Financing Options - Equity vs Cash vs Family Sale

[jmillar]

Somersoft,

I have been spending my weekends looking at properties to get my head in the game, and my savings are going great so definitely on track to purchase in April. Just need to sort out one more thing relating to finance.

My parents were going to help me out by either giving me $20k cash after they receive a large payout from a court case in a month's time, or by putting forward some equity as security for my first purchase.

At the time I was thinking that using the equity may have been a good idea as it would have allowed me to have my $35k+ savings in an offset account, saving me around $2,100/yr in interest, making my purchase positively geared.

The option of using my parents’ equity is no longer valid as they are selling (almost) all of their IPs to put into their super fund. They own their own PPOR (worth $1.3-1.4M) but I’m not sure if they will want to draw equity from this.

They are still happy to give me $20k cash if they win the court case in a month's time. However... they are going to sell their unit in Mount Druitt soon, which is rented for $300/wk and is worth around $215,000. I am currently looking at properties in Blacktown as I think there will be better growth there, and I wanted to stay away from Mt Druitt unless I get something great.

But what if I was to purchase their Mt Druitt unit for around $190,000 instead? This would save them CGT, agents fees etc and would allow me to draw down around $25k equity to buy a second IP in the next 4-6 months. The tenant has been there for around 10 years and never had an issue so I'm not too worried about vacancy rates on the property as well.

What are your thoughts? Would it be best to get the $20k cash and buy something a little more expensive in Blacktown?

A buyer fell through with finance on a property my parents just sold because the buyer received $16k into his account the day before - would banks look favourably upon this sudden $20k hitting my account and me using this as part of my deposit for a larger deposit?

Any tips would be great.

 

[Aaron_C]

Depending on LVR getting the $20k isn't a big deal.

 

[Peter_Tersteeg]

If it's $20k hitting your bank in isolation you're going to have limited options with lenders. Most lenders will want to see you save at least 5% of the purchase price yourself.

You indicated you've got $35k available, which would solve this problem if you've held that money for more than 3 months.

Purchasing your parents property at a reduced price could certainly help you. The biggest challenge is if it really is worth $215k. It would require a full valuation to determine this and many valuers would see your purchase price and simply go with that. Accessing the equity in 6 months may have the same challenge.

 

[Jake D]

Purchasing your parents property at a reduced price could certainly help you. The biggest challenge is if it really is worth $215k. It would require a full valuation to determine this and many valuers would see your purchase price and simply go with that. Accessing the equity in 6 months may have the same challenge.

If parents order a val before sale, and then purchase price is lower than valuation, how would that affect JM's equity options?

EDIT: This questions sounds snarky but I am genuinely curious how a lender would view this situation, ie, would the purchase price override the outdated valuation?

 

[Aaron_C]

If parents order a val before sale, and then purchase price is lower than valuation, how would that affect JM's equity options?

Banks take lower of the two unless it was disclosed as a favourable purchase.

 

[jmillar]

Thanks for all the quick responses. Much appreciated.

Purchasing your parents property at a reduced price could certainly help you. The biggest challenge is if it really is worth $215k. It would require a full valuation to determine this and many valuers would see your purchase price and simply go with that. Accessing the equity in 6 months may have the same challenge.

2 comparable sales in the building - one next door, both with 2 bed, 1 bath, 1 LUG etc sold for $210k in mid-late 2012 so I would think $210-215k is where it would be at. 2 agents told my parents they could get $215-230k but I think the upper limit of that would be a stretch.

 

[alexlee]

But what if I was to purchase their Mt Druitt unit for around $190,000 instead? This would save them CGT, agents fees etc

Why would it save them CGT?

 

[jmillar]

Selling at ~$190k rather than $215k or more. I think this would save them some CGT - correct me if I'm wrong? They paid around 180k a few years ago.

Thanks

 

[alexlee]

Selling at ~$190k rather than $215k or more. I think this would save them some CGT - correct me if I'm wrong? They paid around 180k a few years ago.

Well, yes, they save a few thousand on CGT, because they're selling for 25k less.

It benefits you, but don't read it as a benefit to your parents.

 

[jmillar]

Option 1: They have generously offered $20k cash
Option 2: They sell for $25k cheaper, but save $6,000 on agent's fees, a few more thousand on CGT etc so it may actually work out cheaper for them to sell the property for $25k less rather than give me $20k cash.

I'm hoping to find an option that works out cheaper for them as well. I certainly didn't ask for any money from them - they have been kind enough to offer me some assistance in starting off my investment portfolio. I'm just trying to find an option which will benefit me as well as benefit them, so we can sit down and discuss the best way to proceed.

Thanks for your help

 

[Terry_w]

CGT will be calculated at market value. Being a related party transaction then the ATO may be more inclined to audit if they come across it. Make sure you have a valuation to back up this amount. (not that $20k is much to worry about).

As the unit is in the family you would have a good knowledge of it and its history of probelms etc. I would be more inclined to look at buying this if you think it is a good buy. Good rental yield too.

 

[jmillar]

Thanks for the tips, Terry. Strata rates are upwards of $700/qtr which I consider high for such a small unit, but at $190k it's an 8.2% gross yield.

 

[jmillar]

Sorry to revive a dead topic but just wanted to see if anyone else has thoughts on my situation.

Option 1: Accept $20k contribution from parents to add to my $35k savings. Buy something around $300k in Blacktown with 7% + yield on a 90% LVR, leaving around $20k (5k for purchase costs etc) in an offset account. Property would be neutral cashflow.

Option 2: Purchase a property in Mt Druitt worth $210-215k bringing in $300/wk from my parents for around $190k. I would use all my savings if I have to purchase at 80% LVR.. if I can get away with 90% LVR then I have around $12k to put into an offset account and I'm sitting on about ~20k of equity from day one. Property would be positively geared (8.2% gross yield).

Whichever option I go for, I intend on drawing equity and purchasing IP no. 2 by the end of 2013.

I like Option 1 as I see better future growth in Blacktown than Mt Druitt. I like Option 2 as I'm currently on a low salary and this will help with cashflow and be a good base on which I can build my portfolio quickly.

Any help would be great.