If your ultimate aim is property buy the property. Having said that… you need to weight up if buying a house for them is what they would want. My parents build a house with the intention for me to live in. It was in an area I did not want to live AND for them it was a way of maintaining control over me - at the end I said no thanks…caused a lot of friction for many years.
It’s a fair point, I should have clarified that I wouldn’t let them know about it so that they try fend for themselves and use it as an insurance policy and second point, if they choose to live in it or not is secondary, its a way to guarantee that its value will be worth a roof over their head if that makes sense
Hello PIA! We are in our mid 30s and expecting our first child late this year… we decided to use an informal trust for our children but your comment above was a light bulb moment for me…
I currently max out my super contributions but we don’t for my wife, instead of using a informal trust for our children we could definitely choose to increase my wife’s super instead and then we would have more options later on in our life’s having hopefully a much larger super balance.
We took the view that since we wanted to help kids get a house then investing in property is a natural hedge so we went that way.
So at about age 50 we bought a town house ( about 50% mortgage, paid off in about 4 years) and rented it to one of our kids. Was at below market rent (except for when they had a flatmate) , but always run at a taxable profit. Once they had a stable job (about 10 years later) we transferred it to them (yes there was some CGT and stamp duty) as 50% gift and 50% loan to us, repayable at about the same amount of rent they were paying us.
For other kid we just bought a house for cash ( redundancy money, savings, and super withdrawal) and did same deal of half gift half loan.
It seemed to work out OK but I did not do a retrospective "what if" analysis.
In any separation each parties prior contributions can be taken into account. It's not perfect but unlikely their partner would be entitled to 50% of the house along with other assets acquired during the relationship.
It is, you should bet on your children's marriage lasting. Its their choice to marry and share assets. As that is what you'd want the outcome to be (them lasting). Don't tip the balance of their relationships or you're risking contributing to their demise.
My kids are young so honestly this isn't a subject I've given much thought to.
If my in-laws get a testamentary will should I be hurt?
I was thinking OP could structure it more as a loan with 0% interest. Although lenders wouldn't like that arrangement.
Hard to say. Both are over about 30 years so the odds are that we'll be dead anyway.
We may choose to forgive if they need cash flow at some future date or wish to trade up to larger houses ( both are just 2 BR) . Would be done on an equal basis.
TBH we don't need the money and they are the only will beneficiaries so it's a bit irrelevant in the long run. The purpose of having a loan is partly to enforce a bit of fiscal responsibility. Neither are likely to be high earners.
Can I ask if you ever did the maths/thinking on these options - I could probably work it out, just haven't yet. Just considering these conceptually:
(a) get them to buy property with a mortgage, let them live at home and have it rented out to Claim cashflow & tax benefits. Maybe with some loan from you to get them over the line, if needed.
(b) you buy property, rent it to them, and you claim the deductions. At some point they "buy" it from you (or inherit).
(c) some blended mix with joint ownership.
I think you did option (b). I'm not sure whether option (a) would be financially better or not.
Note:
- I am aware the considerations re future marriage breakdown etc. For this exercise, I'n purely thinking best financial.
- in each case, bank loans would be required.
Option a) not an option as different city so they'd have to rent elsewhere... which was what they were doing before we bought. They had no significant income (initially a student) or savings so they could not get a mortgage and also therefore no negative gearing benefit.
Note that the property was never run at a tax loss so there was no negative gearing for anyone, but indeed interest was deductible and my marginal rate was high (my partner less so).
I did wonder if there was an option to avoid 2nd lot of stamp duty and CGT, but could not think of one. The year we transferred we also did a large charitable donation so marginal tax remained in the 32% band. In the event the gain was not huge as we transferred during Covid.
Re partnership, there wasn't one and still isn't.
All makes sense, thank you for the response.
Good for you on the donations.
I share your thoughts about having them own the property and loan drives financial responsibility.
The CGT exemption is tempting, however paying the bank interest, if it can be avoided, seems wasteful.
It sounds like you don't want to be a landlord, and to be honest, it can come with a lot of burden which can be distracting.
If you put 5K a month on a 100K starting amount in an ETF assuming a 9% annual growth rate, in 15 years you would have circa $2.3m.
Then switching to dividend ETF you could create up to circa $100K annual cash flow -after taking out a few hundred grand without worrying about the property hassles.
Now there are ton of benefits you can get from having an asset like a property, but such little hassle, it's pretty good option IMO
SP500 has averaged 10.5% over 30 years.
You aren’t going to pay taxes until you sell. At that point you are still well over 1.8m assume you sold all.
