Hi Felicity,

Thanks for the clarifying post.

In fact, this site does not necessarily owe any affiliate to me and I certainly don’t want it to be the “Steve McKnight” site – such as Somersoft is Jan Somer’s site etc.

I’m more than happy to be an expert, but all visitors should appreciate that my thoughts are my opinion and need to be considered and debated rather than swallowed as unquestionable fact.

This web site facility is available to any and every investor – and while the theme is +ve cashflow, I welcome any posts on any matter relating to property investing.

Indeed, I welcome constructive criticism about me [], since I’m always trying to improve too.

Bye

Steve McKnight

P.S. Re: land tax – I understand it to be a State by State based tax and that there is no connection between databases. That is, NSW land holdings are not added to Vic. to form one assessment base, rather there are two assessment basis.

The rates, thresholds etc. vary from State to State too.

Hello Jarrod,

Thanks for your post and welcome to the forum.

Let’s see if I can help you with a few of your concerns…

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I have a quick cash deal that I would like to complete on a property in Melbourne’s northern suburbs. I have a few problems with the deal, that I thought someone from the forum might be able to help me with.

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It might be wise to spell out a little more about what you mean by ‘quick cash’ – as these days that tern can mean a number of things. I expect that you mean a flip, that is, buy it and then resell it during the settlement period.

quote:

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The property is being sold because the owner has relocated to another state. It is a brand new house from a house and land package. The house is valued at 225,000-235,000 and I believe I can purchase it for about 195,000 based on conversations with the owner.

The problem is I would like to sell the house straight away but I am concerned the closing costs will make the deal not worth much at all.

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Hmmmm – it’s an interesting situation here. You have found a potentially under-priced property (I would due more due diligence to establish this) and you seem to have a sale figure in mind too (again, I suggest more due diligence to get a more reliable figure).

Your due diligence is designed to remove ‘approximates’ and thurn them into certainties. For example, stamp duty at $195,000 would be $7,360 + a $570 Transfer Fee.

The more you know about the figures the better your investment decision would be.

As for the other costs, get written quotes and turn estimates into definites.

Now let’s look at those numbers, working backwards…

Sale Price $235,000
Closing Costs ($7,930)
Legals ($500)
Landscaping ($3,000)
Agent’s Commisison ($15,000)
Purchase Price ($195,000)

Balance $13,570

Now only you can make a decision as to whether the investment is worth the risk… but if the place sells for less than $235k then in my opinion you are starting to look a bit skinny.

Alternatives

Perhaps a better idea is to try and buy an option over the property at the low price and then sell the option to someone else. This raises some issues about being a licensed real estate agent that you should investigate… but it may allow you to by-pass stamp duty and also agent’s costs if you can deal direct with the buyer.

This means you will have to mount your own advertising campaign, but more work will probably mean higher profits.

Exit Stratgey

If you go ahead, I’d also work on Plan B for the investment on the basis that you have to close… what would you do with it then and what would the financial consequences be?

I commend you on finding a deal, but would encourage you to work hard to develop a realistic plan that deals with more certain numbers and evaluates how easy it would be to find a seller willing to pay $235k in a presumably new housing estate where builders / developers might be cutting deals left, right and centre.

Good luck. I’m sure the forum would love to know how you get on.

Bye

Steve McKnight

Hi Kita,

Thanks for your post and welcome to the Property Investing.Com community.

Re: your question about wrapping…

You can do either, but I have used it to fuel the cash needed on other deals. This allows you to finance the deposit for property #2 from the wrap deposit received from property #1 and generally fast track your property investing empire.

Hope to see more posts from you again soon.

Bye

Steve McKnight

Hi Michael,

Thanks for your post.

This topic is now covered in much detail as part of the Masters seminar (about 26 pages of comprehensive notes!). It is also briefly covered in the Wrap Library.

As such I don’t plan to recover it here and potentially dilute the value of those products. AD… you can look forward to receiving all the information in Sydney in November!

However – I would say that the structure that we use is a company / trust multiple entity version.

We look to replicate the structure when we feel that we have more to lose than the cost of setting up a new structure and maintaining it with tax returns, ASIC lodgement fees etc.

Have an AWESOME day!

Bye

Steve McKnight

Hello Ian,

Thanks for making your post and welcome to the Property Investing.Com commmunity.

quote:

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Anyway my situation is that I have enough equity in my own home to borrow 110% of an investment property. Therefore when calculating cashflow on prospective properties the loan repayments include all the costs of purchasing the property. When doing this I am unable to find anything cashflow positive. My question is this, and I guess I’m looking for a yardstick here- am I being unrealistic with my expectations? Should I be paying a deposit and/or purchase costs out of my own kick so that the actual loan is less, and overall the property is then more likely to be cashflow positive? What do you think???

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You raise a very interesting question.

