Building Second Story on Parents House - How to Finance?

• 

  redfox1200 on 19/08/2020 - 11:15

  +8

  without owning part of the house you are basically just giving your mum 400k at the end of the day.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:00

    So an official loan drafted by a lawyer wouldn't mean anything?

    My thoughts were that at least that would cover us if our relationship did break down (somehow).

    • 

      redfox1200 on 19/08/2020 - 12:01

      +1

      a loan doesn't give you any ownership of a property

      • 

        Bargain Hunter 007 on 19/08/2020 - 12:58

        My thought - and as I understand a lawyer can draft an arrangement any which way?

        • Loan for $400k,
        • 'Interest' mapped to valuation of the property (mostly to protect my mum if it property prices crash).
        • If I want my $400k back, the maximum amount per week that my mum would have to repay would be in line with cost of renting the upstairs property (conservatively $400pw).

        Any holes in my thoughts? Can the legal system work like this..

• 

  bobbified on 19/08/2020 - 11:21

  +4

  I am currently in discussions with a builder to build a self contained 2BR apartment on the 1st floor of my mum's place

  While I don't have an answer to your actual question about financing the build, I have to say that that's a lot to be placing on top of a home and land not owned by yourself.

  Things can turn sour between people really quickly. You might have the best relationship with your mum, but you can't control how your partner feels about certain things. What happens if you get a new partner who doesn't get along with your mum? You won't exactly be able to pick up the new 2 BR apartment and move somewhere else. And it'll be real bad if you had to ask your mum to sell so you can get your portion of the value of the renovated home.

  It's a really really risky situation.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:08

    We have discussed most of the what if's, and the thinking is that as it is self contained I would simply rent it out. My mum currently rents out the bungalow and shares the kitchen/bathroom, so would be very comfortable with sharing a separate dwelling.

    In terms of the risk:

    • The likelihood of the situation going sour is very low.

    • The consequence of
      a) our relationship going south and I need to move out isn't a financial issue as I would rent it out (partner from overseas, so this will be the plan for a year or two in any case).
      b) our relationship goes south and we want to screw each other over as much as possible - would be pretty dire, mostly from an emotional standpoint, financially that's what we want this loan / tenants in common situation to cover as best as possible

• 

  k-rokfm on 19/08/2020 - 11:24

  +6

  and the house is currently worth approx. $1.3m

  The House isnt worth 1.3M, the property is. Have you looked at a knock down rebuild? It will likely result in an overall better outcome, yes it will cost more, but then you might not have to put up with constant ongoing issues and, generally, an ugly house - easier to sell in the long run. You could customise it to make it seperate, with the potential of connecting it with some minor modifications

  • 

    Freitag on 19/08/2020 - 11:34

    Definitely worth looking into.
    A work colleague of mine is currently building a 2 story 270m2 house in sydney for a bit over $430k I think. That includes all the site costs and upgrades.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:11

    We did look into a knockdown, or selling and buying a new $1.7m property. But we thought this was the best solution given the layout we could achieve.

    The aesthetic of the house is Victorian and is what we would look to achieve if we built a new house from scratch, the renovation will match in to this and we will have common features across both floors. Looking at the companies other work, it ties in seamlessly.

    Definitely was worth looking into however, appreciate the comment.

• 

  Caped Baldy on 19/08/2020 - 11:24

  +7

  self contained 2BR apartment on the 1st floor of my mum's place which will also have a separate entrance

  I can't imagine too many people that would be keen on buying a house that is set up like this.

  I earn $150,000 per year in a secure industry

  You're doing very well for yourself, I'd rather buy something already built. There's a lot of stress involved with getting design, certification and construction.

  • 

    jjjaar on 19/08/2020 - 11:43

    +1

    I can't imagine too many people that would be keen on buying a house that is set up like this.

    If it’s designed in an adaptable way that knocking out 1-2 walls or opening up some walls as doors would allow it to be one complete family home (with a weird extra kitchen, that could be converted into a “bar” say), then when selling, those adaptations could be made prior to selling.

    • 

      Caped Baldy on 19/08/2020 - 12:40

      I read it as building a floor on top of an existing floor and needing stair entrance. Upon rereading the OP, I'm still not sure.

