Frankston 50/50 with inlaws

Hi everyone

I'm currently looking to help out the in-laws to be debt free and go halves with them in a property in Frankston. They will be selling their current residence and putting the money into 50% of the new property with a bit of change left over. She still works in Frankston and part of the reason is so she can be closer to work and also to downsize.

They would live in the property and potentially pay for the up keep (rates etc.). I know it's not an ideal investment property for us as I won't have any income from it, but we will have a home in Vic that we can stay in when visiting and one day might be handed down. Plus I think Frankston has a lot going for it and will appreciate well over the next 5-10 years. If we can get interest only loan it will probably be costing us around $600-700p/m.

The missus and I currently have 2 properties with equity that are cash flow neutral, and we are looking at a 3rd in Adelaide somewhere and don't want to affect our borrowing power by going halves in this Frankston property.

I have 2 questions on the Frankston property:

1. If the in-laws put 50% cash into the property can I secure our 50% against their equity? Allowing me to use our equity on the Adelaide property. This way my borrowing power will only be affected by loan repayments.
2. Is there a better way to help them out? Maybe we buy the Frankston 100%, they rent out their property and rent ours at discounted price with no agents involved- this seems more complex though

Thanks for taking the time.

Regards
Shane

 

I just came to say hi and welcome! I can't really answer your question though.

@Corey Batt, this seems to be up your alley?

 

Thanks for the tag - this does look like an interesting one.

Shane - a few things. I generally always suggest people against borrowing/buying with family outside of their own household as this impacts your borrowing capacity significantly in the long term and can stop you much sooner on your investment journey. But assuming if we put that aside and that you want to still do this:

• YES - if you buy this property jointly with the parents and they contribute the cash component, you won't need to chip in any deposit funds from a lending perspective as this would be considered at a 50% LVR overall
• If you get any finance secured on the property, the parents will still need to either go on as co-borrowers OR guaranteeing the loan, as all people noted on the title must be on the loan or providing authorisation via guarantee

I'd probably investigate if there's any other way you can get this to work - as that joint loan will certainly be a drag on your borrowing capacity unless you have a substantial income. Even if you purchase the property solely and rent at a discounted rate this will have impacts on your borrowing capacity + tax - so get specific advice from your accountant before signing anything so you don't have a structure you regret and costly to change later.

 

Thanks Corey. Will definitely be seeking professional advise before signing anything, was just after a general feel. The good thing is the equity we currently have won't be affected, only our borrowing power will be affected due to the loan repayments. This impact will be reduced because all parties on the title will be also on the loan, which will reduce my share of the repayments on paper.

Can't really see another way around to set them up with no mortgage.

Might have to speak to the banks regarding borrowing power to see what I can fit in.

 

Get some legal advice on this one. Too many issues and there are potentially much better ways to structure this.

 

Cheers Terry, yeah it's a curly one.

 

Thought a trust might be better and maybe SMSF to help buy the property, but this is getting over my head now. Not sure if a trust is a viable option for all

 

SMSF wouldn't get over the line as it would breach the arms length rules.

Likewise I would note that you've mentioned that for 90% of lenders - you have to count the entirety of the debt secured on the property on your liabilities and the repayments - just because you only own a portion of it joint and several liability requires this, hence why ownership with non-same household parties is disastrous to your borrowing capacity.

Meanwhile the inlaws will want to get specific advice as well to understand if you put the property in any other structure how it might limit their ability to centrelink/pension/tax during retirement. Something which might be entered in to help your inlaws may end up hurting them significantly.

 

Thanks Corey, hadn't thought from that angle.

Appreciate the comments all.

 

This post may help:

Strategy: Incorporating Parents into Property Planning Strategy: Incorporating Parents into Property Planning

and

Legal Tip 25: Children helping parents out https://propertychat.com.au/community/threads/legal-tip-25-children-helping-parents-out.1323/

 

Legend, thanks. Some good reading there.