I think that finding a positive geared property and also gaining a 100%+ lend is a very difficult task. The 11 Sec. solution assumes that you will contribute a 20% deposit – that is, your loan will be about 80%.

I think that the answer to your question requires that you separate your property investing into at least two distinct phases.

Phase One

Finding properties that in the ordinary course of events would provide positive cashflow based on an 80% lend.

Phase Two

Working out the best and most creative way to finance those properties.

Doing this will at least allow you to find properties that in the ordinary course of investing would be +ve cashflow.

Cash On Cash Returns

If you use 100% financing then you really can’t calculate a cash-on-cash return as it is infinity.

Perhaps a way forward is to assume that you contribute x% as a deposit and then annually adjust the amount of your deposit by your interest so that you work off an accurate denominator.

The danger in what you are describing here is that you become so highly leveraged and may be prone to a collapse in a high interest rate environment.

I think that you will be OK so long as part of your strategy also involves a plan for repaying the debt and bringing your overall borrowings down.

Perhaps look at the 100%+ financing as an interim way to get into the property and then soon after look to pump some equity in that will:

1. Improve your cashflow return
2. Reduce your overall credit risk from overgearing

I believe buying properties based on 100% lends is a dangerous strategy given the liklihood of capital appreciation becoming flat and potential interest rates rises.

Has this helped?

Regards

Steve McKnight

Hi Daniel,

Welcome to the Property Investing.Com forum and thank you for contributing your post.

I have a few minutes now and I thought I’d try to answer a couple of your questions…

You ask

quote:

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Is there more differences which would be significant enough to know about? I am particularly interested in the taxation or non-taxation of money received after refinancing a buy-and-hold type property to release equity. Dolf de Roos says it is not taxable, since it is a loan. How does the ATO see this?

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With respect to the American guys who come out here, there are many differences between investing in Australia and in other places.

That is, while the psychology of investing is the same and generally speaking we use the same phrases with different words (eg. settlement vs. close), the actual ‘how’ to do it is very different.

Especially when it comes to tax and property law.

In relation to what Mr. de Roos says as quoted from you, he is right when he says that the money (ie the equity that you are redrawing) is not taxed as you have not disposed of the asset. Capital Gains Tax is triggered when you sell rather than refinance.

However, there is another dimension to this issue which may not be discussed.

While the money may not be taxable, depending on the use of the money then the additional interest resulting from your refinance / redraw may or may not be deductible.

If you use the money to pay for lifestyle related expenses, such as a trip around the world, then the interest on the refinance / redraw is not deductible.

However, if you buy income producing assets where there is the appropriate connection between investing and earning income then the interest will be deductible.

The last thing that I would want to do is have a whole lot of debt that is not deductible that I then have to repay with after-tax dollars.

What I am saying is beware about using equity to fund lifestyle expenses.

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I also see australians talking a lot about wraps, yet americans (I hang out in US forums a lot) don’t seem to mention it. What is a wrap?

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I have explained this at:
https://www.propertyinvesting.com/files/content.asp?cid=wrapintro

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And foreclosures? How do they work in Queensland or generally in australia?

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I’ll tackle this in an upcoming newsletter, but for now let me just say that the privacy laws in Australia are a lot more strict than in the wild west that is North America.

The best way to pick up a bargain is to find a motivated seller via agents rather than lenders.

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What about the business behind mortgages, such as if the banks sell them to investors after a short period.

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I must confess that I am not the expert on this, although I haven’t heard of banks selling thier loanbooks to private investors before. But it might happen…

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What about asset protection? If I have a Pty Ltd company with one property in it, it would protect me from being sued from anything related to that property, (with exceptions according to ASIC) right? WHat about protecting our empires by attacks from outside? If I have the same property inside the company, and I am found liable for something outside this property/company, how can I protect it from being taken?

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Whoa, whoa… let’s take a pause for a minute as this question cannot be answered with a three line response.

The issue you describe here is broadly called structuring and encompasses:
– Asset protection, and
– Tax planning

There is no ‘right’ answer when it comes to what structure is best, but there is a way to control your assets and not own them via a complex company/trust structure.

But this is quite expensive to set up so you want to be serious before proceeding.

quote:

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And what about these tax differences? How does GST affect us? and CGT? How does the residential tenancies authority affect us? Can we hold security deposits (bonds) from other investors when entering a deal? Or is it required to send them in to the RTA?

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Daniel, you are asking all the right questions but I tell you what… instead of just providing you with the answer how about you try to find out and post your reply. I’ll check it for you and provide some further feedback as I do.

One final point – if you are serious about investing and will be back home in November, then I suggest that you book a seat at the Property Masters seminar on 9 & 10 November in Sydney.

I can tell that you will profit greatly from attending.

Hope to see more posts from you again soon.

Once again, welcome aboard.

Bye

Steve McKnight []

Hi,

I thought I’d provide a little light reading for a Friday arvo…

A few years ago I purchased a property for $38,000 when the original list price was $50,000.

