Buying unit from Brother...

Discussion in 'Property Investment - Other' started by bradwilks80, 23rd Mar, 2008.

  1. bradwilks80

    bradwilks80 Member

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    Hi All,

    I have a few questions. I am considering purchasing a 2BR unit in NSW that my older brother is considering selling - He is selling to finance another venture. My questions are:

    1. Is there any way of transferring ownership without incurring stamp duty and other taxes? Possibly via a family trust?

    2. The unit cost is ~$300000. It is earning $250 p/week rent ($13000 p/annum) and costs last year were approx $3500. Is this a reasonable venture?

    3. The unit was built in approx 1978. Is a depreciation report worthwhile on the property considering its age?

    Thanks,
    Brad.
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    A change in ownership will most likely trigger a capital gains event. Moving something from one name, to a trust will usually do this. There is a provision for between husband and wife, but I don't beleive it applies between siblings. A property savy accountant would be the best person to ask.

    The deal you've described could be a great deal or a lousy deal. The only way to determine how good it is will be by doing the research in the local area and compairing it to the rest of the market.

    Despite not having any building depreciation obviously available, a quantity surveyor will probably be able to find additional things in the property which will be depreciable. I've yet to see a QS report that didn't pay for itself several times over, regardless of the age of the property.
     
  3. bradwilks80

    bradwilks80 Member

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    Thanks PT_Bear,

    The property is in a good beach suburb that has rented well over the last 10 years or so. In 1999 the rent was $160. In 2003 it was $210. Today is $250.

    As I stated the purchase price is ~$300000.
    The rent is $250 p/week rent ($13000 p/annum).
    Costs last year were approx $3500 - just under the usual 30% of total income.

    After my deposit I will have a loan for ~$260000. With an interest only loan I expect my monthly repayments to be ~$1800 ($21600 p/annum).

    So $21600 - $10000 = A loss of ~$11600 per year that I will have to pay?

    Can people please confirm that my above calculations are accurate, or detail if my out of pocket annual costs will be less?

    I am in the 30% tax bracket.

    Brad.
     
  4. Kristine..

    Kristine.. Broker and Raconteur

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    Hi Brad

    Sometimes, when we know somebody who is selling something, we can be convinced that this is a ‘good deal’ just because we are familiar with the property / motor vehicle / TV set or whatever.

    We can be attracted to the purchase because of that familiarity, and somehow convince ourselves that the purchase will be a good one.

    But you have to ask yourself:

    If you were looking for something to buy, and

    You came across this property in the usual way,

    Would this be a good deal?


    All that you have told us is that the property is a ‘2 bedroom unit’ in a ‘good beach suburb’ in NSW, was built in 1978 and that it ‘rents well’.

    In and of itself this is insufficient data to make a decision to buy at $300,000.

    From a capital purchase point of view, how does $300,000 compare to other recent sales of similar properties in the same area of the suburb? If the area is tightly held, this can make it difficult to form an opinion of value, but you should still be able to get information on comparable sales.

    Regarding the cash flow analysis, the unit is obviously in a large development to have total outgoings of $3,500 per annum. I appreciate that in NSW there has to be a ‘sinking fund’ to make provision for future capital works, does the $3,500 include a contribution to the sinking fund? In which case, this is not so high, but if there are lifts, fire services, swimming pools, caretakers, lighting for common areas etc then these costs will rise substantially every year. Will rent continue to increase sufficiently to cover the increases in operating costs?

    A ‘back of the envelope’ cash flow calculation is:

    Purchase Price $300,000

    NSW Stamp Duty = $8,990
    Stamp Duty on Mortgage of $260,000 = $981
    Mortgage Registration Fee = $90
    Solicitor / Conveyancer = $1,000
    Sundries & Disbursements = $250
    Rates & Body Corporate Adjustments $1,750
    Lender’s Application, Valuation & Settlement Fees = $900

    Funds to Complete: $313,961

    This is what you have to work your calculations on, as this amount is made up of borrowings plus your own savings / equity drawdown. All funds have a cost, whether a direct cost (interest paid to the lender) or opportunity cost (you could be earning interest in a deposit account). There is no such thing as ‘free’ money.

