Brother potentially moving in next door - want to check my maths.

So I bought my neighbours house and am giving my brother first dibs at renting it. He currently lives a few suburbs away and likes the idea of moving in next door as it would be closer to other family and save him travel time each day with work. The rent in each suburb is similar and as such what he would receive if he rented out his current home would cover what he would pay me in rent. I know there are tax implications and have made a spreadsheet to get a ballpark figure of whether overall (after tax) he would be better or worse off. My analysis has so far come out pretty even. Am I missing anything major that would change the outcome significantly in one direction or another?

https://imgur.com/a/kOeemey

The screenshot shows 2 scenarios. His current situation with a fictitious salary of 100k on the left, and then on the right how it would look if he rented his out and moved in next door. Example assumes 500k mortgage balance on his current place, mortgage repayments of $2k per month at approx 3% interest.

Thanks in advance for reading and I'm looking forward to reading your comments and learning more (if I have missed anything). Please don't bother with comments saying not to mix finances and family. At this stage I am just wanting to check numbers, not discuss family dynamics.

Update: Thank you for the comments saying not to mix family and finances - message received. In terms of the actual advice I am seeking thanks for the useful comments. My spreadsheet was missing Land Tax, factoring in less than 100% occupancy of my brothers house, Capital Gains Tax if he does not return to his current place within 6 years, and a big row, bold and double underlined, about not mixing family and finances.

Comments

  • Don’t mix finances and family

  • not to mix finances and family

  • Finances and family don't mix

  • +13 votes

    No mixing finances and family

  • Cash only for gumtree transactions

  • Please re-do the maths in a paint diagram

  • So you're not looking for a maths debate?

  • Will your brother now be liable to pay capital gains on his house (if sold) since it is no longer PPOR?
    (There is a six year rule about this, but the implications are significant!)

    • That’s the big one. Capital gains tax could be nasty if you get it wrong.

    • Very good point. I hadn't considered this as a factor. Thank you. I shall add it to the list to look into. Also thank you for your serious reply.

      • He still can claim it as PPOR for the next 6 years and still enjoy the benefit of negative gearing (if there is), overall it is better for him in financial term. Whether it is a good thing for your relationship with your brother, it is a different story.

        • I am just a random person on the internet, but I would highly doubt you would be able to claim any deductions, and as such there won't be any 'negative gearing'.

          The six year rule only applies if you consider the place your PPOR, and deductions can only be done for investment properties.

          • @filmer: Well, I guess I was wrong.

            Somehow renting out a single room of your PPOR incurs CGT, yet you can rent your whole home and get no CGT and full deductions.

      • I'd say a lot of the other replies are serious. So many things can go wrong, and you lose the relationship.

  • I don't know if anyone's said this before, but many people say, mixing finances and family is not a good idea.

  • Assets and kinfolk don't interflow.

  • Every family is different, but have a think about what would happen if as time goes on you could earn more renting to someone else and were tempted/needed to kick your brother out. What if your brother doesn’t look after it in the way you hoped, or you think that repairs he asks for are petty- what does that do to the relationship?

    • You are right, every family is different. The type of house I would be renting to my brother is definitely not a "forever home". I may be naive but I would think that after a few years he and his partner would be looking to buy elsewhere but who knows what the future holds. I consider myself pretty handy so I don't think I would get upset doing repairs, heck, I already mow 8 nature strips on the street because I like helping out and using my tools. Any excuse to bring the drill out would be welcomed.

      • I love would to see you use your tools on my lawn. Is be very grateful…

      • You're a good brother. Congrats. I would do the same for my family and i know they would for me.

        Every family is unique.

        Unless they're on ozbargain, in which case their family is out to scam them.

      • I don't undertsand the crappy relationships people must have with thier families. I would find it much easier to evict my brother than some stranger that I don't know whether will get vengeful.

        I thought my brother was going to treat the place as his own - so in exchange for gettng the property he wanted at a good rate, he would improve it's value through improving gardens etc. That didn't happen. And he didn't clean it properly when he left, so I had to do it myself. (And he stayed less than a year.) I told him he's a pain and a pig, he got over it, I got over it, and we're fine.
        If your brother is worse than that, don't do it. If he's not, what's the problem? A brother vs a stranger - I know which I'd choose.

      • bring the drill

        Cutting the neighbours grass..
        So cute…you've got a pet name for it

  • Mix family and finances, nothing better then ripping off a family member. /s

  • Don't mix family & finances, and if no finances involved, don't live immediately next door to family.

  • Just make sure you charge enough that it isn't a big deal to replace things or repaint walls or replace all carpets when he moves. It's an unusual thing for a landlord to be seeing their house every day and inside of it. While he is renting it it is HIS house though, he is the holder of the lease, but you still will have feelings about the house like it is your house long term. If you charge enough then you can know you can just replace it all when he finally moves, the old carpets (which should be replaced after 10 years anyway!), patching up walls, retiling moldy bathroom, etc. You might need to accept that you will make less money off him than you would with a normal tenant. Also you might need to accept that normal tenants wouldn't be happy living next to their landlords! They may move out sooner and not renew as often, or not accept it in the first place.

