Loan pre-approvals by banks can be confusing. They aren't a rubber stamp to buy whatever you want, but some buyers are being a little too cautious.
Downsizing parents - is it time to let go of the family home?
A delicate challenge many of us will face is the elderly parent or parents whose assets – including the home and investments – that have served them so well are now becoming a burden. They might be alone in a large home that’s hard to maintain and is remote from family. Or they have a complex investment portfolio that they are struggling to keep track off.
I say delicate because often we’re wary of engaging the matter for fear of being interfering or coming across as patronising. Or worse, having our motivations misjudged by others as self-serving and venal.
Moreover, effecting a change can be time-consuming and painstaking. To begin with, elderly parents are often cautious decision-makers and may require significant attention before they are persuaded of the merits of a course of action. Further, there are usually other stakeholders who may need to be consulted and/or whose approval or buy-in sought: our other siblings, grandchildren, the parents’ siblings and friends, and the parents’ accountant and/or financial adviser.
But engage we should if the status quo is one of avoidable worry for our progenitors.
The oversized home is often the most pressing issue, the one that most impacts on an elderly parent’s wellbeing. Typically the objective is to downsize to a property that is located closer to family and has features that will support not hinder the ageing body: think a single level dwelling or in a building with a lift; wide corridors and a walk-in shower.
Another frequent objective is to complete the transition from one home to the other with some surplus cash – ideally several hundred thousand dollars. Unfortunately, this downsizing windfall doesn’t always eventuate. Although the new home may be smaller and on less valuable land than its predecessor, it is often the case that these savings are mostly offset by the tendency for downsizers to go for the fully-optioned home replete with the latest modern conveniences.
I’ve seen this scenario play out many times and it is a lesson to all that relying on your home to fund your retirement can be a recipe for disappointment.
Turning to a parents’ property investments, one would expect to find a situation where they’ve held the assets long enough such that there is no outstanding debt or that it is so low that the rental income from the holdings far exceeds the cost of funding.
Now one of my central investment rules is buy, hold and never sell. With that in mind, there isn’t necessarily a financial reason to sell these properties, as long as they are happy with their current income levels. But there are two caveats to my rule. The first is that one bought well in the first place. And the second is to be sensitive to the vicissitudes of life.
Even if your parents don’t need the funds tied up in the investment property, they may want to be released from the responsibilities of ownership, such as complex tax returns, dealing with tenants, body corporates and suppliers, and worrying about the economy. Although they may have outsourced these roles to third parties – which I hope they have! – there can come a time when commitments previously taken in one’s stride become onerous.
Check in with your parents to see how well they are coping with this commitment. You may find that they are perfectly at ease with it. But it may also be the case that they are only keeping their investment properties in a kind but misplaced obligation to you and other future heirs.
If you establish in principle that they want to start disinvestment, it is also important that this is all achieved with the minimum fuss. Look to work with their accountant and possibly a property advisor to chart – and with your parents’ approval – execute on a strategy that is cognisant of tax rules and the property cycle.