Buying share of father in laws property

[thegoat]

HI,

We are total newbies to the investment property scene, so please excuse any ignorance in my post below!!

My wife and I currently own our own property in Springvale South, Victoria. House is worth around $430, owing around $250.

My wife’s step-father is currently going through a separation and owns a 2 bedroom unit in Noble Park. They owe around $70k on a unit worth around $250k. Since my wife’s step-father doesn’t want to move and her step-mother is willing to be ‘paid out’ to leave the unit, we were thinking of stepping in. We were basically thinking of paying her step-mother her share ($125k). She would then pay off her half of the outstanding loan ($35k). We would cover the other half of that loan, essentially borrowing $160k ($125k to pay her out and $35k to pay off his half of the loan). We would then own 64% of the house (160k/250k) and would set up the house as tenants in common.

He would continue to live in the unit and pay us 64% of market rent (or thereabouts). To cover ourselves, we would draw up a legal agreement which specifies the amount of rent he pays, what happens if one party wants to sell and also what would happen if he passes away.

From a tax/loan perspective, I’m assuming he would have to be a ‘party’ on the loan when we borrow the extra money? In order to claim deductions etc, would things like rates, gas, electricity etc need to be in all names?

Are there other things we should be thinking about? I know people say never to mix business and family, but I feel that if we structure it correctly it could work out ok. Has anyone else been in similar situations and have advice to offer?

Thanks in advance!

 

[Aaron_C]

Best thing to do would be to refinance the entire loan on the Noble Park unit, and put the new loan in you/your wife's name and your father-in-law. This will clear your former mother-in-law from the title. Then you can pay her out her 50% share.

 

[Terryw]

You should also consider:

death (more detail) - if he dies his share can be willed to anyone he chooses. Others could also make claims on his estate - exwives, children, mistresses, dependants etc.

Insolvency: What happens if he goes bankrupt.

Family Law: What happens if he enters into a new relationship and later on the new wife makes a claim and slaps a caveat on the property.

Stamp duty: would be probably exempt to get the wife off title if he would be sole owner but not exempt if 3rd parties are the transferee.

 

[Ed Barton]

keep it clean and buy the whole lot

 

[thegoat]

Best thing to do would be to refinance the entire loan on the Noble Park unit, and put the new loan in you/your wife's name and your father-in-law. This will clear your former mother-in-law from the title. Then you can pay her out her 50% share.

Thanks for the quick reply Aaron. Why do you say this is better than just borrowing what we need to? Isn't what you're saying worse for us because we'd be liable to pay back the full amount of say $250K, but would only be receiving 64% of market rent

death (more detail) - if he dies his share can be willed to anyone he chooses. Others could also make claims on his estate - exwives, children, mistresses, dependants etc.

Thanks for the quick reply Terry. He has two other daughters. Including my wife, his will is made out to the three of his daughters. We were thinking that if and when he does pass away, we could decide at the time whether to borrow extra to pay out there share or just sell the property. Is there more to this than what I'm thinking of?

Insolvency: What happens if he goes bankrupt.

He's on a pension at the moment, so we were thinking of just having a direct debit system set up so that the rent comes out automatically. But yes, this is something we would have to think about.....

Family Law: What happens if he enters into a new relationship and later on the new wife makes a claim and slaps a caveat on the property.

this is somethign we'd have to talk about with him, although from personal experience its unlikely he will enter in to a new relationship.

Stamp duty: would be probably exempt to get the wife off title if he would be sole owner but not exempt if 3rd parties are the transferee.

do you know roughly what we'd be looking at for stamp duty in Victoria?

 

[Terryw]

Don't forget that wills can be changed and challenged. Most probably don't get changed or challenged, but it is still a possibility. At least he has a will!

For the stamp duty it will be just the value of the property % transferred to you. So it could be worked out on one of the online calcs quickly. In VIC I think it is waived for transfers between spouses normally, and would be anyway because of the relationship breakdown.

 

[Aaron_C]

Thanks for the quick reply Aaron. Why do you say this is better than just borrowing what we need to? Isn't what you're saying worse for us because we'd be liable to pay back the full amount of say $250K, but would only be receiving 64% of market rent

Either way you are responsible for the loan. Any bank loan between more than one person means that each borrower is joint and severally liable for the loan. You can't just be on the hook for only half of the loan - it doesn't work that way with mortgages.

