PPOR and rent back

[0wl]

Hi guys,

My fiancee and I have recently bought our future PPOR. As part of the contract, we agreed to rent it back to the seller (at no cost) for a 6 month period.

We didn?t mind because we were in no rush to move in and were planning on renting it out in the interim. Now I'm kicking myself a little because of the additional costs of council rates, landlord's insurance, not being able to negative gear that period etc.

Specifically though, what are the next steps involved after settlement? Do we need draw up a proper rental agreement? Do I need to look for a property manager/real estate agent?

 

[danwatto]

Get tax advice too.

I don't think you can get the main residence exemption for capital gains if you don't move in straight away..

 

[r3ckless]

I hope u got the property at a decent price to factor in the no rent fee for current owners for 6 months sheesh!

 

[travelbug]

WOW! I'm surprised your solicitor didn't try to talk you our of that. I'm guessing you didn't speak to you accountant either?

I DO hope you got it for a price that compensated for the loss in rent plus the rates, insurance etc. You will also have to pay CGT when you sell and if you rent it out in the future will not be leigable for the 6yr (no CGT) rule. And, as you mentioned you have a mortgage you have to pay while getting none of the tax benefits.
So you are paying a mortgage, all costs, plus your own rent for 6 months? Must be some damn good house.


In regards to your question. YES definitely get a tenant agreement agreement drawn up prior to settlement. Otherwise you have no control and they may decide to stay indefinitely.

 

[Paul@PFI]

You got suckered as a first time buyer. Your solicitor isn't looking after you either.

Did you pay less for this deal. How much less ?? If I had a offer to buy at $400K and someone wanted to stay for six months my price would be no more than $390K...That reflects a 5% yield on the rent...$20K. pro-rata.

I assume that the deal is a deferred settlement and not a lease. You can't lease for no consideration. Bond ?? What happens if they plan to stay on ? How do you evict ?? That's not a lease. So CGT and deduction issues shouldn't pose a concern if a deferred buy. I cant imagine how the legalities of not having a lease would work - You are permitting them to squat ???

When I sold a former PPOR we agreed to rent it back for another six months. Young couple were happy. We had to do the lease, bond etc things and that was right down to inspections etc...I even allowed them to do some fence work while we stayed on. Win-Win. I recall the agent was adamant that we couldn't adjust price and stay there rent free as it wouldn't be legit and be subject to normal rental rules.

If there isn't a lease I would be asking my solicitor what rights you have to evict them. Now or even in six months if they decide its a nice place to stay for another year.

 

[vaughan]

Additionally, you will not be able to claim expenses (interest, etc) as a deduction because the property will generate no income. Getting a tenancy agreement will be interesting because the bond will be 4 weeks rent = $0, and a property manager will not touch it because their commission will be 8% of $0 per week.

Landlord insurance might be hard to get too.

 

[Paul@PFI]

Your lawyer should amend the contact UP by the factor of rent then defer it DOWN as a settlement issue so it wastes under the contract. That way consideration for rent is part of the contract.

 

[travelbug]

Paul if it was a deferred settlement none of the issues would be relevant as the vendor would still be paying the rates etc and he wouldn't need to negative gear anything. So I don't think that is the case.

Owl- you need to raise all these concerns with your solicitor BEFORE settlement. They don't sound very good but maybe they can sort something out.

Good luck.

 

[0wl]

Wow thanks for the great feedback. I guess it is a little too obvious that we are property newbies...

For those of you who have been asking, we did secure the property for 50k less than other very similar properties in the area. That is substantially more than 6 months' rent, so it was a reasonable deal for all (or so we thought).

We don't have have a solicitor, we are just using a normal settlement agent. Accountant was happy, broker was happy, and bank valuation was very happy. I am aware of the CGT implications but we plan on staying here for a long time and certainly >6 years, so the CGT when we do decide to sell will be calculated retrospectively pro-rata.

I realise it probably wasn't the wisest offer but the contract has already been signed by all parties. The deal was a zero-dollar lease with settlement next month. Is there anything I can do about this now? I didn't think it was possible to change the contract of sale, and as many people have pointed out there are going to be repercussions on trying draw up a zero dollar rent contract/finding a PM.

 

[travelbug]

Hi,
in light of the discount, financially it was probably a good deal.

MMM- no solicitor was not a good idea under the circumstances.

I'd say to the vendor that $0 makes it difficult and tell/ask them to put a nominal amount on the lease agreement. Even if it's $1 a week/month (but they don't have to pay it).

You won't get an agent as there is no payment.

But definitely have them sign to say when the lease ends. Just download a rental agreement for your state (google it they are online) and get them to sign it before settlement. This is a MUST!!! to protect yourself.

 

[Perp]

I can't see why you couldn't approach a PM and ask them to manage it on the basis of $X per week (X being standard PM % x market rent). I think this would be a very good idea to ensure that the condition report is done properly and all paperwork ship-shape.

Also, make sure you do a pre-settlement inspection on settlement day and are happy with the condition of the property. Ideally, get the PM to do the entry condition report at the same time.