Me, My Sister and I

I bought my first house in 2003 in Lalor Park and have been living in it as a single income home owner ever since. I was under the misconception that I would need to continue working and paying off my mortgage for many years to come, with limited options to branch out financially. In 2009 I heard through a friend about a financial advisor who had coached her and her husband through a scenario which involved using the equity in their Castle Hill home to share in the purchase of another home in Castle Hill with her brother. My friend and her husband own 50% as their investment property and her brother owns 50% and pays 50% of the rental value as he lives in it with his young son. This was an ideal situation for all parties as it allowed my friend to buy an investment property in a very good area of Sydney with a guaranteed excellent tenant. And it allowed her brother to get his foot into the property market, in the area he was already renting which would have been unachievable for him on his own as a single dad.

Her situation inspired me to consult with the same financial planner in 2010. Initially I wanted to know if I would be in a position to purchase my parents Baulkham Hills home, as they were selling it for retirement on the North Coast. Although they no longer had a mortgage they did need the money in it to purchase their dream home on the beach at Kingscliff. On doing the sums the financial planner quickly discovered with my income and equity from my home in Lalor Park I did not have sufficient funds to purchase their home and live comfortably so we ditched that plan. Whilst there my mother and I wondered aloud to the financial planner if it would be feasible for me to go shares in a home with my sister. I had initially ruled it out as an option as my sister was not working at the time, and being a single mother her capacity for work would likely only be part time for the next several years.

I was surprised to learn that it was very feasible, even if my sister was not able to go onto the loan due to her unemployment, I would be able to have a loan approved for the full amount. One of the factors that made it work so well in my situation was that my sister lived in the Jarvis Bay area south of Sydney, which meant property prices were significantly lower than Sydney. Also it was important that I knew my sister to be a very responsible person who would take the arrangement seriously and be a good partner in it. In fact my financial planner was of the somewhat unconventional opinion that where possible if people could find an opportunity to buy property with family members it is more beneficial than seeking unrelated parties to rent. I saw the benefits easily in that I would never have tenant issues or have to pay property management fees to a real estate agent, knowing my sister would be there with her own interest in maintaining the home that she part owned. Even with her not being on the mortgage this was not an issue, as the financial planner simply advised that I have a will drawn up to ensure she would inherit 25% of the value of the home should I die. Beyond that there is also a degree of trust between her and I that we are both assured we have each others' interest at heart.

After factoring in the amount of rent + mortgage my sister would be able to afford, the amount I would be able to borrow plus the impact to my living money, we came to a budget of $220k to spend on the house, with me owning 75% and my sister owning 25% and paying 75% of the rental value. It is important to note here that my sister’s rent is in line with the current rental market to ensure I am able to claim a tax deduction. The impact to my living money came to approximately $100 fortnight, after conservatively factoring in all possible expenses, potential interest rate rises and tax return entitlements. The financial planner allowed for a ‘buffer’ amount from the equity draw down to sit on my home loan, which is where the investment mortgage would be drawn from and my sisters rent would be deposited. Also although I had switched to interest only on my own mortgage, we budgeted to allow me to keep paying the full principal plus interest amount, which would build up over time taking interest off my own home loan (where I cannot claim a tax deduction) and later down the track could be switched to pay for the investment property mortgage if needed, as the equity ‘buffer’ amount reduced.

With the magic figure of $220k in mind and the financial planners okay, my sister and I started looking at houses. We did initially agree on the suburbs we were targeting, which was helped greatly by her 10 years experience living and renting in the area. We did not consult any house sale reports or figures but relied on my sister’s knowledge of how values had changed or held over time and also regarding schools and personal preference for her as the occupant. As my sister was the one who would be living in it I left the searching and vetting of houses primarily to her. And in turn she was happy to leave the negotiation and ultimate decision to me.

We agreed that with our budget we would prefer to purchase an older house in a good area than looking for something modern or ‘done up’ that would sacrifice location or size. We didn’t mind out-dated décor, kitchen/bathroom so long as it was comfortable to live in, with the aim to gradually do modest renovations over a long period of time.

In July 2010 we found a suitable 3 bedroom free standing home in St Georges Basin, a well regarded suburb with good property value. Whilst the home was on a main road (not busy compared to Sydney standards), it was also next to a huge empty development area. One of the first things we did was check with the council what the proposed development for next door and behind was. It turned out to be a retirement community. We figured that this was nothing at all to be worried about and in fact better than if the land had been vacant as we would always have a concern about what might be built next to and behind us.

The house was on the market for $239k, we put in an offer for $210k. The agent got back to us to say that was too low and indicated they would need a little more. I told her straight out that our max amount was $220k and made it clear there was no more. They accepted quickly. In hindsight I’m not sure if it was wise to jump $10k so quickly but we felt that it was a good deal as we had originally thought it may not be possible to find a house in St Georges Basin within our budget.

Upon making the usual pest and building inspections we found the home whilst old (1979) and somewhat daggy in décor, was structurally sound with only minor issues such as leaky shower and termites in a tree stump out the front. Both of which were fixed by the owners without any problem before settlement.

My sister has now been living in the house since September 2010 and is happy that she no longer has to worry about moving her and her son to a new rental home. She also has chooks, which she always wanted! I have noticed minimal impact to my living income, or to my time in managing the property. The added benefit of my sister being the co-owner and tenant is that I can leave her to source local tradespeople for any maintenance issues that have arisen, and simply pay my share of the bill. And when I go to visit her for the weekend I can claim it as a tax deduction.

The biggest revelation to me in this experience was changing my perception of home ownership and mortgages. Previously I believed the best I would be able to achieve was to pay off as much of my house as I could during my working life, with the hope that by retirement I would own it outright. This new way of thinking taught me to make your mortgage work for you, with the aim to not necessarily end up with a fully paid home. In fact that the smarter way is to potentially own several homes without paying the principal in the knowledge that over a long period of time the value in the houses would far exceed the original debt. And whilst many people would resist entering into such an arrangement with family, I would never have sought out an investment property on my own to rent to strangers, not wanting the hassle of property management that goes along with it. In this arrangement I feel like I have the best of both worlds and the best part is my sister is benefiting from my equity just as much as I am benefiting from her as an excellent tenant.

LM