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any suggestions?

Discussion in 'General Property Chat' started by Excalibur1, 29th Jun, 2016.

  1. Excalibur1

    Excalibur1 Well-Known Member

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    Hi all

    I finally managed to convince my parents that if they work smart and not hard that they can live comfortably.

    I told them that i will ask around on what would be best strategy and how to approach it. This is their situation. Father is working as a tiler and only works and picks jobs he finds "interesting". Mother is retired and helps with grand kids. They both want to officially "retire" in few years and spend more time with grand kids / travel (they are 55 and 58 years old). They are looking to generate 50k/year passive income, more if possible. They are in NSW, Sydney.

    PPOR - bank valuation 1.7m
    Loan on PPOR - 300k

    savings - 200k (sitting in offset)
    Father earns 60k per year - although if he takes on more work this can be around 100k or more

    Property can be rented for 1,350/week

    The bank doesn't want to lend them any money as he can't service anymore loans. They are with ANZ and they have not talked to any brokers or other banks.

    They are willing to reallocate / rent another place which is smaller, but dont want to sell the house they own, so the house can be rented. We can tell the bank they will be living with me to keep their costs down, but would prefer not to lie to the bank to increase serviceability.

    Do you guys have any suggestions on how to proceed by taking out equity. and suggestions on where to invest. Dad would like to take out equity and purchase old or run down properties and then renovate/rebuild and possibly keep for extra income or sell to fund next project.

    Any suggestions are appreciated.

    Cheers
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Their age is going to be a huge challenge. Having a PPOR with a significant debt against it close to retirement age will mean most lenders won't be able to assist.

    They could consider sellig the PPOR, downgrading into something worth less. This would clear up their PPOR debt and give them significant cash to invest. Under those circumstances they might be able to borrow the difference for an IP or two.
     
  3. Big Will

    Big Will Well-Known Member

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    First they need to speak with a different person within the bank or with a broker. My parents just got the biggest loan of their life and both don't even work (your dad is semi retired).

    You have missed a key part which is super, when they get to 60 they will have an income from this (unless there is no super...) So for their 50k p.a CF how much would be from super? or was it 50k on top of the super income?

    If your parents are unable to secure another loan they will be unable to get any equity out so they only have 200k in savings.

    With this they could go buy 2x 100k properties (ex buying cost) and to reach their goal of 50k would need to buy in BH and have them rented. BH yield is 11% (according to re.com) so they would pay 11k each or 22k p.a. combined (less expenses) lets just call it 15k p.a. So if they were getting 35k from their super there is the magical 50k :).

    BTW I can comment on rent something smaller as that could be a unit, house, to many variables but if they rent something for $500 (I don't know if they would want that) there is a further 850 pw in cf or 44,200 plus the BH would make it ~59k (less tax maybe 50k).

    BIG NOTE - There is not much room for error at their age losing it all it will be unlikely they will be able to recover for a comfortable retirement.
     
  4. Mumbai

    Mumbai Well-Known Member

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    Build a granny flat with the saved money. You can probably have 350-400 a week coming in, depending on location and build.
    Lease a room (or two) from the PPOR either via a PM or just airbnb it.
    The money coming in can be used to pay off the PPOR without touching the 200k (minus 100k if you go down granny flat option)
     
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  5. Excalibur1

    Excalibur1 Well-Known Member

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    Thank you for your input @Big Will and @Peter_Tersteeg . I know there is no room for error. This is why I suggested they take out a loan for as much as possible now and put it in offset only to use for investment purposes.

    They have no super so it would be about getting to that 50k without it. I suggested to them to rent something smaller and lease the house. This would work, but it would mean that he would not be able to buy anything else.

    @Mumbai there is slight potential for granny flat conversion within the house. We never saw it as option as it would take away from the overall value of the house. Mum is the scared type, so airbnb and lease by room is out of question.

    Would it work if I go in there with my salary (kind of like a guarantor), so that servicing can be increased? Is that possible? I was reading somewhere (sorry cant remember who), about annuities and using them for servicing?
     
  6. Mumbai

    Mumbai Well-Known Member

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    It won't take away the overall value of the house. The value might not increase to the cost of granny flat build. But, thats when it is sold. They are not planning to sell, so there is no question of value of house going up or down.
     
  7. pinkboy

    pinkboy Well-Known Member Premium Member

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    DO NOT DO THIS.

    Without being harsh, it appears you don't even know what you are doing or advising. Your parents require professional advice.

    pinkboy
     
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  8. Big Will

    Big Will Well-Known Member

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    Taking as much money out as possible would change responses but currently the answer is no.

    If you used your salary you would be tied in with them or have to factor it into your risk. I know they are your parents but I wouldn't want to do it for my parents or do it for my children.