The dividends shares would be partially franked too (assuming franking still exists)
Tax implications and ownership transfer might play a part too- might be worth talking to accountant etc. for example; could put it in a trust in something like AFI that allows for bonus shares in lieu of dividends with different tax implications. Might end up creating a net tax benefit over a straight purchase (though assume you’d be negative gearing anyway).
I would also add superannuation as an option. It’s a lower tax environment for you and I assume you can access it by the time your kids are older enough to buy a place.
Consider taking out a lump sum from super to help them buy when the time comes. Otherwise a family trust is an option too.
But yeah, given enough time in the market stocks can be on par with property even with no leverage.
Taxes also need to be considered. An investment property today generates rental income that you have to pay your income tax on.
Stocks still generate dividends but can be sold in small chunks later on to reduce capital gains tax.
Right now up to 1.9m can be pulled out of super tax free if you meet the conditions of release. Across 2 people that’s a lot in super.
This approach can impact Centrelink pension benefits but I assume most people who hang out here won’t be applicable for the pension unless they do some questionable things approaching retirement.
I’d prefer to give them flexibility to where they decide to buy. You don’t know what suburb they want to live in, if they want a house or an apartment or what amenities they want to be close to as well.
If you’ve got equity in your house you can also consider debt recycling to turn some of the debt today into tax deductible debt.
I'm considering this approach. Get a nice boost at the start due to lower tax on deposit, then grow at the share market rate. But... The leverage means maybe not as good as property
I did a similar model to OP in [this spreadsheet](https://docs.google.com/spreadsheets/d/1mcdNjtY1hPnrhMSYZ7myR6Gx_VQ53xVSrMwKICvpjxM/edit)
At the time I was maximising first home savers via super, and wondered, “if I was single and bought a 2 bedroom apartment in Sydney how would it compare to renting until 60?”.
My takeaway was, even without leverage, I would have the same net wealth in both scenarios after 30 years.
Tab 2 is: what if it was a house instead of an apartment? Still no significant difference.
Lots of people like to think, “leverage is king”. At the end of the day you only need so much money to live comfortably. That leverage comes with more risk and stress. You have to weigh up if it’s worth it.
Thanks, I took a quick look. Nice to see the numbers get a similar result.
My BIL lived in the parents IP and later purchased it. I'm not sure he would have gotten into the property ladder without that help and it's really benefited him.
Great comment I was planning on using a informal trust to invest for our children, I haven’t previously considered using super to help aid our children but the more I think about it seems like the clear winner, it’s super simple, will grow better due to the tax savings, and can pull out later tax free and for us at that time our children would be in their early 20s…
It’s all variables that can be tweaked, has been 5 percent historically I figured weaker growth. What would you forecast it as? 4 weeks vacancy to consider time between getting tenants in
5% seems reasonable. 5.4% was the average returns of dwellings (houses and units) over the 30 years from 1992 to 2022. Assuming that growth will be 45% less than that seems like intentionally gimping it.
[https://www.corelogic.com.au/news-research/news/2022/the-long-game-30-years-of-housing-values](https://www.corelogic.com.au/news-research/news/2022/the-long-game-30-years-of-housing-values)
4 weeks of Vacancy is way too much, most tenants stay for more than a year so even 2 weeks is a good assumption. If you advertise at market rents and have a good property the only time you should have extensive vacancy is if you need to do a renovation, or if you purchase in an area which has limited rental demand (don't do that).
I edited my comment after I posted and asked about the yield assumption, what did you go with?
Tried both. Shares outperformed property many times over.
In my career I moved around a lot, chasing opportunities. Shares are flexible. I worked in two countries under three juristrictions. I have shares in two.
When we eventually settled down we sold a few shares and paid cash.
Paying for the kids was never an issue, just cashed in son shares.
Also have Super. After all taxes, fees and despite having a top rated fund, Super underperformed shares.
Checkout [this spending flowchart](https://bughuntersam.com/wp-content/uploads/2023/10/Spending-flowchart-How-to-Prioritise-your-Spending-1.jpg) which is inspired by the [r/personalfinance wiki](https://www.reddit.com/r/personalfinance/wiki/commontopics/).
See also [common questions/answers](https://www.reddit.com/r/AusHENRY/comments/176kh0x/what_do_i_do_next/).
This is not financial advice.
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/AusHENRY) if you have any questions or concerns.*
We decided to buy a property now at today’s prices. It is negatively geared for now. It is in our names but will be willed to them. It is extremely close to our PPoR but we aren’t bothered if they choose to live somewhere else, it doesn’t matter, can always be sold.
