Forums / Getting Technical / Finance / advice in finance structure please

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  • Profile photo of jack620jack620
    Member
    @jack620
    Join Date: 2006
    Post Count: 20

    Hi Everyone,

    I'm about to dip my toe into residential property investing.  I'm naturally conservative with money so my strategy to date has been to pay off my PPOR as fast as possible then look at where to invest. In other words, delaying the inevitable!  However as I'm 45 y.o. I think it's time to start buying properties to build a decent portfolio before I retire.

    My current financial situation is as follows:

    Equity in PPOR is about $1 million

    PPOR mortgage $210k with 100% offset account

    My wage $200k

    Wife's wage $42k

    No other investments except super

    After some research we have decided to buy a new house in a growing area (Mornington Peninsula) worth between $500-600k.   I'm told this
    should rent at between $450-500 p.w.

    We plan to secure the IP with a deposit bond then take out two IO loans.  One for 20% of the value of the IP secured against the PPOR and the other
    for 80% of the value of the IP secured against the IP.  We will probably borrow from a different lender to the PPOR mortgage.

    Due to our different tax brackets I was advised to make the title Tenants in Common with a 99/1% split.  However I'm not sure who gets the 99% and
    who gets the 1%!  Can someone clarify please?

    I am going to see an accountant next week to ask some questions, but I'm not even sure what questions I need to be asking.

    I would appreciate any comments on my planned strategy or advice on what questions to ask my accountant.

    Regards

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Hi Jack

    If the property is negatively geared and you need to claim the negative gearing each pay period then 99% shares would go to the highest marginal Tax payer and 1% to the other owner.

    Course downside is that one day when the property becomes positvely geared then 99% of the income gets allocated to you and also if the property is sold then 99% of the Capital Gain also gets added to your Taxable income for the applicable year.

    A Discretionary Family Trust gives you flexibility when it comes to income distribution however you are unable to claim the tax losses in Trust so if this is important probably not the way to go.

    There are some excellent no frills style investment loans at the moment so splitting the loan like you have suggested is a good idea and a recommended strategy.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of BankerBanker
    Participant
    @banker
    Join Date: 2010
    Post Count: 371

    Hi Jack,

    The title will say something like this;

    99 of 100 shares; mr Jack…
    1 of 100 shares; mrs Jack…

    If this is the case you will get 99% of income / deductions
    Your wife will get 1% of income / deductions.

    The upside for you is tax benefits if neg geared – you claim…
    The down side is capital gains if sold while you have high income… Tax at your tax rate…

    Another alternative is a family trust. Trust will receive income / deductions. Profits are then distributed each year in at any desired split between beneficiaries / then taxed at their individual rates. Therefore you can give profits to your wife if you sell

    Downside of a trust is that you can’t distribute losses (only carry them forward to future years). You have high income now; therefore I would assume want some tax benefit now… Rather than not being able to claim losses until the future when the trust is profitable…

    So it depends on if you will sell in the near future.

    Peninsula is a great spot but there are pockets that have always under preformed. I would stick to Mornington, Mount Martha and Mt Eliza:- on the beach side; walking distance to cafes. You should easily get this in your budget.

    Re the structure; 20% and 80% is fine. When the investment goes up in value you can role the 20% into the core debt; thus moving 100% of the debt to the one property once it has increased in value.

    I wouldn’t worry about split banking. If the loans are not cross collateralized there is no major benefit and you will get a lower rate and single annual fee for all loans if with one bank.

    Profile photo of jack620jack620
    Member
    @jack620
    Join Date: 2006
    Post Count: 20

    Thanks very much to both of you for the detailed responses.
    I do plan to negatively gear the property and the plan is not to sell until after i retire, so I think I'll go for the 99 me, 1 wife share split.

    You read my mind Banker- I have only been looking at the "3 M's"  although beach side of Nepean highway can get a bit expensive and new properties are very hard to find in there.  I don't mind paying more for a good property, but the rents don't seem to keep up with the price and % return falls off.  I imagine you also start to limit the pool of available renters as rent goes above about $500pw.  That could translate into higher a vacancy rate which would hurt the hip pocket.   I could go for an older/cheaper property, but I want maximum building depreciation.   These probably need more maintenance too. 

    Decisions, decisions!

    Regards

    Profile photo of LHLH
    Participant
    @lh
    Join Date: 2010
    Post Count: 97

    Hey Jack,

    There was a nice little piece in the recent API magazine about investing after 40 that you might also find useful for other areas as well.

    $600K can also get you some pretty prime property in a 2-10km range of the Melbourne CBD which have been earmarked as the next "boom" areas (although you'd struggle for a house!) and you wouldn't be waiting, but if your heart's set on something new in the Peninsula…

    Best of luck with your new venture

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    hi Jack

    Since you have a high income you should be able to knock that PPOR loan debt off in 1 to 2 years. After that you should have considerable cash available so I think you should seriously consider a discretionary trust. You can start gifting cash to the trust and park it in a 100% offset account and this will quickly reduce any losses. it will also offer significant asset protection and long term tax benefits.

    Whereas if you get the property 99% in your name, then when it turns positive you will be paying 47% tax on the rent and you will cop all the CGT too. It may turn positive faster than you think once the PPOR is paid off.

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

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

    Profile photo of jack620jack620
    Member
    @jack620
    Join Date: 2006
    Post Count: 20

    Lincoln,
    thanks I saw that article.  I'll see what's available near the city too.

    Terry,
    I should have mentioned I've got 2 kids at private school, so PPOR will probably be paid off in 3-4 years depending on how negatively geared I get.  I reckon rent would have to increase from the expected $480pw to over $1000pw for the IP to become positively geared. I always thought the idea was that when an IP became positively geared you borrowed more and bought another negatively geared property so that you always have a tax deduction.  have I got this wrong?

    I will certainly ask my accountant about a disc trust.

    Regards

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Keeping on buying more may be one way to tackle the problem, but the is only so far that you can go and eventually you will be left with a huge income/capital gains with no flexibility. If you had used a discretionary trust you could give up to $16,000 pa to each kid if they are over 18 and not working (eg maybe while they are at uni) or $3,600 pa each while a minor. If you have 2 this means a potential income of $32,000 pa tax free. Even when your kids get jobs you will still be able to save tax by distributing income to your wife who is on the lower income. With a trust you get the flexibility to chose who gets the income and this can save you heaps of tax – assuming there is a profit to distribute.

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

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

    Profile photo of jack620jack620
    Member
    @jack620
    Join Date: 2006
    Post Count: 20

    OK Terry, thanks for the explanation. I'll take it up with the accountant next week.

    Profile photo of BaysideBayside
    Participant
    @mornington
    Join Date: 2018
    Post Count: 64

    The Mt Eliza, Mt Martha and Mornington area grew by 16% on average last year. The area is really booming.

    Bayside

    Coastal markets 2019

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