I then turned around and wrapped it to someone else for $65,000 – only to have the original real estate agent call me ‘unethical’.

I was gobsmacked and speechless, since this agency charges above market commission on the basis that they provide a better service.

“Surely”, I said “I offer a different product and a better service and charge a margin accordingly – just like yourselves.” I also pointed out that the repayments that I received were still less than the rent that would otherwise be payable.

I suspect that what the agent was really saying was that he couldn’t get the price, so how could I?

Was I unethical…????… Well you need to decide… but the property two and a half years later is valued at $67,000.

It seems to me that people are quick to point the unethical finger when the buyer is paying seemingly above market value for a property, without understanding that it is a win-win outcome over 25 year agreement and that the buyer gets all capital appreciation.

Just another example of the victim and poor me attitude that afflicts a few people who expect others to constantly bail them out of trouble. It suits them while it suits them and then it’s someone else’s fault when they have no more need.

Bollocks to that.[]

Have a great weekend – go bombers []

Bye

Steve McKnight

Hello Matt,

You seem to be on the right track.

The finance left in the deal would usually be a second mortgage. The only ‘x-factors’ in such a deal would be the time of the loan and the interest rate. Most 2nd mortgages that I have seen haven’t been for more than 5 years… but this is certainly something that can be negotiated on a case-by-case basis.

You could do up a simple spreadsheet to cope with the numbers using the @pmt function.

I might have a go at something and put it up for people to download as a freebie if enough people ask.

Bye

Steve McKnight

Hi Rolf,

Welcome to the Property Investing.Com community. I appreciate your post and welcome you to contribute at any time.

You write:

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can you define the difference between a guaranteed loan and a real loan where start-up company loans are involved, where the directors have either minimal funds and or experience in property related projects ?

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Let me say up front that if you cannot pass the usual lending requirements for funding then you will find it hard to proceed to secure finance in your own name.

Such people shouldn’t give up… they just need to either:

1. Seek money partners
2. Look to do no-doc loans

My structure / strategy has worked very well for me though considering that I’ve been able to borrow over $6m on a taxable income of less than $40,000 per annum and next to no personal assets.

It would work even better for people with more income / assets (such as their own home etc. (I rent)).

A problem that many investors find is that they quickly become ‘maxed out’ when the borrow in their own names because lenders impose a debt servicing ratio of roughly 30%.

This means that once your loan service costs reach approx. 30% of your income then you may experience trouble gaining further finance on the same terms as the loans you have already secured.

The way I have worked around this problem is to borrow in a company structure and then go personal guarantor.

This works in two ways…

1. Once the company structure has reached a maximum lend then we just replicate the structure

2. We place multiple guarantors under the structure – being me, my business partner and also our accounting practice.

The effect of doing this is:

1. Because we only guarantee rather than borrow in our own name – we are not personally ever maxed out. The Company structure may be (and that’s when we replicate)… but me/we as individual guarantors are not.

2. Becuase of the multiple guarantors under the loan – we can leverage off a greater pool of money (ie. combined gross income)and borrow more money.

Now for a few words of warning…

A. Just because I do this does not mean that it will work just as well for everyone else. But it does mean that it is possible and perfectly legal too.

B. I always provide full disclosure… but I can only answer the questions on the loan application forms presented to me. To date I have never been asked to specify what loans I am guarantor for since these are contingent and not real debts. (Although they become very real if the contingency crystalises!)

C. I am not looking to deceive or hoodwink anyone here… it’s not a loophole, since that implies something that is just not the case. It is a legitimate way to structure your affairs to gain asset protection and has been used by many, many wealthy people for many, many years.

D. Finally, what I have provided here is the briefest of overviews. The way that I do this is much better explained in the Masters Of Property Investing Seminar Notes.

Once again Rolf, thanks for your post and please let me know if something that I’ve written conflicts with your knowledge / experience.

Regards,

Steve McKnight

P.S. People with minimum property investing experience need to become educated first well before trying to implement advanced financing structures such as this.

Wei,

Why were you slammed?

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How do you guys go about structuring it? Is it as simple as purchasing in a trust using a corporate trustee (like every man & his dog does), and then borrow up to the limit, and then replicate the structure? The guys on Somersoft seem to agree that the loans guaranteed by an individual will be recorded against their personal credit history, while Steve mentioned that this is not the case.

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I can only speak for me where it is not recorded… but even if it is… so what? It’s not a real debt as such…

To date I have never been asked a single question about going guarantor on the loan for any of our investment properties purchased via the structure outlined at the seminar and included in your course notes.

Mate… when it comes to structuring there is no perfect answer for all people. If you have made your mind up about the right structure for you then the next step is to actually buy something.

Don’t worry too much what other people think… it’s what you think that matters most.

Bye

Steve McKnight