Hi Micman,

By management rights, do you mean management rights to a leasehold property?

For instance, management rights to run a motel, caravan park, etc? Or perhaps franchise rights?

If so, then some tips I would give you include:

1. Remember you are buying an income stream, rather than a physical asset. The value in the business that you are creating can only be realised through business profits (while you own), or on the basis that you can find someone to sell the rights to. Some people build the business, can't sell it, and become either trapped in the business, or else walk away.

2. Therefore, make sure you have a clearly identified exit plan for how you will get out.

3. Remember that leasehold improvements generally stay with the property unless otherwise specified.

4. Get good legal advice on the management rights paperwork, as no doubt there are 10,001 unknows that can quickly add stress.

If you can provide more info on exactly what you are talking about, I may be able to help further.

All the best,

Interesting post.

As an accountant, and an ex-auditor, I've seen first hand enough fortunes sunk to never want to own assets in my own name.
 
There is no perfect structure, but some options are better than others. Individuals pay the highest tax, partnerships are dangerous from a unlimited liability viewpoint, trusts are complicated, companies don't get access to the CGT discount, super funds can't borrow (well, that's now open to debate). That's why education and advice are critical, because there will be pros and cons to any decision you make.

In my case, I use a company to do my developing work and my buy and holds are in a family trust. This is the best mix of asset protection and tax advantages in my case.

Cheers,

Hi,

Thanks for your comments about the book, I'm glad you liked it. And welcome to the forum.

It's always tricky to pinpoint the time, as much of the analysis is subjective.

However, I think we have now come off the massive high in Melbourne's east, and we will now go into a period of general market gains (5% to 10% per annum). I'm not as sure in Brisbane.  Personally, I like Sydney best as the next big growth area as it has been repressed for some years now.

Cheers,

Hi again,

Well done on booking your place at the conference. You're going to have a wonderful time. See you there!

In the meantime, here's a little synopsis of property development.

To begin with, property development is profitable two ways:

1. Better Land Use

While land has perceived value when being used as a backyard (i.e. lifestyle), land becomes income producing when people can use it as a home (at least when it comes to residential blocks). Therefore, when the property development consists of a land subdivision, the sum of what's created needs to be worth more than the block as a whole.

Remember this rule and you should be starting on the right foot: the greater the potential density of the development, the more valuable the land.

2. Value Adding via Building

The building side of developing is much trickier, and has many pitfalls. For instance, many people get caught up in what they build rather than looking at what housing product best suits the target market for the area. To borrow a fishing analogy, you will always come home with a great catch if you find out what bait the fish are hungry for and give it to them. So too in developing, if you do the research to find out what type of housing is most popular (# bedrooms, # bathrooms, size of living rooms etc), then provided you can built it and add to your project profit, you'll be looking good.

Remember that you must always add more in perceived value than actual cost. If you forget this, you'll be eating into your profits.

Some of the risks of developing that people often forget include:

A) Your costs are now but your income is between 12 and 24 months into the future. Therefore, you need deep pockets to fund the cash shortfall.

Banks may lend 80% of the cost of construction, but in the majority of cases, this will be the last 80%, not 80% of ever dollar spent. For example, if your cost to build is $200,000, then you will need to come up with the first $40,000 yourself, and then bank will provide the last $160,000.

C) Just because you think you can do it does not mean that you can. Property is sold on the basis of STCA (subject to council approval), which is a massive disclaimer! You must always do your own research, because although most things can be done or built, you will only want to proceed if you make at least your minimum profit.

D) Selling with plans and permits and banking a profit sooner rather than later can sometimes be better than going on and building. Remembering that a bird in the hand is worth two in the bush, a smaller profit that can be banked today without the risk of building may be juicier than holding on for top dollar.

E) Cost overruns are common. Unless you have experience, fixed price building contracts mean you may seem to pay a little more, but they are safer for new investors as the risk of overruns is borne by the builder.

Well, that's a start for you. Have a wonderful day.

Hi again,

There's no magic formula about how much to refinance. It comes down to your risk profile, affordability etc.

Of course, whatever you buy with your refinanced capital needs to be returning more than the cost of the funds, otherwise you will be going backwards.

The interest rates quoted were not based on a real loan product. They were just for discussion purposes.

On the basis that you are looking to buy a home first, and then reduce your exposure to the -ve cashflow, your plan has merit. You certainly seem to have a grasp on the financials, so well done.

Hey team,

Thanks for the comments about the book. There's no doubt that property prices have moved higher since the 0 to 130 was released.  I accept that some will view it as outdated, however I continue to use the same theories to make good profits today.

It is fair to say that residential +ve cashflow properties are now very hard to find. I recommend people interested in this approach look to commercial property where tenants generally pay outgoings, and as such, the cashflow outcome is better than residential (where the landlord pays outgoings).

I hope to write a free report soon titled 'Where Have All The Positive Cashflow Properties Gone?'. Keep an eye out for it as it will be available in the months ahead.

Enjoy the rest of the book. It is wise to read widely, but your plan of attack will need to be made based on which approach will get you to your goals the fastest and with the least risk.

Cheers,

Hi,

Many people have asked what has happened to the Wrap Kit that I produced some years ago.

