Difficult next step that I can't seem to figure out

My investing style is buy, hold and rent in cash flow neutral properties in growth areas. The goal is not 100 properties with amazing cash flow, the goal is 6-7 properties that can afford to support themselves, but also grow to be accumulated 6-7 properties, to later pay down the debt and have some positive cashflow in later years.

Situation right now:
Used a guarantor loan on parents property to buy $280,000 place in Deception bay, QLD (2 months ago), plus Stamp duty on it, so the loan is $291,000 on interest only. It also needed a $20K reno, that now done the property is worth around $320,000. Renting out at $340 a week.


We have $85K cash.
My partner pre approved $290K
Me not yet pre approved but looking $380K
Guarantor needs $85K to be released

What are the next best steps, here are how I see the options:

1. Partner buys cheap property similar to what we have now.
2. Pay cash to release Guarantor parents from the property, then use the Guarantor a second time on higher priced asset.
3. Buy in my name using $80K as deposit on $380K property
4. Joint purchase a property for $400K

Challenges with each scenario:

1. Partner buying cheap: Means we tie up our hard cash in cheaper asset with less growth potential, so longer time to get number 3 as we would rely on equity and minimal savings
2. Release guarantor: Can we use the guarantor twice like this, will the bank allow it? Would it be a smooth transition, especially considering the recency of purchase.
3. Buying in my name means 4 month wait as I am moving jobs and would need a few months of salary in my account to be considered for a loan.
4. Option 4 wouldn't really be an option because it would hamper the service calculators for purchasing multiply more.

I am keen to get some of your thoughts, it seems like a bit of a fun one to chew on.

 

Pay your parents out. Relying on your parents as a retirement for you is not something I believe an adult should do.

Pay off some of your debt then look at buying in the future when you have an asset and more money saved.

 

I agree. As a once-off to help you get a foothold in the market, OK, but still a risk to your parents. Now pay them out and develop a strategy that relies on you standing on your own 2 feet.

 

* Cheap property isn't always cheaper. Rates, utilities and insurances don't scale well with property value. It seems to me that slum lords complain a lot more about bad tenants, maintenance issues, disinterested property managers and financiers. Buy for growth, ideally both capital growth and rental income growth. Quality over quantity works in the long run.

* Work to release the guarantor. You're currently in a negative equity situation. It doesn't affect serviceability calculations, but it does affect credit scoring. This is something to give you a head start, not something to rely on as part of a strategy moving forwards.

* Buying in your name doesn't mean a 4 months wait. There are lenders that will lend on a single payslip. I've had loans approved for clients who applied for the loan on the day they got the first payslip in a new job. Some lenders look at consistent employment, rather than how long in the current job.

* Purchasing jointly actually increases your borrowing capacity overall. Two people working together have greater capacity than the sum of two individuals investing separately. There are some useful asset protection benefits to doing things separately, but from a lending strategy perspective it reduces your borrowing capacity and creates other challenges in the longer term.

 

I agree with you guys, its not a long term strategy to leverage off parents for eternity. However, getting a boost up in the early years in investing makes all the difference in the long run (so we can afford the old people health care needed). Bare in mind we only just bought our first property 2 months ago. The plan would be to have 3 get properties then release the guarantor loan when equity rises on those. The risk for parents is mitigated when I have more property and those are purchased by a respectable BA in a decent area for growth. Its not a scatter gun approach where we buy off the plan or new 2 bed units in Gold coast.

Peter, your'e speaking my language with the first statement, bang on. That is why I dont think option 1, with my partner getting a cheap property is really viable. I feel we made a mistake by using the guarantor on such a "cheap" property, when I was pre approved $410K, but we blindly listened to our buyers agent and didnt think about it.

I should put forward too that we are saving $2,500 a month with $500 of that paying the negative equity of the first property.So we have $2K saving towards that $85K a month.

Job wise Peter, I did have a thought that may be the case, especially as I would be going to the same industry and same pay job, so that is good. Would the Tier one banks lend?

Also, purchasing jointly means that I am going 50/50 on a property with my partner, great, borrow more in the first instance.However, when the banks look at the serviceability of that they assume me liable for 100% of the property, which makes number 3 harder. If I I would have to go ahead with my partner and if her financial circumstances change, then we are limited on number 3. That and when you factor in Land Tax thresholds, doing it separately means we get double the Land Tax threshold.

