All Topics / Help Needed! / Advice in structuring and starting my property portfolio

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  • Profile photo of johnycitizenjohnycitizen
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    @johnycitizen
    Join Date: 2010
    Post Count: 8

    Hi all,

    I'm after some advice as to how to go about stucturing myself to start off in property investing. At the moment im a little confused as to how to go about setting up a trust. Who do i talk to? what questions do i need to ask?

    My situation:
    I'm 27, in January this year i stopped work due to a health problem(all sorted now) i haven't been back and i dont think i will. I'm still getting paid annual leave/sick leave (due to finish in the next few weeks). My income was $50,000. I plan to start renovating houses for lump sum gains.

    My girlfriend/partner earns at least $80,000 pa. 4 years ago we bought a house for $300,000. The house was purchased in her name. I'm not on any forms. It is our PPOR. Just finished paying it off but haven't closed the account down ($180,000 in front of repayments). House is worth $400,000. We have no other debts, $10,000 in cash, share portfolio worth $50,000.

    WHERE DO I START?
    I've found a house that i would like to renovate. Its $240k. after a reno it would rent for around $300
    I want to structure myself so that i can keep expanding a property portfolio.

    Any advice would be great. thanks

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Hi Johny

    Good to hear that your health problems are all sorted out.

    You will want to be very careful in going forward as if you look to redraw the $180K from the PPOR loan then the interest will not be Tax deductible.

    Also you not having an income will limit your progress in expanding your portfolio as you will be limited to your partners income and rent for serviceability.

    The structure you would probably is a separate investment Line of Credit or similar secured against your partners PPOR from which you will draw the deposits, acqusition costs and renovations amounts from and then a standalone interest only loan secured against the individual investment property.

    The entity you use will be dependant on a few things. If you are looking to buy in a Trust then you need to bear in mind that if the property is negatively geared any losses will stay within the Trust and cannot be claimed. Of course the upside if the property is positively geared is that the Trust can distribute 100% of the income to you and you will be assessed at your marginal Tax rate. 

    Whichever way you go your partner will need to be a party to any loan irrespective of the structure or entity as her income is the only income apart from potential rent that can be used to assess serviceability.

    Your Broker should be able to guide you through what could be a complicated maize.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of johnycitizenjohnycitizen
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    @johnycitizen
    Join Date: 2010
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    Thanks for your reply Richard, much appreciated.
    Technically i still hold my job at the moment. How quick would i be able to apply for a loan on my wage knowing that in a few weeks i want to quit from it. Servicing a loan isn't going to be a problem.
    The second question is, who can set up a trust fund up eg professional. How expensive are they.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    Under the new Credit Act making an application for a loan and not declaring you are likely to be leaving this shortly would fail the Responsible Lending guidelines so that course of action is out the window.

    A Property based  Accountant would be able to set up a Trust for you and costs will depend on whether you have a personal or Corporate Trustee. Allow between $800 – $1800.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of johnycitizenjohnycitizen
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    @johnycitizen
    Join Date: 2010
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    Richard,
    What would you advise that i do first. Set up a trust or a loan application.
    Will the 'quality' of the trust vary with different accountants. I expect it to be a personal trust
    Thanks heaps

    Profile photo of Richard TaylorRichard Taylor
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    Well the loan on your partners PPOR will need to be set up first and then maybe a pre-approval on the first IP (once you have decided which entity you will using)

    As long as the Trust is set up prior to the Contracts being signed / exchanged you will be ok.

    If you are wanting to set up a Discretionary Family Trust with you / you and your partner as Trustees most Accountants should be able to assist. I guess the difference between Accountants is a combination of cost, experience and expertise in purchasing property.

    Like asking some mortgage brokers to set up an investment loan when they havent even paid of their own PPOR.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of Josh AthertonJosh Atherton
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    @josh-atherton
    Join Date: 2011
    Post Count: 269

    Hi Johny,

    Firstly i would look seriously at the renovation aspect of your strategy. I know it can provide some good initial capital gains, however i would firstly look at the tax benefits it may bring. There are two people who should be paying your investment property off for you. 1. Tax Office 2. Tenant. I am assuming you may spend $50k or so renovating? being an older property, albeit a renovation in progress, you could assume that depreciation might be small. This property sounds like it will leave you with a significant shortfall on annual holding costs each year. If this is the case, it may hinder your potential to move forward when you may desire in raising finance to purchase another property to grow your portfolio.

