We have inherited a house, would like to live in it, but also build wealth if possible.

Maxofdad on 26/06/2020 - 09:22
Last edited 26/06/2020 - 09:22

Helloooo everybody.
We recently inherited a house from a passed relative.
We were renting, and slowly grinding our way to some savings for a home deposit.
The house is good enough for us to live in long term (family of 4).It's value is about 600k and it's completely paid off.

Main question for the friendly Ozbargain fam is, what would be the best way to use the house to make us more money? My partner and I are both employed with good jobs. We have a financial advisor who is a family friend but I respect the opinions of the OzB community

My main options (that I'm aware of- please add to list if I've missed something)

  • get a line of credit from the bank and put 100K into share market while market is down. (Financial advisor says market will probably crash a bit further and would be great time to buy if it does, so basically get line of credit and wait for further 'discounts' in share market with blue chip shares).
  • borrow against the home to buy another property and rent that out and claim renovations/improvements as we go
  • knock the house down and build 2 properties as block is okay size for this- although that would be riskier in current climate and require more captial I guess?
  • rent this house out and improve it slowly and claim repairs while we rent elsewhere (doesn't seem like best option)

What would you guys do if you were in our situation and what have we missed? We are very lucky and would just like to slowly build our wealth.

Thanks for reading!

Financial

Comments

  • [Deactivated] on 26/06/2020 - 09:26
    +8

    Stock market, reinvest dividends watch it grow over the decades.

  • SnowDragon on 26/06/2020 - 09:27
    +10

    I'm the last person you should ask, but this is what I would do

    borrow against the home to buy another property and rent that out and claim renovations/improvements as we go

    • Maxofdad on 26/06/2020 - 15:52
      +1

      yeah currently this idea is the leader. The riskier version involves getting a line of credit approved for 100K and just set buy orders for some blue chip shares in the event of another market crash. If everything went really bad, we'd owe 100K on a house with some worthless shares that will claw back some $$ eventually, and we'd be able to pay off the 100K with our current salaries pretty easily over a few years with what used to be our rent money.

  • nephilim on 26/06/2020 - 09:29
    +5

    ""-rent this house out and improve it slowly and claim repairs while we rent elsewhere (doesn't seem like best option)""

    ATO most likely would block you claiming improvements, also a loan for stock market? ouch.

    I suggest you join your local library and use the web portal to read Money Magazine for free, maybe last 6months. Will give you a good grasp on options.

    • screwball on 26/06/2020 - 09:55

      Yeah ATO would definitely block improvements. Repairs are fine but as soon as you start repairing things with better versions you fall afoul.

    • Keplaffintech on 26/06/2020 - 09:55
      +1

      why would ATO block the claims? are renovations/improvements on IPs not tax deductible?

      • RPS13 on 26/06/2020 - 10:13
        +2

        it would be capital expenditure

        • Keplaffintech on 26/06/2020 - 11:43
          +2

          ahh, so you can deduct depreciation. e.g. depreciation of new carpet over X years

        • Maxofdad on 26/06/2020 - 15:45

          even if I am renting out the house that is being repaired? I meant, I rent a house, while renting out the house I own to tenants, doing works slowly over a few years while they are there, and then claiming those works as business expenses for the rental property business.

          • JIMB0 on 26/06/2020 - 19:03

            @Maxofdad: You'd annoy the hell out of the tenants by doing this.

            • Maxofdad on 26/06/2020 - 19:59

              @JIMB0: hey, I meant like at the end of 12 months or when they move out, we install floorboards or get the bathroom done before EOFY, something like that.

  • FoxJump on 26/06/2020 - 09:31
    +8

    Maybe … move in, buy toilet paper - and enjoy a peachy life?

  • kingsville on 26/06/2020 - 09:34
    +31

    Did you make much progress 'slowly grinding our way to some savings for a home deposit.'?