    Annual PAYG or nett taxable business income: $75,000 (Tax Bracket 30% up to $75,000 per annum) (Tax Paid PAYG $18,225 inc Medicare)

    Plus Rent Income $13,000 per annum

    Total Gross Income $88,000 per annum

    Less:

    Interest on loan of $260,000 @ SVR 9.20% = $23,920
    Interest on Contribution of $53,961@ SVR 9.20% = $5,240
    Rates, Body Corporate, Landlord’s Insurance = $3,500
    Provision for Vacancy (Allow 2 weeks) $500
    Letting Fees (Allow 2 weeks) $500
    Management Fees @ 8% Annual Rent = $1,040
    Provision for Repairs & Maintenance $500

    Total Annual Provisions & Outgoings $35,200

    Adjusted Nett Taxable Income $($88,000 less $35,200) $52,800

    Tax payable $52,800 = $11,232 (inc Medicare)

    Tax rebate from tax previously paid $6,993

    Value of income from property ($13,000 plus $6,993) = Gross rental of ($19,993 divided by $313,961) = passing rent of 6.37%

    After Tax Shortfall from you ($19,993 - $35,200) = $15,207

    Internal Rate of Return: $15,207 annual contribution

    If property increases in value 5% = ($313,961 x 5%) $15,698 = neutral gain

    If property increases in value 10% ($313,961 x 10%) $31,396 = 100% IRR

    So the question is:

    Can you sustain an annual contribution of $15,207 from your ‘take home’ pay?

    Would the $15,207 be better used in another property?

    Are you confident that the property could improve in rent (above the annual increases in operating costs including interest rate rises)
    Would you be happy with a 100% annual Internal Rate of Return?

    Could you do better with another type of investment elsewhere?

    If you are satisfied with your response to this analysis, then go ahead and buy the property.

    When buying from an immediate family member, lenders will generally accept this as an Advantageous or Favourable Purchase.

    No Contract of Sale is required, just the Consideration (agreed price) written on the Transfer of Sale.

    A lender may allow borrowings to 95% of the Valuation, or to 105% of the Consideration, whichever is the lower.

    So if the property values at $300,000, (subject to serviceability) you would be eligible to borrow up to 95% of the Valuation ie $285,000 with the balance of the Funds to Complete coming from your other funds.

    If your Brother agreed to sell you the property for, say, $285,715, then you could borrow to 105% of the Consideration ($285,715 x 105%) being $300,000.

    Your Brother may consider that as he does not have to prepare Contracts, pay marketing or Agent’s commissions etc that to discount the selling price by $15,000 would be a good deal for him, and as you could then borrow the whole Funds to Complete from one lender, this may be a good deal for you.

    Obviously, in this instance, the deal ‘stacks up’ slightly better for you as you would be calculating your returns on $300,000 and not on $313,961.

    So all in all, if buying a property you know from someone you know, is the way for you to get into or expand your property investment portfolio, then the deal certainly sits within the parameters of ‘fair to reasonable’ but only you can determine whether this particular purchase will move from ‘fair to reasonable’ to ‘good’ to ‘great’ in the manner and time frame that you would expect any property purchase to achieve.


    Hope this helps
    Kristine
     
    Last edited: 23rd Mar, 2008
    yo yo ma and Nards like this.
  5. Alex P Keaton

    Alex P Keaton Member

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    thanks Kristine :)
     
  6. long88

    long88 Member

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    wow kristine.. that is very detailed.

    can you ask you to do that for me ? when i bought my first ip, i just go for it, never done anything like that. i don't even know my IRR or my return rate.

    i suppose.. you learn as you grow older ?
     
