Procrastination and Drama's

[Ghetto]

Evening All - long time reader, first time poster. Only reason I've finally decided to post is because I've finally decided to started asking for peoples advice on what has been successful for them and to look at different ideas and what they might do in my circumstance. Sorry for the long post but I hope to hear a few different ways people might approach this situation considering the current climate and thinking about things they might have done now they have learnt even more with experience.

Family
Wife + 1 son (We want to try for a second at end of this year). We're both 29, turning 30 at the end of the year.

Life Goal
To earn some sort of a passive income (Potentially from other sources - if you think this is impossible from property) for myself and my wife equivalent in today's money of at least $200k p/a (Ultimate 520K if dreams came true). I'm not keen on living on LOC as I just worry that the banks will someday stop lending me the extra amount which doesn't achieve my goal. I want to retire early and start travelling and coaching kids in sport and learning new things. Want the financial freedom to give our kids a good life and opportunities too.

Salary
My Salary After Tax - $5700 p/m
Wife Salary After Tax -$2915 p/m
Total After Tax - $8615

Savings - $20,000 in savings account. Saving 2k a month, will look to add in tax return of about 5-8k in July.

PPOR (Western Sydney) - Valued by RE at $330k last November, owe 292k (Bought 5 years ago for $329k so no real growth unless latest median increase makes some small difference and RE was being unrealistic), variable rate with Westpac. PPOR is in good shape except the bathroom, the bathroom needs to renovated due to leaky shower floor, mould and minor plumbing issues which I'm assuming a renter would complain about, issues I can live with personally. Also has a large pool. 550m2 block.

Short Term Desire
The PPOR my family is struggling with room. We're keen to perhaps build a new house in the area in new development areas and look to up size so we have room for our next child. 3rd bedroom is being used as a study and there is seriously not enough room to turn it into a bedroom. Desire for next 10 years would be a two story 4 bedroom Eden Brea home (Cambridge) if we could reach it. But may have to live more to our means, thinking it would come to 550k or there abouts. Issue being we would be left with a property that has seen no growth yet and we would have to cover the shortfall. $350 p/w rent so shortfall would be $200 approx at current rates (PPOR has a pool so not sure how to handle this). (Saying that we pay full tax so should be able to do a tax deviation form for this). Having kids is also a worry as the pool is a serious hazard and also is 12m x 6m so takes up all of the backyard.

Opportunity
My mother approached me a week or so ago and was telling me that she's been having a few issues health wise and would love to see her children eventually use her inheritance while she's still alive who can perhaps enjoy it with us. My wife and I have the plan that one day both my mum and my wifes mum and dad would live on a property all together in there own addition to the house and we would help support them. My mum has since made a crazy like statement and is still pushing it that she wants to offer me to transfer her house into my name, valued I think around the $340k mark. (This gave me a real tough thing to think about obviously, as I don't feel to comfortable about taking it but perhaps we can all be better off because of it.) Her argument is that she's on a disability pension and she'll never be able to use that equity as they simply wont loan her, so why not see if she can help us out now. The other reason is she has 30k of debt against the house and she wants us to pay that off too giving her more of her pension. I have a sister though which also comes into the equation. My mum wants me to look after my sister later on in some way as she trusts the property with me to make something of it as I've been really good with my money, also my sister isn't married and she's worried her relationship may lead to her losing it, the sister also has a very bad credit rating and had her car repossessed last year. Giving back something to her that's fair that equates to half of her property later on, which is fair. P.S. Centrelink has given the green light as long as she gifts the house and we promise legally to let her live in one of our property's, she will continue to receive the pension. Our idea is she just stays where she is.

So as you see, plenty of drama's and options. Not sure if taking my mum's house and the stacks of equity is a good idea, especially seeing I'd lose my savings to pay off her debt first and then the banks may think I have no regular savings. But jeez it makes you wonder if we could get to our long term goals much faster in which we could support the whole family.