      But yeah, makes sense to essentially be a ground floor extension and easy enough to knock down a while like you've written.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:16

    +2

    The way the house is configured would work really nicely as a large family home with two living spaces and 4/5 bedrooms, though we are planning to live here for a long time, so resale value isn't that high on our list. Considering my mum has been here 20 years, and would like to spend another 40 years in this home we really just want a place that we love living in, rather than thinking of the next tenant.

    There is less stress, however I'm an engineer by trade and have really enjoyed designing the home and customising it.

    Thanks for the advice :)

    • 

      Caped Baldy on 19/08/2020 - 12:44

      Engineer too :) but slightly diverged away from engineering.

      What engineering do you do that makes your job secure? From what I've seen in the past ten years is that jobs are tough to come by and there's a lot of competition. Don't have to answer if you don't want to.

      • 

        Bargain Hunter 007 on 19/08/2020 - 12:59

        Will dm

        • 

          BenDoverson on 20/08/2020 - 18:00

          +1

          @Bargain Hunter 007: Hey can you dm me as well? Im an engineering student

          • 

            Bargain Hunter 007 on 21/08/2020 - 08:49

            @BenDoverson: Seem's I can't - you might need to DM me first?

          • 

            Caped Baldy on 21/08/2020 - 15:29

            @BenDoverson: You need to change the setting to allow for private messaging. Under settings > edit > messaging.

• 

  trustnoone on 19/08/2020 - 11:25

  I don't know much about the legal side, but my 2c:

  I take ownership of a % of the house - seems like a hassle and possibly quite expensive if I'm required to pay stamp duty.

  Feel it might be something to take into account, at some point if something happens to your mother, if the whole house ends up coming to you anyway, it may be fine so you don't have to pay stamp duty?

  Can purchase a spot of land and build a tiny home for weekend get away's sooner rather than later

  I do wonder if you own it though, then when you get the sport of land for a tiny home, you could rent it out at first, negatively gear it for tax? Though I'm guessing the preference is to get passive income which can then pay it off even faster and you can own?

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:19

    Will raise the long term stamp duty consequence and negative gearing option to the accountant, I'm not particularly savvy with things like that, cheers for the comment.

• 

  [Deactivated] on 19/08/2020 - 11:34

  Sounds like you would be overcapitalising to me

• 

  jjjaar on 19/08/2020 - 11:40

  +2

  Don’t forget you will need a planning permit to build a second dwelling on one lot.

• 

  Wickz on 19/08/2020 - 11:51

  +1

  My 2c:

  • For $400k I would rather build my own property that I have 100% interest in. It may not be in your ideal suburb, but it is yours, and you dont have to worry about relationships souring. (I'm building in Melbourne and house and land was only $508k - 4bd 2 bath)

  • Does your mum have a decent sized yard? Wouldn't it be better to subdivide the land and build your own unit / townhouse in the rear? That way both properties remain separately owned, but close enough for babysitting.

  • Will you be contributing to rates and other services? Bills divided by 33% to each person living there? Is there space for 3 cars to be parked. Do you live there currently? What is your work schedule? If you have friends over late at night will that disturb your mother? Whilst it might be a self contained apartment, noise is going to travel downstairs to your mum - have you considered this?

  • Is there a mortgage on your mums property? If you do this, you need to consider changing the ownership on the title to tenants in common - otherwise you are just paying for a $400k reno to your mums house, and you cant use equity in the house for yourself.

  • If you proceed, get a lawyer!

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:29

    For $400k I would rather build my own property that I have 100% interest in. It may not be in your ideal suburb, but it is yours, and you dont have to worry about relationships souring. (I'm building in Melbourne and house and land was only $508k - 4bd 2 bath)

    For a similar property we would be looking at double the price, we generally like to live minimally so I think this suits our situation/values.

    Does your mum have a decent sized yard? Wouldn't it be better to subdivide the land and build your own unit / townhouse in the rear? That way both properties remain separately owned, but close enough for babysitting.