  7. Kristine..

    Kristine.. Broker and Raconteur

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    Hi long88

    Thanks - Yeah, but, I am VERY OLD and started in real estate waaaay back in 1975, plus have been a broker since 2003, so I do this all the time.

    Nothing like seeing the deal in black and white.

    Noble Park? Hmmmm, one of my favourite places. Some good buying in Noble Park ....

    Cheers
    Kristine
     
  8. long88

    long88 Member

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    Noble park, bought here in sep 2006, for 260k, use first home owner grant.
    Now ask agent how much can i sell for, $350k.

    even at mid $300k ? is here still a good buy ? i just have a look around, all the Development sites are auction only, and the only one with standard land (not subdivideable) are asking around $300k (shitty house), to $400k

    any hint on $$$ ?
     
  9. skater

    skater Capitalist

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    You will incur Stamp Duty, no way around that.

    Is this unit a good investment? The yeild is below 5%, so I wouldn't touch it, but then, I don't much like units either. Is the price realistic, or is your brother just hoping this is the price he will get? What has been the selling price of similar in the same area? Before you jump in & purchase it, do a little research of the area to determine if it is, in fact, a good investment.
     
  10. bradwilks80

    bradwilks80 Member

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    Thanks everyone for your input - especially Kristine for your great reply...

    There is a lot of info to work through.

    This will be my second IP. So no First home owners $$$ and I will be using equity from IP1 (IP1 Value $210000 - owe $90000) as a deposit on IP2.

    I also have $30000 invested. I have been saving this money rather than paying off IP1 too quickly. Would I be better to use this $30000 as a deposit on IP2 or keep it invested to ensure I get the best tax writeoff benefits?

    I guess if the expected price was $300000. Then I would have to ask for at least a 5% discount considering there is no agent/selling fees?

    This would bring the cost down to $285000. Does this sound ok?

    Brad.
     
  11. skater

    skater Capitalist

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    If the realistic sale price is $300k & he will sell to you for $285k since he has no R/E fees to pay, then, yes, it could be good. But I stress that you really should research it well first.
     
  12. Perp

    Perp Member

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    Exactly, Kristine. In the normal scheme of things, the odds of you buying a property - at market value - from a relative should be no greater than buying a property from any other individual in the population, ie it basically never happens! The fact that it frequently happens indicates that people buy from relatives for non-business reasons.

    Let's say your relative has a property that they say they can sell for $400K, and selling expenses would be $10K, meaning they net $390K from sale. What are they willing to sell it to you for?

    * if greater than $400K, it's no bargain to you, so why would you buy it?
    * if they're willing to sell to you for $400K but you're helping them by saving on selling fees, then you should only do that if you'd be happy to buy the property on the open market at $400K. Otherwise if you really want to save them the selling fees, you'd be better off to give them the $10K as a donation, than saddle yourself with a bad investment.
    * if they offer to "split the difference" and sell it to you for $395K, I'd argue that the market value of a property can't be known this precisely that a 1.25% saving makes it an unmissable bargain.
    * if you wouldn't buy at $400K but would buy at $390K, I'd argue that the chances that this $10K makes the difference between a good and bad investment is infinetesimal, and you're being unduly influenced by your perception that this is a "good deal" because of this small saving
    * if your relative is willing to sell to you for $390K or less, then they're really just making a donation to you. Why not sell for the best price out there, and donate any excess proceeds over $390K to you, if they really want to help you?

    Basically, the only reason one should buy an investment property is because it's a good investment. If you want to help your relative or they want to help you, the best way to do that is each make the best possible investment decisions and donate your profits back and forth if somebody needs a hand, rather than over- or under-selling to each other.
     
  13. lizzie

    lizzie when i grow up ...

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    asides from the money - you've also got to consider how you would feel if, one week after settlement, the hws blew, you found the bathroom floor rotting under the tiles and body corporate suddenly vote to impose a one off $10,000 levy ...

    none of these things your brother would have known about - and has no control over - so how would you feel if you felt you'd bought an expensive dog of someone you know, rather than someone you will never see again.