Keen to know what different people would do in this strange situation. Thinking about our long term goals. I'm more then happy just to keep doing this myself but I'm also looking for advise on what we should do if we do this also, continue to save?

 

[Graemsay]

The relationship between a property's price and size tends to mean that that slightly more money equates to a far bigger house.

Combining both your home and your mother's, you could potentially afford to spend $650,000 to $700,000. You could get a much larger house, and your mother could have a self contained unit or granny flat on the site.

OK, it's not an investment, but it would sort out everyone's housing needs for the foreseeable future.

Incidentally, if you're looking at having a passive income of around $200,000 per annum then you'll need assets on the order of $4 million.

 

[Ghetto]

Thanks for the first reply Graemsy. I guess we could all live in the one place now but she's only 53 so I thought she may want her independence right now so I should have said that we'd like to keep her in her current house.

One thing I forgot to mention is my wife's father in law already has 4 IP's and 1 PPOR (255k LOC at this stage) which is left for us later down the track also in his will (he's 65). He's following the investors club method so to speak but isn't using equity to live off at the moment, but instead still works. Down the line that will go along way too. I'm not to sure on that method though especially starting at 29. I feel I'll be up to my eyes in debt and at some point the bank will stop lending and I'll get stuck with the interest repayments.

Still keen to hear different opinions and what others might do so please keep them coming.

 

[gooram]

talk to a broker, there's plenty on this forum.

you may not need the equity in your mums place to buy into your next place. Sounds like a win-win for you mum and a hit to your cash flow to you. If you're taking over the debt, you may as well refinance the loan so you can at least claim the loss, you'd probably have to charge you mum market rent to do that though (?).

I'm sure the bank would check the finance against the property if you tried to use it as an asset. So be aware of that.

My feeling is it is all too complicated and messy and getting involved in this stuff with your family is problematic. Blaze your own trail, if your parents want to leave you stuff in their will, great, but leave it for now.

 

[Ghetto]

That's the way I'm leaning at the moment too, it's all a bit too messy. Perhaps later when my properties are doing better I'll take it over by using the equity to pay her debt later on. Very keen to get into property investment so I did like the idea in some ways. Perhaps if my PPOR actually grew a bit I may have a different feeling at the moment, but owing 88% in that limits me.

 

[jrc]

If you're dealing with Centrelink get it in writing.

 

[rugrat]

Steer clear of the family drama for now, especially as there is a sister to consider (who while being hopeless financially may not appreciate being put to the wayside or treated like a third wheel).

You do dream big Not a problem to have high aspirations, however you might want to start smaller and build yourself up. Rome wasn't built in a day. This big aspirations as you ultimate goal - now you need to break it down and come up with some smaller goals.

Where do you want to be in 1yr, 2yrs, 3yrs, 5yrs, 10yrs, 15yrs, 20yrs? It is alright to change these goals along the way, but it is good have them set as something to aim for.

Your first goal would appear to be an upgrade of your family home. My advice is, stay where you are for a couple more years. kids can share a bedroom, babies don't actually take up much space and can share your bedroom for a long time. BUT I understand your concerns regarding the pool, so maybe a move is nesseccary for your sanity.

Although your want the nice 4bed - go for the cheaper 3bed, kids can share a room (I know we have the smaller 3 bed and three kids 4yrs, 2yr, 8mths). It may drive you crazy at times, but you can use the extra money you would have spent on a bigger house on investments, and you can always upgrade again later. As such make sure the house you buy would make a good investment.

If you do decide to buy the bigger house upfront, then be prepared for it to take you longer to jump into the investment game.

You have three options with your current PPOR, stay there a bit longer, sell or keep as an investment and rent out. You would need to run the numbers on this to see which is more profitable.

