Hi all,
First time poster, long time reader.
I'm looking at the best way to enter the market, and would like to discuss a strategy/scenario that has come my way.
First, a little about myself:
23 Year old – Renting out of home in Melbourne at $150 per week
Salary – 80k p.a
$10,000 saved, currently saving around $600 per week.
My parents (both retired and on a pension) have our family home in Geelong, a small 3 bedroom, 2 bathroom townhouse valued at approximately 350,000 with around 80k left to pay on the mortgage. As a way for me to enter the market they have offered me the opportunity to buy either all or half of the property at market rate. They will then use the cash injection to pay off their mortgage and then pay rent to me at a market rate. This will allow me to pay off a good amount of the mortgage over a couple of years (whether all or half) and set me up for future investment opportunities.
Can anybody provide me with the feasibility of this working out? Are there potential issues? Is this actually the strongest economic investment I can make?
Thanks guys,
J.
Hi Mark,
Thank-you for your reply.
Are you able to elaborate a little more on why this isn't a good property investment plan?
Really appreciate your help.
Putting aside the helping family, right thing to do etc.
Are you a only child? Could be issues with other members of the family.
capital gains tax issues for your parents even though you have stated its their PPOR.
Cost of stamp duty 20k – to purchase a asset, that you would inherit anyway (sorry mum and dad/hard reality)
valuers: valuation could be higher then the actual price obtainable at market value – hence you would enter negative equity from the get go.
Your parents benefit by obtaining sales from a property without a agent commission, so if
you were to go down that path. I would at least offer them 10k less then the valuation as they would of
lost in commissions by selling with a agent. They clearly want to stay in their house, but yes I understand they would pay your rent. But what happens (devils advocate) if you bought it off them and they didn't pay rent . Or couldn't pay for several weeks cause of some bills etc. Would you kick your parents out.
Alternatively you you could suggest it to them as a I help you you help me situation. See the following.
your serviceability (borrowing capacity) would be decent with a 80k pa job. But your equity is lacking (10k, but savings would increase 30k per year if continuing at that rate of $600 a week)
you could then purchase their house (as discussed for the rate above) and instead of them paying rent to you ie 150 a week. They could pay off their loan (80k) and with the leftover they could loan to you. At interest rates. Of say 5% would mean if you borrowed 156k from them- paying 5 percent interest, that's $150 a week you would owe them. So they could live rent free. Whilst you get access to their capital to enable you to start your own portfolio.
You also have to consider that how would you purchase the property in the first place – ie requiring nearly 25 percent to not pay lenders mortgage insurance and cover costs.
– ie – 90k required for 350k house value. Would mean they might have to go family garunteee first. (I would of said setup a LOC on the equity but they are both retired so sounds like not a option). On the completion of sale this would mean the 90k would transfer to the bank, to cover the LVR of the debt
but if would still leave 66k available – with your 10k to purchase perhaps a investment for yourself.
Many issues.
First determine what effect this will have on their pensions.
Then if you were to buy part of the house, what about accessing equity down the track – all owners must go on loans. If it is a rental then no PPOR CGT exemption for you and what was once fully exempt becomes partlially exempt.
Stamp duty on the transfer.
Estate planning issues.
Asset protection issues – if you default parents won't have a place to live maybe.
Perhaps getting them to assist you into a property may be less messy. parental guarantee or even a loan may work out better.
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
Property investment plan = No
Helping family out = Yes
My advice is to pay their mortgage for them with your rent and keep saving to invest elsewhere. They will be in a better long term position (by not having to pay you rent in the future) and you will be in a better position by not confusing your property investing with buying a PPoR for your family. I hope this helps?
Modernity Investing
Email Me
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