 

[thegoat]

Either way you are responsible for the loan. Any bank loan between more than one person means that each borrower is joint and severally liable for the loan. You can't just be on the hook for only half of the loan - it doesn't work that way with mortgages.

My father in law at best can only pay back 60% of what market rent would be on the house, as he’s on a pension. So if market rent is around $250p/w, he will probably only be able to pay back around $150 per week. So if we borrow $160K, our repayments would be around $240 a week, meaning we would have to make up the $90 shortfall which is ok with us It also means from a negative gearing point of view that because we only own 64% of the house, we don’t need to be getting 100% of the rent in order to make negative gearing ‘viable’.

If we borrowed the full amount (say $250k), our repayments would be around $375 a week, leaving us a shortfall of $215. We would still be able to manage that, but because we’re still only receiving 60% market rent (Eg, $150), wouldn’t this mean negative gearing would become ‘unviable’?

Am I correct in saying this?

 

[Terryw]

If Dad is a on a pension and rents then he may be able to get rental assistance from centrelink too.

 

[Aaron_C]

My father in law at best can only pay back 60% of what market rent would be on the house, as he’s on a pension. So if market rent is around $250p/w, he will probably only be able to pay back around $150 per week. So if we borrow $160K, our repayments would be around $240 a week, meaning we would have to make up the $90 shortfall which is ok with us It also means from a negative gearing point of view that because we only own 64% of the house, we don’t need to be getting 100% of the rent in order to make negative gearing ‘viable’.

If we borrowed the full amount (say $250k), our repayments would be around $375 a week, leaving us a shortfall of $215. We would still be able to manage that, but because we’re still only receiving 60% market rent (Eg, $150), wouldn’t this mean negative gearing would become ‘unviable’?

Am I correct in saying this?

What makes you say the negative gearing is 'unviable'?

 

[Ed Barton]

If Dad is a on a pension and rents then he may be able to get rental assistance from centrelink too.

that's about 60 pw i think. what if he only rents a % of the place and owns a %. i think the op needs to look at the centre link implications of the father in law too.

 

[thegoat]

What makes you say the negative gearing is 'unviable'?

Ok, so this is how my knowledge of negative gearing works (on a very basic level).

If we borrow $160k, the interest on the loan will be around $10,800 per year, with rental income of $7,800 ($150 per week) per year, leaving a $3000 shortfall which we can claim as a ‘deduction’. We’ve actually paid $90p/w out of our own money to cover the loan, which equates to $4,680 per year. Between our ‘deduction’ and what we’ve paid out, we’re short $1,680.

If we borrow the full amount of $250K, the interest on the loan is around $16,800, but we’re still only receiving rental income of $7,800. Since we now own 100% of the property, the tax office will only let us claim the difference between full market rent and interest paid. Based on $250p/w market rent, this works out to $13,000, meaning we can claim $3,800 as a ‘deduction’. However we’ve now been paying out $225 out of our own money to cover the loan which equates to just over $11,500 per year. Between our ‘deduction’ and what we’ve paid out, we’re now short $7,700 – a $6,000 increase from before.

I suppose on a basic level, we're borrowing $250,000 (100%) but only receiving 60% market rent. Is this how it works or have I calculated it wrong?

 

[Terryw]

TG

If you are not going to be charging market rents then you would only be able to claim a partial deduction for expenses.

If your calcs you have also left out borrowing costs, depreciation of building and fittings and travel plus all the other deductions such as rates, strata etc

 

[thegoat]

TG

If you are not going to be charging market rents then you would only be able to claim a partial deduction for expenses.

If your calcs you have also left out borrowing costs, depreciation of building and fittings and travel plus all the other deductions such as rates, strata etc

Thanks Terry, my calculation was basic just to make sure I have the right understanding of how negative gearing would work in this case.

Am I right in saying that if we borrowed the full amount, it isn't really viable as compared to borrowing only 60%?

 

[Aaron Sice]

My father in law at best can only pay back 60% of what market rent would be on the house, as he’s on a pension. So if market rent is around $250p/w, he will probably only be able to pay back around $150 per week. So if we borrow $160K, our repayments would be around $240 a week, meaning we would have to make up the $90 shortfall which is ok with us It also means from a negative gearing point of view that because we only own 64% of the house, we don’t need to be getting 100% of the rent in order to make negative gearing ‘viable’.