You will also need to decide on this all and get started before you and your wife start trying for number 2, because the banks will seriously limit how much they are willing to lend and your ability to pay will be restricted - particularly as your wife will likely take maternity leave. So there will be a significant time where you will be one one wage. Make sure you don't overcommit before a second baby.

 

[The Y-man]

Salary
My Salary After Tax - $5700 p/m
Wife Salary After Tax -$2915 p/m
Total After Tax - $8615

Savings - $20,000 in savings account. Saving 2k a month, will look to add in tax return of about 5-8k in July.

PPOR (Western Sydney) - Valued by RE at $330k last November, owe 292k

Your living costs look higher than I am used to seeing.....

You put aside 2k: this means if your wife stops working, you're in trouble?

According to some quick calculations, your living costs (NOT including mortgage) is around $4300 per month....

I think your first short term goal should be to see if you can put aside ALL of your wife's pay and a bit of yours as well. Find out where the cash is going.

Cheers,

The Y-man

 

[Ghetto]

I use Quicken to track all my costs and yeh we can live with the wife off work (Did it for 8 months in which my son is only 13 months old). I guess your saying why aren't we saving more now. I don't really know, we just have it setup to save 2k cash automatically and the rest of the money we keep in the bank. It would only be about another 1000k though. I should look at doing that, but we use that extra money I guess to have a bit of a life and pay of private healthcare, car loan and a computer lease. Also readjusting from my wife returning to work. I've also had to pay out some big medical expenses as the wife broke her elbow 2 months ago so I was expecting to review the savings but we've paid about $1200 on medical bills so far and she's still in a sling. $1900 is the current repayment on the PPOR.

Car payment and computer lease come back in the tax return which goes to the saving. I should end up with about 35K per year this way + work bonuses. So the saving is there, just in a different way. The past few years we paid extra on the home repayment and fixing the problems in the house.

Short term you're right, the lease is about to expire on the PC so I'll finish that and the car well, that'll have to wait a bit longer. I think 3k a month will be manageable. I'll go through quicken and see what I can do.

I'll post on rug-rats advice next, gave me a few ideas there. I know this is a bit different to investment type of advice but the goal is to get to that and other people can give great advise when looking through different windows.

 

[Ghetto]

Rugrats, Yeh I do dream big, but I'm very good with goals. I have a goal sheet stuck to my fridge and I tick things off when I do them and when it's 50% done I do another list. I believe I can get there, the only one who can do it is myself and I understand that. I should do a year by year one like you said, great idea.

I "live" in Penrith which is a great place to live for me, but not really the best place to invest perhaps so I guess I should consider eventually how many properties I'll own out this way. If I was to upgrade to a new house now which potentially had a study, is defiantly bigger then my current home and stuck to 3 bedrooms I would be buying a place for where I want to live so to speak and potentially turning my old house into an investment if I decided to move, not really being where I want to invest but it's a start I guess. There's a new area opening (Jordan Springs) which I could get a much bigger home built in for under 400K, cheaper then buying an exisitng house in the area I live in now, perhaps that's an option. I'd end up with 3 propertys out this way if decided to upgrade again.

Staying put means we only end up with two I guess.

With the big home goal I agree, like I said I'm wanting to make that the 10 year goal and I just don't know what step to take now. We're struggling though and the wife's stress levels are killing me.

I think I can continue to save 30k a year. So perhaps

2010 - Save to 40k deposit and continue to pay down PPOR.
2011 - Buy new house, larger home with no pool, move in before Xmas. Turn existing home into rental. Save about 15k as I'll probably be paying the interest on the construction loan while the home is being built.New Baby comes along.
2012 - Pay down new home PPOR. No Saving due to maternity leave. Maybe use 15K if equity in old home starts to move.

OR

2010 - Save 40k deposit and continue to pay down PPOR. Upgrade Bathroom in PPOR.
2011 - Buy investment property and stay at home. Save 30K and maybe if PPOR home price rises then look at another one just before baby is born (unlikely)
2012 - Pay down new home PPOR. No Saving due to maternity leave.

