I guess I mean a lawer usually makes a good lawyer, but that is not necessarily the same as a good business person.
And perhaps you and I see the use and role of an accountant differently. You seem to narrow the application to compliance. That would be the same as saying that a lawyer is really only a word processor, or a filing clerk.
Naturally, you have a bias as a lawyer, and I have a bias as an accountant.
Setting aside our personal and professional bents, my recommendation for someone seeking to decide on their right structure would be wise to seek advice that ties the desired end with that person’s affordable means.
And that’s knock off time for the weekend for me, so allow me to finish with this:
An accountant and a lawyer were laying on a beach in Tahiti sipping mai tai’s.
The lawyer started telling the accountant how he came to be there.
“I had this property in Pitt Street, Sydney that caught fire and after the insurance paid off, I came here.”
The accountant said, “I had a city property, too, in Melbourne. It got flooded so here I am with the insurance proceeds.”
The lawyer took another sip of his mai tai, and then asked in a puzzled voice, “How do you start a flood?”
Well, let’s agree on what we agree on: that accountant’s cannot give legal advice.
As for the rest: lawyers, in my opinion, usually run good legal practices (small businesses), but otherwise make poor accountants, business advisers, and financial planners.
Just look at government: beset by ex-lawyers who argue for the sake of arguing, while the rest of us get on with the job.
That said, accountants stare at numbers too much and often make decisions from ivory towers.
People just need to find an adviser they feel they can trust, and go in with their eyes open. Hence, I think our discussion has been useful in achieving that goal. Thank you.
No. I wouldn’t, that’s true. I went to a lawyer and got good advice and a tailored document. But accountants don’t offer to do wills, as far as I know! Maybe that is an emerging opportunity for them.
Here’s what I’ve found happens pratically though re: trusts: accountants tend to work with a good lawyer (or major law firm) to get access to their latest and greatest trust deed as, as you have mentioned, lawyers typically are experts at law, but not tax, or accounting, succession planning, or in many cases, practical business operational matters. This latter part is then ‘wrapped around’ the trust deed to provide the best of both worlds: a trust deed that works, and accounting assistance with tax and succession planning.
Thanks for clarifying. If you go into a project with the intention of ‘turning it’, say a renovation or subdivision, then it is unlikely to qualify for a CGT discount, as you may hold it for <12 months, and even if you don’t, your intention is not to hold it for long term gain, but to buy-improve-sell, and so the profit is likely to be an ‘income’ profit rather than a ‘capital’ profit.
Just on a point, you can’t make a (real) profit and not pay tax on it! Or, if you want to defer your income tax on your salary income via real estate losses, you have to make a real loss against an unrealised profit (i.e. the negative geating strategy).
So, back to your situation… as I see it:
1. You want to do value add projects for quick-turn profits
2. You expect to make a profit from improving the property, as opposed to a long term hold
3. You may lose money in the short term holding it, but your intention is for the improvement profit to exceed those holding costs
4. You hope to use those near term losses to offset your other taxable income (i.e. salary income)
5. You want to distribute the profits to your parents as part of an income splitting plan
Give the above, if you buy in your own name you can do 1, 2, 3 and 4, but cannot do 5.
If you buy in a trust you can do 1, 2, 3, and 5, but not 4.
Therefore, it’s up to you to figure out what combo of options you want more.
In respect to capital gains, as I said, it is more likely the profit is not capital, but rather income. Regardless, if you think it could qualify for a CGT discount then this would be available (subject to meeting the eligibility requirements) both as an individual, and distributing trust income in the form of capital gains to individuals (i.e. trust distribution).
It can be hard finding an accountant to assist. First, get clear on your strategy, then seek an accountant to support. That is, make sure you ask the right person the right question.
If you want to own that many properties you’ll need to get your structuring and finance sorted, or else you will reach a glass ceiling pretty quickly and not be able to keep buying. Of course, you’ll need your own capital for deposits too.
Here’s a conundrum: You’ll be unlikely to acquire that kind of property portfolio with a full time job, but you’ll most likely need a full time job to get finance.
They are right! You cannot distribute a loss from a trust, so to access the (so-called) benefits of negative gearing, namely to offset the income loss from the property against your other taxable income, you will need to buy in your own name.
It does sound like a structural failure of the external building, which is typically an Owner’s Corp matter.
I recommend getting a copy of the governing document, ascertaining whether there is a sinking fund, and then heading off to a friendly lawyer to seek further help. Getting a builder to attest to the issue being a structural failure and not just a ‘wear and tear’ maintenance issue will be important.
A buyer’s agent who owns hundreds of properties? In their own names? Hmmmmm. That doesn’t pass the sniff test.
I’m currently writing lots of new and updated products about due diligence and structuring. I recommend getting your hands on them once I have finished them (still some months away).
Structuring though, as an overview, is the way you control and own your wealth. If you own everything in your own name, then you’ll pay the highest tax on your profits (assuming you are in the top marginal rate – or bumped there because of capital gains in the year you sell), and you have no asset protection between assets – if one fails, they are all at risk. That’s why individuals are usually poor entities to use to structure your investment empire.
