What would you do with a large windfall??

HI all,

I was talking to a friend today who mentioned his mother is considering gifting him a $2 - 2.5mil unencumbered property in Hunters Hill (yeah i know, lucky him). This started a conversation of how we would structure using this gift to further pursue a larger property portfolio. His original thoughts were to live off the rent of this property, and sell it if needed closer to retirement age.

My thoughts were there are a number of other ways that you could use this windfall to buy further properties and give yourself an even more comfortably retirement.

I suggested borrowing against the property and purchasing a number of other properties. Basically using this 1 house to control a much larger portfolio.

A quick few circumstances about him. Mid 40's, approx $120k pa. Primary residence worth Mid $900k, owing $150k.

If you were in this position what would you do??

 

Sell the house, buy a combination of some high-yielding LICs and ETFs or hold direct industrial stocks, and live off the dividends. Peter Thornhill style.

 

Depends a lot on his plans.

Mid 40s might be time to pull up stumps in which case I'd be looking at living off rent (if it's enough) or selling and putting profit in something boring producing a 4-5% return.

If slogging it out for another 10-20 years is ok, I'd borrow against the property and acquire more.

 

The advice I've always read is to wait for a year. Shove it into a term deposit or just don't do anything.

After seeing large windfalls of friends and family evaporate - seems to be solid advice!

 

He won't be living in it after it being gifted, correct?

This means he will pay land tax on it, and may be subject to capital gains if he sells it in the future. So it depends how long term he wants to structure his investments:

- If he would rather leave it as a set and forget, he can draw down equity against it. Chances are the returns will stabilise in the single digits per annum after all expenses accounted for, but its low risk. Personal suggestion with this method, should he choose it, is to search for commercial properties in desirable locations that will stay popular (or get more popular).
This way also gives him some flexibility if he would like to move into a nice area later, as chances are it would otherwise be very difficult to move into an affluent area like Hunters Hill in 10, 20 or 30 years.

- If he wants to put the money to work sooner rather than later, he needs to have a method to get returns of around 10% or more for a consistent time period. I would go with this option if the home has no sentimental value, but I have a business that could make use of the funds. If he hasn't got a way to get these returns, I'd advise against this until he does! I think, for psychological reasons, if he wants to invest in a business or other method of getting good returns, it is better to sell the home for a lump sum, rather than drawing equity against it, but he does have the option of starting small with pulling equity and making a decision later of course.


Addtionally, another option is development or renovation. This is still related to property, but its a more active way of building equity and usually best when you are flexible with money. He might be getting gifted the flexibility he needs for this.

 

"I have a friend'

 

Sell, buy some commercial with a lowish LVR with a much better return than a house in hunters hill, retire on rent. Spend leftover on a forklift in case tenants need evicting

 

Good question about retirement. I never thought to actually ask if he would consider that. Before this he was easily looking at 15 more years + working. Has kids just started high school so not in a position to just take off travelling the world.

Also has no intentions of living in the property.

Can anyone confirm the tax implications? Im assuming stamp duties is still playable on the current valuation of the property, with any CGT from this point forward to when he sells it? It currently the PPOR for his mother.

 

Sorry to be blunt but if the mother has died then IIRC they can have up to 2 years before they would need to pay CGT, this might vary from state to state but you should seek professional advice.

This is what I would be doing as 99% of the people on the forum are not professionals and we can only give opinion or what we may have heard.

However you did say gift so likely not this situation but you did tag it as inheritance.

From the 2-2.5M windfall spending a couple of thousand getting professional advice is what I would be doing as it could all depend on how the asset is transferred.

 

It may be better to refuse the gift - for now.

Tell him to get some legal advice.

 

OH COME ON TERRY!!!
I'm all for your conservative risk-averse outlook but this time you have gone tooooo far! Haha

No one in their right minds should ever knock back a 2.5mil gift.

 

100% that will be happening. I just thought it was an interesting subject to spitball around the community, for a situation most people would love to find themselves in.

It made me question all the plans I had thought out for my own investment strategies, when he asked my opinion on what I would do.

Yes the mother is still alive. Is in her late 70's and obviously well off enough to give away her PPOR while he down sizes.

 

Hahah, that was my first comment. Sign her up before she changes her mind.

 

Easy for me.
Sell it, pay out the PPOR, diversify across a portfolio of safe shares and high yielding commercial property in blue chip suburbs.

I would then keep a couple hundred and invest into a business. Whether my own, with some friends or family. Something to keep me occupied and active.

 

To transfer the property stamp duty would need to be paid (receiptient), and possibly CGT (by her).

But if it is inherited there would be neither. inheriting via a testamentary discretionary trust could also result in income from the property going to children at adult tax rates.

Huge potential advantages in waiting - but like you say the risk is she will change her mind! (or outlive you)

 

Thanks Terry.

Can you explain the GCT event for me. The fact its the Mums PPOR doesnt make it exempt?

 

If the plan is to sell it then just get the mum to sell it and then gift her son the cashola.
No stamps and no CGT.

 

If it has always been the main residence it will probably be exempt.

 

I'm not a big fan of gifts with conditions, but in this case is the mum gifting with a motive - eg she wants to see grandkids raised in a better house?

 

The transferee (him) would pay stamp duty on value
CGT exemption may apply to mum
But if it is rented out the son will be up for CGT when he sells it (cost base the value on transfer basically)
Land tax will be hefty too - 1.6% pa on the land value.