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Finance strategy for 25yo: advice please

Discussion in 'Property Finance' started by Westminster, 20th May, 2016.

  1. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I'm trying to work out a way to help my 25yo nephew who wants to get his first place - he was thinking IP not PPOR originally. We sat down and he has $35k saved up for a deposit which won't get him far so we brainstormed ideas about how to stretch that money as far as possible for the best returns. In the end we came up with a complicated strategy that could well work.

    I'm interested in some broker (and general) feedback on if they think it will work and general feedback on the idea.

    1. buy a vacant block in Perth that is zoned medium density and is big enough to split into 2 for $240k (I have one in mind) at 88-90% LVR (requires $21k plus some transfer fees etc at 88%)
    2. Buy it as a FHOB and use the stamp duty concession
    3. Build a $220k house on a 'theoretical' half of the block, get $10k FHOG, get a $8k rebate from land developer for construction. (requires another approx $20k at 88%)
    4. Live in house for one year to meet FHOG rules (probably rent out 2 rooms to help with mortgage)
    5. After one year subdivide off half the block (ie get it's own title) then build another $220k house on that which becomes a IP. First house should be worth $400k on bank val (had same stock val'd this year) so there should be equity in second block to do second build. Need to do some tap dancing to work out how to do this part. Broker help please!! So first loan would be around $420k and it needs to be somehow magically made to be a loan of $660k with a val of $800k ( 2 loans of $330k??)

    So I think he needs around $40-45k judging by above but will also receive $10k from FHOG (when is that paid) and is eligible for the $8k rebate but can't use that for deposit but will help him with construction costs. I'm happy to lend him the amount needed to get deposit over the line and his savings should count to genuine savings.

    Does it make sense? Is this doable and viable?

    @Jess Peletier @Kinnon Bell @Corey Batt @Rolf Latham @anyotherbroker

    Edit: Step 5 will require around $10-15k to subdivide and get titles for second block. If FHOG is given after construction then he can use that money + savings over 12mths to do that
     
    Last edited: 20th May, 2016
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  2. spludgey

    spludgey Well-Known Member

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    I can't really help with what you asked for, but what I would suggest is that maybe tell him to sign up and ask these questions himself?
    I think this would be a good first step. Initiative is always good.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Does he have an income?

    Could you or other family member lend him more deposit?
     
  4. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    How much does you nephew earn? The first question I would be asking is, can he even service the debt in the bank's eyes?

    Banks won't accept income from rooms rented out in the PPOR.
     
  5. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Yes he's an accountant :)
    He's keen to do this on his own two feet. I could lend him more but I'm most comfortable lending him $10-15k
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I'm pretty confident he will service the debt on the PPOR stage of the plan - lives at home and on $65k pa. For the second stage of the plan he'll be able to add in the proposed rent on the IP to servicing.
     
  7. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Disregarding LVR, serviceability etc - in terms of the actual process it's fairly simple:

    • Purchase Land
    • Build first House
    • Use cash funds for subdivision
    • Release new title, revalue both properties
    • Use new equity generated to cover deposit/LVR requirements for construction
    • Construct house
    • *Optional* post settlement revalue both properties to release any additional equity for future investing etc
    The finer details will dictate exact LVR's, deposits, structures but it's a common and very do-able scenario so long as the income and savings can be provided.
     
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  8. Kinnon Bell

    Kinnon Bell Finance Broker

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    Yep, fairly straight forward transaction if he staggers it. Buy, build, live. Sub divide, equity extract, construct again. Pretty much what Corey said :p

    Depending on the lodgers and whether there's an actual lease in place there may be a couple of banks take that as income. Having it on tax returns would be better though.
     
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  9. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Once the new block is on its own title, you can apply for a separate loan in its own right. Because there's 2 titles, you'd rewrite them both so they aren't x-coll.

    Sounds like a great first project for him!
     
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  10. HUGH72

    HUGH72 Well-Known Member

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    Wish I had an auntie like you @Westminster.:p
    It sounds like a great way to get started.
     
  11. bob shovel

    bob shovel Well-Known Member

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    Yeah that's a cool strategy straight up! Bucket loads of learning! I was just thinking buy elsewhere and cheapie:oops:
     
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  12. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Thanks everyone for your input.
    I think it will be a great thing for him. Initially we were just thinking an IP but the deposit didn't go very far once stamp duty and deposit were taken into account so the brainstorm started.
     
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  13. tobe

    tobe Well-Known Member

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    Step 2, stamp duty concession.

    Not sure about wa, but in vic you can't get the concession unless you have a house on it, or a building contract (and then you also get the fhog)

    Having the building contract before you purchase the land will also help with serviceability. Buying just land means you need to account for rent somewhere else (even if @home with the olds) in the borrowing calculator.
     
  14. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Good point @tobe. We'll have time to do them together, so have a building contract in place before settlement of the land.
     
  15. Azazel

    Azazel Well-Known Member

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    Seconded (or thirded).
    Good on you for helping to sort them out @Westminster
     
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  16. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Thanks for all your input. I have re-written it up for us.

    The simple
    • Purchase Land
    • Build first House
    • Use cash funds for subdivision
    • Release new title, revalue both properties
    • Use new equity generated to cover deposit/LVR requirements for construction
    • Construct house
    • *Optional* post settlement revalue both properties to release any additional equity for future investing etc
    In more detail it looks like


    1. buy a block that is zoned medium density and is big enough to split into 2 for $240k (I have one in mind) at 88-90% LVR (requires $21k plus some transfer fees etc at 88%).
    • Get 90 day settlement which is standard so that you can get plans and building contract done
    • this meets the requirement for FHO Grant (they need a building contract)
    • use stamp duty concession

    2. Build a $220k house on a 'theoretical' half of the block, get $10k FHOG, get a $8k rebate from land developer for construction. (requires another approx $20k at 88%). Use the $8k to reduce the construction costs - might get it down to $210k maybe

    3. Live in house for 6-12mths to meet FHOG rules (probably rent out 2 rooms to help with mortgage). I checked and you only need 6mths according to https://www.finance.wa.gov.au/cms/uploadedFiles/_State_Revenue/FHOG/FHOG_Fact_Sheet.pdf

    4. After 6-12mths
    • apply for subdivision for other half of the block. Takes 90 days for approval and costs around $8k. This may need bank permission to do. Need some broker advice on this
    • Revalue with bank - house on one title, new land on other title
    • Apply for next construction loan using equity in new land for deposit and proposed rental income to assist serviceability. At this stage can convert PPOR back to IP and use that rental income for serviceability. Move back home (or rent) which has added bonus of being able to classify first house as PPOR and keep it CGT free if you want using the 6yr rule.
    5. Construct new house. Rent out

    6. Revalue both properties and see what equity you have

    7. Think about next project!!!
     
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