Hi
My partners parents are going through their business going under, they are going to lose their family home. They have asked us if we would like to help them out by buying their house as a investment property and they would rent it off us. So we would have a definate tenent for the rest of their life (they said they will sign a contract to state that). The home has been valued at $150,000, but they said that they could get it so that we could buy it cheaper than the value.We currently have our home which we owe $107,000 on and its got valued recently at $160,000 as we just refinanced. I havent really got that much of a idea about IP's, I have done a little research, about negative gearing, tax etc.
My partner really wants to do this for his parents, but I'm a bit unsure…..So I guess Im just asking for advise on what people think.
Also just a question about finance how do you go about financing IP's? Do they include what you'd be getting as rent for the IP, when you apply?
Dear Wishful
The earlier you get into the market, the better – and this seems like a great opportunity… but you know what they say about doing business with relatives! You must make sure everything is legally done, and all on paper as if you were perfect strangers to each other.
The beauty is you do not have to pay agents! Get a good settlement agent or conveyancer to do all the paperwork. The way to finance this is through a lender – I would go to a bank or BS. They will need to be satisfied that your salaries will be able to service both your current loan and your new investment loan. The rent you get is taken into consideration, as well as the current values of all the properties you have, and your lifestyle (which means credit cards, personal loans, car loans, etc)
If you can service the loans, you have a good deal. Try to persuade your in-laws that their rent will have to rise if there are future rate rises from the bank.
You will find the first two years the most difficult to manage – after that, your pay increases, the rent increases and a general rise in confidence will make you glad to made the move.
Hope this helps.
Elmina
Hi Wishful – A no doubt traumatising time for the parents, and excellent (and natural) your partner and yourself would try and help. As mentioned though, not without possible issues. Still, I will stick to dealign just with your questions.
A nice and simple method is to accesse some of the equity in your own home – for ease of doing so and common sense, I would suggest up to 80% LVR (loan to property value ratio – ) THus, that would make a figure of $128k on your current home loan/valuation – less the $107k you owe, leaving you around the $21,000 or so to 'play with'. You could then use this as the (or towards the) deposit on your parents property. Bear in mind, you will then be paying interest (and principal repayments too unless you split your loan, and set this part up as interest only) on this , as well as you new loan. If you have no other money, this will probably cover a 10% deposit on the parents house, plus closing costs.
SO the question is can you make this work with the rent, as opposed to the two loan repayments (your deposit, and the new house loan). ?
As far as loan servicability, yes, the lender will indeed count your rental as income, usually up to 80% of it.
Hopefully that gives you a bit of an idea as to how you may be able to discuss things further togehter. All the best.
Hmmm, Hi
Some really good suggestions from people so far.
But I have another for you.
Firstly, a loan for an investment property is different to your home loan becuase lending institutions allow you to have a loan where you only make repayments for the interest charged each month. Where as your home loan, I'm sure you understand, you are required to make princilpe AND interest repayments each month.
Also, there are tax advantages to you and your partner from an investment property, most expenses are tax deductable. An Accountant can help you to fill out and submitt a Tax Variation Form which allows you to pay a reduced rate of tax from your weekly income which effectively improves your cashflow and helps you service the loan.In terms of financing you need to get professional advice of course but I do have an idea for you. I have no idea why the business they are trying to operate is failing, maybe they just need a little more capital for marketing. During the process of arranging finance for your new investment property you can talk to your broker about a Structure Loan Facility. This could provide you with a Line of Credit or Redraw facility which allows you to draw funds against the available Equity in your home and the investment property (provided the LVR is less than 100%). This redraw facility could help support the business until they get out of trouble.
I hope you find this information useful but please do get professional advice.
I appologise for any typo's
My office is in Brisbane
pjk1966 wrote:a loan for an investment property is different to your home loan becuase lending institutions allow you to have a loan where you only make repayments for the interest charged each month. Where as your home loan, I'm sure you understand, you are required to make princilpe AND interest repayments each month.Sorry to disagree with that, but there is no problem paying interest only on a PPOR home loan – whether doing so on the whole loan or either as a loan split, or even a line of credit. Just as there is no problem doing P&I on an investment property if one so chooses…..all depends on what the borrower wants to achieve really.
An option I have seen a few use (and is not a bad idea depending on an individuals plans etc) is to do an interest only loan on an owner occupied home, but actually pay P&I on it – thus giving a small breathing space if any emergencies or unforseen bills/costs may arise.
The only reral differerence between an investment loan and a 'normal' (?) loan is that in generally (there are exceptions – with conditions) while you can borrow up to 100% (or more -yikes) for your PPOR loan, 95% is the usual for an IP.
That said, in the current financial climate, having a minimum of 5% deposit (ideally 10%) if you cannot fund a 20% deposit is the way to go.
And, welcome to the forum!Hi Someone mentioned in one of the posts that there could be possible issues but didnt go into it, I was wondering if anyone wanted to explain the possible issues that could arise.
Also thanks to everyone that replied.
Wishful,
I would avoid any contract with your parents in which they commit to saying and paying rent for the rest of their life. I am not a lawyer but you run the risk of potentially creating a life tenancy or other equitable interest that may create problems later.
For example, if they are contracting that they will stay and pay for the rest of their life, it would seem to me that your are agreeing to grant them the right to do so. How does one then sell the property should you find yourself in a position where you have to do so. Also, you will find lenders might have an issue in that, should things go pear shaped, how would they sell a property that has a tenant who would claim they have a life-long entitlement to stay in the property?
Risky in my view and a far better approach to understand what the commercial rental return on the property would be and ensure you could continue to afford the property if you had to put it out to the market.
Hi wishful.
I thought of a couple of possible ideas:
1. Perhaps your partner's parents repurchase the property through a trust… You act as the Guarantor, but they make the repayments. (perhaps interest only loan)… Perhaps if they default then, you could repurchase.
or
2. Maybe you considered purchasing HALF of the property with them…?
Perhaps this could lighten the repayments for them, then they could purchase the rest of you later.or
3. Would they consider downsizing their property ? (Perhaps there's a property down the road that's more affordable)
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