    This was the original idea, though it would require a planning permit which looked difficult to get, and it would take up too much of the backyard in my mum's opinion - the extension for the ground floor doesn't (unless we officially included a kitchen).

    Will you be contributing to rates and other services? Bills divided by 33% to each person living there? Is there space for 3 cars to be parked. Do you live there currently? What is your work schedule? If you have friends over late at night will that disturb your mother? Whilst it might be a self contained apartment, noise is going to travel downstairs to your mum - have you considered this?

    I am currently living here during covid - overseas travels were cut short. We have two cars and there is ample parking - we may go down to one and use ride sharing. Both our work schedules are 9-5, I will likely have the option of working from home going into the future for 3/5 days. We are social but late night activity is limited and our living space is at the other end of the home, will look further into sound proofing though. We will split all rates 33%, I am financially in a better earning position than my mum and given all the sacrifices she has made I'm happy to funnel her some extra money so she can enjoy her retirement.

    Is there a mortgage on your mums property? If you do this, you need to consider changing the ownership on the title to tenants in common - otherwise you are just paying for a $400k reno to your mums house, and you cant use equity in the house for yourself.

    There is, but it can be paid off in the next month, so working out how we handle that is another question.

    If you proceed, get a lawyer!

    That's definitely the plan! Thanks for your considered response

• 

  Blue Suby on 19/08/2020 - 12:01

  Be careful- you can pick your friends but family and finances can often be a lethal mix!

• 

  klonky on 19/08/2020 - 12:25

  Have you spoken to the bank about this yet? They are pretty tight with letting people over capitalise on their properties at the moment. How much equity does your mum have in the property? What happens if it comes to a point that you NEED to sell your part of the house - can you even do that? Are you going to place a unit title on the house to make it two legally seperate dwellings? It will need its own entrance if thats the case.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:40

    My mum has about $5,000 left on the mortgage, so should be OK on that front, but yes this likely to be over capitalising by $100-200k.

    Not planning to make it separate dwellings as planning permit would be difficult to achieve for our house / given our situation it appears not to be required

    Not sure what could happen in my life that would require a NEED to sell, maybe a medical issue? My mum would be on board to sell the house in that case as we have discussed.

    However I'm not planning on living in debt for >5 years, will reduce working hours and increase holidays once I've paid this off - and also look to buy a cheap plot of land somewhere pretty and build a tiny home there ($300k?) into the future.

• 

  GangGang on 19/08/2020 - 12:34

  +1

  Another scenario could be that neighbours would reject the proposal. Happened to my inlaws. The neighbours reason was they like to swim naked in the pool. This was many years ago.

  I would approach a bank/broker first & see what they say.

  • 

    Bargain Hunter 007 on 19/08/2020 - 12:41

    Fortunately our neighbours actually recommended their renovators, and even more fortunately it will be built to code, so no planning permit required, though unfortunately we have 1.7m screen around our deck - so won't be getting to perv on neighbours in any case.

    • 

      brad1-8tsi on 20/08/2020 - 11:45

      What's your definition of a planning permit? Is that the same as a an approved development application?

      I'm lifting the roof on my top floor from 45 degrees to 10 degrees (turns a useless storeroom into a bedroom) and had to get shadow maps done as well as privacy concerns addressed, survey, concept drawings etc. About $6k inc council fees to get to the point where we've got the green light.

• 

  CheapandUsed on 19/08/2020 - 13:00

  I think last night's episode of Good Bones (s4e14 available on 9now) had a place with a similar layout to what you describe.

  There is also a few builders in norwest Sydney with these intergenerational designs for the new estates.

  From reading the above comments the ownership of the end product is the biggest problem.

  Presumably council won't approve it as a subdivision, so no chance of selling the apartment separately to the main house.
  Which means, what did you buy for your $400k? Basically an extension to your mum's house, unless you incl. the stamp duty to have you added as tenants in common to the title.

  Most of the above also mentioned about your partner wanting something else, what about if your mum gets a new partner and they want something else?

  • 

    Bargain Hunter 007 on 19/08/2020 - 13:10

    Cool! Will check it out.

    Yeah hoping I can do this 'loan' which will only be paid out if the house is sold. Or worst case if our relationship deteriorated I could request her to start paying.