    Unless you are in a high tax bracket, my suggestion would be to take a conservative approach:
    * Enjoy the fact that you can live rent free, but don't increase your spending
    * Use your ex-rent money to build up a bit of a safety net (hopefully this is done via your home deposit saving)
    * Then use your ex-rent money to invest in an index (something like STW or IOZ). If you do this regularly, the cost averaging can save you stress of market volatility.
    * Also consider upping your super contributions to the 25K limit.

    This isn't a get rich quick plan - since your not being overly tax effective - but is conservative given that if you borrow 100K for shares and the market drops significantly, you're giving up much of your new found advantage…

    • trex on 26/06/2020 - 09:43
      +6

      Plus one for this. Last thing you want is to borrow money to invest in shares. Loan comes with interest that you need to pay. Don’t forget that there will be ownership costs (insurance, council fees, repairs, maintenance like mowing etc)

      • GG57 on 26/06/2020 - 10:26
        +4

        Plus one for both of these.
        I would live in the house for at least 6 months and then make decisions. As mentioned above, you will have 'new' types of living expenses related to the house that you haven't had before, and that will eat into your 'saving' on rent. This will also give you an understanding on what you are getting into if you buy another property.
        It will also allow you to decide if you like this property / area for the longer term, or if you would prefer to sell and relocate.

        • kingsville on 26/06/2020 - 12:11
          +4

          …when I bought my house, the dishwasher died after the housewarming and the hot water service died a month later! The joys of home ownership…

    • nomoneynoproblems on 26/06/2020 - 10:27
      +1

      Best advice here.

    • JohnSy on 26/06/2020 - 10:32
      +1

      Plus one for this.

    • friedsnowdays on 26/06/2020 - 11:07
      +4

      This is really solid advice. I would adopt this strategy 100%.

      For "Unless you are in a high tax bracket" I'd also add "and you have experience investing".

      Leverage is a recipe for stress and tears if you go in without experience or an understanding of the downside.

      To the OP, think about how you would have handled the recent market crash. Would it have made you sweat to see your investments drop by $20k, $30k, $50k+ in a few weeks? Now think if that money was backed by a loan that is secured against your family home.

      During the recent crash I saw my investments drop by tens of thousands on paper but I didn't lose any sleep because I have zero leverage and I knew a crash was a possibility.

  • Seraphin7 on 26/06/2020 - 09:37
    +2

    -get a line of credit from the bank and put 100K into share market while market is down. (Financial advisor says market will probably crash a bit further and would be great time to buy if it does, so basically get line of credit and wait for further 'discounts' in share market with blue chip shares).

    This is a strong potential strategy depending on your risk profile and investment horizon.

    -borrow against the home to buy another property and rent that out and claim renovations/improvements as we go

    As above.

    -knock the house down and build 2 properties as block is okay size for this- although that would be riskier in current climate and require more captial I guess?

    Not bad, but be aware that you'll need to fund both the construction and whatever your existing obligations are … may cause cash flow issues.

    -rent this house out and improve it slowly and claim repairs while we rent elsewhere (doesn't seem like best option)

    No. If you want to get into property investment, live in this house, get a loan and buy another investment property. This will be far more efficient.

  • wiipantz on 26/06/2020 - 09:52
    +1

    drop the advisor if it isn't post paid… You can easily build wealth with such an advantage already. Many good suggestions above

  • netjock on 26/06/2020 - 10:13
    +4

    You need to approach this like you didn't get the property for free.

    Would you put 100k into a stock market? How much do you or your financial adviser know about the market? Remember financial advisers take your time horizon and risk profile then put you into a super fund with conservative, balanced and growth options etc.

    As suggested without knowing any of your other information like salary (security of that cash flow), whether you are sending your kids to private school, net cash flows etc it is very hard to give a comprehensive opinion. You sure you want to borrow $100k then you buy in and the market loses another 10%, can you sleep at night?