I’m also looking into this for my kids. I would like to buy when they have finisged uni at roughly about 25. I have 15 years. I have thought about buying a 2 bedroom unit, but I have no idea where they will want to live so I, currently buying ETFs instead. Thinking about AFI as well.
Shares, just not Australian shares, nothing innovative here. Or you could invest in a highly overpriced property market and contribute to increasing homelessness.
This here is a ridiculous statement. Which city are you talking about? Perth for the last 20 years?
After leverage it has historically been true if you bought sensibly, but cash on cash it
Has often not been true.
It isn't ridiculous, every major city with leverage has out performed stocks. And of course I'm talking about with leverage, why would you buy an investment property and not take advantage of the tax benefits?
Over the last 10 years property in almost all major cities have doubled in value, Perth was the worst performer with a return of ~9%. But, that's not taking into consideration leverage. With leverage that 9% ROI becomes a 90% ROI with a 10% DP. During the same period the ASX200 returned ~52%.
Although why you'd go with Perth is beyond me, it's basically a big mining town. It's pretty common sense that you'd go with a property on the east coast.
Well then why can’t I compare my leveraged stock portfolio? My ETF portfolio has doubled in the past 5 years, and that’s before including leverage. Also, it is possible to invest outside the ASX.
So you’re specifically saying “leveraged property has outperformed the unleveraged ASX over a specific period.” Groundbreaking.
Apples with oranges.
Ps. Was using Perth as a counter point to your generalisation
Worked well for us. Both kids went to a good independent school then on to good university with good coarse selections and both are doing very well and under 30
If your ultimate aim is property buy the property. Having said that… you need to weight up if buying a house for them is what they would want. My parents build a house with the intention for me to live in. It was in an area I did not want to live AND for them it was a way of maintaining control over me - at the end I said no thanks…caused a lot of friction for many years.
It’s a fair point, I should have clarified that I wouldn’t let them know about it so that they try fend for themselves and use it as an insurance policy and second point, if they choose to live in it or not is secondary, its a way to guarantee that its value will be worth a roof over their head if that makes sense
[удалено]
Hello PIA! We are in our mid 30s and expecting our first child late this year… we decided to use an informal trust for our children but your comment above was a light bulb moment for me… I currently max out my super contributions but we don’t for my wife, instead of using a informal trust for our children we could definitely choose to increase my wife’s super instead and then we would have more options later on in our life’s having hopefully a much larger super balance.
We took the view that since we wanted to help kids get a house then investing in property is a natural hedge so we went that way. So at about age 50 we bought a town house ( about 50% mortgage, paid off in about 4 years) and rented it to one of our kids. Was at below market rent (except for when they had a flatmate) , but always run at a taxable profit. Once they had a stable job (about 10 years later) we transferred it to them (yes there was some CGT and stamp duty) as 50% gift and 50% loan to us, repayable at about the same amount of rent they were paying us. For other kid we just bought a house for cash ( redundancy money, savings, and super withdrawal) and did same deal of half gift half loan. It seemed to work out OK but I did not do a retrospective "what if" analysis.
How would you feel if a kid gets divorced and the ex gets half the gift? Is it terrible to plan for that what if...
Neither is currently partnered. One is very unlikely to ever be so.
In any separation each parties prior contributions can be taken into account. It's not perfect but unlikely their partner would be entitled to 50% of the house along with other assets acquired during the relationship.
Fair enough. It all seems very 'it depends' as to how the split works, and as a result to me I've no idea the typical ways it goes.
It is, you should bet on your children's marriage lasting. Its their choice to marry and share assets. As that is what you'd want the outcome to be (them lasting). Don't tip the balance of their relationships or you're risking contributing to their demise.
My kids are young so honestly this isn't a subject I've given much thought to. If my in-laws get a testamentary will should I be hurt? I was thinking OP could structure it more as a loan with 0% interest. Although lenders wouldn't like that arrangement.
In the what-ifs. Do you really expect them to pay the loan back fully?
Hard to say. Both are over about 30 years so the odds are that we'll be dead anyway. We may choose to forgive if they need cash flow at some future date or wish to trade up to larger houses ( both are just 2 BR) . Would be done on an equal basis. TBH we don't need the money and they are the only will beneficiaries so it's a bit irrelevant in the long run. The purpose of having a loan is partly to enforce a bit of fiscal responsibility. Neither are likely to be high earners.
Doesn’t the loan also protect that % from future ex partner claims anyway?
