All Topics / Finance / how to maximise available cash

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  • Profile photo of niniebearniniebear
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    @niniebear
    Join Date: 2003
    Post Count: 19

    Hi everyone,
    I’m hoping that someone will be able to give me a few pointers with my financial situation. I have 250k in cash as a result of a successful development done 2 years ago. Since then, I have been passive, but am now roaring to go again. This time, I would like to concentrate on buying +CF properties. What would be the best way to maximise the leverage of this available cash. The thing is, although I have this cash I have no income. So, should I:
    – use the cash to buy one (or a few) investment properties outright and use the equity and rental income from that as a basis to apply future loans? Would this first property owned outright be high rental yield with low capital gain potential or would it be better to buy a low rental yield with high capital gain potential.
    – only use part of cash to buy 1 investment properties, leave aside say $100k to use as deposits on loans secured on the equity of the unencumbered properties.
    – use the cash only as deposit and still use OPM to buy the IPs. But what would the loans be secured against?
    – any other effective methods?
    I would appreciate any advice you may have. I look forward to reading them.

    Thank you,
    N

    Profile photo of KSKS
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    @ks
    Join Date: 2005
    Post Count: 16

    Firstly I want to say I am not by any stretch of the imagination a ‘guru’ and am myself in a similar quandry in regards to buying my next IP – but with very different problems.

    Unfortunately the first glaring problem you have is no income.

    Essentially no matter how roaring to go you are, without an income base you are going to find doing anything from here difficult.

    If you are relying on that money to survive most lending institutions wont even look at you to borrow money.

    The fact is that from what you have posted you are all cashed up but present a very high lending risk.

    1) What debts do you have?
    2) Where do you live — Parents? Friends give free board? Or do you pay $500/week rent out of your current cash hoard.
    3) What is your investment history like?
    4) Do you intend on working soon?

    You see without further lending you have ZERO leverage. No income means no lendining which means you can ONLY buy what your 250k allows you to.

    Another big problem you have is finding CF+ properties. They do exist but with no income how will you maintain them?

    Even when you buy a CF+ve property you need a fund in place for emergencies etc ($20,000 is my fund), and you may experience extended vacancy periods etc no matter how good the property looks.

    To be blatantly honesty the ONLY option I see for you is to buy an ultra cheap property that will allow you to have some money left over for emergencies and use the income it provides to save a deposit for another property.

    But I dont see how you are going to do this since you have no income you surely would need the money to live on?

    You would open a vast array of options to yourself if you aquired an income. Even a small income would give you a massive boost in servicability credibility in the eyes of lenders. Otherwise you may have to go to private lenders and experience very expensive forms of lending.

    What I would do:

    1) Get a job

    2) In quick sucession find 3 cheap fix-up properties around the $200,000. Go for future growth and medium rental return, neutral or very slightly negative geared. Much easier to find also. True +ve geared properties at the moment are in general in very risky areas.

    3) Place a $40,000 deposit on each to avoid MLI, some investors like MLI – I dont.

    4) Do 10k reno on each property to achieve at least a 25k boost in market value.

    5) Put $80,000 in a REALLY good managed fund that achieves about 20% gains. Navra fund has been good. This diversifies your portfolio and gives you a much better servicability as you can claim any profits as income.

    6) Put remaining $20,000 in an offset account or LOC. If you have a low income at this point put half into a direct offset and other half into a personal LOC account to make tax easier at EOY.

    The above does not take fees etc into account but you can tweak it and use your imagination to take it into account.

    What you are left with is:

    1) $675,00 in property (195k in equity)
    2) $80k in shares generating more $
    3) $20k for emergencies and saving you interest
    4) 3 sources of passive income from tennants

    This is currently the plan I am working on myself, but with a slightly different mix of property types and values. But the principle is the same. Yuo dont need to stop at 3 properties. Once your income and equity grows you can start accumulating more valuable properties and the sky is the limit!

    Keep your options open. Be dilligent, but dont procrastinate as that sometimes costs you more than jumping in head first.

    <KS>

    Is it about the money?

    DAMN STRAIGHT IT IS!

    Profile photo of niniebearniniebear
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    @niniebear
    Join Date: 2003
    Post Count: 19

    Wow KS!
    Thanks for your input and suggestions. very interesting and definitely an eye opener. To answer your questions:
    I don’t have any debt per se-I use my credit card as a convenience and pay off everything on the due date;
    my investment history in property has only been 1 buy-slightly develop-sell;
    I’m married and my husband who works full time takes care of all our living expenses;
    I own a small business and any profit that makes is plowed back into the business – thus no income.
    The situation might sound strange but I’m just a frugal person who is committed to working towards financial independence and has survived on no discretionary income for the past 12 months. I used to be a highly paid employee and have savings, but that’s for a rainy day. I quit and started my own business to build a better financial future for my family. In the meantime, my husband is bearing the financial burden of the household. We are using a trust and company as trustee. We don’t want to use my husband’s income to apply for the loan as he has assets that we don’t want to jeopardise.

