Hi guys,
I will be approaching my mother in law or father shortly in regards to using the equity on their PPOR as a deposit on my first home. I have some questions in regards to the things I should mention when approaching them with the request / offer, but first please see below my investment idea noting that my goal is to accumulate cash flow properties:
Min 3 bedroom home with "value adding" options
Suburb – Caboolture QLD ( or further south price permitting )
Price range – $200k – $240k
Rental return – $265 – $300 per week
NB: I have found multiple properties available on Realestate.com.au that suit this requirement
This scenario should suit Steve's 1% rule as a quick reference before delving in and crunching some more numbers.
How can I prove to them that this is a safe method of investing and there is minimal risk involved with the right deal being purchased?
How can I develop the plan on paper to show them how the financing structure works?
I have already sat down with Richard Taylor who is fantastic and I will be using his services for the purchase of the property so all I really need to do now is create a plan on the desired property with the expected returns and costs to show that we can service the debt.
I appreciate everyone's input and would especially like to hear if people have invested in Caboolture at all and what your view on the area is.
Regards,
Matt.
"How can I prove to them that this is a safe method of investing and there is minimal risk involved with the right deal being purchased?"
Investing is always risky, that is why we generate a return. Key is to manage the risks. Try documenting all the risks associated with your deal. Try to access the financial impact of these risks, the likelihood of the risks actually occurring and how you might mitigate the impact of these risks should they occur.
i.e. what happens if;
Interest rates go up? How likely is it that interest rates go up by 1%? What is the dollar impact on your repayments? How can cover the additional repayments? How high can rates go before you are in trouble?
House prices fall?
You lose your job?
You cannot find a tenant?
You under cost your deal and have unexpected costs?
etc…
Don't let the risks scare you or your investors off, have a plan to assess and manage the risks.
Example:
Identified risk – Cannot locate a tenant
Likelihood – Low, vacancy rates in area = 1-2%
Financial impact – $230 p/w whilst untenanted
Mitigation strategy 1 – a use a property manager, who can help find good tenants
Mitigation strategy 2 – lower rent, we can afford to go to $255 p/w
Good luck
That's fantastic advice Richard and I fully appreciate these points.
To assist with these cost valuations would it be advisable to consult a financial adviser?
A financial advisor might be overkill. You might also struggle to find someone to do this quickly and cost effectively.
The majority of financial advisors are more interested in selling financial products in my experience.
Your mortgage broker should be able to help work out changes in repayments for changes in interest rates or if you're IO just times your loan amount by the change in interest rate to work out your additional repayments per annum.
You can use comparisons from realestate.com, real estate agents, bank valuations etc. A good property manager might be able to help you consider all the rental outgoings and you can get quotes for insurance etc fairly easily.
If you are using a spread sheet or other program to crunch the numbers it might be worth getting someone else to cast their eye over it all (mortgage broker, accountant, experienced investor or the like) Changing the inputs and analysing the outcomes is a good way to start as well.
The example you've given I would not consider a cashflow property….but that's just me.
Rick sta, instead of just saying could you please add something constructive and back it up with some actual reasoning?
Fair enough I apologise if that doesn't help. I'm not real clued up on the SE Qld market, but if in pursuit of cashflow I would target properties with a 8 to 9% gross yield and minimal holding costs ( rates and body corp fees, insurance is also a killer up here in north Qld at the moment)
Thanks Rick sta, I just re-read my comment and I am sorry, it came across as very rude but was not intended in that nature at all.
So my question to you, how do you find those 8-9% gross yielding properties? And how many properties do you own?
– Matt
I woudn't say "minimal" risk – there is a high degree of risk which you have to try to minimise.
Think about the legal side of things
1. Structure.
2. Borrowing structure,
3 guarantees, security for the loan
4. asset protection if you or PIL banktrupted.
5. death of either you or them – properly drafted wills (can save you hundreds of thousands in legals fees later).
6. disputes about releasing secuity/guarantees.
7. Centrelink issues – are they on a pension, and will this be effected
8. stamp duty on releasing an interest
9. land tax
10. writteb loan agreements
11. interest rate – to charge or not
12. terms of loan.
13. allow them to caveat
14. Do a full agreement documenting as much as this as possible
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks TerryW,
So to kick start this agreement would you suggest that I consult with a broker, legal consultant and tax adviser to help create this document?
Or what would you suggest be the next step for this approach?
Regards,
Matt.
only lawyers can draft legal documents. But you might want to talk to a broker about strcuturing loans and a tax consultant about tax issues first.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Okay thanks. I have consulted with Richard Taylor who seems fantastic and very cluey with everything I require as he has done it all before.
I will now just need to search for a good property tax consultant in Brisbane and then I can develop a plan. Does that sound like the right idea to you?
Hi Mathew, if using your parents equity fayils, are you able to save for a deposit? You could probably borrow 90% or more
Unfortunately it will take a long time to save a deposit if my current situation remains similar. I have a young child. Lower income and a small $11000 personal loan from my naive days. We’re tracking along nicely now but it will take a long time to save a sizeable amount of money.
Remember, It’s not how much you make, It’s how you spend it. Aim to save a couple dollars per week, within a few years you will have saved more then you realise you could.
Unfortunately it will take a long time to save a deposit if my current situation remains similar. I have a young child. Lower income and a small $11000 personal loan from my naive days. We're tracking along nicely now but it will take a long time to save a sizeable amount of money.
Then how about a rent to buy, lease option or something like that. I know guy's would hate it but the startup is cheap follow some gudielines fill in the blanks.
Caboolture, QLD 4510 and Caboolture South, QLD 4510 what areas came under flooding and so forth
Hi AussieKiwi,
Can you suggest how I go about Rent to Buy so that I can understand how it works and how to look for those deals?
Any help is appreciated.
Regards,
Matt.
HI Matt
Hope you are keeping well.
In Qld we prefer License to Occupy deals rather than Lease Options but in saying all of that you need to find a Vendor who will agree to such Terms and that is the hard part.
Of course you have to accept that you will pay a higher rate and a higher sale price for such a product.
We are hoping to launch a new 100% investment loan product when i get back from the UK so we can certainly chat about this. In the meantime good luck with the mother in law.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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