Family dilemma

[stevey]

Ten years ago my wife brought an IP that was being rented by my mother- in-law in an affluent suburb of Adelaide to assist her as she was devastated by the thought of having to move and could not afford the comparitive rent at the time in the same area. Throughout the years the rent has remained the same to enable her to study and get back on her feet so she could re-enter the workforce and earn a decent wage.

During this time my wife and I have purchased a number of IP's but the majority of equity is tied up in the above mentioned property and our PPOR (which we do not live in. Located in Perth (purchased 1992), and we are renting in Adelaide).

My mother-in-law has now been working for four years but the rent has not increased as she states that she cannot afford it. (expensive tastes)

The 6 year Capital Gains Tax rule will expire on the Perth property late next year and it was our intention to sell and purchase PPOR in Adelaide as we have now finally settled down here.

With this in mind we will also need to somehow utilise the equity in the IP in SA in order to pay a substantial cash down and further mortgage to be able to afford the dream home in the right suburb in Adelaide.

I approached my mother-in-law 18 months ago and informed her that her rent would need to double (still below market rent) in 18 months time.
That time came and she informed me (in tears) that she couldn't afford it but one month later took out another debt on a new car and laundry appliances. (previously we payed off her debts (loan) in order to free up income so we could put her rent up or sell the SA IP and she could afford to rent something else in the area)

Over many months now I have come up with solutions to our problem to try and find a WIN/WIN outcome for all parties - to no avail.
My most recent idea was to draw down the equity on this property and give a quarter of it to my mother-in-law and then put the rent up but have been informed that the monies drawn down would not be tax deductible and that she would probably not be able to afford the rent once the money we gave her ran out. If we sell, we will have to pay CGT and my mother-in-law would have to move out to the boonies if she cannot afford more rent than she is paying now.

A difficult situation that I hope I have explained appropriately so some suggestions may come my way.

Ultimately the home we wish to buy will cost 1 mill, if we sell our PPOR and SA IP we will have $700K cash but our incomes will only service a loan of $400K. Can't sell other IPs yet as not enough equity to really make it worthwhile.

Hope I haven't bored you all but would appreciate some feedback.

Regards
Steve

 

[lizzie]

oh dear - money and family never mix. and she's playing the guilt card to the hilt.

the question is, how do you keep you mother in law on side while getting a proper return for your investment?

has your wife talked to her mother about your situation? it is her mother after all, and perhaps with the family history she can get "thru" to your mil that her not paying decent rent is hindering your own future and that of your children. are you able to negotiate that instead of doubling the rent immediately, she meet you halfway and then you increase every 6 months by a smaller amount until it is in line? can you put the property thru a property manager and give them permission to increase the rents every six months until it comes into line and therefore remove the personal touch.

you are really in a sticky situation. if absolute worse comes to worse, i would seriously consider telling your mil that if the rent isn't increased, you can't afford to keep the house and will have to sell it - and selling it may even have to be an option if she keeps using emotional blackmail on you.

 

[steveadl]

I approached my mother-in-law 18 months ago and informed her that her rent would need to double (still below market rent) in 18 months time.
That time came and she informed me (in tears) that she couldn't afford it but one month later took out another debt on a new car and laundry appliances. (previously we payed off her debts in order to free up income so we could put her rent up or sell the SA IP and she could afford to rent something else in the area)

That would have been the last straw for me! You have been more than fair with her, in fact in my mind you've been a Saint to her! She's using emotional blackmail which I consider to be VERY LOW! How does your wife feel about all this, and has she tried to reason with her mother?

Did you confront her at the time with this ie. how can you afford new loans for a car and applicances when you can't afford any extra rent?

