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