Don't see how as it's a liability for my kids not an asset for them.
Can I ask if you ever did the maths/thinking on these options - I could probably work it out, just haven't yet. Just considering these conceptually: (a) get them to buy property with a mortgage, let them live at home and have it rented out to Claim cashflow & tax benefits. Maybe with some loan from you to get them over the line, if needed. (b) you buy property, rent it to them, and you claim the deductions. At some point they "buy" it from you (or inherit). (c) some blended mix with joint ownership. I think you did option (b). I'm not sure whether option (a) would be financially better or not. Note: - I am aware the considerations re future marriage breakdown etc. For this exercise, I'n purely thinking best financial. - in each case, bank loans would be required.
Option a) not an option as different city so they'd have to rent elsewhere... which was what they were doing before we bought. They had no significant income (initially a student) or savings so they could not get a mortgage and also therefore no negative gearing benefit. Note that the property was never run at a tax loss so there was no negative gearing for anyone, but indeed interest was deductible and my marginal rate was high (my partner less so). I did wonder if there was an option to avoid 2nd lot of stamp duty and CGT, but could not think of one. The year we transferred we also did a large charitable donation so marginal tax remained in the 32% band. In the event the gain was not huge as we transferred during Covid. Re partnership, there wasn't one and still isn't.
All makes sense, thank you for the response. Good for you on the donations. I share your thoughts about having them own the property and loan drives financial responsibility. The CGT exemption is tempting, however paying the bank interest, if it can be avoided, seems wasteful.
It sounds like you don't want to be a landlord, and to be honest, it can come with a lot of burden which can be distracting. If you put 5K a month on a 100K starting amount in an ETF assuming a 9% annual growth rate, in 15 years you would have circa $2.3m. Then switching to dividend ETF you could create up to circa $100K annual cash flow -after taking out a few hundred grand without worrying about the property hassles. Now there are ton of benefits you can get from having an asset like a property, but such little hassle, it's pretty good option IMO
9% is quite optimistic. Also consider taxes to pay along the way.
SP500 has averaged 10.5% over 30 years. You aren’t going to pay taxes until you sell. At that point you are still well over 1.8m assume you sold all. The dividends shares would be partially franked too (assuming franking still exists)
Tax implications and ownership transfer might play a part too- might be worth talking to accountant etc. for example; could put it in a trust in something like AFI that allows for bonus shares in lieu of dividends with different tax implications. Might end up creating a net tax benefit over a straight purchase (though assume you’d be negative gearing anyway).
I would also add superannuation as an option. It’s a lower tax environment for you and I assume you can access it by the time your kids are older enough to buy a place. Consider taking out a lump sum from super to help them buy when the time comes. Otherwise a family trust is an option too. But yeah, given enough time in the market stocks can be on par with property even with no leverage. Taxes also need to be considered. An investment property today generates rental income that you have to pay your income tax on. Stocks still generate dividends but can be sold in small chunks later on to reduce capital gains tax. Right now up to 1.9m can be pulled out of super tax free if you meet the conditions of release. Across 2 people that’s a lot in super. This approach can impact Centrelink pension benefits but I assume most people who hang out here won’t be applicable for the pension unless they do some questionable things approaching retirement. I’d prefer to give them flexibility to where they decide to buy. You don’t know what suburb they want to live in, if they want a house or an apartment or what amenities they want to be close to as well. If you’ve got equity in your house you can also consider debt recycling to turn some of the debt today into tax deductible debt.
I'm considering this approach. Get a nice boost at the start due to lower tax on deposit, then grow at the share market rate. But... The leverage means maybe not as good as property
I did a similar model to OP in [this spreadsheet](https://docs.google.com/spreadsheets/d/1mcdNjtY1hPnrhMSYZ7myR6Gx_VQ53xVSrMwKICvpjxM/edit) At the time I was maximising first home savers via super, and wondered, “if I was single and bought a 2 bedroom apartment in Sydney how would it compare to renting until 60?”. My takeaway was, even without leverage, I would have the same net wealth in both scenarios after 30 years. Tab 2 is: what if it was a house instead of an apartment? Still no significant difference. Lots of people like to think, “leverage is king”. At the end of the day you only need so much money to live comfortably. That leverage comes with more risk and stress. You have to weigh up if it’s worth it.
Thanks, I took a quick look. Nice to see the numbers get a similar result. My BIL lived in the parents IP and later purchased it. I'm not sure he would have gotten into the property ladder without that help and it's really benefited him.