I would tell her flat out, you can no longer afford to subsidize her living expenses to the detriment of your own (& your wife's), and any kids you may have. Give her a decent amount of time, maybe another 4-6 months, and tell her that at that point she'll either have to move out, or start paying proper rent! Unfortunately you seem to have given her too many polite nudges, it's time to stand your ground. (just my opinion)

 

[Twitch]

Steve, from your opening post it seems the whole under-market rent issue is a red herring. Bottom line is you need the cash to buy a PPOR. Given the PPOR you want, your Perth former PPOR + your borrowing capacity is not going to cover it. I can't see much choice other than selling the IP your mil is in if you can't carry more than $400k in PPOR debt, but want a PPOR worth 1-1.2 mill.

edit: actually I thought of one, can you afford to keep the IP your mother in law is in plus the other IPs, plus carry a $400k PPOR debt. If so you could sell the mil IP to a trust and extract the cash that way, there would be a chunk of transaction costs in doing that though.

 

[Pushka]

Oh dear, it is a nasty pickle isnt it! But to be honest your MIL has hardly been fair to you, has she; quite the opposite. And by your (in) actions she has been allowed to get away with it. I guess she looks at all your IP's and thinks well, I pay rent so how can they complain.

Have you negatvely geared/claimed tax deductions for the property she is living in? Because if she isnt paying market rent, and being a family member then you are at risk of a Tax Audit, and this has been the case for the last few years so that is quite worrying for you!

But also, it might be the answer - you could get your accountant to advise you (correctly) that you must charge market rate rent for the IP and the rent will rise significantly, then leave it to her to pay up or getout. Because once you claim the costs of an IP through your Taxation, it no longer is a 'family' issue but a Taxation issue with the Government and that is a whole new scenario with significant legal implications for you.

You actually have no choice; you MUST raise the rents or risk a Tax audit.

 

[Simon]

Can she afford to buy it from you if you gifted her part of the equity? Not the fairest solution but it might put a stop to you having to subsidise her lifestyle.

I suspect she sees you guys as rich and feels she deserves the help. A tough situation and one that she shouldn't be putting you in.

 

[natmarie73]

Over many months now I have come up with solutions to our problem to try and find a WIN/WIN outcome for all parties - to no avail.

It dosn't sount to me as if your MIL wants a Win/Win situation - she wants it all her way so IMO there is no point in any further negotiation - it's time for an ultimatum - she either forks up for a rent increase which is still below market rent or you sell the house and she has to find somewhere else to rent at market value. Give her those two choices and stick to your guns - in a nice way of course, perhaps by explaining that if she is unable to pay the rent increase you have no choice but to sell the house. I would bet she would go for the rent increase as it will still be cheaper for her than moving to another house.

If you do come to an agreement - put her on a lease that factors in regular rent increases as though she was just like any other tenant. You have done so much more for her already and now she is just taking advantage.

Like Lizzie said - family and money just don't mix.

 

[yo yo ma]

My mother-in-law has now been working for four years but the rent has not increased as she states that she cannot afford it. (expensive tastes)

I think the expensive tastes is the key to it... we would all like expensive tastes but your MIL should know that she can't have everything that she wants... Well she can but she has to pay for it, not you!

Can you write a list with your all your options & see what is going to work best for you? Remember, there is not going to be a perfect solution.
Maybe give Dr Phil a call?

I will start off your list & you can add to it:
A Do nothing... stay where you are & continue to allow your MIL to stay where she is
B Increase her rent to 10% below market rent... will this alllow you to move?
C Sell SA IP & PPoR for you to buy a new place for 1-1.2m
D Option C plus assist your MIL to move into downsized unit
E Sell plus allow you MIL to move in with you to the new place

Obviously not a complete list but you can add some more

 

[JoannaK]

my goodness.

Your mother-in-law is playing you (and her daughter) like a fiddle!

How she can cry to you that she can't afford to pay 10% below market rent, yet in the next breath take a loan for a car and appliances is beyond me.

AND you have already paid off some of her personal debts so that she can pay an increased rent!!!

Come on....

Please remember...... YOU ARE IN THE BUSINESS OF PROPERTY INVESTMENT.

You must think and behave like a business person running a property investment business should think and behave.

By all means, help where you can, but you are NOT IN THE BUSINESS OF CHARITY.

Sorry to be so harsh.

 

[stevey]

Thankyou everyone for your responses.

