MONEY | Ask the tough questions before diving into coastal market

Welcome to 2021. Last year was challenging, but today let's be grateful that we live in this part of the globe. Right now, you may be enjoying our beautiful beaches, and if you are at the Sunshine Coast or the Gold Coast may well be amazed at the way property prices have shot up in the past few months.

Various reasons have been offered for the surge, but the consensus seems to be that it's a combination of ex-pats, and southern buyers who are discovering a holiday in south-east Queensland is a much better experience than going to America or Europe in the current climate.

We know what will happen next - before you know it, FOMO will click in, and you will say to the family, "We had better jump in quickly before the market gets any higher".

It's a natural feeling but, before you get too carried away and start signing contracts, ask yourself some tough questions. The first should be, "Will we use it exclusively or rent it?"

If you decide to keep it just for your own use, you'll be tying up a large amount of capital that may be used better elsewhere. And, if you have school-age children, you will probably find that you won't be able to go there as often as you'd planned.

The kids will love you when school holidays are on and they can show the place off to their mates, but when the holidays are over, they'll be too occupied with other activities to join you at the holiday home.

The next decision is to lease it out permanently or make it available for holiday letting. If you go for a permanent tenant, you will enjoy a regular income, but the trade-off is that you won't be able to use it for the odd week or weekend. If you go the way of casual holiday letting, you will need to provide everything from plates to a washing machine and will suffer greatly increased wear and tear because of the constant turnover of tenants, few of whom will treat the property kindly.

To make matters worse, the managing agent will take a hefty chunk of the gross rentals and there will be numerous vacancies because there is often a week between tenants.

Now, think about financing the purchase. Are you going to pay cash or are you going to borrow money to buy it? If you borrow for it, you'll only be able to claim a tax deduction for the rates, maintenance, interest and other expenses when the property is producing rent.

If you decide to keep peak periods, such as school holidays, for yourself, you'll be substantially reducing the income because the highest rents are charged in the holiday season. And if you do use the property yourself, you'll only be able to claim a percentage of the costs.

Next comes the choice between a house and an apartment. A house would be great if you want to take the pets with you - as long as you don't mind the hassle and the cost of maintaining two gardens. But, the cost of a well-located holiday home as well as the accompanying land tax, rates and maintenance, is way out of the reach of most of us.

I'm sorry to be putting a dampener on your dreams - but unless you find a well located property at a bargain price, you are better off to focus on other areas.

History tells us that most coastal property does not perform well over the long term.

Noel answers your money questions

Question

I am an 83-year-old widower on a government pension, living alone in my own home worth $900,000. I have some shares and managed funds worth $120,000, and my only other assets are a car and home contents worth $35,000.

I have one son, age 50, and one grandson, age 24 years. They have been working and living overseas continuously; my son in Dubai for the past 10 years, and my grandson in Barcelona for five years. There are no plans presently, by either, to return to Australia. Both are the major beneficiaries in my Will.

If I die while they are still living overseas, my query is:

  1. What will the tax implications be for them in Australia?
  2. Are there other matters that need to be taken into consideration?

Answer

Mark Molesworth, of BDO, points out that tax in estate planning is complex at the best of times, and non-resident beneficiaries make it doubly so. He tells me it is likely that your estate will end up paying Australian capital gains tax on any unrealised gains in the share/managed fund portfolio. This is because where such assets are bequeathed to non-resident beneficiaries, they will effectively leave the Australian tax net - so the Australian tax law collects tax before that happens by levying it on the estate.

Your residence should not suffer any Australian tax consequences, so long as it is still your main residence when you pass away and it is then sold within two years of death. The proceeds from this sale, along with the proceeds from the sale of personal effects and motor vehicles, should be able to be passed to your son and grandson without suffering Australian tax.

You should also consider taking advice in relation to the general aspects of the estate plan, including who will be your executor. Non-resident executors can sometimes trigger unnecessary complexity. It is strongly suggested that your beneficiaries also take advice in their countries of residence, as some foreign jurisdictions have their own rules in relation to the receipt of inherited property or the proceeds from an estate.

Question

I'm wondering if you could please let me know if it is true that people that own their own home and who are getting a part or full pension may have their homemade as part of their assets.

Answer

Under existing regulations, the family home is exempt from both the assets and income test. From time to time, you hear rumours that this situation may change and houses over a certain value may be assessed, but they are unfounded.

Question

My husband and I are in our late 40s, with a combined annual income of $280,000 a year. We owe $425,000 on our home, which is worth $950,000. We also have a $430,000 mortgage over an investment property, which is negatively geared. We are considering borrowing $250,000 on a home equity loan to cover an extension on our residence, and school fees for the next four years. My husband has $280,000 in super, I have $230,000, but we have no other savings.

Are we biting off more than we can chew? I'm concerned that, while we can service our loans now, we will have considerable debt when we reach retirement age.

Answer

Hopefully, the properties will increase in value over the years, your super will grow and the loans will reduce. Also, you could always sell one of the properties after you retire if you thought you were over committed. My advice is to plough as much money into superannuation as you can now - this will give you a good safety cushion when you retire.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au