Hi,
I was wondering if I could get some advice about this. It’s creative, but I’m not sure if it’s legal. One of the IP’s my wife and I have is an old 3br house on a large block. We bought it at $260K in Dec 2004 and the vendors rented it back at $180 per month for 6 months. The rental rate of 3.6% is pretty typical of that area. We have recently had it re-valued at about $290K. Despite this growth, we are looking to sell it probably near the end of this year to free some cash up as we are currently negatively gearing three IP’s and are “maxed out”.
My sister and her fiance were looking for a place to rent, so we offered it to them. To help them save for their first property, we wanted to only charge them $80/week. However, we later found out that we need to charge market rent in order to keep it property managed and get the normal tax deductions on mortgage repayments, etc. So we decided to have them pay a rent of $180/wk but then give them back privately $100/wk, which they have agreed to.
Later on, I was thinking about the rental income and how it affects the selling price. I was wondering whether it is possible to have my sister and her fiance pay a higher rent, and privately reimburse them more (so overall they are out-of-pocket the same $80/wk), in order to increase the property’s selling price. While we own the property, the only cost to us of any “boosted up” rent will be a slight increase in the property management fees. And in order to make it an attractive and “legit” deal for any purchasing investor, the lease would probably have to run at the “boosted up” rent for about 12 months before my sister and her fiance decided to move out. We are prepared to continue to pay the “gap” between their $80/wk and the rental amount.
Currently the median house price and weekly rent of the suburb is $245K and $165. As I mentioned earlier, our property has recently been valued at about $290K. Even the $180/wk is probably a bit low given the rental rate of 3.5-3.6% — it should be about $200/wk. If we “boosted” the rent up to as high as $250/wk, that would increase the selling price to $360-365K. Is something like that feasible or is it even legal? Are those numbers likely to be too outrageous for the area? And if it is legal and feasible, what’s to stop lots of other investors doing it?
Looking for some direction,
Happyjack72
Heya HJ72,
Well…what a ingenious little ploy. I’m sure the forum hasn’t come across this little tactic before.
What does your raw or gut instinct tell you ?? I suppose if you were happy with this little scenario you wouldn’t be asking the question in the first place.
How would you like to be on the end of that deal ?? Would you be happy or not ??
I know it’s supposed to be caveat emptor and all of that…and the proper due diligence is supposed to weed out little soiree’s like this, but there would be many people who would most likely fall for something such as you suggest.
Hell, I’d go the whole hog and sign up a lease for $1,000 /wk with the associated flick back…works wonders in Indonesia…and see what type of suckers you can pull in with the little stunt. Just watch out for the big bad Karma monster lurking just around the corner – he might just come and bite you in the bum big time.
I’m sure I read somewhere that most successful people approach business with honesty and integrity. Do you think this fits in snugly with that broad definition ??
The saying was not meant to be “Do unto others and then run”…
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
hi,
Have you considered that you would have to declare the boosted up income and pay the appropiate tax?
The reason for the Q is that you want to free up cash to service the other IPs, then you could extend your mortgage as the property has increased in value or sell now.Sure you would pay full CGT but a small profit now is certain profit( money in the bank) whereas in 12 months who knows.
I personally would walk away from your sale when I found out about the inflated rent..wouldn.t you.
hrm
Hi,
The simple answer to this is: No it isn’t legal. It would fall under the same heading as getting money through deception aka fraud. Especially if you fiddle the numbers so you aren’t paying extra tax on the rent earned (even though you are giving a kick back). Stick to market rent and disclose that the current tenents are your family and they are effectively paying $80/week rent. If you don’t do these things and you sell to a canny investor who discovers what’s doing on you might find yourself being chased for damages or worse: criminal proceding (fraud) ACK! (not to mention A Current Affair hounding you).Actually you ask why others don’t do it? Well they do. If you’ve every found a place advertised with a “rent guarentee” you’ve probably seen a unit with an inflated rent.
eg: actual value $100k $100/week
rent guarentee: $150/week for 12 months
asking price: $150k
So the seller gets $50k more than they should and only have to pay $50/week ($2,600) which = $47,400 extra they’ve milked from the buyer. Can be legal, but shady. Often done with off-the-plan units.If you like you could talk to a solicitor about selling with a rent guarentee to up your sale price, but… In this case “seller beware” [buz2]
Okay, thanks for clearing that up. It did sound too good to be true, but I didn’t know the legal implications of it. If we simply charged them market rent, which our property manager says is $180/wk, and declared the full amount as rental income (paying management rates and income tax from that amount), and then gave them back $100/wk out of post-tax dollars privately — is that similarly illegal and fraudulent?
HJ72
Originally posted by surreyhughes19905:Hi,
The simple answer to this is: No it isn’t legal. It would fall under the same heading as getting money through deception aka fraud. Especially if you fiddle the numbers so you aren’t paying extra tax on the rent earned (even though you are giving a kick back). Stick to market rent and disclose that the current tenents are your family and they are effectively paying $80/week rent. If you don’t do these things and you sell to a canny investor who discovers what’s doing on you might find yourself being chased for damages or worse: criminal proceding (fraud) ACK! (not to mention A Current Affair hounding you).Actually you ask why others don’t do it? Well they do. If you’ve every found a place advertised with a “rent guarentee” you’ve probably seen a unit with an inflated rent.
eg: actual value $100k $100/week
rent guarentee: $150/week for 12 months
asking price: $150k
So the seller gets $50k more than they should and only have to pay $50/week ($2,600) which = $47,400 extra they’ve milked from the buyer. Can be legal, but shady. Often done with off-the-plan units.If you like you could talk to a solicitor about selling with a rent guarentee to up your sale price, but… In this case “seller beware” [buz2]
HappyJack72,
I think to make it legal, you are just effectively sponsoring them $100 every week like giving them pocket money every week. They are just renting a place cost $180 per week, which place happens to be yours!
But what’s the benefit? Will it really keep the price of the property up with the current market? Who knows, until you sell it or refinance it.
Just my novice opinions…
From FUN
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