Owners will rent back.................

[Gordon Gekko]

Hi All,

Just a question about a property i am looking at tomorrow in Melbourne.

Talking to the REA today, he said that the owners are wanting to rent the place back off the new owners for about $210 p/w. And want to pay the rent 12 months in advance. The REA says the market value is about $220 - 230 p/w. The asking price is $270000.

I will be doing an inspection tomorrow but i was just wondering what people thought of owners renting back and paying 12 months in advance????

cheers,

GG

 

[Panic]

Owners

Hi,

In my opinion they think that the property value will go down dramatically. They also think that due to that the rents will go up as more renters come to the market, and that is why they want to secure the rental price for 12 months.
Since they have the money to pay the rent in advance, the option that they can not afford the mortgage is out.

Thx
V

 

[Kenny]

Hi GG,

If your due diligence shows a good deal, why not consider making an offer that factors the year's rent in and reduce the price accordingly. It would save on duties/taxes/commissions etc but it would decrease your base for capital gains when selling later.

Regards,

Kenny

 

[nic]

Hi,

In my opinion they think that the property value will go down dramatically. They also think that due to that the rents will go up as more renters come to the market, and that is why they want to secure the rental price for 12 months.
Since they have the money to pay the rent in advance, the option that they can not afford the mortgage is out.

Thx
V

It doesn't explain the rent in advance. They could have just asked for a 12 months rental agreement. It would have frozen the rent for them. Also, mortgage repayments might be much heigher than 210 p/w, plus rates & maintenance. And they might need to release the mortgage to use somewhere else.

Nic

 

[always_learning]

It doesn't explain the rent in advance. They could have just asked for a 12 months rental agreement. It would have frozen the rent for them. Also, mortgage repayments might be much heigher than 210 p/w, plus rates & maintenance. And they might need to release the mortgage to use somewhere else.

Nic

At $270K the raw interest cost at 7% is a hefty $363 per week, plus holding costs, plus purchase costs, so rent at $210 will means big time negative gearing.

The year in advance rental payment I guess is saying "well its cheaper than market, but in compensation we will pay upfront and it will be for one year!"...maybe a newbee property investor would like it.

Anyway doesnt hurt to make an (lowball) offer that is acceptable to you "what about $200K and I will reduce your rent to $150pw and you dont have to pay upfront!"

 

[Medine]

Hi GG,

Any tenant that is prepared to commit for 12 months before I buy the property is fine by me. If you went to the market you might get $10 a week more. But the yearly increase ($520) would be wiped out if the property was vacant for two weeks before you secured a new tenant. I'd take the sure thing.

Cheers, Medine.

 

[AdamN]

I agree with Medine. Obviously with a years rent in your hand upfront, you would have the added assurance that the tenants won't be skipping rent at any stage during the year. One less hassle to worry about

At $270K the raw interest cost at 7% is a hefty $363 per week, plus holding costs, plus purchase costs, so rent at $210 will means big time negative gearing

But that is on the assumption that you would be paying interest on the full $270K, which would be almost worst case. (Worse case being where stamp duty, etc was also borrowed).
Even if $10/wk more could be achieved by going to market, it's now $363-$220=$143/wk instead of $363-$210=$153/wk, which really isn't much in the scheme of things.

FWIW, I'd take their offer GG. Best of luck tomorrow.

Ad(ios).

 

[quiggles]

If the rest of the deal is good from your point of view (I assume you assume there's going to be some pretty monstrous cap gains since the cashflow is so poor) then yes, I'd take the dough. If you put it in an offset account against your IP loan, assuming you are paying 7%, that raises the effective rent to $244 per week, which is right in the zone.

Or, as was suggested earlier, take it off the purchase price and save on stamp duties.

 

[Kristine..]

G'Day Gordon

quiggles has shown mastery over the situation again!

However, ask your accountant if you are considering negotiating a reduced purchase price in lieu of rent, as that would mean there was no rent for the period and you may not be able to claim interest, rates, insurance etc as taxable deductions. Remember, we can only claim the pro rata amount of expense as we received market rent. No rent, no tax claims.

Also, there must be some 'consideration' for the 'promise' to occupy the property, it would be hard to establish a valid lease with no rental payment, plus landlord's insurance may git a bit fiddly without a rental income.

For my money, yes, the owners can apply to rent the property but make sure the property manager does all the usual checks. It is your interests they should be safeguarding, not the outgoing owners. Make sure periodic inspections are still included in the management authority.

If it all stacks up, then sure, why not? A year's worth of rent in the offset would be good, take the usual bond against damage, and settle back for the bonus of a pleasant year.

A friend of mine bought a property at auction and the vendors negotiated a twelve month lease while their new house was built. My friend is very shrewd, and went through the house at the final inspection before settlement and did the Condition Report at that time. 'Oh', she said to the Mrs Owner-about-to-become-Mrs Tenant 'Everything is in such perfect condition! This will be an easy report to do!'

'Oh, no, it's not' said Mrs Tenant 'Look, the tiles are cracked around the bath, and the kitchen sink leaks, etc'

As a result of Mrs Tenant's indiscretion / haste to defend her position as a tenant, Mrs New Owner negotiated a couple of thousand dollars off the settlement due to 'undisclosed damage' at the time of the auction.

