are hoping to get into something with space for both a growing family and a new business, and it is unlikely to be another apartment. I’m guessing you weren’t exactly sure what you wanted, which is why you cashed in and gave yourself some breathing room.

Given your aim to invest the cash in a suitable vehicle, I am going to go out on a limb here and ask if you might consider continuing to rent, at least for the short to medium term? I have a number of reasons for this suggestion.

First, the Sydney market is likely to stabilise for some time to come, meaning that a buyback within three to five years most likely won’t be relatively more expensive than if you do so in 18 months.

Second, with relative rents so low, it may even become cheaper to rent than it will be to pay the interest on a mortgage, and in addition to this some of that rent will be tax deductible, as you are running a business from home. (You can’t do this when you own a home without incurring a capital gains tax liability on the portion you claimed.)

The extra money from the deduction, combined with the rent payment being lower than an interest payment, will boost your savings.

Third, initially renting in areas where the house prices are within your range can help you to determine if you like that area and want to make such a large investment in it – better than buying hastily and then regretting it because you don’t like where you live.

But lastly, and most importantly, in the meantime you can take your $180,000 and use it as a deposit to buy two investment properties, in areas where there has been no boom but there are signs of growth to come. I’m thinking of the suburbs of Brisbane and Melbourne – affordable markets with an abundance of growth drivers.

By doing this your $180,000 will have exposure to the growth on the entire value of those two properties (say $800,000 in total), and even if those properties only grew by 3%pa for five years the profit would be $127,000, or about a 70% return on your capital. Meanwhile, the tenant and the tax office are essentially paying the mortgages on those properties while you keep saving any extra cash you have to further boost your savings. At the end of five years, even with capital gains tax (around $20,000 on those figures), you will bring out much more money than you could by investing in cash, and you’ll also have a better idea of what you want to live in, and where.