Let me know if I am talking out of my ....... on this, just repeating things I have heard/read. As I say, first property purchased 2 months ago, I want to rely on some experts on here and their opinions.

 

On this point, once you borrow jointly, you're correct that (most) lenders assess you as 100% liable but only getting 50% of the rent - if you purchase separately later. If you continue to purchase jointly, that's not a problem. Yes there is a problem if one person's circumstances change, but these are often windows in time rather than permanent challenges.

Additionally you can be 100% on the title but jointly on the loan with a partner. This ownership structure can be used to manage land tax.

Also some of the Big 4 are flexible on employment periods, as are some of the second tier lenders. The exact policies vary, so the right lender might need to be matched to the circumstances. This is an area where a 20% deposit or strong equity position can be very useful.

 

It was 5 years between my first and second property purchase, I used that time (amongst other things) to pay down the loan and learn about property and start to make a proper plan about moving forward.
This forum can make you want to do everything at once and have it all happen overnight but I'm glad I slowly built into it.
It means not as heavily geared, a cash buffer, better asset option/selection and no problems sleeping at night.

I really think a little patience can go a long way

 

OK for you to have that belief - but this type of thing is purely between the parents and children.

As long as everyone is willingly doing it, then it is a great thing. Seen much greater contributions from parents than this arrangement. As long as the children show due appreciation then they should not feel guilty about accepting their parent's support.

 

Unfortunately appreciation does not pay a mortgage. I stand by my opinion. Potentially both parents and children could end up in financial difficulty.

If adults have the capacity to pay back debt owed to parents I think that is the smart thing to do for all involved. Getting into more debt at this point is unlikely anyway. I can not see many lenders champing at the bit to provide more finance two months after a mortgage is written.

 

Don't see the problem. Many people receive cash gifts from parents or help with their first deposits, it's hard getting into the property market and some parents want to help their kids, so why judge when you don't know their exact situation. Taking a guarantee is much more honourable than accepting cash gifts from parents etc. It's not as if he's making his parents pay his debt.

Plus OP hasn't gone off buying in a mining town or something, he's bought in a stable location which probably has good cash flow. If things go bad, worst case the bank will sell his IP and release the guarantee, OP will be liable for any balance funds. If the bank can't recover costs by selling the IP, the guarantor is only liable for the amount guaranteed, which is probably just the 20% deposit plus costs. OP is not really looking to sell, so no need for the freak out. As long as his cash flow is good, no issues.

OP has good savings and they're working hard to succeed. Good luck @Househunter let us know what you end up doing.

 

I'm not "freaking out", quite the opposite. Why judge? Because that is what good business people and smart investors do.

There's an insidious culture recently that feelings trump facts. The fact is that this could all go horribly wrong. Sure, it might not but I do my planning based on worst case scenarios.

 

Ok, maybe I should rephrase my question a little. What I am looking for is a "what would you if you were in my situation?" Transform your current financial situation to what I have put down here, what would you do?. What would your next step be?

Sure we can go on with the debate of parents helping out blah blah blah. And thanks Andy for the stick up and as great as your opinion are Hobart. This is a financial question about property not some ethical debate.

Has anyone got a solution to this problem?

 

What facts make you so sure this could go wrong ? How do you know the parents financial position. It maybe much smarter than waiting until their dead to assist.

 

I don't know the parents financial position. I do know that guarantor arrangements are by their very nature risky. Had the parents provided a 85k gift then there would be less risk involved in my opinion because they are not guaranteeing the loan/ or part of it.

 

This is a guide by ASIC's Money Smart website:
Loans involving family & friends | ASIC's MoneySmart

 

Parents ‘strongly discouraged’ from going guarantor - Mortgage Business

 

Getting a helping hand from parents to get in the market is excellent.

Before moving ahead again (buying more investment properties), weighting up the options of using your current cash to pay down debt and release the guarantor, or buy more. Buying more to accumulate assets is good, but the risk increases as well. When you leverage to the max, there is minimal wiggle room. If something happens and you can not make the loan repayments to the guaranteed properties, what will happen to your parents?

 

Exactly - gifting the funds limits the risk to parents to the amount actually commited towards the purchase, as well as any impact to their borrowing capacity.

 

Great point well made, I will look deeper into the sole ownership and joint mortgage. I Appreciate the help!