When borrowing, debt in your own name acts as a weight to being able to borrow more. Therefore, you would need a lot (LOT!) of income to support the debt on 100 houses owned by an individual (noting that equity would not usually be sufficient as you have to prove servicibility from income too).
In respect to advice… it’s always sensible to find your own qualified adviser(s) who can tailor solutions specific to your needs and budget.
This is a legal question, so advice might need to be sought. Some ideas though…
1. I suspect the property title will nominate the lender on it, so if you get a copy of the title you will see any encumberances – name of lender and mortgage number. Title searches can usually be done online, for a fee.
2. In my experience, mortgage defaults go to auction so the mortgagee in possession can demonstrate they achieved a market outcome.
3. I’m not sure that your status as tenant is protected in respect to notification, but I’d do some further research about whether your lease can be summarily terminated. What does the lease say? Perhaps call up the government entity that oversees residential tenancies? Does the 60 days conincide with the end of your lease? If so, there may not be much you can do.
My contribution to the discussion is via some investing principles that I have seen work time and time again:
1. The goal of getting into debt, is to get out of debt. That is, if you owned a portfolio of debt-free income producing assets then you would be somewhat inoculated against rises in interest rates, plus if you had to borrow in a hurry you would have borrowing ability based on serviceability generated from the assets. If you need to get into debt as a precursor to getting out of debt, then just make sure you have a plan for how you will service and repay the loan.
2. Better to have it and not need it, than need it and not have it. For this reason, repaying a loan and not being able to borrow it back seems a ‘less good’ option than having an offset account that you can access at call and does the same thing as repaying it. That said, consider the cost and terms of such an offset facility, as they are rarely free.
3. Money supply is more important than money cost. People are trying to save a penny here and there when being able to access finance is much more important. The borrowing rule is this: your asset’s net income return (NOI / cap rate) must be higher than the cost of finance (interest/rate of interest). If not, then you will be leaking cashflow that will need to be plugged from another source.
4. You bank dollars, not percentages. Be more worried about your worth based on what’s in your bank account as opposed to what is on your net-worth spreadsheet (that includes unrealised gains). Beware being asset rich and cashflow poor, as this often leads to “poor wealthy”, which is people who seem to have wealth but no way of accessing it (as opposed to “wealthy poor”, who have the signs but not the substance of wealth).
And a shout out to Terry & Benny… thanks for your good contributions.
Well, I greatly respect Terry as a lawyer, but to be fair to me, 0 to 130 is not a text book on trusts.
Instead, it explains the concept of how I have used (and continue to use) a multi trust structure to leverage my personal borrowing capacity.
Everything written in the book is both factual, and accurate.
Oh, and for the record, NOTHING that Terry has said is at odds with what was outlined in the book.
– Steve
BA Bus (Acc), CA, 30+ years accounting experience, 20+ years investing experience, 1000+ property transactions, borrowed millions using multi-entity structures.
This reply was modified 2 years, 8 months ago by Steve McKnight.
This reply was modified 2 years, 8 months ago by Steve McKnight.
I am not a lawyer, and as this is a contractual matter, it is important to know your rights and obligations, especially if you are overseas.
The contract you signed, together with consumer law, will determine the rights and responsibilities of all parties.
Usually, if you sign a contract and fail to perform, you will lose any deposit and have to compensate the other party for losses incurred. As such, and this is not advice, I would expect you to lose your deposit, and you may be liable for any shortfall in sales price the builder / developer incurs selling the property to another party.
The short answer is this: get legal advice, quickly. If the lawyers bring absence, you will need representation or you could find a judgement is made against you.
Absolutely, positive or negative, the result is the result.
The -22% means that for every dollar invested in the deal (your cash down), you will need to find an extra 22 cents per annum to feed the deal and keep it alive.
Be aware that percentages are really for comparison, but as my friend Marty Ayles says, you bank dollars, not percentages.
With that in mind, the bigger question in my mind is where will the $46k needed to plug the hole come from?
Finally, be mindful that any deal with negative cashflow (that is not temproary, such as curing a vacancy), must be a growth deal. And to be effective, the investment’s unrealised growth must exceed realised cash outflow. And even if it is, it will be profitable on paper, and a cash crocodile in real life.
Do your research on the parties mentioned. The truth is out there, if you go looking.
And remember, the structure needs to suit the purpose, not the purpose for the structure. Often people spend a fortune building a fortress with nothing much to protect.
This isn’t advice in any way, but some things to think about.
I’d start with thinking about whether you want to use the money for a home (lifestyle asset), or for return (investment asset). Seems to me that maybe you are looking for some stability given your circumstances? If so, maybe a home first?
If you want to invest, then you need a plan for where you’ll rent to live. If you have low income, then maybe some of that capital needs to be set aside as ’emergency money’, as once it is invested it may not be easy to get in a hurry. If so, how much of the money is for ‘at risk’ assets, and how much for ‘risk-free’?
Then you need to consider your borrowing ability. Without much income, you are probably going to struggle to borrow. That means you will need to invest using your capital, which won’t allow you to take advantage of leverage and hence you cash-on-cash return will be quite low.
Maybe a better option is some kind of listed REIT – one that offers return, diversification and internal leverage, that matches your risk profile. Do your homework. There are a few around.