    In this economy there are many properties that will help you minimise your partners tax as well as achieve a much higher rent in high growth suburbs/regions.

    I know this isnt a direct answer to your question but i hope it is some food for thought.

    Regards,

    Josh Atherton

    Profile photo of Richard TaylorRichard Taylor
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    Hi Josh

    If Johhny buys the property in Trust he cannot claim the Depreciation anyway so buying an older property and renovating is not going to make any difference to his strategy as the idea is to generate income not Tax deductions.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
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    Recently I have started looking at using a unit trust to purchase property. If the property is in NSW a fixed unit trust could enable the land tax free threshold to be obtained. If could also allow you to claim interest against your personal tax return by buying units in your own name, The trust would claim any other expenses in such as depreciation etc.

    This works out very similar to having the property in your own name.

    But, the units of a unit trust can be transferred, in NSW, without the payment of stamp duty (with a few conditions such as total landholdings being less than $2mil etc). A trust can also borrow money to buy your units. So after a few years when the property has increased the trustee of your trust can borrow money and buy back all, or some, of you units. The interest on this money could be tax deductible in full, or in part at least. The unit trust would covert to a discretionary trust, or part discretionary, at this time.

    Another option you will have in the future is to transfer the units of the unit trust to your SMSF, for no stamp duty, and then have the benefits of low or tax free income. The property would need to be unencumbered though.

    The biggest problem in doing all this is financing it. The trustee would be one person with the borrower another, which lenders don't really like. Also if you are converting the trust the bank's permission would be needed.

    Also CGT would be payable on any increase in the value of the units. But CGT could be minimised by transferring small amounts each year so as not to make a huge capital gain in one hit. The buy back of units would be releasing cash to you personally and this could result in tax savings if you had non-deductible debt for example. It essentially allows you to borrow for personal purposes and have the trust claim a deduction for it.

    Very rough eg. Trust buys 123 Smith St for $500,000 using unit trust. You buy 500,000 income producing units. borrowing funds to do so. Trust uses $500,000 from your purchase to pay cash. (all done simultaneously). After 10 years the property may be worth $1mil. Trust borrows $500,000 to buy 250,000 units which are now valued at $2 each. You declare $250,000 CGT, but get the 50% discount = $125,000, so may pay $60,000 CGT. You now have $500,000 cash to upgrade your home. The trust has a loan of $500,000 which it can claim the interest on. You have a new house, but still no debt. The trust is half discretionary, so you get half the income associated with you remaining units and the other half of the income can be dstributed to the lowest income earner so reduced tax is payable

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

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of WomeninPropMelbWomeninPropMelb
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    This is all very interesting reading. I learn sooo much from you guys here.
    I would suggest that Johnny sit down with an accountant who knows about property – and run through the scenarios. You might consider one of the guys posting here. You need to make decisions on your own position and desired outcomes.
    This forum is GREAT for learning and finding out where to begin.
    I agree on the reno strategy- e very careful in this- it can turn into a night mare . Get advice- or a coach.

    Profile photo of Mick CMick C
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    @shape
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    Rahrahprincess wrote:
    This is all very interesting reading. I learn sooo much from you guys here.
    I would suggest that Johnny sit down with an accountant who knows about property – and run through the scenarios. You might consider one of the guys posting here. You need to make decisions on your own position and desired outcomes.
    This forum is GREAT for learning and finding out where to begin.
    I agree on the reno strategy- e very careful in this- it can turn into a night mare . Get advice- or a coach.

    On top of that Johnny it be worthwhile contacting Richard via phone so he can go through with all your questions- it’s free and it never hurts to have a great broker on your side- like Richard :)

    Regards
    Michael

    Mick C | Shape Home Loans
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Boo_HsstBoo_Hsst
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    Just some quick maths from my first look,

    after reno income $300 * 52 = 15,600
    15,600 / 240,000  = 0.065 or 6.5% yield.  this may be an okay yield for most investers set on negative gearing, but the extra money that you spend to perform your renovation will reduce your yield.  If you quit your job what will you use the negative gearing for. 
    It might be worth looking at the maths with what it is currently rented for and possibly reduce the amount you are willing to pay to increase your yield.
    Another idea is to buy the property in both names so that your girlfriend can claim the negative gearing. 