    Is it worth a few thousand less dollars a year to do your brother a favour he never asked for? And can your spouses play nice?

    • Thanks for taking the time to reply. Long term the house will probably be knocked down and we will make use of the big block so I'm not too worried about wear and tear. I also like the benefits of being able to begin projects, for example a new driveway, which I would hope be much smoother working around my brother than a random family.

  • Will keep an eye out for you on A Current Affair.

    https://www.9news.com.au/national/a-current-affair-brothers-...

  • Get your brother to buy your house and you rent his.

    because of the implications.

  • +8 votes

    Brother potentially moving in next door - want to check my maths.

    Is he an auditor?

  • Two other considerations.

    Rental agency fees, for his house
    Landlord Insurance for his house

    • You brother could potentially have loss on income during tenants' change, when his property is vacant (e.g. 2-6 weeks without rent). You on the other hand would be benefited from less loss on income, assuming your brother most likely going to stay longer compared to people who rent in his property.

      There is also those risks of additional expenses incurred by your brother, by renting his property out. E.g. Property being damaged by irresponsible renter, renter asked for immediate fix (which requires urgent-overcharged after hour expenses paid by your brother), bad debt etc. In which, the risk of additional expenses from renting the property out, technically passed on from you to him.

    • Thank you. This is good input. I can adjust down the yearly rental income in the spreadsheet to reflect something less than 100% occupancy in his house and agency fees. Landlord insurance was already taken into account.

  • Come on bro, I just don't have the money this week, cut me some slack, we are family. Look bro, I damaged the wall, but you can fix it, right. We are family. So what if I have all my friends over trashing the place, you get rent. No, not paying any rent rise, come on bro, we are family.

    • I started cringing reading this because that is exactly what is going to happen (and I have seen it happen) and if OP doesn’t believe us then they deserve to get their hands and feet burned by what’s coming to them.

      Letting your brother live there grants them immunity to rent raises and ability to kick them out. You would have to be crazy to willingly have a tenant like that.

      Same reason you never sell cars to friends or family - you will be blamed and shamed for anything bad that happens to it.

      • We don't know how close his sibling relationship is, but yeah that is the rule of thumb path that will go down.

        100% agree with everything else you've said. Hate unnecessary family/finance tensions!

    • This happened to me last year, including the damaged wall and promises to fix it (never happened of course).

      Also the friends over without the family member even been there and then attempting to assault me when I tried to kick them out, claiming I was been rude cos they had to get up for work in the morning.

      Then they came back in the wee hours to try to kick the security door in, push the driveway gate into the garden off its tracks, etc.

    • Bro, you make some good points!

    • Although nothing is ever certain, it would require a 100% personality change for my brother to turn into the sort of person you are describing. I understand that people have been burned in the past by family and I respect that cautionary advice. I would like to think my family is different. I already sold my previous car to my brother 8 years ago and have not had a single issue arise from it.

      • I would like to think my family is different.

        Haha do you think anyone goes into something like this thinking their family could burn them? Of course not! That's why it's so dangerous you naturally let your guard down around family

    • LMAO come on bro

    • That's not a brother vs stranger issue, that's a manage yourself or get a good real estate agent issue.

    • This is only an issue if his brother is a mooching deadbeat with no job or money.

      My brother busts his ass, makes a lot of money, and he would never try to pull any of this shit on me. Just as I wouldn't ever try to take advantage of him. As everyone else has said - it depends on the family dynamic. Obviously things can change, and that's where issues might arise. If he lost his job or something, for example. But in that case, wouldn't you want to be a good brother and help them out anyway? I can't see it as a loss unless you're dealing with a scumbag of a human, in which case, brother or not, i would have cut contact anyway.

  • I mixed family & finance once & lost 30k

  • I might be in the minority here but I am looking at funding my mum's retirement property in a few years time when she is ready. Unfortunately her total available funds for retirement are not sufficient for both owning a PPOR and drawing an income. She will need to sell her current house to unlock the bulk of her retirement money given minimal super balance and not eligible for a pension.

    I see it as an opportunity to help her find a rental she truly wants to live in, and i couldn't think of an easier/better tenant.

    I think if you can be pragmatic, mixing family and finance CAN work but only in select circumstances.

  • lots of comments say don't mix family and finance, where is the love?
    maybe i have a different cultures?

  • If you are giving a family discount you won't be able to claim the full rate of deductions.

    Ask an accountant.

  • Anyone but your family.

