Do Families that Invest Together Stay Together?

Is investing with family members a good idea or a ticking time bomb waiting to go off? Co-ownership arrangements can actually work very well provided you follow our six golden rules to keep your family more ‘The Brady Bunch’ than ‘Malcolm in the Middle’.  

With the median house price in Perth nudging the half a million dollar mark, some would-be investors might be considering the possibility of joining forces with other family members in order to buy. While pooling resources with family members has many advantages, it’s also a path that is fraught with danger for the uninitiated

Here are our top 6 golden rules for entering into co-ownership arrangements with family members:

DO make sure you’re doing it for the right reasons

Perhaps you can’t afford to buy on your own? Maybe you’ve got the money but not the time to develop property? Or perhaps you would prefer to have a diverse portfolio across a number of properties in different areas than putting all your eggs in one basket? These are all potentially valid reasons to consider teaming up with family members. But what if you’re really only doing it to help someone out? Maybe it’s to get your son or daughter on the property ladder, or to help a sibling put their income towards something useful instead of squandering it like they normally do? These kinds of reasons are dangerous when the other family members are not as committed or interested in investing in property as you are. Chances are you could end up carrying the whole burden on your own.

DO team up with those who share the same vision

Buying property is one of the biggest purchases you’ll ever make, so make sure you choose your co-owners carefully. Select family members that wish to follow the same property strategies as you, share the same kinds of goals, and have a similar appetite for risk. This should help to avoid family squabbles and make decision making far quicker and simpler.

DO treat it like a business decision

Don’t be afraid to speak openly about each other’s financial situation as well as future plans (starting a family or relocating could throw a real spanner in the works). You should even check their credit report to verify their true financial position because there are serious consequences for you if they default. Of utmost importance is having an agreement drawn up by a lawyer to specify the rights and obligations of each party and how a variety of potential situations will be dealt with. For example, what happens if one of you wants to sell? What if one of you can’t meet their repayments? How will maintenance work be handled? These are just some of a multitude of questions that should be answered at the onset.

DON’T ignore the fact that money can affect relationships

Let’s face it; money can be an area of great stress for us all, particularly when times are a bit tough. It will almost certainly cause disagreements, some minor while others much more serious with the potential to ruin what was once a great relationship. With so much on the line, arguments could emerge over selection of a tenant, getting quotes for repair work, choosing to renovate or not, or buying out someone’s share. Thinking that money will never get in the way of your family bonds, even if you are an incredibly close-knit family, is naïve.

DON’T underestimate the risks

Although you will only have a share in the total loan taken out on the property, you will have full liability for the loan. This means that if a family member can’t meet their repayments, you will be held liable to make those repayments or risk losing the property and having your personal credit rating damaged. Remember, buying property is often over long periods of time and a lot can change. Someone could fall seriously ill, get divorced, or have trouble finding a job and be unable to meet their repayments. You will also be stuck with carrying the load for any short-term costs like insurance and maintenance. It’s also worth mentioning that your future borrowing capacity will also be severely restricted even though you only have a part-share. If you go out to buy another property down the track, most lenders will take into account the full mortgage of your shared arrangement because you are ultimately responsible for that if another party defaults.

DO establish a fund to cover ongoing and unexpected costs

It seems like commonsense but many people will just wait until costs arise and then try and sort out retrieving money from co-owners then. You may be a saver, but many people aren’t, meaning they may not have the money available at the time leaving you to front the bill. Instead, arrange for each person to contribute to a fund both initially and regularly that can be used to pay bills, maintenance costs, and other unforeseen events. 

In summary, entering into a co-ownership arrangement can work well for many investors, especially those who would otherwise not be able to enter the market at all. If you follow these rules, you should be well on your way to creating a successful partnership with your family. It’s also worth mentioning, that the same rules apply even if you’re thinking about a similar arrangement with friends.

All Eyes on Perth in 2012

A number of property experts are tipping better times ahead for the Perth property market for a variety of reasons. 

Perth is the city to watch this year, according to Tim Lawless, research director at RP Data.