    If you are buying with your parents it gets messy quickly and real messy if you have other siblings. Yes it might be easy for 50/50 now and in theory however what happens when something needs to be fixed, what if they pay the deposit and you service the loan. What if over time it ends up you are paying 70% and then your sibling says no the deal was 50/50 with your parents.

    I personally wouldn't team up with your parents but it is up to you :).
     
  9. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Wow, no super and close to retirement.

    They should get some advice.

    Were it me, I'd bust out some logic and keep it simple:
    • Sell PPOR ($1.35mil after clearing debt & sales costs)
    • Buy new PPOR outright for $500,000 or less leaving $850,000 to;
    • Buy $1,000,000 of IPs at 20% LVR P&I returning 6%+ ($60,000 rent income)
    • Park $200,000 in offset against IPs (completely offsetting interest)
    That'd about do it and ensure outright ownership of a PPOR into retirement.
     
  10. Excalibur1

    Excalibur1 Well-Known Member

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    Do you mind me asking as to why not to do that? they still get to keep their home and if they want to invest the other funds they can from the offset.
     
  11. Excalibur1

    Excalibur1 Well-Known Member

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    I have thought about being tied to it and don't see it as a problem. Don't see it getting messy as I don't want any money from the property. It is up to them to spend as they please. I don't rely on it as my inheritance.

    Both parents are risk averse, they would be happy with money just sitting in the bank.
     
  12. Excalibur1

    Excalibur1 Well-Known Member

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    I need to make a correction.

    Mum does have some super (approx 30k). Dad has no super, always self employed. They would not like to move from the area, so it would be difficult to find something for around 500k. However i will propose that idea to them and they can think about it and I will put them in touch with professionals to create a plan.

    They can pay off the outstanding loan within a year so that is no problem. What they want to do is utilise the equity to generate some income. They don't want to invest in shares and prefer that it is in property.
     
  13. Big Will

    Big Will Well-Known Member

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    Since there is no super income and no real income (I know I just call 60k not real income, but I'm talking from a bank's perspective).

    I would think they will have little chance getting money out so it might be sell and then buy a smaller place and use the extra funds to fund a purchase.
     
  14. Big Will

    Big Will Well-Known Member

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    30k super is that capital or income you are talking, I'm assuming capital so I wouldn't include it in your workings as it wont contribute much.

    Using equity is only possible if the bank will allow you to draw the equity :)
     
  15. Excalibur1

    Excalibur1 Well-Known Member

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    Thanks for your suggestions. Yes 30k is capital. Then possibly they might have to sell.
     
  16. pinkboy

    pinkboy Well-Known Member Premium Member

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    Start here: Tax Tip 1: Parking borrowed money in an offset account

    Do you think a couple who have never owned an IP are going to want to start to at age 60?

    $1mil of LIC/ETF's earning 4-5% (up to 8%) + franking credits would be a much better option for little to no work except go to the accountant annually. No toilets to unblock, no roof to fix leaks, no extra rates/insurance/water bills to chase up, no vacant property, no damaged property to fix.........

    pinkboy
     
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  17. Big Will

    Big Will Well-Known Member

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    I would see that as the most likely thing to do.

    If you don't want to lose the home from the family you could sell to each other (stamp duty will be calculated on 1.3M most likely) but that is a way they can get the money and keep the house. However both parties should seek their own independent legal advice on this.
     
  18. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    $30k may as well be $0 for their ages.

    There's many ways to skin a cat, maybe they can access some equity from the PPOR without selling but lenders will want to see how they will repay the debt without selling their PPOR. Super balances are zip so that's out, so they'd be looking at short loan terms a P&I. If your dad had an office job, you might justify his intent to work past retirement age, but given it's hands on work, lenders will take this into account as well. (how long will his body remain able to do the work?).

    It's late in their run to be gearing up much.

    Definitely worth sitting with a professional on this.
     
  19. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    $1mil of LIC/ETF's earning 4-5% (up to 8%) + franking credits would be a much better option for little to no work except go to the accountant annually. No toilets to unblock, no roof to fix leaks, no extra rates/insurance/water bills to chase up, no vacant property, no damaged property to fix.........

    pinkboy[/QUOTE]

    Also a valid option :)
     
  20. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    First get them to go and see a financial planner who can take their entire situation into account.

    I would be looking maxing out their concessional contributions each year.

    When they are ready to sell their house use the three year bring foward rule to max out their non-concessional contributions. Use the remainder to buy a new PPOR.

    Hopefully they will have $1m in super, 5% returns the can get $50,000 pa (no tax in pension phase) with out touching the principal.

    Edit: The three-year bring forward rule is being replaced by a lifetime non-concessional contribution cap of $500,000.
     
    Last edited: 29th Jun, 2016
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