(Mind you, Mrs Tenant had her revenge by breeding puppies inside the house during the next twelve months, not cleaning the oven when they left etc, and the two Mrsess had a lovely year sniping at each other.)

So Gordon, if the tenancy is applied for, established and managed in the usual way, it is a good idea for the owners as they can then pass over the lump sum of 13 months money (12 months rent, one month bond) at settlement and they don't have to worry about cash flow for twelve months. Only you and Mrs Gordon can decide if it is a good idea for you.

Good luck - hope you like the house

Kristine

 

[quiggles]

Kristine...

One fine day I am going to descend on you armed with nowt but a wallet full of the finest $100 bills. I am going to spirit you off to some Arcadian grove, ply you with the finest champagne and listen to an afternoon, and perhaps an evening, of your fine stories and wisdom.

I shall then depart, with considerably less cash, but a much richer man by far.

You are a jewel in the crown of Somersoft.

And yes, that was off topic.

 

[Gordon Gekko]

Thank you all for you input, i will let you all know how i go tomorrow with the inspection.

Special thanks to Kristine, I was hoping you would reply to my most

Cheers,

GG

 

[Kristine..]

Hi Gordon

Just an afterthought:

On a sale price of $270,000 Stamp Duty $11,860 Land Transfer Registration $754

Less the $210 x 52 = $ 10,920

On a sale price of $259,080 Stamp Duty $11,205 Land Transfer Registration $730,

a savings in Government Charges of $679.

Weigh this up against the possible loss of tax offsets during the year without rent received, plus the long term effects of artificially reducing the purchase price: The Capital Gain Margin would be larger when you eventually sell so if you did decide to negotiate a lower purchase price in lieu of rent it could actually cost you quite dearly in the current and long term tax situation.

Plus, don't forget the lending ratio would also be upset. You have to service the loan periodically and the conversion of income to capital will mean you have to find the instalment payments from other income or reserves. By not having rent income this would significantly effect your loan servicability ratio and may result in not qualifying for the maximum loan amount or the loan amount you may require.

Was it Ros Kelly who used a whiteboard to such good effect when determining government grant allocation? Maybe we all should have giant whiteboards in our brains (if not on the wall in our studies), and draw huge venn diagrams of how all these components of investing interconnect. It is easy in the heat of the moment to forget the long term effects of today's decisions.

Cheers

Kristine

 

[Keen]

Hi Gordon,

I know little about renting back to the previous owner other that at a seminar a PM said that certain parts of the Tenancy Act did not apply. The PM recommended additonal wording need to be added to the lease. Unfortunately I can not recall the exact details - but I think in the example given the new owner had trouble getting the previous owner out. I would ask a PM or REIWA or someone in the know before proceeding.

Sorry the details are vague as it was so long ago.

Regards

Keen

 

[BorisS]

Hi Gordon,

If the place is in a good condition, then chances are that your
tenants (ex-vendors) will also look after the place in the future.

Less worry about potential damages and neglect.

Just my 2c worth.

Boris

 

[Gordon Gekko]

G'Day Gordon


A friend of mine bought a property at auction and the vendors negotiated a twelve month lease while their new house was built. My friend is very shrewd, and went through the house at the final inspection before settlement and did the Condition Report at that time. 'Oh', she said to the Mrs Owner-about-to-become-Mrs Tenant 'Everything is in such perfect condition! This will be an easy report to do!'

'Oh, no, it's not' said Mrs Tenant 'Look, the tiles are cracked around the bath, and the kitchen sink leaks, etc'

As a result of Mrs Tenant's indiscretion / haste to defend her position as a tenant, Mrs New Owner negotiated a couple of thousand dollars off the settlement due to 'undisclosed damage' at the time of the auction.

(Mind you, Mrs Tenant had her revenge by breeding puppies inside the house during the next twelve months, not cleaning the oven when they left etc, and the two Mrsess had a lovely year sniping at each other.)

Kristine

Kristine,

It is "spooking" how close the above could be.

Went to the opem house with Mrs GG, the place was about 2/3 through a reno. Showers weren't complete, rooms weren't painted out, door locks missing..........
I could see you words (above) running thru my mind as i was looking at the place

Looked at two more places whilst we were down there, very nice......just doing a bit more homework and then i will be putting an offer in

Thanks Kristine

cheers,

GG

 

[DD1]

owners can be good

when you have an owner occupied property(for 16 years) and the owner wishes to rent back, if the rent is not discounted then its a letting fee you wont have to pay, usually no problems with a better taken care of property rather than a pot luck off the street tenant we all get from time to time.

The main benifit is its seemless with no down time of 3 to 4 weeks looking for a tenant, checking refs etc before you see some cash back. If its a house you will always get some niggling thing like a tile missing from a splashback or steps needing repairs or something similar. Big deal, all of these repiars are tax deductable so why quibble if the initial purchase deal is sound.

Twice we have had perfect owners stay on, in 1 other case the owner stayed 6 months only so the saving to us was minimal, but the feeling I get if someone wants to rent back is why not keep the property. In tassie a seller wanted cash for his retirement holiday as he was in his early 60's and the govt would foot the rent bill thereafter. So he got his windfall, had a great trip OS and stayed in the house without rates or maintainance to haunt his later years.

My point, sometimes its ok to keep old owners.

DD1