You're 100% right, I need to get this started before the next baby comes along.

 

[jingo]

Life Goal
To earn some sort of a passive income (Potentially from other sources - if you think this is impossible from property) for myself and my wife equivalent in today's money of at least $200k p/a (Ultimate 520K if dreams came true).

As someone said, to earn $200,000 p/a you need at least 4M worth of unencumbered property (depending on yields).

To earn $500,000 p/a you need 10M worth of unencumbered property (depending on yields).

It's possible - but just looking at your saving rates, and family situation I'm not sure how you plan to realistically achieve this goal?

I rekon you need at least $3000 each month to support a family of 2 kids (and another on the way), and I think your current figure of $4,300 per month is not far off the mark. Not sure what others think??

Regards Jason.

 

[Ghetto]

I'd be more then happy living on current salary from home to be honest. Aim would be for the 200K though.

Also we only have one kid (with another on the way), I don't think we'll go to much further.

I did a YTD on spending, this is what I've come up with just quickly. This is just top 10 categories. Only 15 or so anyway. Our 8k a month is spread into this. Interesting how other people compare. Being in an older house my utilities are really high I think, we only had 2 people but with older stuff like old AC in the wall and crappy lights etc the electricity and water etc is to high I think. Looking at this I'm spending 50%+ of my pay on my savings and property.

Housing (PPOR Payment) 29%
Savings 23.83%
Motor 12.07% (Includes Petrol and Lease)
Groceries 8.76%
Utilities 4.27% (Elec Bill, phone, water etc)
Insurance 4.09%
Entertainment 3.2%
Gifts 2.7%
Misc 2.43%

 

[handyandy]

Couple of points.

First up fix that 'leaky' shower sooner than later. You say you can live with it but you indicate that there are obvious signs of the leak. well, termites also love leaky showers and will be attracted to the area because of the moisture and wet wood. If you leave it to long then possibly the job just get larger.

You seem to indicate the path you are planning to take is upgrading and then converting PPOR to IP. If so then you don't want to pay down the loan on the PPOR as redrawing on the old PPOR will effect the tax deductability. What you should look into is using an offset loan for your PPOR so that when the time comes to move to the next PPOR you simply draw down the offset and the IP (old PPOR) has a fully deductable loan.

It's all about what the loaned money is used for that makes or breaks its tax deductability.

You have a good savings record but again don't indicate where you hold the savings. As per my previous point, any savings should also be lodged in an offset account to maximise the earnings which would then be tax free.

Cheers

 

[65fbk]

Maybe others will disagree, but I see it like this..


You have about $30-40k equity in your house.
You have $20k in the bank.
You have a car loan. (We don't know what you owe there)
There's a baby on the way, resulting in higher cost of living and reduced income when the Mrs stops working.
You have saved some, but your consumption appears a little high. (Car loan??)

I understand you want the big house, but I really don't see it being the smartest option for you right now.

If you sell your own house, after paying sales commission and stamps on a new purchase, the small amount of equity you have will be reduced to zero.

If you search here, you'll find the general opinion on mixing family and money results in conflict. Your situation sounds even more likely to suffer as your sister will not have positive feelings about this arrangement.

I fail to see the point in having your mums house in your name. Sure it will enable you to borrow more, but it won't generate any income to help you pay the extra debt. Unless of course you use the equity to leverage into IP's, but you sound more motivated to upsize your lifestyle instead, resulting in a bigger PPOR loan to service??

My advice would be to live below your means and stick it out where you are.
You won't be the first family of four to live in a 3 bedroom house.

Read some books, maybe starting with "The Millionaire Next Door" for $10 on ebay. It explains the pitfalls of those who live beyond their means and accept/inherit gifts from their parents. This perspective may help you avoid these consumption habits when the day comes to inherit your mum and FIL's assets.
Give the book to your sister when you have finished