Hi Felicity,

Congrats! You have managed to completely confuse me with your post []

As far as insurance goes, here are my thoughts:

1. You should insure the property for land and building insurance the second you sign the purchase contract. It’s a bit like getting car insurance before driving out of the car yard.

2. In a wrap you have two choices:

Option A: Have insurance in your name and have your mortgage and your client registered as having an interest in the policy. You pay and then get reimbursed by your client, OR

Option B: Have the insurance in your client’s name and have you and your lender noted as having a registered interest. Your client pays the policy and sends confirmation by way of a certificate of currency to you.

If you go with Option B then make sure any insurance proceeds go to you direct.

Whatever you decide, be very careful to ensure that you find out all the information about your client to ensure they don’t have a horrible past that may allow the insurance company to later claim that they wouldn’t otherwise of insured the property and that you didn’t make a full disclosure.

Some time ago I was working with an insurance broker to develop a wrap specific policy that protected against this risk. Negotiations stalled when they went broke and now I’ve had to start the ball rolling again dealing with someone else.

So much to do, so little time… I’ll report back if I hear any news.

Regards,

Steve McKnight

Hi Gavin,

The item you refer to is the Property Secrets Revealed folder that I created for the Break Free Events presentation.

The offer was $495 for the folder and as part of the package you received a $600 discount off the upcoming Australian Masters of Property Investing event. As you can tell, for someone lucky enough to secure a seat, this was a great offer as you essentially received the product for free.

This was a special joint-venture product that I did for BFE. At this point I have withdrawn the product, but I do plan to release it later in the year with a tapeset based on one-to-one interviews I am completing with a selection of investors who I feel have excellent advice for all property entrepreneurs.

Stay tuned for more information in about October.

Regards

Steve McKnight

Hi Alf,

Something that you wrote caught my eye and I thought it owuld be wise to flesh it out for all community members…

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I bought a torrens title townhouse in cbd adelaide about 2years ago off the plan. I furnished it so it was utilised as a service apartment this gave me building depreciation of 4% and not 2.5%…

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Having researched this in more detail, here’s what I have found…

The normal building income-producing building write-off is 2.5%, but because you are offering short-term traveller accommodation (ie. serviced apartment), you are allowed a 4% write-off.

Of course, you are not entitled to a bigger deduction over the life of the project, just a quicker deduction (over 25 years rather than 40 years).

Now your furniture is outside of this building writeoff deal – as it is a fixture and fitting and not part of the capital structure. Furniture is usually depreciated in five years or less.

As for your deal…

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This larger company is offering us a more comprehensive lease that ties the property up for about 20 years 5+5+5+5 at the end of each term they chose whether they want another term (if they do you have to give them the right of the next term). They are responsible for a signifanct part of the outgoings and management of the property. The catch is that you hand over the furniture to them for one dollar if they chose to go another term. There argument is that one has depreciated the furniture so it costs the owner nothing.

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Yeah – seems like a creative deal, to be sure. You need to weigh up the risk vs. reward, but I’d probably go for it depending on the value of your furniture. A couple of questions in the back of my mind though are:

1. Do you have to replace the furniture every 5 years?
2. How good is the reputation of the coy behind the rental guarantee?
3. Are there any restrictions on you selling it?
4. How are rental increases handled?
5. How are the units booked and what is the penalty for vacancies and strategy for attracting clients?
6. What are the management fees?

You could always go 4 out of the 5 years and sell it in the 5th year to somebody else who probably won’t be careful enough to read the fineprint in the lease and it will become their problem.

Having said that – watch out for a company that ties up management of the place but has a relaxed marketing policy about actually renting them, or worse, if they own the majority of units and have a policy of renting theirs out first and leaving yours vacant. It’s been done before by some dodgy folks in Qld!

Bye,

Steve McKnight

Hi Josh,

Thanks for your post [] and congrats on your potential purchase.

Re: your question about the FHOG. I have cut and paste the following text from the State Revenue Office web site…

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ARE YOU ELIGIBLE?

To be eligible to receive the grant, an applicant and the applicant’s partner must meet certain eligibility criteria.

An applicant or the applicant’s partner must

*be a natural person (not a company);
*be an Australian citizen or a permanent resident;
*not have owned a home before in Australia;
*occupy the home as their principal place of residence within 12 months; (emphasis added)
*not have received the FHOG before; and
*not have entered into a contract to purchase or build a home before 1 July 2000, or not commenced construction as an owner builder prior to that date.

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On this basis I’d imagine that so long as you had the intention of living in the property within 12 months then you’d be OK. Perhaps be careful to only sign a lease with the tenant for less than 12 months from the date of purchase, otherwise it could be construed that you didn’t have the intention of living in it… otherwise why would you have rented it out for >12 months?

As for your property… seems like a good starter property to learn the ropes with. Just be careful on the body corporate fees.