    My mum loves this place, and is very keen on living here til the end, her current partner of 15 years' is happy with the arrangement (they don't live together), if something were to happen on that front though I'd be flexible to work out an arrangement (either pay out or buy out) though it would definitely be a bummer.

• 

  [Deactivated] on 19/08/2020 - 13:03

  🍿

• 

  ihbh on 19/08/2020 - 15:09

  Your situation is low risk, but your mum might remarry, etc.

  Another option is for you to have a contract with your Mum with the option to buy the property for market price less $400k (with specification of how the market price is determined - e.g. average of 2 independent valuations).

  Make sure the addition doesn't reduce value down the track.

  I live in Federation/California Bungalow dominated area with a number of conservation orders. 2nd storey additions have to be behind roof lines, etc. Check this out for your council.

  Our next door neighbour wanted to add a 2nd storey so daughter can have her own space to live with them to look help look after husband. The initial architect plans breached a council guideline thinking it would be waived - it wasn't. They then went for plan B which was a side extension (bedroom, small living area and small bathroom) which only cost $300k+, but resulted in a poor layout and mostly likely will be demolished by the next buyer.

  I realise you're thinking long term, but things change. As a reasonableness check, discuss with some real estate agents on what the market thinks about your proposal.

• 

  miwahni on 19/08/2020 - 18:10

  +1

  How old is your mum? She may struggle to obtain a loan for $400000 based on her age, secured by owner occupied property. If you have no ownership of the property yourself, then your income won't be considered.

  • 

    Bargain Hunter 007 on 20/08/2020 - 09:31

    Interesting, we are speaking with the banks in the next week or so, though she's 55 so hopefully OK on that front, she also has a $200,000 mortgage (paid out less $1,000) that she can redraw from.

• 

  [Deactivated] on 19/08/2020 - 21:28

  Even if not as convenient - investing in your own home instead of your mothers might be better from a wealth perspective down the track. A partner living in this arrangement might feel like a tenant but that doesn’t sound like your situation. Hopefully it all works out but it’s usually simpler to live near parents than with them unless there’s a cultural expectation to.

  • 

    Bargain Hunter 007 on 20/08/2020 - 09:32

    +1

    Sound advice, I think we have a unique situation and doing this seems to leverage it.

    Though I agree in a typical wealth perspective this is not necessarily the best idea.

• 

  Quantumcat on 19/08/2020 - 22:23

  +2

  Sounds like a terrible idea.

  What if your partner doesn't get along with your mum, you want to stay but she refuses to live there?

  What if your mum is really annoying and wanting to visit constantly (or have you visit her constantly) and you have nowhere to escape to?

  What if a relative comes out of the woodwork and claims part of the property after your mum's death?

  What if your mum wants to downsize or go to a retirement home and needs to sell the property?

  What if you need to move because you get a different job or your kid has to go to a special school or some other reason?

  What if your mum doesn't want a stranger living above her anymore (if you ever rent out the space)? Are you going to accept having to pay a mortgage and rates and getting nothing for it?

  What if you want to buy somewhere else, you won't be able to use this property as equity, essentially you just gave away $400k and have to start from scratch?

  What if there is an issue with the document the lawyer drafts and it is found to be non binding?

  If your mum can subdivide the land, sell you the back half and you build your own house that will be better. Or buy a house a little further away, much better.

  • 

    Bargain Hunter 007 on 20/08/2020 - 09:19

    Appreciate your concern, though the situations you are describing are not representative of my 30 years' on the planet with my mum or they are issues we have already considered and don't foresee as an issue.

    If she wants to sell in the future to move into something smaller, we could either sell or I could buy the house.

    If I move out (I plan to live overseas with my partner for a couple of years), then we will simply rent out upstairs.

    My mum prefers living with other people around, as she otherwise lives alone.

    What if there is an issue with the document the lawyer drafts and it is found to be non binding?

    This would suck and we will try and avoid this as best we can, though for this to be an issue, our relationship would have already had to of broken down, which I can't really fathom.

    • 

      Quantumcat on 20/08/2020 - 10:51

      +1

      The issue with the document might not be apparent until after your mum's death.