  • Relations and cash don't blend

  • 2 things:
    1. Not sure if you’ve included it, but he’ll want to take out insurance on his property to account for deadbeats trashing the place and,
    2. I don’t think you should count rent as 550x52 because between tenants there will be a gap, and if you have aforementioned deadbeat tenants it will take time to clean the place up before it is able to be rented again. Not sure what a reasonable discount is, but I’d factor in at least a few weeks a year. (Maybe 550x48?)

    I don’t have a rental myself but I have a mate who has owned a few and had problems with scumbag tenants.

  • Username checks out. :)

  • Don't do it, not in family's best incest interest!

  • Don't mix fiances and family.

  • Depending on the state you are in and the property value you may also both hit land tax.

    Also if you aren't charging market rates then you can't treat your property as 100% rental and offsettable to the ATO.

    Also moving to an investment mortgage may cost him more interest

    • Seems to be about $1500 in Land Tax for a home valued at $700k. Tax deductible though. I'll add it to the spreadsheet.

  • MOVE!

    NOW!

  • Let brother do his own sums lest he blame you for any advice he relies on

  • Engage a family law firm

  • Please don't bother with comments saying not to mix finances and family

    Why did you write that? lol
    You're asking for the trolls to come out.

    The whole premise of not mixing finances with families is a white people thing. A lot of my Asian and middle-eastern friends and family help each other out, they don't leave their brothers for godsake in worse circumstances if they can be of assistance. For example, we build duplexes in Sydney so siblings can share a 1000 sqm lot.

    • Yeah in hindsight I shouldn't have included it - for some reason I thought if the first few comments started off as constructive the rest would follow suit. Kinda depends who gets to the post first.

      I agree with you - everyone (well a lot of people) say that family is the most important thing to them, but when they are able to help out in this sort of way, suddenly their priorities change.

      • The whole premise of not mixing finances with families is a white people thing.

        Could be a Western thing, but I'm all for it.

        It's like when my fellow Asians start fighting to foot the bill after eating.

        Ideally I rather split it (like with mates), but of course if they offer to "shout" then I'm not going to argue over them lol -
        but also don't have an expectation of me to be 'shouting/repay' the next gathering if you know what I mean?

        I'm super close to my immediate family as if we share the same finance; and shout my friends once in a while when I feel like it.

    • I've personally seen people of many different colours and backgrounds mess it up.

    • Yeah I don't see what the issue is, except OP seems to be taking responsibility for this being in brother's financial interest.
      I'd be just asking whether he wants to rent it, take it or leave it. Whether it's finaincially sound is totally on him.

      The benefit to OP is presumably he knows his brother isn't gonig to trash the place, and he might not need to waste money on a real estate agent. But he needs to make it clear that late rent will result in a notice to remedy arrears, and three strikes would result in a notice to leave. I don't see any reason that would cause relationship problems.

      We have relatves renting from us. We were in a position to invest in real estate, they needed homes where they couldn't afford. It's worked very well for us for many many years. One brother decided after less than a year that he could afford his own place, so we found a new tenant. Not a problem.

  • Please don't bother with comments saying not to mix finances and family.

    Don’t mix finances and family.

  • As everyone has stated: Don't mix finances and family

    That being said:
    a. what state are these houses in ? Tax implications might rely on location.
    b. are you prepared to evict them if things go bad or if they stop paying rent ?
    c. if the house burns down due to negligence and for whatever reason the insurance company decides not to pay up, would you be willing to force your sibling to sell their home in order to compensate for your loss ?

    • a) VIC
      b) If they stop paying rent it wouldn't be because they spent all their money on drinking or gambling, it would be due to a loss of employment or health reasons. In such a case I would support them until they found work again. In saying that, he is in a stable job/industry and has significant savings where not being able to pay rent is unlikely to be an issue.

      • Disclaimer: Seek financial advice from professionals.. I'm just some random that probably doesn't know anything

        a) i. It might help to look up the 6 year rule (which might help rule in favor of renting out his own property) and also Capital gains tax (if he decides to sell in future). Might need to consider planning to move back to his home prior to the 6 yr mark.

        ii. if he rents out his place and it positive gears, there will be some potential tax implications but positive gearing is a good thing. Alternatively negative gearing might be potentially viable depending on his financial circumstances.

        iii. circumstances might differ if his house is owned under a trust structure, so he really needs to understand his own finances to make his own decision. It shouldn't be up to you to hand them a spreadsheet as it might be misconstrued.

  • For your deductions, there these that you missed but can be deduced: yearly council rates, water rates (although you can pass on the actual water charges to the tenant if metered on said strata property), depreciation on building (this could be in the high thousands per year but you need a qualified depreciation schedule), property and landlords insurance, management fee if via an agency, accountancy costs and others.

    Let's assume council rates, $1500, water $800, depreciation $9,000, landlord insurance $500, management fee $2,000. This is a further deduction of $13,800.