Think about what you want from an investment, and more importantly what your exit strategy is.

What happens in 10 years time when you want to exit your investment? The lessee still has a lease that has up to another 10 years to run.

Therefore you cannot give a buyer vacant possession. This will limit your pool of potential buyers to investors only.

Similarly if, in 5 years time you wanted to occupy the property (or one of your kids wants/needs to come home – you don’t want this, you’d rather they occupied THIS property instead), you can’t do it because the current lessee has control of the property for (up to) another 15 years.

Anyone investing in this type of property deal has to, in reality, be prepared to stay in for the FULL TERM of the lease (in this case 20 years).

What happens too if the 3% rent increases are way less than the inflationary rate?

These longterm lease-back deals can be quite restrictive. Be careful that their investment profile matches yours.

I trust that your $70k is sitting in an account that has full offset to your home loan? (I wouldn’t rush in to dumping the $70k straight off your home loan just yet).

Why is it that you have 0% equity in your own home? Did you buy, and the market moved backwards that much? or perhaps you owe the usual 20% deposit plus closing costs to your parents? (and therefore you say that you have no equity in your own home)

Royalty, you may need to do a little tidying of your own back yard before embarking on your reno

[biggrin]

You would pay off that credit card debt sooner if the interest rate were lower, yes?

Credit card interest rates are still approx 3 times that of a home mortgage. Credit card finance is for those that either fall into their grasp through spending more than they can repay at the end of the month (sorry to be blunt but I suspect this is what happened to you), or they are for people who need fast finance or can’t get traditional finance elsewhere soon enough.

My advice is for you to do one of the following (depending on which best suits your circumstances).

1. take out an unsecured personal loan with a bank or credit union. The interest rate is still reasonably high (because the lender has no security) but is still cheaper than the interest of a credit card.
2. a secured personal loan – interest rate a little higher than standard home finance but still less than half that of the credit card.
3. a home loan of $10,000 over a suitable repayment period. Since you plan to repay a large part of the capital from the upcomming bonus, make sure you can repay amounts of principal WITHOUT penalty. Don’t be tempted to take the loan over a long term just to reduce your repayments. The interest rate on these loans will be approx 1/3rd of the credit card rates.
4. you might want to consider a ‘line of credit’ style borrowing either for the $10,000 or a higher amount. That higher amount could go towards your property investing/developing – whichever you decide to do. Make sure though that you have seperate loan accounts for the investment and non-investment portions. (keeps your tax affairs suitably quarantined.)

I agree with Landt – get rid of the credit card debt asap (which you said yourself anyway).

The above strategies will save you heaps of interest on your extremely expensive credit card finance.

Good luck with your investing future

Not that you’ll need it though – knowing to get rid of the credit card debt and destroying the card (at least till you can develop a system to use them better) tells me that you have ‘your head screwed on right’. And that’s why I know you’re now on the right path.

Credit card finance traps many people – that’s why the bank’s (etc) make a helluva lotter profit from that source. Credit cards are like ANY form of finance (including the above refinancing options I’ve outlined), ANY of them can be dangerous if misued. Perhaps that’s why you recognised the ‘risks’ in moving forward with an investment strategy.

Personally I have large amounts available to me on credit cards. Yes it COULD be dangerous but to me it isn’t. It is a source of finance available to me to use ONLY when I consider the circumstances appropriate.

As for the wife and her need for a new car – well, I’ll leave that one for you to handle.

Let’s see, is it possible to achieve the above without being a ‘scrudge’… hmmmm.

What about:
1. attend a morgagor in possession type sale where all the mortgagor is looking to do is recover their loan. Whether the property sells at its true market value is of no concern to them.
2. another variant of the above is when councils sell properties to recover the unpaid rates.
3. buying from a builder (or investor for that matter) that has gotten into financial trouble on a development (whether completed or not).
4. buying a business (that has real estate amongst its assets) for book value which is ($50k) less than the market value.
5. provide cash as capital/equity to someone who hasn’t done their math homework properly and can’t get to settlement on a purchase without some (perhaps expensive) OPM….. ie yours.

OK. so off the cuff, there are 5 legitimate ways to buy property at $50k less than its market value.

Why not make it (6) on the trot

6. In the Sydney market at least, the current state over the past couple of months is a softening of prices that many vendors are yet to realise (ie they are yet to hear what the market is telling them). You take almost any property listed for sale in Sydney and take $50k off the listed price and your offer is likely to be seriously considered or at least not laughed out the door (as it may have been 6 months ago).

If the LOC was set up in their personal names, the action you recommend is good advice.

I would however use the same lender that holds the current first mortgage, to set up a lending facility for the new entity. Yes, it would then be 3rd party security and not an easy join-the-dots type loan exercise, BUT it isn’t impossible to achieve.

If my current lender wouldn’t do it for me then I might go looking for one who would.

If I can set my new loan facility up in this way then I don’t need a loan agreement to (in effect) on-loan the newly borrowed money to the new entity (presumably the new Trust structure).

My borrowing structure has already achieved that outcome for me. And as we all know, it isn’t what secures a loan that makes the interest deductible. It’s the purpose to which the funds are used.

Hi Julia

TD51 of what year?

Yes, the Trust will need a TFN.

On the basis that the company was ONLY going to act as the trustee of the Trust, then I would have the company apply for a ABN. Since it was not trading in its own right then it won’t need a TFN.

Depending on the type of property targetted, you may also need to register the Trust for GST. (ie where you will be dealing in other than private residential property. eg commercial or industrial property).

I’ve just re-read the post and the responses and since it doesn’t appear to be mentioned anywhere I guess it begs the question – why would you want your family home in trust in the first place? – asset protection (from creditors) only?

Unfortunately the renos are as a result of you living in the home and therefore are not claimable against the future rental income of the IP.

Money spent in bringing the property ‘up to scratch’ – ie a rentable standard – would be taken into account when determining any capital gains that would be taxable when you eventually dispose of the property.

How is the money recouped? The repairs should improve its current market value. This higher value is not taxable (due to POPR exemptions) and therefore goes to minimise the value that would attract a capital gains tax in the future. (Unless of course the property was purchased before Sept 1985 in which case none of the eventual gain would be taxable)

Mel

You’re right but then you still have to split the interest between the appropriate item numbers in the tax return/s. I would normally recommend the pro-rate approach unless there is good reason NOT to use it.

As you say, if the purpose to which the loan was put was ALL income generating (and hence all the interest deductible) then it doesn’t matter which (in the investors mind) is repaid first.

In any event you’d need some good record keeping to track the components of the loan !!!