    Per suggestion, regularly invest (many options like Comsec Pocket, Spaceship etc etc) with money you can afford and won't make you can't sleep at night.

  • JohnSy on 26/06/2020 - 10:35
    +7

    -knock the house down and build 2 properties as block is okay size for this- although that would be riskier in current climate and require more captial I guess?

    Don't do this - you will be likely horrified when you learn how much the builders and all the other costs will be.

    • Gareth on 26/06/2020 - 11:09
      +4

      Just wanted to say this ^- 100%.

      You're taking a property you own, and then spending more than the cost to build two houses, to end up with two (newer) houses on much smaller blocks?

      Doesn't seem to be gain to me (except for the builders)

      • netjock on 26/06/2020 - 13:24
        +3

        That is why lot of houses sell with plans / permissions to build rather than owners building themselves because time and cost taken not worth it.

        Most of these buy, knock down and build only works on a rising market.

        But it does make a good "HiLux and Ranger Grant" for Construction workers.

        Property is like the ASX25 stocks, everyone knows what it is worth and there is very little arbitrage (price mismatch) profits.

  • cuteseal on 26/06/2020 - 10:56
    +3

    Congrats! Assuming you were renting before and are happy with living in the new house, have you considered:

    • Live in the new house and continuing to grind away to save up for another property.
    • Now you don't have the pressure of "rent money is dead money", you can save up for a bigger downpayment so you don't have to borrow as much, don't have to pay LMI etc.
    • Put the extra money you would have been paying as rent into those savings as well - that should be huge
    • If you are ok with the risk, invest the savings into shares instead of having it sit in a bank account
  • barbarella on 26/06/2020 - 11:01
    +1

    borrow against the home to buy another property

  • brad1-8tsi on 26/06/2020 - 11:09
    +1

    I would:
    1) Move into the house if you are happy to live there.
    2) Take the money you are saving in rent plus the money you were saving for a deposit and put it into a "money is only for investment" (MIOFI) account.
    3) Set up a share trading account. SelfWealth is cheap ($10) and if you use a referral you get first 5 trades free.
    4) When you have $5000 buy VDHG. It pretty much covers everything and is set & forget. Look at the bottom of the page to see what it invests in.
    https://www.vanguardinvestments.com.au/retail/ret/investment…
    5) Have the quarterly distributions paid into the MIOFI account. Do not jump on the dividend reinvestment bandwagon.
    6) Repeat step 4. Don't try and time the market. Just buy whenever you have $5k.

    If you want to borrow money then get a margin loan. DO NOT BORROW AGAINST THE HOUSE. (do you realise what that means and the implications?)

    • kingsville on 26/06/2020 - 12:13
      +3

      borrowing against the house means that you get a much lower interest rate….
      interest it still tax deductible if only purpose is investment…

      • brad1-8tsi on 26/06/2020 - 12:19
        +1

        And it also means that your house is collateral in the event of loan default.

        • conan2000 on 26/06/2020 - 13:39
          +2

          Without knowing their individual circumstances, you don't know their risk. For us we took the mortgage against the house, as we can pay the mortgage easily if either of us loses our job, and we have enough in our offset/savings to live off for about 5 years with no income, we also both have income protection insurance. So, borrowing against the house is easily the best option, as we can do this as <3% vs >5% for a margin loan, as the chances of anything causing a default is so low.

        • kingsville on 26/06/2020 - 14:41

          I'd hope the OP is not borrowing to invest to a scale that leads to loan default!

      • Maxofdad on 26/06/2020 - 15:47

        borrowing against the house would be like 100K, so we owe 100K at a lower rate as you suggest.
        So if everything went to shite with the shares, we'd owe 100K on a 600K home. (if that makes sense).

