Hi johann

I can't profess to be an expert on the whole development side of things, but here is my understanding…

1.  When you decide to do the whole company structure is entirely up to you, and different people will advise different things.  Accountants who charge to set them up will often advise setting them up ASAP, while other investors may advise to hold off on the whole company thing until you've made some money first.  Without knowing your whole situation, I'd probably suggest it's time you got your structures underway. 

If you set up your structures correctly, there should be some serious tax benefits, assuming you make some serious money from the whole thing.  If your fiance isn't working, you should be able to distribute the profits to her until she has as much income as you, and then split the profits from then on.  It can get a lot more technical than that, but that would take pages of explanation.

If you build and sell straight away, I think not only are there CGT issues, but GST issues as well.  Again, I'm not an accountant either!  To get the 50% CGT reduction, I think you have to hold them for at least 12 months, not 6.  However, I must admit I have no idea how CGT applies to a new build scenario.  The other issue is how many of these you can do before you lose the 50% concession.  I think once the ATO sees it as a business, then you may lose that.

2.  If you're renovating IPs you've had for a while, then you'll already get that 50% CGT concession unless it's judged to be your fiance's business.  As for GST, I believe you've got to do some really serious structural work on an established property for that to have to come into consideration.

Like I said, don't take my word as gospel.  I'll be reading the rest of this post too to see how wrong I was!

Andrew

Hi Steve and all

I've done a few of these in Qld, and am a bit confused about your accountant's advice re: GST on buying houses to sell on vendor finance terms.  

Apparently your accountant said – " if i am seen to be in "the business" of developing or buying property to sell on vendor terms – the property is seen as trading stock – therefore have GST implications".

With developing property, there are obviously GST implications there, but buying an established property to sell on vendor terms has GST implications?  Really?  Anyone else out there understand this to be the case?

Personally, I've never dealt with new properties and have never had any GST issues arise – I'll let you all know if I'm arrested for massive tax fraud.  However, if you are worried about paying GST because the property is new, would doing it as a lease option work, so the house is no longer viewed as "new" when they exercise the option?  Would this also mean you get to keep your depreciation benefits??

New houses definitely not my area of expertise, just a thought.

Andrew

Ahh yes, the FHOG….

I finally received my first one last December, and have two more coming through this month – might go skiing this year after all!

Contract must be in existence for 12 months or more, they must have made payments totalling at least 10% of the purchase price and they must not be in default.  Then they have to sign a stat dec saying all that's true, provide proof, and also swear they'll pay back the FHOG if they move out of the house at any time in the next 6 months, or if the Instalment Contract falls over – that's always a fun one to explain to the buyer!  

lol

Good luck finding a lawyer familiar with the new legislation at this point!  After Tonly talking to us for 2 hours a couple of months ago, I'm not sure who was more confused at the end of it all!

In any case, I'll certainly be registering sooner rather than later, even though it may be a while before I would be technically required to.

Aside from the added credibility that ASIC registration will give us, I also believe that at the beginning registration will be a much easier process than it will be a few years down the track.  I could be wrong, but that's what I'm betting on.

Andrew

Hi guys

I've done a couple (of dozen) of these, and I work them out a little differently.

I start by working out what the property is costing me per week, and then come up with an amount per week above that I think is reasonable.  I then work out all my figures around that in reverse.

eg, I have a property worth, say, $250K on the open market, with $225K debt on it.  I'm paying 6.5% interest only – $281.47 per week.

Now, I generally want at least $100 per week cash flow, so I stuck $398 per week on this one, just to keep it under the $400 per week.  This was before I had even decided for sure what the total price was, or what the deposit was going to be.

I then decided on a price of $280K, the buyer gave us $5000 deposit, and we worked out the interest rate with $275K as the loan balance.

Could I have gotten more cash flow by adding 2% per annum to my base rate and going from there?  Maybe, but then who's going to pay $550 per week to live in a $250K house??  Probably someone, but not as many people who will pay $400. 

Normally, there is no right (or wrong) answer for these things.  However, if you've got someone who is interested, then the right answer is probably a negotiation with them.  Just make sure you understand your figures a bit better than your originaly post before you get to that negotiation.

Have fun!

Ahhh, you've gotta love this thread…

The original poster wants us to tell him how it works, but is not prepared to spend the money to find out – that's just great!

I can add another voice to the "yes it works" column if you like, but passing on my training I've paid $60 000 for?… I think not!

In any case, you can get more information about how it works from any free seminar where the guys who teach this stuff guest speak than any of us can teach you through this medium in a couple of hundred words. 

I suspect the reason you haven't been able to find anyone who can say that they've done it successfully in the real world though, is that you're not moving in the right circles.  I don't know any successful wrappers who scoff at the idea of paying for training or good advice!

Ok, this may be a stupid question – but why are you so worried about whether you make a small loss or come out even?  Is it just a pride thing, so you don't have to say you made a loss on the property? 

I would think that if you want to sell the thing, then just sell it.  If you can't even work out whether you're making a loss or not (I agree it's tricky) then who cares?

Am I oversimplyfying here??

If you have legitimate reasons for selling, then do so.  I wouldn't be too concerned about calculating numbers that are largely irrelevant in my opinion.  Personally, I like to hold properties forever.  I've only ever sold one property the "traditional" way, and all my other properties I've sold using vendor finance, because it suits my goals better.

Can I ask why you are selling??