    Just my two cents,  I am only new to investing and have already made my own problems.

    Profile photo of Josh AthertonJosh Atherton
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    Qlds007 wrote:
    Hi Josh

    If Johhny buys the property in Trust he cannot claim the Depreciation anyway so buying an older property and renovating is not going to make any difference to his strategy as the idea is to generate income not Tax deductions.

    Cheers

    Yours in Finance

    Hi Richard,

    Sorry i didnt make my point to clear there, if it was me i would be aiming to buy the properties in personal names here. I say this due to Johnys desire to build a portfolio, so over the course of 5 or 6 properties the depreciation benefits could be substantial. Whats your thought on this?

    Josh

    Profile photo of Richard TaylorRichard Taylor
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    Hi Josh

    Would slightly disagree as if Johny buys them in his own name with next to nothing by way of income he wont have anything to claim anyway. If he buys them in his partners name then this could be different.

    Remember any Capital Allowance that is claimed reduced the Cost Base down the track should the Asset be sold. 

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of Josh AthertonJosh Atherton
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    @josh-atherton
    Join Date: 2011
    Post Count: 269
    Qlds007 wrote:
    Hi Josh

    Would slightly disagree as if Johny buys them in his own name with next to nothing by way of income he wont have anything to claim anyway. If he buys them in his partners name then this could be different.

    Remember any Capital Allowance that is claimed reduced the Cost Base down the track should the Asset be sold. 

    Cheers

    Yours in Finance

    Hi Richard,

    Once again I assumed that the house would be in the partners name (as the house which they will gain equity from) and the serviceability is provided solely by her, not Johnny. I would take it by your previous comment that Johny may not be able to borrow money due to his work potentially ceasing. This then provides an income of at least $80,000 to apply tax deductions to.

    I understand that any capital purchase applies to the cost base once sold. However, this is still hard costs that must be funded in the mean time. The point I am trying to make is that if the reason for such an investment is to make money (which one would assume is the case) in both yields and capital growth, then this may not be the most cost effective option that provides the best short, medium and long term ROI.

    Cheers,

    Josh

    Profile photo of Property TraderProperty Trader
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    Hi johnycitizen,

    Look like the guys in this thread are giving you heaps of good technical comments, so I will concentrate on some practical advice on the topic of being a renovator from my experience. We’ve done around 30 renovations over the past 10 years amongst other property transactions that were done.

    1. The key principle that I live and breathe by “Is That You Make Money When You Buy”, I find a lot of people say that and very few people actually do it, especially in the renovation game. Therefore as the statement says you need to buy extremely well from the outset. The average person finds it difficult to put offers on properties at 20% to 40% below the market. If you buy extremely well at the start that covers any learning experiences on the way, any renovation blowouts or a drop in market value to name a few.

    2. You need to have a thorough understanding of the market/suburb you renovating in. An example of this is where I saw a person overcapitalise on a property in an extremely high rental area and the funniest thing I saw was that they had installed water tanks on the property. If they had done their research they would have realised that no house in a 2 km radius had water tanks. Because they had overcapitalise their $290,000 house, it was on the market for $360,000 to recoup their costs and had priced themselves out of the market.

    3. Understand the true costs of doing renovation.

    I hope this helps you and your investing endeavours.

    Cheers … Jason Moore

    Property Trader | Boston West Pty Ltd
    http://bostonwest.com.au
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    Private money lending opportunities available paying upto 12%, secured by bricks and mortar!

    Profile photo of WomeninPropMelbWomeninPropMelb
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    @womeninpropmelb
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    Property Trader, this is great advice. Make offers and walk away. As an investor, you need to be able to walk away. There WILL be another deal tomorrow. Agents will always make you believe it is the LAST deal on earth- that is what we do. We as agents must love every deal we have. As an investor- there will be another one tomorrow.
    Do your sums and do the research. Dont over capitalise. Swimming pools are another area-cost a heap, look great but will cut your buyer population in half.

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