        • kingsville on 26/06/2020 - 20:58
          +1

          Exactly. If you can service a 100k loan, then I think that borrowing against the house would be a superior option than the margin loan. Personally, we did this when the home loan was nearly paid off - split the loan to use as investment (and the interest is tax deductible).
          My suggested conservative approach above was to point out that just because you have a step up, you don't necessarily need to leverage it, and you could seek to grow by learning and doing.

          It sounds like Gordon Gecko is your brother-in-law so maybe the organic approach isn't required!

    • skid on 26/06/2020 - 15:01

      Do not jump on the dividend reinvestment bandwagon.

      Why is this?

      • iand on 26/06/2020 - 21:12
        +1

        Pain in the A when it comes to selling as every purchase has a different buying price and date

        • hoey888 on 27/06/2020 - 09:48

          True, but could instead pay somebody else to take on that administration burden; like a Wrap platform.

          No pain no gain! Cost of doing business

          • iand on 27/06/2020 - 10:45

            @hoey888: True but why pay someone else when you can simply take the dividends and invest in other companies diversifying your portfolio

      • brad1-8tsi on 26/06/2020 - 23:46
        +2

        Excessive amounts of admin

        No control over the buy price

        No guarantee that you'll get a single share even if they pay a dividend

        You need to find money to pay tax on the dividend (it's still taxable income).

        I've personally done DRP, been burned and I think it's for lasy people that don't realise how much admin they will have to do later. I'm currently working through a friends portfolio of their ex-employer issued bonus shares and DRP. It amounts to 400 individual share allocations many of just 1 or 2 shares. The last time I got an accountant to reconcile something like this it was $3 per allocation and that was 15 years back.

        Most "blue chip", high dividend shares pay a 3.0% dividend per 6 months. If you owned $5k worth of Westpac you would get $150 (8 units) worth of shares. Would you buy $150 under normal circumstances? The ASX wouldn't let you for good reasons and there's no reason to circumvent that.

        If you owned $5k of IVV which is $300/share and a growth stock you'd go 2.5 years before you got a single share (back of the envelope calculation).

        If you can't afford to buy a decent chunk then keep saving until you can.

  • [Deactivated] on 26/06/2020 - 11:36
    +1

    btc

    • Maxofdad on 26/06/2020 - 15:43

      we already have some from 2016 ;)

  • AustriaBargain on 26/06/2020 - 12:04
    +2

    Stocks and bonds will outperform anything else in the long term. But if you want to live there then just live there and invest your other money somewhere else. Rent out a spare room to make some money.

    • netjock on 26/06/2020 - 13:26

      Stocks and bonds

      Bonds maybe but not into the future. At close to 0% interest rates inflation at 1.5% will mean almost zero returns. Governments with massive debts are inclined to inflate away your capital.

  • conan2000 on 26/06/2020 - 13:34

    I'd personally take an investment mortgage out at a value you are very comfortable paying off without any additional income and use as a deposit for a mix of investment properties and shares. I luckily did something similar just before the pandemic drop. We borrowed ~$200k, put a deposit down on an investment property and about the same into shares just after the market bottomed, that way you diversify risk. I.e. Property will still generate income even if share market drops etc. (assuming no issues with tenants). We have made about 20% return on the shares in two months.

    It's hard to know what will happen with the market now, the financial adviser is crystal ball gazing suggesting there will be another drop.

    • Maxofdad on 26/06/2020 - 15:49
      +1

      hey, thanks. The crystal ball advisor is actually my brother in law who is a bigwig at a financial firm in New York. Like something out of a movie. Has given us some fantastic financial advice over the years so I trust him. He says his company has sold for profit on the latest boom and is now 'short'. His point was basically, that jumping in now is just too risky vs the reward. He said just wait to see if the market crashes again, and if it doesn't, you can jump in when things are a bit safer to go 'long'.

      • hoey888 on 27/06/2020 - 10:01
        +2

        To be honest I tend to agree with your brother in law's comments.

        Jumping onto the investment bandwagon is probably too late when everybody else is doing it. Normally the investment professionals time it better than the typical mums and dads.

