There are lot of you all that have ‘been around the block’ a lot more than me, so what better spot to post in regards to some guidance that I am seeking - I’m not looking for specific financial advice… more just some pointers - here goes:
Myself and my brother are looking to buy an investment property for my mum to live in. We have about 110k as a deposit. He lives in Strathmore and I live in North Melbourne and we’re hoping we can buy something within a close proximity to us and also somewhere near a train station on the Werribee line so mum can get to work (in Altona North).
A few questions that I have:
What kind of loan structure would be best so that in a few years we can each use the equity to our advantage to either re-invest or purchase our own homes (we are both currently renting)…(principal and interest vs. interest only)
Is buying mum an apartment a totally wrong move (I get that it doesn’t increase in value as much, but there are other advantages in terms of stamp duty savings, security and there are so many to choose from)
Mum will be able to afford about $1500 a month repayments, so my brother and I are able to contribute if need be - what are the advantages of this?
I’m no expert but I’ll offer a a few points of view.
houses with land have traditionally provided better capital growth than both units and apartments. With the yield being better for units and apartments. Considering yield is irrelevant in this case I’d always try and push your finances for a house. Obviously you can only stretch as far as you can.
housing prices have gone beserk over the last 25 years and imo you just won’t see that growth again in the medium term. In fact I don’t think you’ll see much capital growth in the short term so I wouldn’t be in any hurry to purchase a property today. I’m pretty keen to acquire a property in my SMSF but I’m holding off for the next 24 months to see what happens.
you will need to think about the entity you purchase the house in to ensure you can create a 50/50 ownership structure with your brother that’s simple, offers the best tax advantages and has no stamp duty implications and one you can utilise as collateral.
Also you need to think about a loan agreement with your mother and between you and your brother, what will happen if she passes, what will happen if you want to sell or your brother does, what happens if you tip in more money than your brother etc… many of these deals turn south with good intentions. You will need to get an accountancy firm with estate planning involved or consult a lawyer directly.
I agree with the previous post and would add one thing.
You talk in your post about realising your equity in a few years. IMHO that is 100% the wrong way to approach a property investment.
You can be pretty sure that over the long term, if you’re sensible in your choice of property, you will make a good return. But long term means 10 years or more, not a few years. You can be lucky over the short term, but you can’t count on it. Property can and does go backwards.
Example. My wife and I bought our first house in 1979 and sold it 18 months later for a 75% profit. We then bought our second property, and if we had sold it any time within the next six or seven years we would have lost money.
And with an investment property you have to factor in interest costs etc., which are higher than a home loan.
So if you buy a property, assess it on the basis that it will be yours for at least the next 10 years. If that doesn’t stack up financially, then be prepared to take a loss.
Yes that is correct. The ATO doesn’t take it well where investors who own property rent it out to family members at less than a reasonable commercial/market rate.
One other thing I remembered and that has to come into consideration is repayment serviceability. I’m quite sure that even if you go fifty fifty with your brother, you won’t get the loan unless you can both service it on your own.
As per above you will need to speak to an accountant or financial advisor. There are special rules around treatment of taxation from renting a property to a family member.
Get a good accountant, form a Family Trust Company with you and your Bro owning equal shares. Loan your savings to the Family Trust, ask your Mum where she wants to live and buy a Unit.
Docklands is good and near the train, and prices are OK.
Borrow as much as you can afford to service and hold on to it for at least 10 years. Once place accumulates in value, use it to buy cheap shiteboxes and rent them. Ask the Accountant but trading in a Family Trust has many advantages.
Remember that Labor is committed to stopping negative gearing once it gets elected; they will not make it retrospective, so get in before the next election. They will never stop Family Trusts in my lifetime, which will be at least until the next Bomber Flag.
A lawyer in case all hell breaks lose (e.g. fall out with someone or unexpected death / health). Best to get it documented what you want to happen and what it all means.
Financial planner. This is also to make sure all scenarios are covered. So if someone passes away does it that person’s share of the loan and asset pass on to the family (doesn’t automatically happen)? What if that family wants to sell but the other side doesn’t? Is there insurance in place to buy out the other party if needed?
Loan broker. Not all banks will accept this sort of structure.
Your family again after all parties have got independent advice.
And not sure why I am prick ( in this instance, usually I know ). The advice of buying shiteboxes, if from my Accountant who has helped many a client become very wealthy landlords of cheap, serviceable, rentable properties.
Say you only want to borrow 80% of the property value (above 80% you start to incur Lenders Mortgage Insurance, which is pretty expensive IMO).
That caps the price of the target property at ~$440k…because by the time stamp duty is added on, you are going to have to fork out $462k for that purchase…and if you are borrowing at 80% x $440k, well that is a loan of $352k…and there goes your $110k cash contribution, to span that gap between the $352k loan and the $462k total purchase price.
A $440k value property suggests a 1BR apartment to me.
A $352k loan…go principal and interest loan because the government has made it more expensive to get interest-only loans now…and I think the banks are charging more for investor loans like yours…so $352k x say 4.5% interest rate x 25 years x principal and interest = $2000/month repayments…so your mum can’t pay all of that, you’ll have to pay the $500 per month difference…other monthly costs will have to be considered, like body corporate and rates, which could be another $500 per month?..and finally, if interest rates were to rise 2% (just to really stress test), we’ll that’s another $352k x 2% / 12 = $587 per month shortfall that you would have to come up with.
So I’m guessing you and your brother will share a monthly cash outflow of ~$1000 initially, which could rise to $1587 if interest rates sky-rocketed?
Disclaimer#1: I’ve tried to be conservative on the interest rates, 25 year loan when 30 years is probably possible, body corporate etc. Disclaimer#2: I’ve never owned a property.