$200k from father in law

Discussion in 'Loans & Mortgage Brokers' started by Brian84, 11th Sep, 2015.

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  1. Brian84

    Brian84 Well-Known Member

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    Hi everyone,

    My father in law has just offered my wife and I $200k cash to put towards an investment property or properties. Catch is he wants the $200k back in 5 years time and wants half of the rent that I receive from the investment properties. He doesn't want any profit from when the property goes up in value.

    Would you take up the offer of the $200k?

    Would it be best spent by my wife and I going for a loan of $400k and using the $200k towards it to have $600k, then we will purchase 2x$300k properties

    Or

    Would it be better to borrow $200k and use the other $200k to buy a $400k property?

    Any advice would be appreciated and any suggestions on other strategies would be helpful.
     
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  2. Sackie

    Sackie Well-Known Member

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    @Brian84 2 properties, middle ring areas and something you can add value to.

    Also make sure your passports are current in the 5th year, just in case (exit strategy):D
     
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  3. Propertunity

    Propertunity Well-Known Member

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    Personally, I'd let your FIL keep his $200K and not have to put up with the interference in your family life, that this kind of scenario can lead to.
     
  4. wylie

    wylie Moderator Staff Member

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    I would not take up that offer. He gets half the rent, and wants the money back in five years. You could be better off borrowing it from him and paying him interest.

    In five years, you would have to hope the property or properties have gone up enough to pull out the money to repay him or you would have to sell a house or houses to get his $200K back. If you don't have enough equity, you will have to sell and you've lost the entry costs.

    Sounds bad to me.
     
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  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I'd come up with a more concrete arrangement than 'half the rent'.

    If you buy something worth $400k receiving $350 a week, this equates to you paying roughly 2.5% interest on that $200k.

    If you buy $700k across a couple of properties, receiving $600/wk, you're paying 7.5% interest.

    If you think about how you're going to pay the money back, you're probably going to have to leverage more, otherwise your equity may not increase enough in 5 years to get access to $200k (assuming you even qualify for a $200k equity release). You might have to set yourself a goal of saving $200k in 5 years, which isn't easy.

    The first example is generous, the second probably isn't. A better arrangement would be to pay a flat interest rate on the money, and have a longer term than 5 years.

    That said, I wouldn't borrow money from family. It tends to come with conditions that you can't put in writing and they last long after the loan is repaid.
     
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  6. Brian84

    Brian84 Well-Known Member

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    I was actually thinking that as I don't know if it would turn bad.
     
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  7. Brian84

    Brian84 Well-Known Member

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    Thanks everyone for the advice. I kind of leaning more to doing it on my own and not take his cash offer and keep everyone in the family happy.
     
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  8. legallyblonde

    legallyblonde Well-Known Member

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    I agree that is could go really bad really easy... But if it is something you would continue with... I would be leaning towards a set interest rate instead of half of the rent.
     
  9. Perthguy

    Perthguy Well-Known Member

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    I've done it as a lender and a borrower. I wouldn't do it again. Personally I would thank him for his offer but I wouldn't take the deal.
     
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  10. Bayview

    Bayview Well-Known Member

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    $200K back in 5 years - and half the rent as "interest"? (I hope that's nett.)

    Assuming the yields are circa 5.2% (as a general average)

    If you bought 2 x $300k properties, this equates to $31200 per year, gross.

    Half is $15600.

    That's 7.8% per year interest to him - if you base the payment on the gross rent.

    Correct me if the maths is wrong.
     
  11. Perthguy

    Perthguy Well-Known Member

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    You could do it with a commercial loan agreement, but what happens if one of the parties in the transaction unexpectly passes away? It could result in a forced sale of a property if the loan couldn't be repaid when required.
     
  12. Coota9

    Coota9 Well-Known Member

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    Family and money don't mix!!..simple
     
  13. Perthguy

    Perthguy Well-Known Member

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    Your maths looks correct to me. When you put it like that, it doesn't looks like a great deal for the father-in-law and a bad deal for the son-in-law.
     
  14. Inov8ive

    Inov8ive Well-Known Member

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    I would go and buy a 200k property in a regional area- split the rent for five years (happy days) and then sell in 5 years time to give the old man his 200k back. Only risk is if is the property doesnt go up in value at all and you get stumped with the stamp duty and legal fees. Sounds like free cash to me, take it!
     
  15. wylie

    wylie Moderator Staff Member

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    Also, I wonder how it would work. House in your name, half the rent going to FIL???

    Will he add the rent to his income? Will you? Messy, messy, messy.
     
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  16. larrylarry

    larrylarry Well-Known Member

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    I agree.
     
  17. Hodor

    Hodor Well-Known Member

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    And you have transaction costs and it could be hard to sell.

    Sounds like a poor deal to me. The higher you leverage the money, assuming better rental returns, the better your FILs return and the worse off you are.

    If you were to take up the deal I'd be inclined to purchase one property around the $300k mark and then use equity in 12 months to get a second one. He can't expect to have a piece of the pie of a growing portfolio and this way would minimise the impact to serviceability etc.

    Still my advice is don't do it
     
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  18. bob shovel

    bob shovel Well-Known Member

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    It is generous and likely to be messy but what about lower the amount as it could be the number offered is to large.
    Why not say 10% of property price or something to help secure say a second ip rather than just one off your own bat.
    Also half the rent doesn't seem fair for you guys as mentioned. 10%prop price and an agreement on interest amount
     
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  19. EN710

    EN710 Well-Known Member

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    Because it's you father in law, I wouldn't do it. If the money goes to you other half without condition, where it is then used for investment by the both of you then it's a different matter :confused:
     
  20. Steven Ryan

    Steven Ryan Well-Known Member

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    Unless you're keen to explore an "in-and-out" type or scenario...

    e.g. use it for the deposit and costs of splitting a block to sell at completion (or transfer ownership of one block to the father in law to pay him out) or buy and undertake a decent reno then sell on completion), I would not sign up for the slew of potential headaches.

    Even in the above scenarios, the potential for things to go bad are there.
     
    Brian84 likes this.

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