Financial Gain Vs Lifestyle while helping family.

Discussion in 'Money Management & Banking' started by JenQld19, 30th Sep, 2019.

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  1. JenQld19

    JenQld19 Member

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    What’s the best way through this?

    We currently reside in employment supplied accomodation for $50 per F/night. We are considering a move from here for our well-being (things have gone a bit sour), although our employment is good and secure and will remain the same (no issues with employment at all).

    We own a 3 bedroom property which is rented to our pensioner mum for $100 per week. Market rent for this property is $400 per week which would cover the $289k mortgage (we would still be negatively geared as far as rates etc is concerned). We have owned this property for 18 months (capital gains tax is not a concern). The property was built in 2016 and so depreciation should be decent.

    We are considering building a 4 bedroom house with 2 bedroom granny flat (under same roof, seperate entrance) for $685k (house and land). The plan would be to rent the granny flat to mum for $100 per week, we move into the 4 bedroom side of the home and rent our other property for the market rent of $400 per week. We plan to put mum on a lease and claim the depreciation of the granny flat.

    Alternatively we could build the new property and rent it out for approximately $600-$650 per week. Leave mum and us with our current arrangements for 5 years and save over $100k on the mortgage of the new build with extra payments. (This of course would mean having to stay in our unhappy home for financial gain and have our new family home tenanted (not ideal but financially good for rent and depreciation).

    We are about the have a baby and I will be on part time wages, which our budget allows for. Essentially if we follow this plan we will have $750 left per fortnight as a “buffer”. The buffer would cover things like fun purchases and outings, clothing, linen, children’s activities. The $750 buffer does not include any extra money we may get from overtime or tax returns (our wages go up marginally every year). We plan to have a total of 2 or 3 children in the next 3-4 years. We already put away $80 per fortnight for unexpected bills.

    If we fell on hard times we could sell the 3 bedroom home and I could go back full time with mum looking after the children at home (undesirable but workable). Us all moving into the 3 bedroom home would be an absolute last resort as it would be very cramped and not good for family relationships.

    What is an appropriate buffer for a family of 4?

    As an outsider looking in, what option would you take? Can you see any other options we may not have considered? We are very open to suggestions.

    Thanks.

    Additional info: We are in our mid to late 30’s, emergency service workers (very secure employment), have 1 older rarely used car, and 1 new family car salary sacrificed. We are pre approval for the loan. Mum is on a part pension and can not afford Moreno than $100p/w rent.
     
  2. Trainee

    Trainee Well-Known Member

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    Renting the property to your mother at below market affects your deductions.
     
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  3. JenQld19

    JenQld19 Member

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    I have probably used the wrong language, apologies. The 3 bedroom house has never been claimed as a rental/investment property. We pay the mortgage and mum just gives us $100 a week, she is not on a lease.

    When/if she moves into the new granny flat we plan to put her on a lease so we can claim the granny flat portion of the house as an investment for depreciation and tax purposes. (If this is even possible?).
     
  4. Trainee

    Trainee Well-Known Member

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    Have you considered the capital gains impact?
     
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  5. The Y-man

    The Y-man Moderator Staff Member

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    What is the interest rates you have allowed on this buffer?

    Is there any buffer for "savings"?

    The Y-man
     
  6. The Y-man

    The Y-man Moderator Staff Member

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    Hard to comment without knowing more - eg why the current place is no good, local market conditions (your plan B of selling houses is highly dependent on a liquid market), rental availability in area, etc

    The Y-man
     
  7. JenQld19

    JenQld19 Member

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    On the granny flat component of the house? No. I’m not sure how that works? Any advice? The granny flat component is setting us back approximately $85k, would Capital Gains be considerable?
     
  8. JenQld19

    JenQld19 Member

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    The interest rate is 3.38%. Unfortunately not really planning on savings. Anything surplus from the buffer would go back into the mortgage or set aside for
    other household improvements. We had planned to do the same with overtime and tax returns (put back into the mortgage), to create a buffer in the mortgage to provide us with some breathing room should the interest rates rise considerably. If they do and we couldn’t cope options would include me going back to work full time and/or selling the 3 bedroom investment property. What do you think Y-man?
     
  9. JenQld19

    JenQld19 Member

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    I’m in North QLD the rental market is extremely strong at the moment (due to the floods and many people misplaced). Our investment property is in a brand new development that was completely unaffected by the 1 in 100 year floods and so the suburb is very appealing to tenants and investors alike. The area has a large defence community who contribute to the rental market and a Nickle Refinery said to be reopening new in 2020 (although I’m not relying on that).

    The current place (employment residence) is to do with ongoing and increasing tensions within the compound (essentially it is 2 residences separated only by a 3 foot wire fence, shared driveway and the workplace within the compound in a small rural community). There is no anonymity from the community, some believe it is okay to come up the driveway and holler at the residences for assistance, regardless of whether your working or not. This isn’t a main issue, the main issue being ongoing tensions between the compound residents.