      The extension doesn't add much to the value of the house. Are you happy receiving less than the 400k you spent on it in the case of her selling? Or just have it not have grown much? Or have 400k less than you would have otherwise if wanting to buy a house somewhere else? It isn't a very good investment decision.

      Having relationship problems with your mum isn't something to be swept under the rug and just assume everything will be fine. Sure, maybe you still lived with your mum as an adult and know you get along with her. You can't control what your partner or kid does however. Imagine your kid likes to wake up at 5 every morning and stomp up and down the hall and shout. Do you spend your life trying to keep him quiet for your mum's sake and being stressed about it every day? What if you want to watch a movie in the evening? Or send the kid to a sleepover and have fun loud sex? It has all the drawbacks of apartment living with the extra downside that the other person in the building is a family member. At least if they're strangers you can move or you can decide you just don't care about them or go to war with them. Can't do that with family. And unless your partner has already been living with your mum you have no idea if they can get along. It's quite often that you can have a good superficial relationship or even a good friendship with a person but when you live in proximity to them they drive you up the absolute wall.

      And what if you rent the upstairs to someone and they hurt your mum or make her life miserable? They may behave in a way that means you can't justifiably evict them but nevertheless are unpleasant. If that happens it will be your fault.

      So anyway, to summarise -
      - very poor investment decision
      - potential for life to be stressful and unpleasant with no easy exit
      - potential to make your mum miserable

      You should really just buy a normal house elsewhere and have your mum get a student boarder to live in one of her spare bedrooms if she wants company

      But doesn't matter what we say,you'll do what you want regardless. Best of luck, hope it turns out "okay" and not horrible like it has the potential to do (no potential to turn out really well)

      • 

        Bargain Hunter 007 on 20/08/2020 - 11:03

        +1

        Worth mentioning I wasn't asking for advice on the investment opportunity of the home or how the relationship between my mum and I could complicate things.

        Was simply asking about some legal avenues to protect both of us in the worst case scenario.

        I appreciate you can't perceive how it can turn out really well, and that's OK, but we aren't all cut from the same cloth.

        Given this is a forum, I was expecting 95% unsolicited advice on things I didn't ask, though am always open to listening to a different scenario I hadn't considered and a couple have popped up that I've since discussed, so I am thankful for all responses.

        And to be fair, you have touched on the one thing that concerns me about the situation - the loud sex.

        • 

          brad1-8tsi on 20/08/2020 - 12:10

          @Bargain Hunter 007: I'm not sure why people think you are over-investing when they haven't seen the property.

          I paid $100k "too much" for my inner city place as I was willing to pay for a lot of intangible benefits (public transport access, local amenities, distance from children, GF and work). Lots of things worth money to me but not anyone else. You appear to be in a similar boat.

          The biggest hurdles I see are:
          1) Your mum is 55 (I'm similar vintage). She may struggle to get a mortgage for the full amount due to age and income but you may be able to go guarantor for her. Unless you have a major asset you haven't mentioned, they won't give you a mortgage without collateral. A good mortgage broker & property lawyer will be all over this. You aren't the first to have this situation.

          2) This is the big one. If your mother re-marries or even goes into a defacto relationship then the new person will be first on the list to get the house. Don't think she won't as she's still young and (no, I won't go there). Again, you aren't the first to be in this situation and a good solicitor will know how to structure her will and get a binding contract in place.
          My new partner and I don't live together but my will says that in the event we are living together and I die she gets a big bundle of cash and 18 months rent free to move back to her house (which will have tenants on a lease in it) with all strata costs, maintenance etc to be paid from my estate and my kids get the town house and all remaining assets. It isn't a hard one to structure but you have to communicate with the parties so they understand why you are structuring things as they are.

          • 

            Bargain Hunter 007 on 20/08/2020 - 12:24

            @brad1-8tsi: Yeah, I believe the situation is that we might be 'overpaying' $200,000. However buying an equivalent property that will provide the quality of life this will afford would be $1,000,000 - and even then.. it's not as nice as this renovation, and the location isn't as good.

            1) Getting advice from a financial planner is scheduled for Monday, so I'll raise this.

