First time home buyer - should I go it alone or take up this opportunity?

Discussion in 'Where to Buy' started by jim_88, 15th Jan, 2015.

  1. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    Hello all. LONG time reader, first time thread starter!

    So, here?s my situation. I?m a 26 year old from Melbourne who currently lives at home (in Plenty) with my dad, younger brother and younger sister. I have worked full-time for 5 years and have a very stable job in advertising and in-between a few European vacations, I?ve relatively easily managed to save up $60,000 and get a loan approval for $400,000 to buy my first home!

    I would like to stay relatively close to home simply because I like the area, I want to stay close to my family, friends, social activities, work (good train line). I?ve been looking for a small house or even a unit in the Greensborough / Watsonia / Macleod area over the last few months and have come close once or twice. I may need to save up a few extra $ but that can be sorted out given a few months! I?ve had help looking around from my dad but the purchase itself will be mine which is something that is really important to me (having MY own place that I own alone).

    But here?s my situation (albeit, a very good one to have). I have an very wealthy uncle (I mention this because he doesn?t have ulterior motives) who I?m very close with who has offered to go 50% with me if I was keen on buying a place (in say Macleod), subdivide it and build out the back (to then sell and split the profit). So, we would go $400,000 in each to buy a place (say for $750,000 + stamp duty, etc), I?d live in it for a year and then we?d go about getting it split up and build something on the back lot. My uncle is very wealthy due to business ventures and so on but he is not in the property game AT ALL (ie. thought I wouldn?t have to pay any stamp duty on the aforementioned purchase as I?m a first home buyer, etc). He is using this as an opportunity to help me out which I'm very appreciative of, learn himself as well as getting his foot in the door (I guess) without having to do any of the leg work (as my old man and I would be doing that).

    After reading this forum and doing a lot of research (I?ve had to present a $ case to him), I?ve come to learn that it?s not as easy as it seems. Saying you want to subdivide and then going through with it with no experience are two very different things. Finding the right place which could take time (especially considering I?ve just gotten myself into gear and incredibly excitedly have almost purchased a place myself), getting permits, getting other people involved etc. And that the financial gain from doing this doesn?t seem to be as good as it?s made out to be?

    I spoke to a family friend who is a financial advisor early doors when I was getting my deposit sorted and he advised me to stay away from this type of situation as he doesn?t think it?s worth it at the moment. I?ve been told this by a couple of other people too but family, friends etc all say it?s an unbelievable opportunity. Everyone seems to be an ?expert' on property though...

    What do you think about the latter option? Is it something I should be taking up without even thinking and am I stupid for being so cautious and even contemplating not doing it or would it be better to go it alone, have my own place and proceed from there?

    I've been reluctant to post, but I will kick myself if I go with the second option and it blows up in my face (or the first for that matter) and I didn't consult with everyone here, especially considering I've been using it daily as invaluable resource up until now.

    Any help would be very much appreciated!

    Thanks. :)

    tl:dr – should I purchase a property myself or go halves with an uncle in buying a property and then subdividing it.
     
  2. Propertunity

    Propertunity Real Estate Buyers Agent

    Joined:
    1st Jul, 2008
    Messages:
    9,698
    Media:
    1
    Location:
    NSW Central Coast, Sydney, Newcastle and Lower Hunter
    IMO, go it alone.

    Risks in doing a joint purchase with your relatives:
    1. Death or incapacity of the JV partner
    2. Bankruptcy of the JV partner - he has business interests
    3. Inexperience of both of you in development
    4. You are both jointly and severally responsible for the loan
    5. Unexpected change of circumstances for either or both partners
    ....the list goes on.
     
  3. Erica

    Erica Member

    Joined:
    29th Mar, 2012
    Messages:
    307
    Location:
    Glenelg SA
    take the opportunity I say

    Obviously just my personal opinion here- I would take up the opportunity your uncle has presented you with, I am probably biased though, because I have done one of these types of subdivisions (retain old house, cut off the back hammerhead style, and build on it) and am now onto my second one (corner block back yard cut off, and renovate the front house)

    I started 3 years ago with just and idea and enthusiasm to learn, I had no prior knowledge (other that what I read on Somersoft) and just gave it a crack and learnt along the way, sure mistakes have been made, but I am in a much better financial position now, than had I just done what everyone else does.

    There are very few people that could get the opportunity and financial backing your uncle is offering, it could potentially set you up well ahead of the average Jo Blow, and the info you learn in doing your first subdivision, you could use time and again.
     
  4. Propertunity

    Propertunity Real Estate Buyers Agent

    Joined:
    1st Jul, 2008
    Messages:
    9,698
    Media:
    1
    Location:
    NSW Central Coast, Sydney, Newcastle and Lower Hunter
    ....and there you have both sides of the argument.

    No one can help you decide without knowing you or understanding your personal appetite for risk.
     