    I’m curious though, you mean that even if I buy say 2 properies with total value of $200k, and I still have $50k to place deposit on next property, the bank won’t loan me money using the equity in the 2 owned proerties and the rental income from the 2 properties and the 3rd one being borrowed for to service the loan?

    Any other input and opinions are welcome!

    Thank you.
    N

    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    You cannot apply for a standard loan without an income regardless if you had no property or millions in unencumbered property. You cannot even apply for a low doc loan unless you lie because you are required to state an income and the ATO is auditing these intermittently.

    The only option is no doc but you will be restricted to about 65% LVR. No income figure is required to be stated or proven.

    TMA


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    Profile photo of MagellanMagellan
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    @magellan
    Join Date: 2003
    Post Count: 50

    Ninie and TMA –At present surely Ninie would have an income– i.e Interest on her $250k say at term deposit rates of 5.5% p.a =$13750.(unless she has it under her matress LOL) When she bought the 2 houses she would then have the income from the rent to state as her income. All the best

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Nine

    One possiblitiy is to lend your money to your trust and then to buy a property for cash. Buy only bargins and Stack the contract up higher with a rebate on settlement.

    Then after settlement apply for a loan to release your funds. If you have purchased well, the valuation should come up higher and you may be able to get a loan close to 100% of what you paid for.

    Repeat the process.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of niniebearniniebear
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    @niniebear
    Join Date: 2003
    Post Count: 19

    Thanks everyone,
    But isn’t Magellan right? Wouldn’t the rental income be considered income?

    N

    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    When you apply for a loan, you have to state your assets and liabilities as well as your income and expenditure. The interest on your money as presented by Magellan would only just cover your living expenses for a single person with no children and no other expenses at all. This is highly improbable for anyone.

    The rental income will be used for serviceability but most lenders will only look at 70-80% of it. There are also many expenses involved with property as well as vacancies. In any case, you would need a very very positive cashflow property to cover your loan repayments, your living expenses and any other expenses you may have (eg: car, phone, electricity, rent, credit card, etc). Living expenses are only in relation to food, clothes and personal items.

    TMA


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    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    I almost forgot…

    The interest would not be considered if you were using the funds to buy a property as it would cease on settlement of the property. That would leave you with ONLY the rental income. Rental income is not very certain. Income from established employment is far more certain.

    TMA


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    Profile photo of Robbie BRobbie B
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    @robbie-b
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    Originally posted by Terryw:

    One possiblitiy is to lend your money to your trust and then to buy a property for cash. Buy only bargins and Stack the contract up higher with a rebate on settlement.

    Then after settlement apply for a loan to release your funds. If you have purchased well, the valuation should come up higher and you may be able to get a loan close to 100% of what you paid for.

    Repeat the process.

    Can you explain this further? What is the point of lying on the contract? Won’t you pay more stamp duty????

    If this generates an income somehow, then there is tax on that income isn’t there?. I don’t see how giving away thousands to demonstrate a fake income benefits someone without any real income.

    TMA


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    Profile photo of TerrywTerryw
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    @terryw
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    It is not lying on the contract. Stacking the contract may be a way to get a higher valuation after settlement. Since you are not getting a loan at settlement, there would be no lying to the lender needed. After settlement, the lender will not require a copy of the contract, but will just go on the valuation price of the property.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of MagellanMagellan
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    @magellan
    Join Date: 2003
    Post Count: 50

    Not trying to argue — just trying to explore different scenarios— Could Ninie say that as she is married she does not have any of those living expenses as she does not work and her husband supports her entirely? So the income from her Capital is entirely “play money” I have not been in the clutches of the banks since about 1992. We in fact have been acting as a bank for our kids when we can. However Knowledge of Lenders requirements is useful and I appreciate all your posts.

    Profile photo of KSKS
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    @ks
    Join Date: 2005
    Post Count: 16
    We don’t want to use my husband’s income to apply for the loan as he has assets that we don’t want to jeopardise.

    Now unless you are currently living very close to the danger zone then the careful spending of your money wont jeoparise your other assets at all – just steer clear of high risk purchases.

    As long as you go for a few properties with a deposit of 20% or more and go as close to CF pos/neutral as possible you will fine.

    Several people have already correctly stated that rental income is only considered 80% when put towards income, and even then it is only considered a bonus towards servicability if you attach it to a primary source of income.

    To put things into perspective for you:

    My GF and I = 90k income/year combined.

    NO DEBT at all bar tiny mortage on IP property which was CF +ve.