Andrew 

Hi Helen

I must agree with pully on this one – what on earth is a challenging rental??  I'm going to guess that you mean the amount of the rental is too high for most tenants?  Although, that's probably not where I'd start looking for VF deals, as obviously the owner has to like the whole idea, and chances are if they're asking too much to rent the place, they're not going to want to give away future profit by selling it today for basically high rent payments??

Anyhoo, vendor finance certainly isn't a scam.  There are some legal difficulties with it in South Australia, and I think in WA you have to be registered, but I'm pretty sure it's still open slather in Vic.  However, I certainly wouldn't be suggesting it as a strategy to a real estate agent if I had no idea about how to go ahead with it.  Your chances of just bumping into an agent who can put a VF deal together are non existent.

Somehow the real estate agent profession has positioned themselves as experts in the marketplace, when most salespeople got their qualifications in a week long course that cost them around $500!  Unless they've been working successfully in the industry for many years, then your agent just isn't the expert they are promoting themselves to be.  I would suggest that most  investors with more than 2 houses have more knowledge about real estate than most agents these days.

As for who I know in Victoria, I certainly know a few people doing VF down there, but I'm not sure if they're in south west Vic.  The other issue is, they're not what you'd call advisors, but some of them do take on JV partners to show them how to do VF deals if it's going to be profitable enough for them.

Cheers,

Andrew

Hi all

Yeah, my first ever tenant as a 25 year old was dodgy – enough to turn most people that age off property investing I would think!  But (as my wife keeps telling me) this isn't about me….

Firstly, you have to make a decision for yourself if it's worth all the effort for this amount of money.  Or if you think it's worth the effort purely to be punitive to the naughty tenant.  Personally, I'd think it wasn't.  You end up wasting a whole lot of your time and life energy pursuing this, for what is likely to be very little chance at a reasonably small reward.  Chasing after a bad tenant just to get them back, bring them to justice, or save the next landlord all feel negative to me, and that negativity will undoubtedly bring you down.  Only you can decide if it's worth $3000.

Recently, I had a judgement made against me by the OSR who deemed that some properties I bought were worth more than I said they were in a non-arm's-length transaction.  (ie, my company bought them from me).  The judgement was totally ludicrous, quite unjust, and bordering on corrupt.  I fought it for a while, but in the end decided to just let it go.  I realised that the cost to me of pursuing "justice" further was too great, and just paid the six grand.  I decided instead to put that same energy into making more money, and made more than double that amount in a short period with far less effort, and with much more positivity attached.  Am I sounding too much like a hippy here??

What you do need to take from the experience however, is the lesson.  Or, in this case, lessons.  At the risk of sounding like a pious know-it-all, I would suggest your lessons are as follows:

1 – Property management is a skill.  If you are going to manage your own properties, then you do not ever put up with people damaging your property.  Deal with it immediately.  Damage to your property is like an ice berg.  There's always more going on than is visible to the naked eye.

2 – Choosing a property manager is a skill as well.  Unless you live in an area where there are only a couple of potential property managers, you're always going to be able to find a good one if you look hard – and you should look.  I think of my properties as my children, and I don't just hand them over to anyone to be looked after.  I always interview prospective PMs, and choose the best one from the pool that I interview.  It should be like a job application, with you as the potential employer. 

3 – Being under insured is always a bad idea.  The problems with claims often come from the need to prove malicious damage.  This is another reason to not put up with the gradual deterioration of your property just because someone has lived there for a few years.

Good luck!

Andrew

Ahoy hoy

Well of course the traditional method is better IF you have the money or the borrowing power.  If you are buying anything with cash, you have more bargaining power, and can therefore negotiate a lower price.

If you don't have the ability to come up with all the cash to buy a house, and you want to get into the property market, then these sorts of arrangements are all you've got.  Unless the seller enters into the arrangement with the knowledge (or plan) that the buyer will never be able to refinance and own the home, then the seller isn't taking advantage of anyone.  If the buyer doesn't work out their own situation and gets taken in by a less than savoury character with more brains than them, well I do have some sympathy for them – but chances are if they buy a $300 000 house on impulse, it's not going to be the first time they get ripped off.

Do you know what percentage of people in Australia can get a home loan at the moment?  It's around 13%.  That leaves 87% of people who can not buy a house the "traditional" way.  I'm not sure you've thought through the implications of only 13% of Australians owning real estate.  Now, if you have to save for another 5 years to accumulate a 10% deposit, or you can "buy" a house using a creative way for only 10% more than it's really worth now, then that's a decision only the buyer can make.  Personally, I see it as a no-brainer.  There aren't a lot of 5 year periods in the last 60 years where property hasn't gone up more than 10%. 

Is Harvey Norman taking advantage of people by offering them "4 years interest free"?  Harvey Norman know this is profitable for them, because a vast majority of people don't get the price paid off in the four years, and end up paying 25%+.  But if you don't have the cash and want a TV…… 

Oh, by the way, the "traditional" way is only a relatively new thing in terms of buying and selling houses.  Banks haven't always been so happy to lend money on real estate.  Buying a house on terms, however, has been around for hundreds of years.

I really don't understand why people who aren't interested in creative techniques come in here and bag them.

I also find it interesting that you would stay away from the whole idea because it could become legally messy.  I think if you avoided everything in life that could become legally messy, you would have an extremely boring existence. 

The risks we are talking about with these sort of transactions, while very real, are very low.  Certainly much lower than the risk of people getting shut out of the real estate market FOREVER because they hold off buying for another 5 years.

But hey, that's just my point of view….  (apparently you can say whatever you like with no proof whatsoever if you say it's just your point of view).

I also noticed you didn't respond to any of my queries about how these things were "way over market value". 

Interesting