Okay, so you’re close to retirement and considering your options of generating an income stream in retirement.  Within your asset base, you hold an investment property that has zero debt against it, but it is achieving very little income return as a vulnerable family friend is currently renting it. 

You are aware the capital value of the property could be generating you much more income than you are currently receiving, but you are loathe to either increase the rent OR sell the property, as you want to ensure your friend is looked after.

What can you do?

Bill*, a Hudson member, presented this very scenario to me recently, but I also know of many Hudson members in similar situations where they have parents residing in their investment properties. The average rental yield these members are generating is less than 2.50% per annum.

Comparatively, the average rental yield you can expect to achieve from residential property is between 4.00% and 5.00% per annum (assuming the property is within a certain radius of capital cities). The return on cash these days is around 5.50% per annum, and historical share market dividends are approximately 6.00% per annum. So, really, by converting the property to cash and reinvesting the proceeds, you will be doing yourself a huge favour.

In the above scenario, the family friend, Natalie*, residing in the property is very keen to purchase it, but is limited to borrowing only $220,000 from the bank (based on her local financial institution’s assessment of her borrowing capacity and serviceability). One option Bill has is to sell a portion of his property to Natalie, whereby they would both have ownership of the property jointly as Tenants in Common. This would solve Bill’s need to access capital whilst looking after Natalie, and also allow Natalie to achieve property ownership (albeit partial ownership). Tenancy in Common is where two or more individuals hold property in any share they choose (assuming Natalie contributes $190,000 of the market value of the property, Bill will own 50% and Natalie will own 50%).

The most important advantage of Tenancy in Common, is that the share of the property will be protected in the proportion designated – Best illustrated in the event that either Bill or Natalie die. If Bill were to pass away, his share of the property passes in accordance with his instructions as set out in his Will, meaning he has absolute control over who will receive his ½ of the property upon his death (unlike joint tenancy where the rules of survivorship exist).

Note: It is imperative that both Bill and Natalie hold valid and enforceable Wills which specify the person/organisation that is to receive the benefit of their share of the property.

Bill has now achieved his aim of generating greater returns from his accumulated capital, whilst ensuring Natalie still has a roof over her head!

* not the member's real name

Speak with our finance manager about Investment Finance and Loans on freecall 1800 804 296 about this in more detail, or make a time online now

Information contained on this website is general financial product advice and does not take into account does your individual investment objectives, financial circumstances or needs. Information provided on and available from this site does not constitute financial, taxation or other professional advice and should not be relied upon as such. Mainview Securities Pty Ltd recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser.

Authorised Representatives of Mainview Securities Pty Ltd may hold interests in financial products that they recommend to you. Complete disclosure will be made about such interests in any advice that is provided to you by the Authorised Representative.

Please refer to Mainview Securities Pty Ltd Financial Services Guide