All Topics / Value Adding / Reno fliP finance

Viewing 16 posts - 1 through 16 (of 16 total)
  • Profile photo of waydo77waydo77
    Participant
    @waydo77
    Join Date: 2011
    Post Count: 155

    Hello there,

    I am looking at doing a Reno with my partner and have just realized a few things so I have a few questions that I know you intellectual ladies and gents will be able to help me with..

    First off our plan is to buy, renovate and sell within 2 months, generating some small cash profits.

    My questions for the finance side of things are-

    1 – would it be better to put the loan in my name or joint, considering my partners income is around 60k and mine is 100k per year meaning she would pay less CGT I’m guessing.
    2- if a broker obtains a loan for us do they still retain their commission even if the loan is paid out within the following months, I know they don’t receive trailing commissions but yeh.
    3- is there a certain loan structure that is best for renovating and flipping? Surely the banks wouldn’t be willing to lend all the time if they know you are just going to pay it back straight away?

    Thanks in advance for all your wisdom.

    Wade

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

    1. If you are going to be making a profit then a trust structure would be worth looking at
    2. No, brokers must give back the commission if the loan is repaid within 12 to 18 months
    3. Best to borrow off other property and pay cash if possible. If not then not much you can do, don't fix, keep it variable.

    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 Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Due to the clawback, the broker will need to charge a service fee – otherwise it’s simply not financially viable for them to write the loan.

    If going direct, probably not a good idea to inform the lender that you plan on paying out the loan within a few months.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    As Terry mentioned a Trust structure is probably certainly worth considering especially if you intend to do it a few times.

    We have many a client who do small development style projects and there is a couple of ways around it with the financing.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Also what name the loan is in makes NO difference to CGT. It's who owns it (as in who is on the contract).

    Profile photo of gibbo1gibbo1
    Participant
    @gibbo1
    Join Date: 2008
    Post Count: 152

    Hi,

    As others have mentioned the broker will have to payback the commission. If you talk with the broker about what your aims are they can arrange a service fee to ensure they make money but a good broker should realise that you will become a regular customer in the future and help make it beneficial to both.

    Regards

    Gibbo

    Profile photo of waydo77waydo77
    Participant
    @waydo77
    Join Date: 2011
    Post Count: 155

    thanks for your help guys, it sounds like the easiest way to go about it is to lie..haha

    richard and jamie, do you guys deal with many clients for any small development or renovations that have intentions to buy, reno/develop/subdivide and offload it asap?

    do you charge an upfront fee for this?

    cheers

    wade

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    waydo77 wrote:
    thanks for your help guys, it sounds like the easiest way to go about it is to lie..haha richard and jamie, do you guys deal with many clients for any small development or renovations that have intentions to buy, reno/develop/subdivide and offload it asap? do you charge an upfront fee for this? cheers wade

    Hi wade

    Yep – and we need to charge a service fee for these sort of deals. As much as I love my job – I'm not prepared to do it for free :)

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of waydo77waydo77
    Participant
    @waydo77
    Join Date: 2011
    Post Count: 155

    Sounds fair to me, are the same banks willing to lend again once u have used them and paid out the loan straight away though?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Wade

    Yes like Jamie we do a fair amount of this sort of business for forum clients but we dont charge a fee.

    There are a couple of reasons for this and will depend on the deal.

    I have a couple going at the moment where the client has completed the reno and is looking to sell within 3 months of Settlement.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of wisepearlwisepearl
    Member
    @wisepearl
    Join Date: 2009
    Post Count: 264

    something else you could discuss with a lender/broker is setting up a loan with a bank who allow substitution of security for the loan. So you could buy a property (could do loan in joint names to get better borrowing capacity but put contract in partners name only if tax works out better), then when it comes time to sell the house and realise the profit – instead of DISCHARGING the loan and releasing the title, the bank can deposit funds from the proceeds of sale pretty much equivalent to the loan value and hold this in a term deposit and keep the loan alive. Then you buy next property and substitute the security of the deposited funds to the new property.