  5. westminster

    westminster P Plate Developer

    Joined:
    22nd Nov, 2010
    Messages:
    5,503
    Location:
    Perth, WA
    Some questions which you need to know the answer to
    - if you do this will you lose anything like FHOG benefits
    - do you have the skill set to do feasibility on this type of project to ensure you can make a profit?
    - what structure and tax implications are there for you both?
     
  6. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    Thanks for your thoughts, Erica and Propertunity.

    That?s a great story though, Erica. Something I?d hope to emulate. Congratulations on your early success.

    Propertunity, my personal appetite for risk isn?t very high ? valid points though, something I will have to take into consideration.
     
  7. laam

    laam Member

    Joined:
    28th Oct, 2013
    Messages:
    13
    Location:
    Melbourne
    If you buy for 750+ you will be above the threshold for any first home owner discounts, benefits, etc so you will be paying full stamp duty.
     
  8. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    - So long as I live there for at least 12 months before subdividing and the property is <$750,000 I would still receive the $10,000 FHOG. As the property would most likely be >$600,000 I would not receive any discount on stamp duty.
    - Not really, however I would think I'd be engaging with professionals throughout the process in order to get it right. If I subdivided again in the future I'd imagine that the list of people I'd need to help would decrease as I'd know more. To work out exactly how much this would cost though I'd have to do a lot of ringing around.
    - From my research I would be exempt from CGT but would need to register for GST as I have subdivided and sold in order to make a profit? This is an area I need to look into way more or get some professional advice about, thanks for the heads up.
     
  9. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    From research, if the house is above $600k you don't get any stamp duty concessions, however as long as it isn't over $750k you still get FHOG ($10k).
     
  10. laam

    laam Member

    Joined:
    28th Oct, 2013
    Messages:
    13
    Location:
    Melbourne
    The 10k is only for buying new houses. For existing houses the FHOG no longer exists in Vic. So given you were going for an existing house to subdivide and build out the back you wouldn't get this unfortunately.
     
  11. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    Abolished as of June last year. Something to add to the list...
     
  12. thatguy2015

    thatguy2015 Member

    Joined:
    15th Jan, 2015
    Messages:
    4
    Location:
    ipswich, QLD
    family business

    personally i would never do this kind of business with family i think you would have more satisfaction doing it by yourself
     
  13. Redom

    Redom Mortgage Broker

    Joined:
    1st Jul, 2014
    Messages:
    1,324
    Location:
    Sydney (West) and Canberra
    Sounds really risky with lots of challenges to overcome. I'm all for going and taking risks, especially early, as its helps accelerate the wealth creation process and i personally value the 'upside' potential of these type of deals much higher than the 'downside risk'.

    All i'd add here is if you do go in with the JV approach, spend ample amounts of time planning around it. Treat it like a business deal and set your structures up accordingly. I.e. become an expert, learn what you need to, set it all up appropraitely, get good legal/tax advice, etc.

    Good luck!

    Cheers,
    Redom
     
    Propertunity likes this.
  14. Marty McDonald

    Marty McDonald Mortgage Broker Syd

    Joined:
    5th Oct, 2010
    Messages:
    1,443
    Location:
    Sydney (North)
    Are you sure of your uncles true position? Not all wealthy looking uncles are actually wealthy!
     
  15. albanga

    albanga Member

    Joined:
    14th May, 2014
    Messages:
    726
    Location:
    MELBOURNE
    Well this is something I feel very highly educated to discuss because this is me right now!
    Firstly any FHOG concessions would be lost. Due to the fact your uncle is almost guaranteed to have purchasd before then you lose this right. Regardless if you fitted into the FHOG criteria. When I purchsed with my brother I lost this (offset with not paying LMI due to his large deposit). BUT that being said still seek specific advice incase my situation was unique.

    Now regarding your options. I took the opportunity because I had a small deposit but wanted to get into property. If I had a deposit like yours then from my personal experience I would say DO NOT develop. Here is why:

    Circumstances change - development is not easy, it takes time and a lot of stress. Now during that time what happens if somerhing occurs that requires needing to get out? Requires money which is locked into this project? One party becomes unable to service the loan? 1 year in my brother sat me down and said he wants to sell! No growth, stamps paid, looking at fair loss. It was only through negotiation and to be fair his fairly relaxed persona that we were able to come to an agreement.

    Work - there is a lot of it! Who is responsible? One of you is inevitably going to be investing A LOT of time into this project and believe me it has a ripple effect! My stress levels have been very high at times and it's even had an affect on my personal relationship with my wife. believe me it will come to a point of "I'm doing all the work". Even if you engage a town planner or project manager, one party will ultimately be responsible for dealing with it all.

    Money - The land is just the beginning. Be prepared to have the cashflow tap turned constantly on. Plans/permits/engineering.etc. ofcourse you will do the sums but not a week goes by in the early stages you are asking your partner for extra cash because the draftsmen had to make a slight tweak. And then what about servicing when construction starts? Can you service say 600k of debt by yourself?

