Your thoughts greatly appreciated

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Mr Magpie

Draftee
Apr 18, 2008
10
1
Narre Warren
AFL Club
Collingwood
Hi all, please feel free to add any feedback you'd like to this situation!!

Me and my mate own a house 40 mins from Melb CBD

Mate is sick of the commute.

Me and my girlfriend buy a small apartment closer to the CBD (we can afford this)

Mate moves into this, and for rent he just pays his share of the home loan repayments. I pay my share of the home loan repayments on the house too, and girlfriend and i pay the interest only payments on the unit.

Now just to confirm (im new to all this) we pay ONLY the interest off the unit as it is an investment property and ALL interest we pay is tax deductable. (correct???)

Me and girlfriend then “own” the investment property, and I “own” half of the house with my housemate still, BUT all three of us are paying off mollis close and me and girlfriend are getting ALL the interest back on the unit as a tax return.

What do you think?? Is this a better alternative to me and my mate selling coz he's over the commute and me and girlfriend then buying again?? Am i missing anything glaringly obvious???

Love to hear your thoughts!! Especially some of you "pros" out there.
 
Your mate isn't paying rent :confused:

If he owns 50% of the house then he should be paying 50% of the loan repayments

If you own 100% of the unit you should be paying 100% of the loan repayments (regardless of whether or not they are interest only payments)
IF he is living in the unit he should be paying you rent for this as well as continuing to pay off half of the house.

Also, you don't get a tax refund of ALL the interest you paid, you can claim a deduction for a Rental Property loss. The refund created by having an investment property is worked out like this; Rental Loss x Marginal Tax Bracket

eg say you have a rental loss of $10,000, which is made up of $10,000 income and $20,000 interest expenses and your marginal tax rate is 30%; your investment property has created an additional refund of $3,000.

Sorry this may be a bit hard to follow but without knowing more its a bit hard to explain, just don't expect to get back 100% of the interest you paid on the investment property because that is not how it works.
 
I think what you mean to say is you pay 100% of the loan repayments on the house, and your mate pays the equivalent of 50% of the loan repayments on the house to you as rent for the unit, which you then use as part of your loan repayment on the house, yes? In that instance your mate is effectively renting the unit for free...

If you and the mate own the house 50/50, you should split the loan repayments 50/50.

If you and the girl own the unit 50/50, you should split the loan repayments 50/50.

If the mate lives in the unit, he should pay you and the girl 50% of the rental value each.

If you live in the house, you should pay the mate 50% of the rental value.
 

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Maybe I didnt explain it that well...

Me and mate pay $2000/month on house ($1200/$800 split)

if he moved into the unit he would continue to pay the $800/month as a suedo "rent" for living there. The benefit for him is the smaller comute, for me its the second investment.

Then the first house would continue to be paid off as per normal, and me and my girlfriend would pay the interest only on the unit and write it off as a tax deduction.

All I'm looking for is any major flaws in the plan... I think as long as my girlfriend and I dont live there it is an "investment property" for tax purposes? And the first house is doing very well, value wise so I dont want to sell it.
 
Mr Magpie said:
Maybe I didnt explain it that well...

Me and mate pay $2000/month on house ($1200/$800 split)

if he moved into the unit he would continue to pay the $800/month as a suedo "rent" for living there. The benefit for him is the smaller comute, for me its the second investment.

Then the first house would continue to be paid off as per normal, and me and my girlfriend would pay the interest only on the unit and write it off as a tax deduction.

All I'm looking for is any major flaws in the plan... I think as long as my girlfriend and I dont live there it is an "investment property" for tax purposes? And the first house is doing very well, value wise so I dont want to sell it.
Click to expand...

Perhaps I'm missing something, but to me both explanations look like you're being short changed by your mate...
 
yeah_nah said:
Perhaps I'm missing something, but to me both explanations look like you're being short changed by your mate...
Click to expand...

Yeah going by that he's effectively not going to be paying any rent.

My interpretation is that the OP is not looking for any rental income at all, which I think is he is asking advice on, which in turn makes the last sentence of your first reply the most pertinent bit of information so far given back.
 
Mr Magpie said:
Mate moves into this, and for rent he just pays his share of the home loan repayments.
Click to expand...
Bad bad idea. Crazy talk.

If your mate wasn't living there you'd have someone in there paying market rent. This goes a long way towards paying your interest bill.


Now just to confirm (im new to all this) we pay ONLY the interest off the unit as it is an investment property and ALL interest we pay is tax deductable. (correct???)

