Seller wanting to rent back long term with cash up front on sale of unit

Hi all.
Ive come across a seller who wants to rent back the property for about 6 years to continue to live in herself. She is willing to put cash up front (around 100,000) for the 6 years rent in advance on sale of unit at an agreed price (prob current market price). I will be purchasing the property on 100% finance (or is there a better way given the above opportunity?) and want to keep the investment for at least that long. She wants the rent kept at 300 p week over that entire time (current market rent). The way I see it as a golden oppotunity to use her money as reducing the mortgage interest charged and/or invest to assist with costs out of the interest gained etc or is there something I havent thought of re the structure etc? Not sure how to structure it all..considerations to tax advantages/disadvantages etc on the investment property, capital gains (hence why dont want to reduce the property purchase by 100k). Any ideas or suggestions or hints appreciated.
Thanks
Sandy

Sandy VG

Not wanting to throw a spanner in - but what if she wants to move or you want to sell before the 6 years is up?

A couple of things to consider:
1) buying at MV, 100-106% finance, $100k upfront rent payment, does your borrowing include the use of the $100k for the purchase (ie: buying for $400k but you only have the capacity to borrow $300k)/borrowing $400k with $100k in offset account?
2) How will you manage repayments if you have recieved $100k upfront to cover 6 years rent? (Offset account gets no interest/tax liability but reduces interest charge by the equivalent amount)
3) $100k will be treated as income in the year that you recieve it - it will be taxed at the top MRT (unless you have some incredible losses to offset against the income).
4) Why not consider dropping the purchase price by $100k to reduce your borrowings? (saving on mortgage costs, stampduty, reduces vendor's capital gain and is a non-cash transaction for your income eg only $1 per year rent not $100k in yr 1).
5) Consequence of reduced purchase price will be increased capital gain when you come to sell as you have a lower cost base
6) Difficulty in selling within the 6 year period will be that the purchaser will not recieve any income (this is unusual for resi properties but is not unheard of in other types of property eg phone towers with upfront payments)
7) What happens if the vendor dies prior to the 6 years - who keeps the balance?

Hope this gives you some options.

Getting $100,000 up front will greatly add to your income!!!! probably half of it will go in tax, and then for 5 more years you will have losses.

Terryw
Discover Home Loans
Terry@discoverhomeloans.com.au

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HI all who have responded. Much appreciated and sorry no reply till now.
In answer though (and yes..have done a bit more research about it off the net and you all have good points Ive been asked outside this forum..)

Purchase price including the 100k..no. would be MV then receive that after purchase or at the same time but separate contract.
INcome lost in first year..yes..thanks...realise it now and altho 100k looks GREAT!..(and of course..I started thinking hard about what I could invest it in while it was waiting to be used for rent!) but alas..50% approx lost in first yr. That would be great if I wanted to show the loss but my tax problem not THAT big yet! Maybe one day! :)
If she wanted to move before 6 years up? well...the contract would cover that for sure! And had I gone on with the deal (which Im not by the way) then she would have lost her money in my book!! And i would have had the balance of the time paid up front..no refund sorry!! 
Dropping purch price by 100k yes..affects cap gains when sell. Thanks. I thought of the positives on that one too as is my first investment property (altho have owned own homes before 5 times) but dont want to put much in that I dont have to.

So thanks all for your help and great advice! :) I havent gone back to her (and maybe would of if could have thought of a better way around it) because it turns out the body corp on the unit is about 165 pw and other costs not making it an overall outstanding investment on its own without considering any benefits on the rent up front..so couldnt think of a better option more my way than hers so are back to drawing board looking for a better deal somewhere else. Was worth considering tho..an interesting one..thanks all again very much for your efforts tho for me.WOuld have been a lovely property to have though..but ..moving right along to 'next!! :)

Cheers

Sandy

Sandy VG