He pointed to the fact that, despite the city’s property market underperforming since 2008, there had been recent improvements in key indicators. Specifically, he highlighted the increase in the number of transactions and less discounting by vendors as reasons for his confidence the market is heading up. 

“That’s quite a ray of hope,” Mr Lawless said.

“All the indicators are looking positive. We’re actually seeing some evidence that the market is turning around. Perth is going to be the market to watch this year (although) I’m not saying it’s going to boom.”

Lawless isn’t alone in his prediction. Peet property group managing director, Brendan Gore, who joined Lawless on a panel of four at the Urban Development Institute of Australia national conference, is also optimistic about the Perth property market.

He pointed to the tightening rental market, which will entice more people to buy, and the emergence of investors from the East Coast as clear signs of better times ahead.

Terry Ryder also recently wrote an article in Property Observer citing that  “Perth is where investors should focus their attention” and that “the impact the resources revolution will have on Perth’s property market is unprecedented”.

Offset vs Redraw Account

If you’re interested in saving more interest on your loans, it would be wise to consider the use of an offset or redraw account. While many think they are virtually the same, there are key differences so you must choose wisely. 

If you’ve got a home loan as well as a chunk of spare cash sitting in your everyday bank account, you’re losing hundreds if not thousands of dollars every year. While you may earn interest on these savings, it’s often meager and is also taxable. Instead, put your savings to much better use by utilising an offset account or redraw facility with your home loan which will save you more and also save you tax. 

What is a redraw facility?

This facility allows you to pay extra onto your home loan to reduce your loan balance and the amount of interest you owe, while still being able to redraw this excess when you need it.

What is an offset account?

An offset account is a separate savings or transaction account that is linked to your home loan. The money you deposit in this account is offset against the loan balance, meaning the interest on your home loan is calculated based on the net balance.  Most lenders offer 100% offset accounts.

What are the key points of difference between them?

• Essentially, both alternatives offer the same outcomes in terms of interest savings (assuming a 100% offset account).
• The redraw is more direct in that the money goes straight onto the loan reducing both the loan balance and interest owing, while the offset is indirect. Having said that, if paying principal and interest, your repayments will stay the same meaning more money goes towards the principal each time so the loan balance will also be effectively reduced with an offset account.
• Offset accounts are more flexible and convenient in that they act like a regular savings or transaction account, allowing you to withdraw as often and as much as you please including at ATM’s. Redraw facilities are usually more restrictive allowing only a limited number of redraws or a minimum amount for redrawing, take longer to transfer the funds and often there are fees applied for each withdrawal. These drawbacks can be beneficial, however, for those who like to eliminate the temptation of withdrawing the excess funds.
• Some lenders loan products may have a higher interest rate if you want an offset account linked or may only offer a partially offset account. With these lenders, you will need to do the sums to work out if the additional cost is worth it as you may need to have a large sum of cash regularly offsetting the loan to make it worthwhile. 

As an investor, is one better than the other?

It depends on your circumstances however many would say an offset account is better suited for investors. The reason for this is the tax implications. If you were to place a sum of money onto an investment loan and then redraw it later on for personal purposes (e.g. buying a car), you will reduce your ability to claim the full interest expenses on that loan as a tax deduction for the life of the loan. You will also encounter a similar problem if you have a redraw sum available on your principal place of residence, redraw the funds as a deposit for another family home down the track, and then turn your old home into an investment. You therefore need to consider if, and how, you may use any excess funds in future to determine which option is right for you.  Speak with a Momentum Wealth Finance specialist who will set you up with the right structure for you in conjunction with your Accountant or Financial Advisor.

Suburb Snapshot:Maylands

Our bi-monthly Suburb Snapshot section shares our tips on the best suburbs to keep a watchful eye on for your next investment purchase. In this month’s issue, we profile the north-eastern suburb of Maylands. 

Maylands is an inner-city heritage suburb located approximately 5km north-east of the Perth CBD.

It sits along the Swan River and is bordered by the suburbs of Mount Lawley, Inglewood and Bayswater. It enjoys excellent transport infrastructure with several bus routes, a train station, and key arterial roads such as Guildford Road and nearby Tonkin Highway. Both the Mitchell and Kwinana Freeway are also just minutes away via the Graham Farmer Tunnel.