        Speaking from personal experience, getting loan refinanced with a line of credit was one of the best things I ever did. Got mine before all the banking royal commission scandals. Absolutely no chance in getting one now with the revised serviceability requirements.

        If the banks are willingly offering you a line and credit which you are able to comfortably service; take it. I sat on mine for a few years before the right opportunity came to arise. You don't have to use it straight away.

        Definitely speak to a mortgage broker about getting loan/structure right.

        • PoKGuy on 27/06/2020 - 21:38
          +1

          Yes indeed.

          By the time the professionals are recommending buying in, you've missed the boat.

  • DemocracyManifest on 26/06/2020 - 13:46
    +1

    I’d live in it, pay off all your debts first, buy some shares and probably go on a holiday when restrictions are lifted. Renting it out and buying another place as an investment could be a good idea when housing prices drop, but lending criteria will get tougher. You don’t want to go backwards and accidentally end up losing your house

  • NumberEight on 26/06/2020 - 14:06
    +1

    Definitely in the short term, move in and enjoy living rent/mortgage free.

    I’d probably take a loan out against the property and put it entirely in a 100% offset account. This way, you have the flexibility of having the value as cash, without paying interest.

    This should give you some time to decide on the right option for you.

  • Mechz on 26/06/2020 - 14:28

    I'd take all the rent money you're not spending and pump it into your super and switch the super to high risk.

    • [Deactivated] on 26/06/2020 - 16:16

      Super is ultimately pointless.Get it out now while u can

      • Mechz on 26/06/2020 - 17:15
        +1

        Please do go on…

  • Gelato on 27/06/2020 - 00:52
    +1

    only invest in shares when you know how share market works and when you do your own research. Dont just buy xxx share because yyy says so
    or when you pay your advisor for a fee and he/she invest for you under proper arrangement to protect yourself against a loss

  • snooksy on 27/06/2020 - 08:53
    +1

    If you have been renting and do not own a house then I wonder about your super balances? Are you ahead there? Investing in super offers all the direct benefits of owning shares - CGT discount, dividends with additional tax benefits as contributions up to $25k per years are only taxed at 15%. If You don’t have enough to retire in your super then I would focus there by using the money you are Going to save by not paying rent. If you are both maxing out your $25k personal contribution limits then I would consider further diversification, either via investment property or external share / bond portfolio. This way means you are going to pay less tax overall, increase your exposure to the share markets, and get great tax deductions. By being given a house you have achieved something many people don’t and that is security of residence if you were to both lose your jobs. You are now in a position to secure your retirement income as well. If you have additional funds available after maxing our super then look to investing in a less tax beneficial environment. Banks and Financial advisers dealing in the stock market won’t tell you to do this because they won’t earn any fees from you doing this but an honest adviser will tell you to invest in super.

  • Mythreesons on 27/06/2020 - 09:40
    +1

    Just put the money you were using for rent into stocks until the interest rates go up again (than maybe look at long term high interest savings accounts). You now own a house outright, I wouldn’t do anything to risk losing that, especially if you take out a loan (which you will be paying interest on) to invest on stocks that you hope will improve but might not, nobody knows what’s going to happen with anything these days. I am very cautious after watching my mother completely lose everything (after a being left a large sum of money).

  • pdperth on 27/06/2020 - 12:32
    +1

    The capital gains to pay…or not…might be relevant. https://www.ato.gov.au/General/Capital-gains-tax/Deceased-es…

  • Mark1159 on 27/06/2020 - 22:14
    +1

    Increase contribution to both your Superannuation

  • Euphemistic on 30/06/2020 - 15:52

    Consult a tax accountant on what are the implications of selling the current property, renovating it while renting and borrowing against it for purchasing another’s property.

    I have no idea on the tax implications of inheritances.

    Whatever you do, selling now probably isn’t the best optio.

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