            2) Will raise this to financial planner as well, she said her current will wouldn't cover this, so will need to make sure we are protected for this instance in the future. Her current relationship however doesn't present this issue as they live separately (did trial living together.. she kicked him out).

            • 

              brad1-8tsi on 20/08/2020 - 12:29

              +1

              @Bargain Hunter 007: I've found with women in that age group that the smart ones know what they want in life and can't be bothered dealing with crap. They soon let you know when a relationship isn't working as it should.

              I really enjoy being the weekend partner.

              Good luck. You will work it out

        • 

          kiitos on 20/08/2020 - 21:10

          +1

          @Bargain Hunter 007:

          you have touched on the one thing that concerns me about the situation - the loud sex.

          You'll just have to wear earplugs…

• 

  Keplaffintech on 19/08/2020 - 23:25

  +1

  waste of money, you're not going to get half of that back when you sell the property

  • 

    Bargain Hunter 007 on 20/08/2020 - 09:11

    +1

    Agreed, but money doesn't buy happiness :)

    I make plenty, and I spend very little, unless something drastic happens (brain injury?) then I don't foresee money having an impact in my life. In the event of recession/depression it would also be good to have a home I can pay off in the next few years.

• 

  kiitos on 20/08/2020 - 08:49

  How long will the building works take? What benefit will your mum get out of this?

  • 

    Bargain Hunter 007 on 20/08/2020 - 09:09

    +1

    6-9 months.

    Mum will get to live with future grand kids, my company (she otherwise lives alone), helping out her son, I'll cover 66% of bills and rates, and I'll likely buy a holiday home which she will get the use out of too.

    We have very open communication and we are both happy with the situation :)

    • 

      RogerSyd on 20/08/2020 - 11:49

      +2

      Living with parents is common in many asian cultures and includes the benefits you mentioned above. Good Luck :).. Also, It's good to see detailed and respectful replies on a thread by OP

• 

  Bob Svargis on 20/08/2020 - 11:36

  +1

  I would be speaking to a lawyer to get some sort of contract drawn up before doing anything else.

  It all sounds like a great idea and really good for your mother so she can spend time with your kid/s.

  However, what happens if something (God forbid) happens to your mum and the house passes to a partner/defacto/husband? Worst case scenario is that you could be left on your ar5e.

  What happens if she goes into care in the future - how do you pay for it? Often it requires the sale of assets to fund the residential accommodation bond (which you do get back at the end of the day). Yes, she could go in without a bond but then she would only get basic care. I know that sounds extreme, but you need to think about these things. She might be a long way from this, but people's circumstances change, health changes and so on.

  • 

    brad1-8tsi on 20/08/2020 - 12:14

    It's fairly easy to cover the "new partner" thing. See my post above.

  • 

    Bargain Hunter 007 on 20/08/2020 - 12:27

    Plan is living here will be able to delay her going into care as I can assist in looking after her, should that not be possible then I would happily sell the house and downsize as any kids I may have would be independent by then.

    We are definitely taking a long term view on this, thanks for your response :)

    • 

      brad1-8tsi on 20/08/2020 - 12:33

      +2

      That's about the only other thing to consider.

      If your Mum goes into care she will have 2 years to sell the house before it affects her government benefits. This probably / hopefully won't be an issue for 25+ years and the solution would probably be to sell to you but it's a potential "gotcha".

    • 

      Bob Svargis on 20/08/2020 - 16:07

      +1

      Fair enough, sounds like you have thought of everything. But you never know when your loved one may need care. My Mother in Law went into care at age 69 and it was a rapid descent from roughly age 65. She was in and out of respite care for a year, then into a nursing home at 69, dying a few months later.

      Just something to think about. It can happen to anyone so you and your kids just need to be protected. Like I said, it sounds like you've thought about it and you can't plan for everything, and things can happen to anyone.

• 

  [Deactivated] on 20/08/2020 - 18:09

  -1

  This is such a dumb idea.

  • 

    Bargain Hunter 007 on 21/08/2020 - 08:41

    Thanks for the comment, I'll consider and reflect on this and bring it to the lawyer :)