Me and girlfriend then “own” the investment property, and I “own” half of the house with my housemate still, BUT all three of us are paying off mollis close and me and girlfriend are getting ALL the interest back on the unit as a tax return.
Click to expand...
Are you sure you understand what tax deductable means? You don't get "all" the interest back. Not even close unfortunately. What it means is this amount is deucted from your income. Say you earn $50k pa and your interest bill is $13k then you get taxed on $37k rather than $50k. That would save you about $4k.
Is this a better alternative
Click to expand...
Alternative 1

Your mate finds you an acceptible flatmate. Your mate pays the short fall between the lodger and his loan repayments. If your mate wants to live in the unit, do it through real estate and have him pay market rent. Better still, just get him to rent elsewhere - too risky on your mateship.

Alternative 2

Buy your mate out. Get two valuers and get them to value your place. Split the middle between the two valuations. Buy him out with what you were going to buy the apartment with.

Alternative 3

Sell. Split money. You and your partner go buy your own place. This will incur selling costs and stamp duty on another place. Not the best option. This option needs to be last case scenario.

A couple of tips for future:

1. Don't invest with mates
2. Don't feel obliged to give your mates free rent or even reduced rent. Any investment is for you and your own family's future. You will undertsand this when this happens but take it from me now - keep mates and investments separate.
3. Make sure you have a written contract with your partner with any investment you go into. If you're putting in 2/3s then make up a contract that stipulates that. If the relationship lasts and you have kids, then you can rip up the agreement.
4. Don't buy an apartment in Melbourne right now. The chances are you will get minimal growth or negative growth in the short term. Either buy your mate out or keep saving until the market is better (ie when everyone is whingeing about how bad it is).


Good luck.
 
Mr Magpie said:
Maybe I didnt explain it that well...

Me and mate pay $2000/month on house ($1200/$800 split)

if he moved into the unit he would continue to pay the $800/month as a suedo "rent" for living there. The benefit for him is the smaller comute, for me its the second investment.

Then the first house would continue to be paid off as per normal, and me and my girlfriend would pay the interest only on the unit and write it off as a tax deduction.

All I'm looking for is any major flaws in the plan... I think as long as my girlfriend and I dont live there it is an "investment property" for tax purposes? And the first house is doing very well, value wise so I dont want to sell it.
Click to expand...

If you currently pay $1200 and he pays $800, after he moves out you should be paying $2000 (you are renting his half for $800). He then is renting the unit off you for $800, which is fair value (?). He is still obliged to pay his $800 a month in mortgage (which is the $800 you pay him). Then the $800 he pays to you and the GF is used to service the loan on the unit.

He is getting a good deal. You may be getting a good deal if you want the whole of the house for yourself, otherwise you're short-changing youself.
 
Sums aside ....investing with a mate and a girlfriend really looks like a bad idea.

You want these things on a business footing.

If investing with a girlfriend make sure it is a clear split.

Renting properties to friends is dangerous and you put your friendship and investment on the line.
 
bunsen burner said:
Or you and your mate.
Click to expand...

Not that there's anything wrong with that ;)

On topic, if you explain the arrangement to the ATO on the same terms as you've explained it to us, you will get no tax deduction as they will simply treat the arrangement as "private or domestic in nature" (they will basically eliminate your negative gearing deduction as a result.

In order for the CBD rental arrangement to stand up to scrutiny, it needs to be done on arms length terms. Your mate needs to pay commercial (market) rental to you for rented the property. What you do with the current property out in the 'burbs' is neither here nor there ... the one you are wanting to treat as "investment" must be run like any other arms length investment ...
 

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Your House:

Your mate owns 50% of your house. You pay 50% of market rental to him for his share. He claims a tax deduction on 50% of the interest on your home mortgage, and declares the money you pay (50% of market rental) as income. He pays 50% of the mortgage repayments.

Unit

You and your GF own 100%, he pays 100% of market rental. You pay 100% of mortgage repayments.

-----------------------
In the above example, lets presume your house rents for 2000 a month, and the unit rents for 800.

You/GF:
Income = $800/month (100% unit rent)
Expenses = 50% of House mortgage, 100% of unit mortgage, $1000/month (50% house rental)
Deduction = 100% of Unit interest.

Him:
Income = $1000/month (50% house rent)
Expenses = 50% of House mortgage, $800/month (100% unit rental)
Deduction = 50% of House interest.
 
Detach the smateship situation and it would be like this-
You & mate bought house together at equal share, you live in it & should be paying market value rent.
You & girlfriend bought Unit together which mate lives in & should be paying market value rent.

Regardless how your loans are set up thats how it should work as it normal does with investors in todays market place.
The difference between your loan arrangement, interest only or principal & interest, may determine whether the house is postive or negative gearing.

You have to work out if your gaining from the current arrangement you have bween you & your mate, if so leave it , if not change it.

If your are getting any postive cash flow on either property then off set it by using it an expense towards the other property, a smart accountant(if any!) can really work your situation to minimise the tax your pay from your regular earnings.
 

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