    An example:

    Buy a house for $320k, get an 80% loan for $250k

    Sell renovated house for $450k, put >$250k (bank may request $255 or 260k, need to check with their policy) in a term deposit and secure the loan of $250k against this deposit and release the title. Loan gets paid at 6.5% interest, or whatever it was already on and monthly payments continue. Deposit earns interest at 5% ish, leaving a funding shortfall of 1-1.5% interest to keep loan alive. Obviously this is not ideal if you leave a lengthy time between deals, but if you’re looking to regularly turn over a new transaction then the cost of a few hundred dollars in interest for a month or two may be well worth it.

    What this means is one ongoing loan rather than having to reapply each time for a new loan. The lender could set it up and keep trailing commissions. Less credit applications/checks on your credit history, and a better long term relationship with the bank + lender.

    Any of the experienced brokers on here will no doubt have an opinion on this strategy and I’m looking forward to reading their replies. Please note I am not a finance broker nor advisor, but am an investor that is currently talking to my bank now about this exact scenario as it suits my personal circumstances.

    As a side note there are some banks out there that will not clawback commissions from the broker, so it can always pay to check if the recommended product for you does clawback or not. If not, let the bank pay the broker, if it does then dip into your pocket and pay for their advice. Be open and honest about everything with a broker, they’re an important member of your investing team. but if you choose to go to a bank direct, you don’t need to share all plans with a lender… just confirm the portability of loan ;)

    Good luck!
    Emma

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Emma raises a couple of good points.

    If the loan product allows for "portability" you might be able to shift the loan to a new security once you've sold up.

    If you're happy to use a lender that doesn't claw back the brokers commission, then it would be reasonable for the broker to waive the service fee (because they're getting paid). It's just a matter of ensuring that the loan is the right fit for you irrespective of whether there's a claw back or not.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of wisepearlwisepearl
    Member
    @wisepearl
    Join Date: 2009
    Post Count: 264

    Jamie – in the above situation, given the original loan account was for investment property and provided the new purchase is also for IP, can one safely assume that the income payments required to keep the loan alive can therefore be tax deductible as they are borrowing costs for investment purposes?

    OR do they lose their tax deductibility because the loan is not at that time used for an income producting purpose? though one could argue there is interest being earned off the term deposit held as security?

    let me know your thoughts on this, otherwise will flick it to the accounting forum and see what any of the tax gurus have to say.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hiya Wisepearl

    I'm not an accountant but I'd assume the purpose test would be applied when porting the loan to a new security. If the loan secures an IP and then ports over to secure another IP, then I can't see why the debt wouldn't remain deductible the entire time.

    Is that what you mean?

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of wisepearlwisepearl
    Member
    @wisepearl
    Join Date: 2009
    Post Count: 264

    More or less, yes Jamie :) but if there’s a brief pause between IPs and loan is secured over a term deposit at that time? My thoughts are that the funds should remain deductible so long as the loan then gets ported to a new IP.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213
    wisepearl wrote:
    Jamie – in the above situation, given the original loan account was for investment property and provided the new purchase is also for IP, can one safely assume that the income payments required to keep the loan alive can therefore be tax deductible as they are borrowing costs for investment purposes?

    OR do they lose their tax deductibility because the loan is not at that time used for an income producting purpose? though one could argue there is interest being earned off the term deposit held as security?

    let me know your thoughts on this, otherwise will flick it to the accounting forum and see what any of the tax gurus have to say.

    Interesting questions.

    The interest on money borrowed to invest in a term deposit with an interest rate lower than the loan rate normally woudn’t be deductible as it is not a commercial transaction.

    But if it is temporary and the new security also becomes an IP straight away then it may be arguable that it was done in the production of an assessable income. I don’t know the answer, so make sure you get some tax advice.

    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

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