I agree with all comments and also agree that I have been a soft touch over the years regarding this issue and have probably contributed to the problem by choosing to ignore the blatently obvious.

I will discuss further with my wife and address the problem as soon as possible (rent will go up to increase income).

Regards
Steve

 

[depreciator]

I find this the really scary bit:

I don't believe a PM would help the situation as ultimately my mil considers the property hers and that her rent is actually mortgage payments.

If she's under some illusion about part ownership, you'd better clear it up ASAP.

I can't see you getting the rent up to where it needs to be. Selling it would be easier. Of course, then she may expect you to subsidise her rent elsewhere. Maybe you need to look for a house with a granny flat?

 

[wylie]

What a horrible mess!!!

To me, this is so unfair of your MIL but I also think the MOST important thing is that you AND YOUR WIFE have to be in total agreement with whatever path you go down, or you risk alienating your wife.

If you and your wife both stand firm in what you decide, but do it as gently as possible, perhaps pointing out all the benefits she has had for many years, she may see reason.

If not, you BOTH have to agree to the plan of action or you may end up with a problem in your relationship with your wife.

Either way, you have a difficult time ahead.

Good luck.

Wylie

 

[steveadl]

Keep the thread updated with your response/her reaction, would be very interesting!

 

[Altitude]

My most recent idea was to draw down the equity on this property and give a quarter of it to my mother-in-law and then put the rent up but have been informed that the monies drawn down would not be tax deductible and that she would probably not be able to afford the rent once the money we gave her ran out.

Please do not do anything of this nature, whether from draw down or hand outs.

You do not want an economic out-patient, more than she already is, on your hand.

An economic out-patient can become an economic in-patient one day if you are not careful.

 

[Altitude]

my goodness.

Your mother-in-law is playing you (and her daughter) like a fiddle!

How she can cry to you that she can't afford to pay 10% below market rent, yet in the next breath take a loan for a car and appliances is beyond me.

Agreed.

She's actually sending you a message that, she will not pay you, she will get herself into more debt to prove to you that she can't afford the rent increase.

 

[s_t]

Roughly who are we talking about here - a 70 yr old widow who has to go to work, or say, a 55 yr old? I am guessing the latter, but before everyone gets too carried away I thought some checking may be in order If it is the former then many of the responses may be a bit harsh.

Interesting how a MIL topic can generate such interest in such a short amount of time! I understand how though

 

[topcropper]

It's all bad.

Just as bad as family, is friends. I got into terrible trouble renting a farm house to some friends. The rent was 'mates rates' for a start. But then they dropped months behind. To them, I suppose they thought I was well off and didn't need the money, and I was well off compared to them, but they didn't know my debt levels.

No need to go into details. It didn't end well. We have finally made up after 7 years, but it will never return to the friendship it was.

See ya's.

 

[wish-ga]

Gah! What to do.... maybe ask her when's a good time to get an REA through to value the place? "Just checking our options in case we have to sell" As the REA goes through ask how much rent they'd get if it was on their rent roll, while she's in earshot .......... maybe she doesn't BELIEVE how much it costs to rent elsewhere.

I really admire you trying so hard for a win/win situation.

From now on (irrespective of what happens with her renting from you) make sure NEVER to discuss your portfolio in front of her. Keep schtum.... every time you buy a house your *bling factor* increases.

(I have learned from this that it is better to help someone by paying for their education not living costs. Her studies stopped and you are still subsidising her lifestyle)

 

[anrke]

I don't believe a PM would help the situation as ultimately my mil considers the property hers and that her rent is actually mortgage payments.

Scary. Seems this is what needs to be addressed ASAP. How can she understand her 'mortgage repayments' going up because you want to borrow against 'her' house to buy your dream home?

 

[stevey]

Roughly who are we talking about here - a 70 yr old widow who has to go to work, or say, a 55 yr old? I am guessing the latter, but before everyone gets too carried away I thought some checking may be in order If it is the former then many of the responses may be a bit harsh.

Interesting how a MIL topic can generate such interest in such a short amount of time! I understand how though

She has just turned 60.

REgards
Steve