Maylands has one primary school; a public golf course on the river; a yacht club; a new library, community and sporting centre; and a rejuvenated café and shopping strip amongst other things. Maylands also enjoys a number of parks, beautiful lakes, children’s playgrounds, and walking and bike trails that follow the Swan River through East Perth and into the CBD. It is closely situated to utilise the amenities of Belmont, Morley and East Perth.

Once quite working class and run-down, the suburb has already seen immense change over the past decade. New housing estates have been built, streetscapes have been transformed, and heritage buildings restored into funky cafes and apartment complexes. The West Australian Ballet will also be calling Maylands home in 2012, basing its headquarters in a $12 million newly restored heritage building.  However, the suburb still has much more room for improvement. Identified as a key district town centre in the state government’s Directions 2031 framework, it is set to benefit from a revitalisation of the town centre, increasing levels of private development, and an influx of young professionals into the area.

Housing in the suburb is varied and interesting with everything from old and new apartments, villas and units, development plots, and multi-million dollar family homes. Prices are still affordable but have been steadily increasing in recent years and are set to rise even further. Housing is most popular in the south-east of the suburb close to the Swan River and at the opposite end nearer to Beaufort Street, with lock-up and leave properties in demand near the town centre. 

Entry level into the suburb is around $200,000 which will fetch a small one bedroom apartment. Villas and townhouses start from the low-mid $300’000’s through to high $600,000’s. Land can be found from as little as $275,000 although rises to as much as $900,000 for premium plots with more generous sizes and river, lake or city views. Development projects are priced from $600,000 upwards. Houses are quite varied depending on their condition, size, and particular location. Those on small lots typically start from around $500,000, while those brand new or situated in the newer estates from around $800,000. Prices, however, do go for as much as $2.5 million in some parts. Rents are equally diverse due the varied housing available, thus range on average from around $250 to $950 per week.

Key Statistics

Source: REIWA.com.au, January 2012

Selecting a Suitable Renovation Candidate – Part Two

In our last newsletter we discussed what characteristics make a suitable renovation candidate. In this month’s newsletter, we focus on what features are generally not desired and as such may signal a poor renovation prospect. 

Some properties to avoid include those that:

Do not meet market demands

The lifestyle and expectation of people twenty years ago is vastly different to that of today. Some people may make sacrifices for some styles of home (eg a period home), but most want a property that doesn’t constrain their lifestyle. They like big bedrooms, ensuites, and large open-plan dining areas for entertaining. Unfortunately properties that require major floor plan changes to make them suitable for today, require renovations that are usually prohibitively expensive.  And although the new purchaser or tenant may thank you for the works done, your ability to easily add value relative to the expense is dubious (particularly for a novice renovator).

Are not consistent with surrounding properties

If the neighbourhood has been compromised by ugly infill construction you should think carefully before committing to a purchase in that area. The best prices are obtained when people feel they “must have” a property. A compromised neighbourhood usually turns a “must have” property in a “settle for” property regardless of the quality of the individual property. When this happens, the emotional attachment to a property is diminished and they are less likely to pay good prices. 

Have an alternative highest and best use

If the property is in a high density zoned area and is in need of renovation, you may find that any renovations you undertake add little value to the property. That is because the development value may continue to be higher than as a single residence into the future, thus negating the renovations you may undertake (eg it would be better to demolish and build townhouses or units). If you own a property in a high density zoned area, it is probably unwise to spend too much upgrading the property as it may still simply be worth its land value regardless of the improvements undertaken.

Are over capitalised

One of the biggest mistakes renovators make is not knowing the market area and market limits. Most localities have a price limit where it will be difficult to sell a property at that level or above regardless of the quality of the property being offered. This is because people prefer to substitute an inferior quality of home for a better location, thus if the property was over the price limit they would likely choose the alternative entry-level home in the better suburb. You may find that the property you are considering is already close to that limit and therefore any renovations may not add much value.

