All Topics / Finance / Can I do this?

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  • Profile photo of WayWay
    Participant
    @way
    Join Date: 2013
    Post Count: 8

    Hello,

    I have a question that I would like to ask:

    Is it possible to purchase a house and land via a loan, subdivide the land and then sell the half without the house (i.e. the backyard).

    If I had an offset account put the money I got for the sold half into there or if I didn't have an offset account to use the money to reduce

    the outstanding loan and keep paying off the rest of the loan as normal?

    Sorry for my very simplistic question, I am still a beginner and trying to educate myself about what strategy is best for me.

    My end goal is that I want to own several houses and be able to live of the rental received from them, I am not to concerned so much with

    the value of the house rising ( I would see this as a bonus) as I don't plan on selling the houses I keep for rent, I just want to pay off the houses

    as fast as I can and reduce my debt.

    Thank you in advance for your replies.

    Wayland

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

    Technically it's possible (if the land could be sub divided).

    You won't be able to sub divide a block that is part of a house and land package though. Those parcels of land have already been divided up.

    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 WayWay
    Participant
    @way
    Join Date: 2013
    Post Count: 8

    Hello Jamie,

    Thanks for the quick reply.  Sorry I didn't mean in a house and land package, I just meant a block of land with a house on it.

    So, technically I could do this if the land was able to be subdivided?  How would it work out with the loan?  Would it change anything in terms of LVI?

    Are there any big cons with this idea? 

    My reason for asking is because I want to pay off one or two houses fast so that I would be getting rental income to help pay off the next houses faster.

    Wayland

    Profile photo of TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Couple of points:

    1. Yes you can do want you are saying and it is a very common strategy. From a finance perspective you will need to let the lender know. The lender will order a valuation to check a few things – DA, LVR, price of each block, etc. Make sure you run this by the broker or banker upfront. Many lenders offer upfront valuations so if possible take advantage of this before submitting the application

    2. Be careful paying off your loans. You can achieve the same results whilst maintaining flexibility and maximising your tax benefits. Ensure that you set this up correctly.

    Which state is this?

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

    Profile photo of WayWay
    Participant
    @way
    Join Date: 2013
    Post Count: 8

    Victoria.

    Okay, here is my initial ultimate goal:

    I want $100k a year in rental income. 

    Ultimately, I don't want to pay a lot of land tax so I was considering a strategy that I heard in a recorded interview on the Reno Kings website.

    Rather than buy lots and lots of properties, I want to buy a few and put more houses/units on them so that they are earning more rent so that my land tax

    isn't increased with every new rental income source I have.  So I am looking to buy properties that have development potential.

    But to get the ball rolling, I wanted to buy some entry level properties where the repayments weren't so high and where I could pay off the loan quickly and

    gain a higher income (I am vaguely aware that this will increase my taxable income – I haven't researched that area in great detail yet) but with the higher income

    I could then start buying blocks of land with houses on them that were suitable for development by either adding another dwelling(s) on the back and would

    be able to use the rental income that I was receiving from the properties I initially bought and then sold their backyards to help pay off the loans and to allow me to comfortable afford them.  Also, I am (again vaguely) aware that with new houses on the back of the property (that have been subdivided) would give me some depreciation to help

    offset the extra income I was getting from rental properties.

    What kind of structure is ideal in this case?  Also, if you can give me any cons you can see in this strategy, I would be happy to know.

    Wayland

    Profile photo of TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Grab yourself a good accountant to discuss possible tax scenarios. From a finance perspective you need flexibility, and cashflow so I would lean towards a variable interest only loan. Make sure that the loans for each property are separate for a number of reasons. 

    Strategy is good – the strategy becomes undone when there are unexpected costs in the subdivision. I not familiar with Vic councils so best to also speak to a town planner from the area.

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

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

    a few of my clients have done this. Buy a house with a large block of land. Split the land so that they end up with one empty block and one smaller block with the original house. One guy got the original house valued at almost the same as his purchase price meaning he basically got the block of land for free. He will sell the new empty block and pay out the portion of the loan attributed to this land, then reborrow up to 80% and repeat.

    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 MillietMilliet
    Member
    @milliet
    Join Date: 2012
    Post Count: 6

    Hi,

    I would also like to buy houses on blocks of land and then subdivide.  Do I need a different type of mortgage for this purchase? I assumed I could get a mortgage and then just go about subdividing the land.

    Thanks Sarah

    Profile photo of WayWay
    Participant
    @way
    Join Date: 2013
    Post Count: 8

    Hello everyone thank you for your answers, they have been of much help!

    Wayland

    Profile photo of TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    The mortgage product is standard, i.e. variable, fixed, LOC, etc. We did a similar loan for a forum member whereby they subdivided their block and kept the loan with the current lender but moved the subdivided block to another lender due to the valuation amount of the other lender.

    So in short yes doable and very common. To be on the safe side – its best to do an upfront valuation. It can be a bit complex so worthwhile engaging your banker or broker.

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
    Email Me | Phone Me

    Residential and Commercial Brokerage

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Just bumping this thread because there is no shortage of people out there losing money on backyard subdivision projects at the moment.  Be sure to due your proper due diligence when considering this sort of thing.  For example, chat to council to understand minimum block sizes, how much "private open space" each lot must have, minimum driveway widths etc.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

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