    We could stick it out in the employment accomodation if we really needed to. My biggest concern is that $685k is a large mortgage and I don’t want to replace an emotional problem now with a financial problem in the future, if that makes sense?

    Initially if interest rates rose above what our $750 buffer could cover I’d go back to work full time which would throw another $1300 or so back into the budget. Then consider selling the 3 bedroom investment before interest rates rose too much and stalled the market. Does this sound like a good plan Y-man or is there room for improvement?
     
  10. The Y-man

    The Y-man Moderator Staff Member

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    Talk to your tax accountant - basically you lose the tax free status of part your home when you sell it for starters, let alone tax issues for your loan deductibility, etc etc

    The Y-man
     
  11. The Y-man

    The Y-man Moderator Staff Member

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    Run the numbers at 6%pa. So many people have gone under thinking interest rates will stay this low forever - unless you have fixed it for 10 years.


    I don't like the words "at the moment".

    What will the rent be in "normal" times?
    How long will "at the moment" last?

    In any case - let's see if someone knowledgeable with the area pops in to comment.

    @significance @BarneyRubble @strongy1986 @cberg86

    The Y-man
     
  12. JenQld19

    JenQld19 Member

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    No problems. We will plan to do that. We don’t plan on selling (if ever) for a long time or at least until we are empty nesters approx 20 years (but you never know what life might throw at you in the next 20 years that’s causes a sale).
     
  13. JenQld19

    JenQld19 Member

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    Yes I guess my “at the moment” does sound vague. The rental market was doing well until the floods and then after the floods it has gone gangbusters (obviously that won’t last). Our real estate agent says that rents in our suburb won’t go down because of its flood free appeal (but again there are no guarantees). I’ve only lived up here for 5 years so I’m definitely not an expert.

    At 6% on the full $685k on our current incomes it would add another $500 onto repayments making it too close for comfort for me. But if it were 6% 5 years down the track (down to $525k not withstanding any additional repayments) it would add another $400 onto repayments. Without promotion or a new enterprise bargaining agreement our wages go up marginally every year (approximately $2k each). Husband is likely to be promoted within the 5 years (again this is likely but not guaranteed).
     
  14. The Y-man

    The Y-man Moderator Staff Member

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    I'm just trying to digest this bit by bit ~ sorry for the very fragmented response.

    1. You have a rarely used car I assume you are paying insurance and rego for ($1,500 per year) - do you need it?

    2. What is the salary sac arrangement? Were you professionally advised on this and/or is it a screaming cheap deal you get with your work

    3. Loan pre-approval - for the house and land?

    4. How was the costing for the new build done?

    These might help others with ideas.

    The Y-man
     
  15. JenQld19

    JenQld19 Member

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    The rarely used car is worth about $6k. It’s a Ute so it comes in handy. With our current work arrangements you can’t leave town because of being on call except for 1 weekend a month. This would change if we moved, and the Ute would be used more (still not as much as the primary car). Because of its low usage we only have 3rd party on it.

    Salary Sacrifice - ideally husband needs to reduce his income by $12k annually to fall into a lower bracket. The car sees his income reduced by just over $9k (pre tax). Im not wrapped in salary sacrifice because it’s very inflexible (you can’t just pay it off early and move on if you need to without a balloon payment, but it’s easy not having to budget for car expenses). In 5 years the novated lease term will have ended giving husband more disposable income (but also now needing to budget for car expenses). The car is a new but modest SUV I do big rural highway kms every week. An SUV was chosen due to growing family, safety and high chances of hitting stock and wildlife on the highway.

    Loan pre-approved for the house and land, it isn’t a package. Builder has done up the plans. It will be structured as 1 home loan (no investment loan for the granny flat component or anything like that). Just 1 build and 1 loan.
     
  16. The Y-man

    The Y-man Moderator Staff Member

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    Ouuuuch.... how many % interest are you paying on the lease?

    The Y-man
     
  17. Trainee

    Trainee Well-Known Member

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    This makes no sense. The aim should never be to just reduce income. You could donate 12k to charity. Focus on capital growth and income.
     
  18. geoffw

    geoffw Moderator Staff Member

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    It sounds as if it may be a good area for an Airbnb. Further down the track, keep this possibility in mind should circumstances ever change. Don't design it solely for one person (sorry to state the obvious).
     
  19. JenQld19

    JenQld19 Member

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    I agree! But we needed another car at the time, and that with the appeal to save tax on his income seemed to make sense at the time. The only other option would’ve been a car loan at something like 5% interest . Would this have been a better option?
     
  20. Trainee

    Trainee Well-Known Member

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    Buy a newish second hand car or demo model with cash?

    Theres no overall plan here. Its all try to reduce taxable income instead of lets try to build wealth for the long term. If your not interested in that, fine, but if you are, this needs a rethink. The problem might be that you are operating from false information. So what makes sense might actually hurt you in the long run.