With council or heritage problems

In many areas, councils have strict development control policies and heritage precincts that severely curtail alterations and renovations to property. You will need to check the Town Planning Scheme and the zoning in the area you are considering. You will also need to check council policies and design guidelines. This is most important if you are intending to make major alternations or make changes to the front of the property. It is best to discuss your proposed alterations and additions with the council before proceeding with purchase to reveal any possible issues.

The lesson here is to carefully evaluate the properties you have identified and avoid rushing into a project. While most renovations can significantly improve a property, there are some that should not be considered if the aim is to come out with a profit. 

The 6 Year Rule

It’s a common question asked by property investors. If someone decides to move out of their home, can they still claim it as their primary residence and therefore obtain the capital gains tax exemption? The answer is yes with some limitations. 

The temporary absence rule states that where a dwelling ceases to be an individual’s main residence, the individual can choose to treat the dwelling as their main residence for all or part of the period they are not living in the property.

If the property is NOT used for income producing purposes after the person moves out, then the taxpayer can treat the dwelling as their main residence indefinitely. But if the dwelling IS used for income producing purposes (i.e. it is rented out) the dwelling can be treated as the person’s main residence for up to six years after they move out.

The good news is that if the property is rented for longer than six years in one continuous period, than the exemption still applies for the six years. It is not lost entirely. But you can only have one primary residence at a time. You cannot purchase another property and rent the old property out and claim both properties as your primary residence for capital gains purposes.

What happens if someone moves out of the property, rents it out then later moves back in, then later moves out again and rents the property? Does the 6 year rule apply to the total of the two periods?

No. The ATO has said in TD 95/9 that the six year rule applies to each period of absence. That means you can access the six year rule more than once for the same property. For the new six year period to start, you must move back into the property.

Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.

Paid on Time

Managing a property is like running a business and like any business; all landlords would like to receive their payments on time. In an ideal world, landlords would like to receive the rent from the tenant when it is due at all times, however all experienced landlords will agree that things don’t always go to plan.

When realising the rent is late, it is common for most landlords to experience 2 emotions – anger and fear. The landlord is often angry because it effects his/her ability to meet mortgage repayments and afraid because this one late payment may be the beginning of a string of late payments.

Like a business, remember that for each day of unpaid rent that goes by, your financial security is threatened. Late rent must be appropriately dealt with quickly. By taking the correct action immediately, you will redeem your rent and will ensure your tenant does not get into the habit of breaching the terms of their lease agreement in future. There are a number of legal matters you must consider in order to ensure you collect your rent on time and a good Property Manager will be on top of the process and make sure that tenants are followed up as soon as the rent is late.

What is Life Insurance?

Planning is the essence of any financial strategy. If you’ve planned properly, then you’ve left nothing to chance. Effective planning also means having a strategy in place to deal with life’s unexpected events. One of the best forms of protection against these circumstances is adequate insurance. There are several forms of insurance available to protect you and your family’s financial security against life’s misfortunes, the most common being life insurance.

What is life insurance? A life insurance policy provides financial assistance in the form of a lump sum to your family or other dependants in the event of your death. At a time when your family won’t want to be worrying about money, this lump sum can be used to meet their ongoing financial commitments, such as the mortgage, and to maintain their standard of living.

You may be thinking ‘who needs life insurance?’ Simply, if you have a family who is financially dependent on you and/or have debts that are serviced from your income alone, you should look at taking out life insurance. Obviously, the greater your financial obligations and the more dependants you have, the more life insurance you’ll need to protect your assets and your family’s financial security.

There are different types of life insurance available to you. For example, term life insurance only provides death cover and has no real investment value, but life insurance is a cumulative investment that has a monetary value at the end of the policy. You’ll need to explore your options to make sure you have the type of life insurance cover, which best suits your needs and personal situation.

Most superannuation funds also offer some form of life insurance protection if you invest your retirement savings with them. However, don’t assume this cover alone will be adequate. It will be entirely dependent upon your current needs, debts, and other obligations such as your own business, as well as the number of family members financially dependent on you.

Ensuring you have adequate life insurance given your individual circumstances can be a difficult task. We can sit down with you and discuss your current financial situation to ensure that in the unfortunate event of your death, the last thing your family will have to worry about is their financial security. 

Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs.