Hi all, I'm trying to work my head around some options with going ahead with our property purchases and would appreciate any advice. As with many first timers, we have 3 negative geared properties and we're close to the end of our cashflow and borrowing capacity. Just to give you some facts:
Ownership is broken up into:
1 house – 50% owned by my husband ($300k value – $250k loan)
1 apartment – 100% owned by me (approx $440k value (conservative) – $370k loan) – prev PPOR
1 house – 100% owned by my husband and me ($485k value – $460k loan) – looking to add value with minor reno at the end of the year when tenants move out.We are currently renting.
My apartment is on a fixed rate of 8.29% and hurting abit as rent is only receiving $390/wk (renting to a friend so should really be about $430/wk). Break costs, as of today is $11,300. I have 2 yrs of my rate to go.
We would like to free up some capital to be able to invest in some small developments (subdivisions/renovs) so are considering selling my apartment. In terms of options, Im wondering whether I should:
1) sell now at say , $440k – $450k (minus agents fees (2.5%?), break free, other fees and loan) – approx remaining $54,000 (cgt free) ; or
2) refinance at approx 6.5% and selling as a vendor finance arrangement for $460k at 8% with a 5% deposit ($23,000) – which will improve cashflow and some initial cash but only be able to get the capital once the purchaser refinances in say 2 or more years.We want to increase our borrowing capacity and would like to set up a trust (with 4 beneficiaries) for our next project with the intention of it being income producing. Seeing the bank will assess the trustee's income (either mine or my husband's as guarantee) – are we better off having less debt now (from selling my unit and increasing the LVRs to 80% in our other properties) or increasing our cashflow with vendor financing?
I read in Steve's revised book (pg 175) that "if you've already borrowed in your own name or have significant personal debt then this strategy (using a trust) will be of little use, because any exisitng debt you have it deducted from you borrowing capacity. That's why it is important to have a high income and little or no personal debt".
Any opinions on how we should move forward?
Thank you in advance!
Setting up a trust will not help borrowing capacity as the lenders will still lend based on overall borrowings and loans guaranteed.
If you have less debt it will help your borrowing and so will more income. If you are reducing debt it would be good to reduce personal debt because the interest isn't deductible and there is no income produced from the borrowings (such as rent). But if you sell your house and are renting most lenders will take the rent you pay into consideration too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Agree, there is a myth out there that setting up a trust/company will increase the servicibility.
The reason is people does not understand what trust isIf you sell your prev PPOR (i.e. apartment), you will encounter CGT. You are only allow 1 PPOR at any time.
Thanks for the replies guys.
TerryW – we don't have much personal debt (some low limit credit cards which we pay off monthly). Everything's investment debt so we do get a healthy tax deduction every year. I guess its just a matter of increasing the equity/savings and cashflow. Will consider turning my unit from negative to positive cashflow via VF arrangement to improve our cashflow.
God_of_money – we're renting as we decided that it was economically more beneficial for us so we don't have a PPOR at the moment. Selling the apartment will hopefully not encounter CGT is it's sold within the 6 yr time frame (?) of which we probably have 3 more yrs of.
I will look further into trusts and servicibility. I think I was mainly thrown out by Steve's comments in his book about lenders not necessarily taking loans you guarantee into account in calculating serviciability (unless I interpreted that incorrectly). Terry's advice is that this is not the case.
Thank you both again
You must be logged in to reply to this topic. If you don't have an account, you can register here.