If we borrowed the full amount (say $250k), our repayments would be around $375 a week, leaving us a shortfall of $215. We would still be able to manage that, but because we’re still only receiving 60% market rent (Eg, $150), wouldn’t this mean negative gearing would become ‘unviable’?

Am I correct in saying this?

if it's a new-ish unit you may (and i mean MAY) be able to get a spare NRAS allocation and rent it out to your dad for under market rent and receive the benefit.

"MAY".... did i mention that bit?

 

[Terryw]

Thanks Terry, my calculation was basic just to make sure I have the right understanding of how negative gearing would work in this case.

Am I right in saying that if we borrowed the full amount, it isn't really viable as compared to borrowing only 60%?

Well, if you are going to get the same rental income then it would work out better to only buy 60%. But, then you get only 60% of the CG too.

 

[Sheryn]

Don't take on other adult peoples problems.

My wife’s step-father is currently going through a separation and owns a 2 bedroom unit in Noble Park. They owe around $70k on a unit worth around $250k. Since my wife’s step-father doesn’t want to move and her step-mother is willing to be ‘paid out’ to leave the unit, we were thinking of stepping in.

Why complicate your life?

Are there other things we should be thinking about?

Yes there are lots of things you should be thinking about

If the step father is on a pension it may be beneficial for him to sell the property even though he doesn't want to move.

Who will do the repairs.

Is he going to pay you rent - if he half owns place he can't get rent assistance from Centrelink IMHO.

What will happen if he has to go into an aged care facility and you are forced to sell the place shortly after you have brought?

Not saying it is a bad thing to help family but make sure you have all the bases covered as sometimes it is easier to give little gifts of money to make his life comfortable rather than grand gesture that hasn't been asked for.

Will he lose pensioner discount on rates, electricity etc.

Where are you going to be in 10 or 20 years time? Still subsiding his living accomodation?


Kind Regards
Sheryn

 

[thegoat]

Hi,

Thanks for all the advice given by posters so far. Based on some of that advice, we’ve come up with another scenario I wanted to post up.

We buy the unit outright and her father in law would be left with around $100,000. He’s willing to ‘loan’ us that money, which we would put onto the loan for the house we live in, effectively saving us around $7000 a year in interest. We would then allow him to live in the unit at a subsidised rent (around $130 per week).

Does this sound like a good option?

Cheers,

 

[Terryw]

Might still effect centrelink payments.

The loan would still mean the asset is his and on death the loan would still be repayable (generally).

Gifting would also effect centrelink payments for up to 5 years.

 

[Sheryn]

We buy the unit outright and her father in law would be left with around $100,000. He’s willing to ‘loan’ us that money, which we would put onto the loan for the house we live in, effectively saving us around $7000 a year in interest. We would then allow him to live in the unit at a subsidised rent (around $130 per week).

Does this sound like a good option?

Cheers,

I think Centrelink would require the step FIL to receive interest on the money he has lent you. So if he lends you 100K he would need to receive say 6K per year as interest from you and declared then Centrelink would reduce his pension according IMHO.

But they may pay him rent assistance payment.


Starting to get messy IMHO...


Scenario
2 bed unit worth 250K minus selling costs of say 25K = 225K
225K - 71K to pay out existing loan = 154K

Assuming they are settling 50% each
Ex step mother in law's half share of sold unit = 154K/2 = 77K

Step father in law's half = 77K
Cost of divorce legal costs etc. unknown?

77K cannot be lent to you without interest being paid IMHO and most pensioners cannot get by on only the pension.


Dear the goat
Would you think this unit was great value as an IP at 250K?

Could you afford to pay off loan if step father in law stopped paying rent?

Alternatively how about the step mother in law buying him out?


Always good to want to help family as the saying goes charity starts at home but charity to me is small gifts to tied family members over until they can get back on their feet.

I think what you are trying to do will be a burden to you and may even be a disadvantage to your FIL.

There is a cultural thinking among some older people that they are entitled to the full pension and if you do anything and they lose part of their pension they will be angry with you.


Kind Regards
Sheryn

Talk to your accountant and solicitor and phone a Financial Information Officer at Centrelink to discuss options.

The below link on deeming may help as well.

http://www.centrelink.gov.au/internet/internet.nsf/factors/income_deeming.htm