Hello, and welcome to The Australian's Money Puzzle podcast.

I'm James Kirby.

Welcome aboard everybody.

If you are watching property prices take off around the country, land prices to be precise, really, maybe as you're gazing out your back window you might be looking at an opportunity right under your nose.

My guest today is Nathan Fradley, financial advisor from Fradley Advice, regular on the show, and we're going to talk about this property opportunity which I think has been sort of underplayed to some degree, and I'm really interested in what he has to say about it because he has been involved in it.

How are you, Nathan, I'm good, James six for having on again.

Great to have you on.

I mean, obviously there's a couple of other things I want to talk about, but I do want to put this up front, if you like, just before we do.

I've had I think it might be one of the questions today from listeners, this ongoing suggestion that most advisors, not you, but most financial advisors, when you go into them, they just talk about chairs, bonds, listed investments, investment platforms, funds they don't like, they don't want they are not able, for one way or another, to actually advise in any sensible, coherent way on property, as we know direct residential property true or false, Nathan Bradley.

There's there's layers to this, James, And you know I loved to be moderate, and you're looking for a headline as well, so i'll give you.

I'll give you desperate for a headline today there is, Yes, there's an entire empty newspaper coming out tomorrow.

I think the first part is to recognize that financial advisors are actually only licensed to sell financial products, so there is that kind of.

Restriction in it.

But I do think there's plenty of advisors out there who are more than comfortable to do financial planning and incorporate right strategy and property and if they are comfortable in doing so, if they licensee or the business they work for allows them to.

But the other part of it is going to be the incentive.

And that's always been the factor that what we are licensed to provide advice on and how we are paid may create a difference in how we give advice.

Now, there's plenty of situations where someone might say, oh, I'd like to buy a property, and what they can afford and what makes sense doesn't make sense, but I think there is there has been, historically, more than now, I would say, a tendency to just lean towards things that advisers can charge a percentage fe on instead of charging for retirement advice as a whole.

Yeah, And I suppose on one side we have the fact that some of them won't give advice.

On the other side, we have the problem that some of them give advice.

And that's beautiful to you're alluding to.

Okay, so on those ones that do, like yourself, So we have a I mean, there's obviously this ongoing notion that property is expensive, but the chase the property market.

Residential property market is in very good shape just now, just had a very good year.

Forecaster for another very strong year next year.

A lot of demand, strong rental returns, virtually zero vacancy rates in many places, capital gains, and a lot of this is to do with the value, if you like, of residential urban land.

One of the things that has not been fully explored, it's been a while since I even talked about it on the show, is densification and the opportunities in that area.

I don't mean developing, becoming a property developer yourself per se folks.

But I am talking about whether you are citing on a piece of land that could be much better used.

Have you got a term for this?

I know traditionally it was granny flats.

I think Granni flat's probably too narrow these days, is it, Nathan.

Well, yeah, The Granni flats world is more around transferring assets and living somewhere for life, versus the subdivision or building the physical Granni flat, which with comes from building up these I think there's two parts that as the part that says, hey, we've got this space, could we drop a tiny home on it, you know something that and subject of planning all the other fun stuff and get some additional rental board out of it.

I think that's definitely an opportunity out there.

And then there's the granny flat other side of that, which is, hey, we've got this big house.

We've got might be estate planning needs, maybe we've got personal care needs, We've got kids that need additional support, maybe we spend a lot of time with them, they've got a big mortgage, whatever it might be, and we are comfortable living together and for whatever is in the estate planning and the stars all ALIGNE.

Then that's kind of this transfer of assets for the right to live somewhere, And I think that's going to come up a lot as this generational wealth transfer sort of story plays out.

Yes, absolutely, Okay, well let's delve into that.

I mean there's two parts.

Let's do both parts, the intergeneration and notion, which is put very simply, like, there's just a scenario being that there are two people in the big empty house with a large garden back.

They have perhaps a son or a daughter who is struggling with a family in a tiny house, and it's all a bit absurd in that scenario.

Is there a hypothetical you could put forward that would be useful to explore?

Yeah, So I think the first definition we'd lean on as a cendling definition, because that's often where people latch onto centlink things.

So according to center Link, the transfer of.

Assets, be it a property or cash, for the right to live somewhere for the rest of your life constitutes a granny flat.

So in that instance, we could have the parents potentially transfer the house to the kids and then they all move in together like parents have the right to live there for the rest of their life and that transfer happens, or they could sell their house and move in with the kids and maybe renovate or buy a new house or whatever it is and give them assets and those from a senlink perspective, depending on how it is done, come with what we call deprivation exemptions ie sent link don't assess that money anymore.

It's not like a gift that you have to assess for the next five years.