At the time, it was the only resource available on how to do vendor finance sales in Aus (and in Vic in particular). Rick later put out a version that adopted and advocated a slightly different approach (and was more based on the NSW legal framework).

My version has been out of print for some time now. This has been because I have been convinced that some investors have used vendor finance incorrectly and misled buyers with dodgy tactics. In short, I did not want to advocate an approach that was seeming to do more harm than good.

I do hope to make some of the information freely available for public use and debate in 2008. My hope is that a better informed public will be able to protect and educate themselves on vendor finance, and that the fear, hype and greed will be fairly addressed.

Hey Blaze,

Thanks for the post and welcome to the community.

First, congrats on the property purchase. It is no doubt an exciting time!

Your question about how to leverage to buy a second (or third etc) property is a good one, and it is a topic that all investors must address sooner or later.

As far as the finance is concerned, one of the many finance experts on the forum should be able to point you in the right direction as far as options go. Some comments I can make though are:

1. The tax situation is a little confused when you rent one bedroom out. Your principal place of residence (PPOR) is usually capital gains tax free, but this is not the case if you rent out a room and claim some of the loan interest as a deduction. You will need to apportion the gain… some will be tax free, some will attract CGT. This shouldn't put you off as such, but it is something to be aware of.

2. Did you buy the property for income or growth? Your decision about your expected profit should point you in the right direction about how to finance the property. For example, if you wanted income, then you would try to max your income and min your expense. As such, an interest-only loan may be appropraite at a high loan-to-valuation ratio. For example, perhaps an 85% interest-only loan (anything above 85% may attract mortgage insurance) could work for you as it would preserve your deposit base and also max your income.

3. Be wary funding new property purchases with debt. Others disagree, but I feel the safer and more sustainable approach is to sell and cash in some of your equity rather than refinancing to the hilt.

4. I'd love to see more accurate financial info about the expected cashflow and growth from this property. I think this would help you get clear on the likely end outcome.  For example, here is a very rough set of numbers based on an interest only 80% interest-only loan @ 9% interest:

Rent: $16,200 (your figure)

Management: $1,296 (8%)
Outgoings: $3,000 (your figure)
Interest: $14,400 (9% interest on loan of $160k)
Total exp: $18,696

Cashflow: $2,496 (say $2.5k)

Annual growth required to cover -ve cashflow: 1.2%

If you assumed an average growth rate of 5%; the value of your property compared to loan and -ve cashflow would be:

Year; Value; Loan accum + negative cashflow; Equity
0 ; $200k ; $162.5k; $37.5k
1 ; $210k ; $165.5k; $45k
2 ; $220.5k ; $167.5k; $53k
3 ; $231.5k ; $170k; $61.5k
4 ; $243.1k ; $172.5k; $70.6k

Hopefully you can see how the numbers come up. I would do a speadsheet based on this sort of approach.

The question is, at what point do you access equity to go again? And at that time, do you sell or refinance?

Generally, and subject to affordability, it is better to refinance for getting to properties 2 to 4, but after then you will probably need to sell and keep going.

Has this helped?

Hi guys,

Sean, thanks for posting your reply. You seem to have thought through it carefully.

Some further thoughts that I would like to add are:

1. Are there strings attached to the deal your in-laws are offering? For instance, what if you decide to sell soon after moving in to people your in-laws don't like.

2. The 100k would be enough to get into a buy-reno-sell situation, but that can be a lot of hard work if you are planning to do the work yourself. Still, DIY projects are a great way to learn. Things in the eastern suburbs are quite expensive though… If you go down this road then get advice about how to do it in a structure that won't affect your ability to get the FHOG or other incentives.

3. You can always rent for 12 to 18 months while your in-laws property is 'fixed up' for you both to live in.

Box Hill is a good area, and experiences strong demand from a growing Asian culture. I lived in that suburb for 5 or so years and know it well. What street is the house in?

Cheers,

Hi,

I'm not sure I understand your question fully, but I'll have a go at answering it for you.

First of all, if you want the interest to be deductible, then it won't be a PPOR (CGT free), but rather an investment property.

Tax law requires that there be a connection with the earning of income and the expense, and the expense cannot be of a private nature (i.e. a home).

So, you will need to create a valid investment model, which can be negatively geared. That is, you will need to charge and pay a market rent. Whether you create a seperate investment structure to do this is up to you.

A possible model then would be as follows:

1. Buy new PPOR in a new structure. For discussion sake, let's say you set up the 123 Family Trust to buy it in.
2. You buy the property (let's call it 123 Smith Street)
3. You refinance your current PPOR to pay for the deposit and closing costs. The interest on this redraw is deductible provided 123 Smith Street is an investment property (even if it makes a cashflow loss).
4. You get an 80% loan for 123 Smith Street, offering the title up as security. Assuming you are either the Trustee, or director of the Trustee company, you will be asked for a personal guarantee. The interest on this loan will be tax deductible too.
5. You will need to pay a market rent to 123 Family Trust. You may offset this cost by potentially renting your current PPOR for a short time without compromising the CGT status of it. You will need to see an accountant about this.
6. When you sell 123 Smith Street, any capital appreciation will be subject to CGT.

I hope this will help get you started. I really think you need to see an accountant. I would also say that this is a highly leveraged strategy, meaning you are borrowing a lot of money. This often carries a lot of risk.

Cheers,