    To build my last property I came close to 80% LVR and still had a bit of a tussle with the bank.

    Now what your going to be doing is the same process but with NO INCOME at all.

    Now if you use hubbies income then asked for a small loan when the properties your buying can be as low as 50% LVR you would be laughing.

    <KS>

    Is it about the money?

    DAMN STRAIGHT IT IS!

    Profile photo of KSKS
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    @ks
    Join Date: 2005
    Post Count: 16
    Not trying to argue — just trying to explore different scenarios— Could Ninie say that as she is married she does not have any of those living expenses as she does not work and her husband supports her entirely? So the income from her Capital is entirely “play money” I have not been in the clutches of the banks since about 1992. We in fact have been acting as a bank for our kids when we can. However Knowledge of Lenders requirements is useful and I appreciate all your posts.

    Nope this is not possible I am afraid.

    Marriage alone is not sufficient justification and would DEFINATELY require Ninie to then put forward her husbands income/assets as security against the loan.

    Some instances will warrant flexibility – but when it comes to banks and risk with their money their caution is absolute.

    They cant go to their insurance company claiming for losses if there was a default on the loan and say “but they said they were married” and then expect a big payout.

    Not having a go Magellan – just being brutally honest [blink]

    My parents have been the ‘bank’ for me also this year, got a loan for my 2 cars off them which will be paid back plus interest next year – enabled me to move fowards like I have in a much shorter space of time.

    Good on you for helpin gyour kids out – I find it teaches a healthy respect for money also – but only if you enforce it like a bank would minus the red tape.

    <KS>

    Is it about the money?

    DAMN STRAIGHT IT IS!

    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493
    Originally posted by Terryw:

    It is not lying on the contract. Stacking the contract may be a way to get a higher valuation after settlement.

    Can you define “stacking”?

    I take it as putting a misleading amount on the contract. Misleading referring to NOT the true purchase price. How does this differ from lying? I believe this is also prohibited in legislation hence the advantageous purchase requirements most lenders have when a contract is below market price. I am sure this would also work the other way.

    Can you outline the process you mentioned above please? How does this “stacking” etc generate a useable income for serviceability and not lose you thousands in additional stamp duty and tax?

    TMA


    http://www.email4money.info
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    Profile photo of MagellanMagellan
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    @magellan
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    Thxs K S for clearing that up My queries just show that I have been married a Verrrryyy long time —-LOL–

    Profile photo of zenqzenq
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    @zenq
    Join Date: 2005
    Post Count: 26

    Could you use your husbands income to service the loan, but use the properties purchased as security? I might be missing something but I wouldn’t expect a problem with this unless he is already heavily exposed.
    If you want to make the most of cash, perhaps a reno or a joint venture would allow you to build up more equity.
    Wish I had 250k cash to play with!!!!!!

    “If you look long enough into the void the void begins to look back through you.” Nietzsche

    Profile photo of Robbie BRobbie B
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    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213
    Originally posted by TMA:

    Originally posted by Terryw:

    It is not lying on the contract. Stacking the contract may be a way to get a higher valuation after settlement.

    Can you define “stacking”?

    I take it as putting a misleading amount on the contract. Misleading referring to NOT the true purchase price. How does this differ from lying? I believe this is also prohibited in legislation hence the advantageous purchase requirements most lenders have when a contract is below market price. I am sure this would also work the other way.

    Can you outline the process you mentioned above please? How does this “stacking” etc generate a useable income for serviceability and not lose you thousands in additional stamp duty and tax?

    I am unaware of any legislation covering this.

    Stacking the contract up to a higher amount would result in a higher stamp duty amount payable. It would not help serviceability, but may help you get a subsequent valuation higher and this could result in less money needed in the deal.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Robbie BRobbie B
    Member
    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    Stacking equals lying equals fraud.

    For example, you buy a property for 200k. You ask the vendor to put 300k on the contract and kick you back 100k (why they would do this I don’t know as they would have to pay CGT on the extra 100k as well). You pay the extra stamp duty. The contract is stacked!

    You go for a loan later and request a valuation. The valuer asks you how much was paid for the property. You tell them 300k. There is the lie!

    You submit the loan applicationand fill in the box that asks for purchase price of the property. You write 300k. There is the fraud!

    Read the fine print in loan offer documents. This is illegal and can result in the lender taking possession or calling in the loan.

    Now the next bit really confuses me…

    Originally posted by Terryw:

    Then after settlement apply for a loan to release your funds. If you have purchased well, the valuation should come up higher and you may be able to get a loan close to 100% of what you paid for.

    Where does the income come in to obtain the loan? You will not be getting any more rental income by ‘stacking’ the contract!

    This practice is pretty dodgy Terry. Please tell me you have never done it!

    TMA


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