It disappears, So that can have really good I suppose outcomes for the right people where you've got a situation where you get the co living situation.

Maybe there's shared responsibilities around taking give grandkids and future care responsibilities for the kids to take care of the parents, but parents will get to keep their pension, you know, the kids get their extra cash and support, maybe a reduced mortgage.

Maybe that have to work as much.

There's a lot of sort of co benefits in these kind of arrangements.

So for those who are on a pension, who will probably be on a pension, which is by the way, the majority of Australians right, the majority of students have some access to the pension.

To retain that access, there's certain so tell us how that would work in the scenario I've just put forward.

Yeah, So if you think about I mean the point about property made earlier, most Australians hold most of their wealth in their property, you know.

That's you know, and they might be sitting on a you know, on a two million dollar house that's unassessed for the age pension, and maybe they've got a couple hundred grand it's super whatever it might be.

That house is currently exempt.

If they sold it and that money sat in the bank, it's now assessed.

So I suppose the continuation of that is they still live somewhere and centillly going to give that exemption to that point.

And so there's a few sort of curly worthy rules and I won't get too heavy into them.

Don't do anything until you get vist on this one, guys.

This is a curly weary one.

But there is the ability to transfer the property and the full value of the property, if done in the right way, can be exempt from gifting or from deprivation.

It's a technical term.

Or and that could be a ten million door a house, mind you, or it could be the sale of the property and the transfer of assets and the amount that is zempt is calculated based off the youngest party in that transaction, the youngest gifter, and basically a life table.

So there's a series of calculations that are done there.

Okay, so the couple can actually retain their pension and do this arrangement where everyone in intergeneration, where everyone lives on the original property and the pension is not affected.

Tell me that where there's a scenario where there's two people and again the same scenario.

They want the young family to move in with them, but pension doesn't matter.

Right, So they have more than enough, they don't need the pension.

Is it easier then?

Well, this is where the center link thing stops being an issue.

Right, And this is why I think I alluded to before this conversation is not so much about granny flat rights and the scent link benefits and what have you.

This actually falls back to intergenerational living arrangements.

You know, it ties into a state planning, It ties into retention of property within the family, It ties into family law.

You know, you might just.

Transfer the house to them.

There's a or a co ownership arrangement or something to such an effect.

And obviously that has all sorts of tie ins around you know, what's in the will, and maybe if the children separate or all that kind of stuff comes into it.

But I think fundamentally it's a conversation around as a family, what do we need and how can we all benar effort in this world that is getting increased in the expensive and harder, but also that we can lift together, that we can cohabitate things that I think we kind of fell away from through the nineties and two thousands and see that coming back.

Now, right.

Is there any numbers about this?

I know obviously intergeneration well transfer is the huge issue.

We also know the property prices and the elevation, if you like, is a huge issue.

Do we have any numbers about in this area.

I don't have any stats on how much this has been taken up, but I do know that until the twenty twenty one the transfer of those assets was considered a D one capital gains event for the recipient, ie they paid full tax on it, and so it kind of deterred people from doing it.

There's a few exemptions that the ato of are put in place, but if you meet their requirements, then that saves that tax that gives you the exemption on that tax, so that I think that's sort of drawn people to a lot more these days.

The way it works, folks, is up until twenty twenty one, there was a bit of gray area and a lot of arrangements where there was build out the back and perhaps an older couple living out the back.

They were informal arrangements and the Board of Taxation moved in.

It looked like they were kind of clamping down, but in fact when they came out the other side of this, they sort of formalized the capital gains tax exemption for the Brandy flats.

That's a really strong issue.

I mean, even at the time there was three hundred and fifty thousand older Australians who lived basically in homes owned by their in homes presided in homes owned by their adult children.

So those arrangements are quite prevalent.

And that was a couple of years ago, so it can only have increased.

Let's just look for a.

Moment, Nathan.

So this is a I mean, obviously this is terrific, as you say, you costiously say all the time, as long as everyone is happy to live together and you know they can work that one out for themselves.

Not for our show to determine that one, But can we look very briefly at the notion of the building out the back using your property, not for that intergenerational setup in the traditional manner, but in a new manner where perhaps young adult children could live on the property in their own accommodation.

How does that work and does that have the CGT exemption?

So if you're talking about in that example of they living together, or we're talking about two separate buildings on the same lot.

I'm imagining two separate buildings where I know people have bought larger properties and they're say, my plan is you know, my son's going to live there or whatever.

Yeah, I think that will largely fall back to probably a planning issue more than anything around what can be done with that property.

But the premise would fall back to how is it transferred?

So an example might be that there's a large property.

We'll say it's.

Less than two hectares because it makes it easier and for whatever reason, there can be two buildings on it.

In that instance, the parents may transfer that full property to the name of the children.