    Honestly I could keep going but I think you get the drift. Look I am not saying a JV to develop is not a good idea, done correctly they can be very lucrative but in your situation I would advise against it:
    A - you have a fairly good deposit which will allow you to get into the market almost immediately and by yourself.
    B - you and your uncle (I think) have no knowledge on the development process. It is very complicated and stressful. If you could have a 3rd party who was a developer then I would reassess.
    C - Doing it with family/friends is just asking for trouble unless it's treated as a pure business transaction and that is all legal. Do not assume because your family everything will be fine. You are dealing with a lot of money and time and as I previously mentioned these have flow on effects as well.

    Whstever choice you make good luck!
    P.S - I had to take a day off work yesterday to meet with council and then a surveyor and then investigate finance and slept about 3 hours. Today I need to make calls to engineers, town planners, broker, brother, council planner, traffic and draftsmen. That is inbetween trying to do my normal job. Oh and I'm not even sure if I am going to construct the property or sell the land.
     
  16. Gockie

    Gockie Life loving Big 4 Banker

    Joined:
    15th Sep, 2011
    Messages:
    288
    Location:
    Northern Sydney
    I say don't do it. I agree with other posters.
    I believe
    1. You don't have any experience (you would be jumping in the very deep end you and your uncle has no experience in this sort of thing) and
    2. You lose all FHBG which you could get if you went by yourself.

    If you can do it alone do that. I suggest you might want to start by buying a place you can interior reno yourself such as a typical bathroom and kitchen update as a first starting point. Still value add but you get to see a little about getting tradespeople etc, working to schedules (something supposed to take 6 weeks can take 12 if you dont have the control and oversight over the tradies/project manager!) And much less risk than a full development. And costs can blow out.
    Good luck.
     
  17. tone1

    tone1 Member

    Joined:
    13th Jul, 2014
    Messages:
    74
    Location:
    Melbourne
    I'm in a very similar position to you (same age, buying solo), and I think as a first step the value-add through renovations of an existing house is the best way to go if you want to tackle this type of project. Don't rule out brand-new units or townhouses if that's the way you want to go, but the idea of adding value to a property can still be yours alone.

    Also, I have seen extended families break down over property/money and the like far too many times, the legal issues which result. I would think extremely seriously before getting involved in property with anyone who was not in my immediate family.

    Buy solo, it's what you want by the sounds of it and will be the perfect representation of your hard work paying off.
     
  18. sanj

    sanj Member

    Joined:
    16th Jul, 2010
    Messages:
    3,441
    Location:
    perth
    I'm going to disagree with the general consensus here. Without knowing your relationship with your uncle and both your approaches to money it is hard to say if it's a good idea or not.

    I've personally invested with relatives, friends etc and it's been fine, the important factor is only doing so with people who understand the risks/reward and aren't going g to lose their minds/shirts in case things don't go to plan.

    You do have a great opportunity here, I wouldn't discount it but I wouldn't rush into it either. If you do decide to go ahead make sure you have all the potentially uncomfortable discussions upfront re who is repose foe what, what if someone needs to sell early, how will profit be split etc. Make sure this is documented, even if you're very close having it written down and greed to formally helps everyone get clarity re rights and obligations.

    Also, on another note, when purchasing make sure you do a realistic feaso with enough contingency in the for when something inevitably goes wrong.
     
  19. The Y-man

    The Y-man Member

    Joined:
    27th Sep, 2004
    Messages:
    11,564
    Media:
    29
    Location:
    Melbourne
    Neither.

    Buy 2 properties yourself.

    Buy one with a bank loan.
    Buy another with a loan from your uncle (no ownership, but give him a decent interest income)

    The Y-man
     
  20. jim_88

    jim_88 Member

    Joined:
    5th Dec, 2014
    Messages:
    11
    Location:
    Melbourne
    Thank-you all so much for the feedback. Invaluable. :)

    True, although I would be undertaking the subdivision process myself which I think would be just as satisfying.

    Thanks, Redom. That's exactly what I'm doing. Seeking legal advice now in regards to it all.

    Haha. Can see where you're coming from here, but he is. Something worth thinking about though.

    Great insight, thank-you! Do you think some of these problems could have been avoided by planning things better? Ie. Sorting out 'what if one person wants to sell?' early on, completing a comprehensive costing spreadsheet to allow for 'slight tweaks' by draftsmen and so on? Would love to get some feedback!

    That was the plan initially, but had to re-think it when this opportunity came up. Thanks for the advice!

    Cheers, thanks for the input. Have you purchased yet or still looking around?

    Thanks for the reply mate. I think that's how I'm looking at it right now (as a great opportunity). After reading this thread I think the main problems I will encounter could be minimised by taking my time and meticulously planning everything (as much as you can in this situation, from a legal standpoint and from a monetary standpoint) and ensuring it's treated like a business venture.

    Heh, don't think that would fly with him, but a good idea nonetheless.

    Thanks again for all the responses. They've been amazing. I'll keep this thread updated with my progress as it happens!