G'day Forum,
I'm a first time poster on this site (from Darwin NT) & need some advice from experienced members.
My partner's Aunt recently passed away & has left her 1/3 share of the estate which = 1/3 of a House (100% owned by the Aunt). The Public Trustee has advised that the valuation "…came in around $500,000" (don't know whether this is just over or under at this stage – so will go with $500,000) – final figure TBC in coming days.
Now my partner want's to keep the house as an IP or PPOR & will have to buy out at least one, maybe 2 of the other people's share in the estate. We have just recently bought our PPOR for $490,000 about 18 months ago so probably have little equity to use – although we haven't had it re-valued yet.
Our combined income is around $110,000 with weekly repayments at $628/wk, & after living costs in Darwin that doesn't leave us with much in the pocket. We have little savings < $5,000. So, we are wondering how we are going to find finance to keep the place? We haven't spoken to a Mortgage Broker yet but will soon.
Rough figures would tell me that we would need a loan of at least:
- $333,333 plus other fees (eg Public trustee, loan etc etc.) to buy out 2/3 Share; or
- $166,667 plus other fees (eg public trustee, loan etc etc.) to buy out 1/3 (if one party agrees to Buy & Hold with us)
The median house price in the area is around $600000 – $620000 (whether this means anything at this stage) & rental demand is quite good in Darwin as you know. I haven't spoken to an agent yet, but basic research tells me we could achieve between $500 – 600/week in rent as it is ideally located. (Property is: 2-3bed/1 bath/2 car house with separate 1 bed/1bath granny flat attached)
I would think that the rent alone should just about cover the cost's of loan right? Also, is it possible to use part of my partner's share in equity in the house as a deposit for the required loan?
We could rent out our PPOR (4 bed/1bath/2 car) for around $550-$600/wk which would free up that much in income every week if it would help us secure the place. If not, the least preferred option would be to get a loan to renovate & try & sell for more.
Sorry for the long initial post, any suggestions or advice would be extremely helpful in helping us take the next step.
Kind Regards,
Andrew.
Hi Andrew
No unfortunately rent of $500 per week won't cover the expenses and mortgage repayments on a $620k property. You'd be putting your hand in your pocket to prop it up for a few years. This is known as negative gearing which is also known as making a loss. You can get tax refunds on a portion of your loss (but not all) presuming you have another income (such a job) to claw back your tax payments from.
As a rough guide:
If you were going to borrow 80% of the purchase price from the bank at an interest rate of 4.99%, then on a $620k property you would need the rent to be at least $585 per week to break even on expenses (presuming council rates are about $1000 a year, insurance $900 a year, water rates $180 per quarter and the property manager 7% of the rent).
If you wanted to borrow a larger percentage of the purchase price (LVR which means loan to value ratio) then the rent would need to be higher again.
Similarly, if the interest rates went up, you'd need the rent to be higher in order to break even.
Everyone will have an opinion on how much deposit to lock away, but 20% of $620k is a lot of money to surrender.
Whatever you do get yourself a great broker that can really help you leverage this fantastic opportunity you have. The structuring of the loan can make or break you. Pick from one of the gun brokers on these forums ;
https://www.propertyinvesting.com/user/qlds007
https://www.propertyinvesting.com/user/jamie-0
https://www.propertyinvesting.com/user/terryw
Hope this helps
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Andrew, welcome to the forum. I'm just a newbie, but will get the ball rolling for you.
Firstly, my condolences to your partner and you on the loss of your Aunt. <Bouquet>
Secondly, what is the decision criteria being used to assess the property as investment? Is it just emotional at this stage? Although it sounds like you are running some numbers.
If the house is worth $500k, and your partner owns 1/3, this is roughly $166k. You should be able to quite easily get a loan for 80%, or $400k, and still have $66k left for expenses and perhaps a bit of a kick towards your next investment. I have plugged your numbers into a cash flow estimator, and based on an interest rate of 5.5% (Interest only loan) and management fees of 8.8% and rates/other of about $5k, and a depreciation allowance of about $4k, the property is cash flow positive. If, on the other hand, it is rather run down and needs some work in order to prepare it for tenants, this would significantly change the outlook.
Given that estates and succession and buying out other relatives can be fraught with danger, maybe another option to seriously consider is simply selling the house and taking the cash (I'm not sure of the CGT implications here – hopefully one of the resident legal experts will help out here). That cash could be used to pay down a big chunck of your PPOR, thus reducing your non-deductible interest amount. Then you could borrow the amount back, but as an investment loan or Line of Credit, and it would become tax deductible – provided you use it to buy an IP. This would save you about $750 per month on your own PPOR interest bill, and also reduce your tax. A double whammy of putting money back in your pocket.
As for renovating, have you ever done it? It can be very rewarding if you know what you are doing, and very disheartening if you THINK you know what you are doing.
My parting message is this: Investment grade properties need to be researched, found, analysed, negotiated and managed. I'm not sure that inheritance should be the sole decision criteria. But then again, I'm only a newbie……………….
Andrew, I hope all goes well for you whatever you decide to do. Keep us posted.
Hi Andrew
Sorry to hear about your family passing never an easy time.
Have to say on the numbers you have given us the property certainly wont be paying for itself and whilst i can understand your desire to retain the property you would have to ask whether it makes financial sense.
By retaining the property it will certainly have a drain on your monthly income and that assumes it could be financed.
Holding the property with another family member whilst it might sound appropriate might be fraught with issues in more ways that one.
Personally i think i would sell the property and then carefully utilise your funds to restructure your home loan and set up an equity loan to fund a deposit on a new IP.
There are many properties we come across that certainly are not a drain on your hip pocket and are neutral or positively geared.
You might just have to look outside the NT.
Whatever you do not an easy time as i said.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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