The children then build the second property on there.

The parents have the right to live there it could be a granny flat.

So it all falls back to those two elements for Senlink if that's relevant, which is the transfer of asset for the right to live, and then meeting the requirements for the ATO, which is you know basically that it's documented that it's not commercial and there's some requirements around either being of age, pension age, or requiring.

Assistance from a disability perspective.

So and I'm being very blase because they are very distinct rules and you've got to make sure you get them right or it goes horribly wrong.

But you know that's how that would tend to work.

Okay.

It's interesting and I imagine it's something that our listeners are really tuned into what we're going to do with text short break and Nithan's going to tell us about an example of where it worked out very well.

Back in a minute.

Hello, Welcome back to the Australians Money Positive Podcast.

I'm James Kirby talking to Nathan Fradley, financial advisor and we are talking about building out the back Ymbi's yes, in my backyard please.

This is optimizing your property from an intergenerational perspective.

It may be for you that you're all adult children, perhaps end up actually moving into the larger house you're at the back, or it may be that you are putting an adult child in the back and you stay in the house.

Nathan, just you've got to tell us a story about something you came across recently in this area.

How it all worked.

Yeah, this is a case I worked on about eighteen months ago, and it was effectively, we've got an only child with three kids, a partner living in a house in Sydney, discerent sized mortgage, both professionals, and then you've got mum and dad living in their house.

Dad's sort of taken ill a little bit, so he needs a bit more support.

Mom's still working part time and she's doing grandchildren stuff, and everyone's kind of chipping in left, right and center.

There's a lot of driving around.

So they decided to investigate the grainy flat option, and what they ended up doing was mom and dad sold the property and then transferred the assets to the children for the right to live there for the rest of their life.

But the way they did it was they actually paid a series of invoices for a construction, so they built an extension.

They went up.

Kids live upstairs with their kids.

There's a common living area downstairs, and mum and dad lived in a more accessible spot down below.

And what that meant was that everyone's in the same household, so we all of a sudden save all that time.

The kid's mortgage was substantially lower, and they actually could reduce their days of work and help out with dad more.

Mum didn't have to do as much, so she could actually get back some form of social life again, and it worked really well.

It worked well because they had lived together during COVID while they were saving for that house.

Yep, exactly a very important mine.

It's not in everyone likes ramon situation.

You know, they only child, so there was that.

You know, the inheritance piece was less of a concern because once that those assets are transferred, they're not the parents' assets anymore.

They were also quite young, so they're in their.

Mid sixties or midi late sixties, which meant that the transfer itself, when you calculate how much they could transfer, was quite high.

It was about nine hundred grand, so it meant that they could move closer into the city, be with a family, still maintain their pension as before a little bit of cash left over from the sale, but overall everything worked together and then sadly unfortunately a dad passed away, but everyone was together for that and is still together, so mum's down and living by herself.

So it kind of had a big flow on effect from that around the benefits.

But I think, again I mentioned before, the stars do align with that one.

It's a great example of when it works.

But you know, there's definitely broader considerations.

Okay, what we.

Might do is actually get you to just listen, what are the key issues to examine if you're thinking of this folks.

And obviously it course without saying it does sound like this really an advisor is ninety nine percent compository here just before we do.

In terms of the commitment that must be made in this, it sounds to me that it is the older people that must make the commitment, and they must actually sign off a former document where they attained the right to live on the property, so that's part of their security and it is that right.

Yeah, so you've got you've got a contract, right, it's a commercial arrangement or private arrangement twent two people or between those parties, and that document will should have certain words in it for cen Lenk purposes, and it should have certain words in it for the ats purposes.

But then broader than that, it should include what the terms of the arrangement are we're going to move in.

And in that case I talked about, the idea was we never want to go into residential care.

Yes, right, and it's written in black and white that they have the right to live there forever.

Forever has to be, has to be.

There can be exit clauses if it doesn't work, and things like that.

There is a five year rule that sen Alink apply that if it breaks for reasons you should have known when you entered it within five years, they just unwind the whole thing and chase up the pension basically.

But in this instance, the agreement was that if age care residential care was on the cards, that either one of the kid or their wife would actually quit their job take care of mum.

So there's a commit there's a future commitment that sort of tied into that that there was this joint what are we going to do?

And that is very that's a very private matter.

I think how people want to navig at that, what the line is for care all of those things.

And then also or you know who pays for what we're going to move in, We're giving this lump sun we don't want to have to pay for any more utilities, or will chip in this much, all those kinds of things that all factors in.

So that gets done as an agreement.

So you should absolutely be getting legal advice and both sides should.

Those agreements are only as good as the advice that he's given on them.

So I think that's crucial outside of obviously for a.

Chart is that is both generations basically it should get their own legal advice.