Regards,

Steve McKnight

Hi,

I did some surfing and found the following information that seems to be relevant about title insurance…

Source: http://www.oldrepnatl.com/

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What is Title Insurance?

Title insurance is an exclusively American invention. Its purpose was well stated in the first advertisement for title insurance back in the late 1800s:

“This company insures the purchaser’s of real estate and mortgages against loss from defective titles, liens, and encumbrances. Through these facilities [the] transfer of real estate and real estate securities can be made more speedily and with greater security than heretobefore.” [circa 1876]

Protecting purchasers against loss is accomplished by the issuance of a title insurance policy, which states that if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy.

Title insurance differs significantly from other forms of insurance. While the functions of most other forms of insurance is risk assumption through the pooling of risks for losses arising out of unforeseen future events (such as death or accidents), the primary purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject of real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

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Title insurance is a uniquely American concept and is not needed here in Australia as the process of conveyancing completes the checks that you would otherwise pay the Title company for.

Hope this has helped.

Bye

Steve McKnight

Hi CY,

Thanks for making your first post and I invite you to keep posting in the future too.

I’ll try to answer some of your questions…

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1. Do I have to tell my bank If I ‘m going to wrap the property? If yes, is it BEFORE or AFTER settlement ? What is the penalty (if any) if I didn’t tell?

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I would encourage you to adopt a policy of being totally honest with your lender and certainly put it in writing that you intend to wrap the property.

Telling half-truths is no way to be investing tens of thousands of dollars.

I am currently working with a mortgage originator who has mentioned that he’s sourced a financier who is happy to do wraps… I’m building the details as a new part to this website and hope to release it soon.

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2. Do big banks /major financiers allow wrap? or do I have to settle with the ‘low doc’ products?

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Obtaining finance was certainly easier when I began wrapping than it is today and it seems that the big banks are not interested given the demand for home loan products associated with the latest boom.

As for a low doc loan – I’d only use this product if you don’t qualify for regular finance due to the interest premium charged.

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3. What is the ‘proof’ of home ownership to the wrapbuyer? (since I have the title in my name)- so that if I go bankrupt the house stays with them –

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Usually your purchaser will place a caveat on title stopping you from selling or refinancing the property from under them.

However, there is no guarantee you can offer except to point out the biggest reason you’ll go bankrupt is if they stop paying… so as long as they keep paying then…

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4. Do I have obligation to let the wrapbuyer know what is my loan balance ?

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No, although in Vic. you may need to establish that you are appropriately paying off your loan from the proceeds they pay you (ie. at least the principal version).

But under a policy of full and honest disclosure – why wouldn’t you show them if it builds trust?

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5. In NSW , can I legally pay IO to my original loan & charge PI to wrap buyer ? (increase cashflow)

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I don’t know the position in NSW, but I’d be very surprised if you could do this. I am certain that this is not possible in Vic.

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6. If I put and/or nominee- and we have same day settlement with the wrapbuyer- do I still need to pay stampduty?

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CY – this is a question to ask your legal adviser as the rules vary for State to State.

Out of interest though and for discussion purposes, in Vic. the nominee clause only applies where you know the nominee before you buy the property and they have appointed you as thier agent.

You are also not allowed to earn a commission.

That’s why I point out the need for appropriate legal advice in the State that you live in (NSW?)

Regards,

Steve McKnight

Andrew,

The business that we use to establish entities for our accounting clients, together with an outline of their pricing, is http://www.shelcom.com.au/services.htm

You might also expect to pay about $400 (2 hours) of time for your accountant / lawyer to fill in the necessary paperwork and ensure that the documents you receive are correct.

Accordingly, the $1,650 you were quoted does not appear to be unusually large.

Regards,

Steve McKnight

Andrew,

In your circumstance outlined here, my opinion is that when you are cashed out in three years time you would need to pay the balance of the CGT… probably on a gain of about $19,000.

Now, the actual amount of tax that you pay would depend on the entity you have purchased the property in and your own personal ‘structure’.

If you purchased it in a company, the you would pay tax at a flat 30% ($5,700).

In your own name you would get a 50% exemption, but you may pay at the top marginal rate???…???

I suggest you talk to Mark about this when you meet with him in the next few days.

Bye,

Steve McKnight

Edited by – [email protected] on 20/06/2002 12:11:40 PM

Hi Felicity,

Just taking Darren’s point a little further…

Just as the Commonwealth Bank would keep a set of keys to a home, neither do I and it would be certainly inappropriate to just barge in.

However, the contract that I use for my wraps contains a special condition that does allow me to gain access to the property to ensure that there has not been any unauthorised renovations, or that any agreed upon renovations have been done according to my consent and specifications.

To date I have not found need to use this clause, but it is a handy power to have just in case.

Bye,

Steve McKnight