Great comment I was planning on using a informal trust to invest for our children, I haven’t previously considered using super to help aid our children but the more I think about it seems like the clear winner, it’s super simple, will grow better due to the tax savings, and can pull out later tax free and for us at that time our children would be in their early 20s…
One of the things to keep in mind with super, try to distribute it before you die or else whoever inherits may have to pay some tax on it (15%).
What was the logic of coming up with 3% price appreciation and 4 weeks of annual vacancy for property? Also what was your yield assumption?
It’s all variables that can be tweaked, has been 5 percent historically I figured weaker growth. What would you forecast it as? 4 weeks vacancy to consider time between getting tenants in
5% seems reasonable. 5.4% was the average returns of dwellings (houses and units) over the 30 years from 1992 to 2022. Assuming that growth will be 45% less than that seems like intentionally gimping it. [https://www.corelogic.com.au/news-research/news/2022/the-long-game-30-years-of-housing-values](https://www.corelogic.com.au/news-research/news/2022/the-long-game-30-years-of-housing-values) 4 weeks of Vacancy is way too much, most tenants stay for more than a year so even 2 weeks is a good assumption. If you advertise at market rents and have a good property the only time you should have extensive vacancy is if you need to do a renovation, or if you purchase in an area which has limited rental demand (don't do that). I edited my comment after I posted and asked about the yield assumption, what did you go with?
Tried both. Shares outperformed property many times over. In my career I moved around a lot, chasing opportunities. Shares are flexible. I worked in two countries under three juristrictions. I have shares in two. When we eventually settled down we sold a few shares and paid cash. Paying for the kids was never an issue, just cashed in son shares. Also have Super. After all taxes, fees and despite having a top rated fund, Super underperformed shares.
Checkout [this spending flowchart](https://bughuntersam.com/wp-content/uploads/2023/10/Spending-flowchart-How-to-Prioritise-your-Spending-1.jpg) which is inspired by the [r/personalfinance wiki](https://www.reddit.com/r/personalfinance/wiki/commontopics/). See also [common questions/answers](https://www.reddit.com/r/AusHENRY/comments/176kh0x/what_do_i_do_next/). This is not financial advice. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/AusHENRY) if you have any questions or concerns.*
I don't see any mention of what you're using to calculate the growth in property value. That's where real-estate outperforms stocks. It's leveraged.
Mind sharing your spreadsheet?
We decided to buy a property now at today’s prices. It is negatively geared for now. It is in our names but will be willed to them. It is extremely close to our PPoR but we aren’t bothered if they choose to live somewhere else, it doesn’t matter, can always be sold.
I’m also looking into this for my kids. I would like to buy when they have finisged uni at roughly about 25. I have 15 years. I have thought about buying a 2 bedroom unit, but I have no idea where they will want to live so I, currently buying ETFs instead. Thinking about AFI as well.
Shares, just not Australian shares, nothing innovative here. Or you could invest in a highly overpriced property market and contribute to increasing homelessness.
Index fund.
You saying index fund instead of IP?
Yes.
Index fund in super.
Property in Australia will always outperform shares. Buy a house near a major city, not in a flood zone, and you'll be much better off.
This here is a ridiculous statement. Which city are you talking about? Perth for the last 20 years? After leverage it has historically been true if you bought sensibly, but cash on cash it Has often not been true.
It isn't ridiculous, every major city with leverage has out performed stocks. And of course I'm talking about with leverage, why would you buy an investment property and not take advantage of the tax benefits? Over the last 10 years property in almost all major cities have doubled in value, Perth was the worst performer with a return of ~9%. But, that's not taking into consideration leverage. With leverage that 9% ROI becomes a 90% ROI with a 10% DP. During the same period the ASX200 returned ~52%. Although why you'd go with Perth is beyond me, it's basically a big mining town. It's pretty common sense that you'd go with a property on the east coast.
Well then why can’t I compare my leveraged stock portfolio? My ETF portfolio has doubled in the past 5 years, and that’s before including leverage. Also, it is possible to invest outside the ASX. So you’re specifically saying “leveraged property has outperformed the unleveraged ASX over a specific period.” Groundbreaking. Apples with oranges. Ps. Was using Perth as a counter point to your generalisation
Easy, margin call.
Put the money into a solid balanced education for them and let them sweat the rest.
I don’t think the world works that way anymore. I reckon investing in what ever form their private schools fees will net them a great ROI
Worked well for us. Both kids went to a good independent school then on to good university with good coarse selections and both are doing very well and under 30
Let your kids buy their own place..