Yeah, one would draft the document, the other one would get advice on the document drafted.

Yeah.

I think the estate planning stuff comes into that as well.

Again, a lawyer that does both is usually pretty common.

But the transfer of assets changes estates, you know, it changes the dynamics of the will it's in place, and other siblings, is everyone on the same page, all that kind of stuff, And then the family law respects.

I did one recently.

There was a double granny flat, so nana and mum and dad and so there was a family law consideration of a's one point four million dollars coming across from my family.

So they did a binding financial agreement as well to kind of build that into the process.

And these are all these sort of formal considerations that are you know, I mean, ultimately you have to get along firstly, but I think this is one of those areas if you don't, if you don't pay to do it properly, you definitely can't afford to pay when it absolutely goes wrong.

Yeah, Okay, well yes, I imagine.

So so there you are for isn't that really fascinating?

And I think we've got to see more and more of this.

As you say, Nathan, it's hard to get stats on it.

The onliest we have was that three hundred and fifty thousand and that was elderly Australians living, you know, with their own children.

But one thing we do know from just all you have to do is look at property listings.

Intergenerational properties are not just on the market, but they are being created from the ground up more and more, Okay, back in a moment with some questions.

Hello, Welcome back to the Australians Money Puzzle podcast with Nathan Fradley and James Kirby.

Folks it's interesting.

I had two questions, and those two questions that actually came in more or less underpinned created this show to some degree, but it's worth going back over them.

The first was from Annie, and he asked, I have been to financial advisors more than once, and they talk always about shares and funds and platforms.

No one talks about property investment.

Is this always the case?

Well?

I think we kind of covered that just on that issue, Nathan, so proper on occasion, an advisor may not even be able to give advice because it's not a financial product.

Is that right?

I think it.

Yeah.

It's important to understand what they're giving advice on.

So if you're finding an advisor that you want to work with that does property, and I say does property with talking points, that's a philosophical alignment.

What kind of advice do you give?

What do you consider them, what you do?

Do you manage investments?

Do you talk about feelings?

I think that's sort of that area.

But what we are licensed to give advice on is financial product.

But when we do retirement planning, we consider and model out the long term impacts.

We are tax financial advisors.

We can model for tax We can do all of those kinds of things.

So when you're getting advice from an advisor on property, it's more of a strategic a property of blah blah blah blah blah, as opposed to if advisor starts telling you like taking you out on a Sat Day and going auctions together and all that kind of stuff, they might be crossing some boundaries there, but it could be a property worth this.

Here's some local stistics.

We've made some assumptions like that, and then you go off and you purchase that property and come back and they sort of adjust the plan and you work together on that strategically.

That's absolutely something that advices can help with.

Okay, Yeah, I've never heard that actually sort of written out like that.

Okay from Ron it's a self managed super fund.

It's just suitable for residential property investments.

And do I have to deal with non banks to get a loan?

A great question, but that not really means the person has to really think about the answer.

Yeah, I know the adswer my rule of thumb is not really and the main reasons around that.

More or less really they're not really suitable not for.

Residential I'm not saying it's not saying you can't.

I think there's a couple of factors that fall into it.

One is, as the listener alluded to, I don't think any of the major banks lend to them anymore.

I could be wrong on that, It's been a while since I've looked at it.

But secondly, I think a lot of the time money is made through residential property through self improvement, going in there and being able to do repaint things yourself, tidy it up.

You know, all those sort of assets or development right one or the other, and you can't do those.

No, you can maintain, isn't that right?

Yeah, and you have to.

Pay someone else to do so at market rates.

So that's where you start seeing those sort of strategies fall down.

I think it's not saying you can't work with plenty of clients of the year who've got great residential portfolios within SMSFS.

I do think diversification falls into it.

Sometimes we jumped to the idea if I want to buy a property in super I've just got enough money by what I can afford.

Doesn't end up being a great property, end up being killed by interest.

I think, Yeah, my rule of thumb is at least a mill if you're going to be, you know, looking at that sort of strategy, not the old two hundred thousand dollars in super line and the same they used to use.

I think it's that person would want to have Mitian in their super fun before they play in the area.

Yeah, it's very interesting and not advice folks, of course, information only, but a couple of points there.

Nathan's making that managed super funds.

It's a bit ticket item property, so it's difficult for first of all, you need a lot in your super to really get in there, and you are paying more than everybody is because the banks don't do it and you must deal with non banks.

Other aspects of that.

Negative gearing isn't as good either, but it may suit some.

All right, very good, Thank you, Nathan Frandley.

That was great, Hey, James, I would love to have some correspondence on that, especially on the intergenerational living.

We haven't done enough on that at all.

So the money Puzzle at the Australian dot com dot au.

Talk to you soon.