Forum Replies Created
Looking at your portfolio buying a residential +CF ain’t going to help much (the best I’ve found is around $2K p/yr cashflow). Also because you are losing $10k per yr, and your portfolio is only $4k away from 80% LVR I don’t think the banks are going to lend you much more than what you’ve got (esp. if you are losing moeny on it).
I guess my advice would be to sell one of them. Although this is aginst the grain of many, if you sold one (perhaps the one with the highest cashflow drain) then you use the money to either repay the debt or invest in +CF (probably more commercial deals). You are still young, so you’ve got time on your side (which is the most valuble asset), and if you pay down your debt your other properties could be netural (i.e. not positive, but not negative either).
Hellman
Hi TMA
Well thats a good reason then“Do you find it more advantageous to rent as apposed to having your own PPOR?”
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There are three general entites in which you can buy a house (this is for your PPOR):
~Own Name: No Capital Gains Tax if you sell (big reason for most people); Cannot deduct rent from company/personal income; Little asset protection (you lose the court case, you can lose the house); Zero accounting/tax costs (V. easy).
~Company: Pay full CGT tax (so 30%); Comapny can use the loss from the property to reduce their profits (so good if you work for your company – pay little to no income tax); Quite easy accounting; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Property falls under the companys liability (so if you get sued you probably won’t lose it, but if the company does, you may have problems):
~Trust: Pay 50% discount on CGT (so 15%); Trust can use losses from the property to offset future earnings; Hybrid trusts can “transfer” (via ‘units’) the loss to personal income; Downside is accounting can get quite comlicated esp. if “transfering” the loss; Must pay current market rent and be seen as arms length (extra admin for ATO req.); Best asset protection (IMO) if you get sued you can protect your assets (with a company as trustee it is very difficult for anyone to get your assets).
I think this sums up the
Hellman
ather than persue them wouldnt you just try and get new tennants, perpaps offering them the wrap deal as well? The way I see it (and I’m probably missing something because I’ve never done a wrap deal) is that the tenant paid a deposit and then would have been paying his repayments (a percentage point or two above your mortgage figure) and that if he walks away from the deal he forfeits the deposit and any payments made.. so you are still ahead, but simply have the cost of going back to a property manager to try and find another tenant?
> There are two thoughts on this. One is to buy the house and the advertise and find a buyer, the other is find a buyer then get the house. Both ways can have their merit, and I know succesful wrapers who use both strategies. Of course once you’ve got the house and the wrapee leaves then it’s just find a new wrapee.
The real benefit of finding a buyer is that there is no down time, by that I mean you don’t have an empty house with a mortgage to pay.
Hellman
I haven’t herd of new tax rate scales for Trusts…
What State are you refering too??
Hellman
2. After some research, I am quite keen on investing in positive cash flow property. However, having spoken to some “experts” – every single one has told me that there are no longer any positive cash flow properties. And that even if there was, the effort required to find them would outweigh the potential returns. Is this true?
> Im still buying +CF residential; And yes you can buy them in Australia (though I must admit I’m buying interstate, but then I do live in Syd…). Look at regional areas.
Anyway who are these “experts”???3. If you don’t invest in positive cash flow property, what else can you do in the current environment to build wealth and/or improve your cash position?
> Well if you have a large amount of equity/money you can become a hard money lender, which can give you a high return (beating the Avg. stock market return).
Hellman
Not for me…
Hellman
Because most contracts are different (individually and then on a state by state basis) I would see a lawyer about it.
Usually builders have all types of clauses and they can really make a lot of money on the variations (I read recently that one particular builder makes 70% of his profits on variations!).
So double check with your solictor and also post it to the developing forum, as they have developers on there who know more about this stuff.
hellman
I can’t see that much wrong with it. There are only three potential problems I can see…
The first being size of the outfit. If you start taking to much money in ASIC will be all over you.
And also State Gambling Bodies might start to have an interest in it too. And since they control poker machines and other forms of gambling, they are quite adapt at raising funds! They probably won’t do anything though (as you are already adding to their revenue by betting in the first place)unless their political masters tell them to jump.
The last problem is media. And whever the media s politicans are usally not that far behind and that could mean legislation, esp. if ACA or TT dtart to hammer the issue.
IWhile I wouldn’t do it, if you started small and kept quiet about it I think you could do something.
Hellman
As for the suggestion for getting this indvidual a loan with a lower interest rate, it is a good idea, but I question if a lender will lender him further funds with that high debt level (and with no real assets), even if the stated purpose is to decrease the interest rate.
As for in-laws going guarantors, it would be better for them to lend the money direct (and consider it worse case scenario as a gift). As if the in laws go guarantor and this family spends more money, the in-laws could get taken down too.
Anyway these days banks lend on the strength of the borrower not guarantors.I would avoid a LOC as people who have bad finacial habits will be able to withdraw all their income away, and the lender may increase their credit limit (meaning they can borrow more).
The best way is to make it as easy as possible. So either just a standard loan (and apply all the repayments they make on their CC to their loan) or follow the advice suggested above.
Hellman
Okay the object here is to pay off your CC debt.
The first thing you need to do is get rid of those cards – but keep one ONLY! Get that card and put that one in a container, add water and put it in the freezer.
Now the second thing you need to do is to find out the most efficent way of paying off that debt.
Get a blank piece of paper. Make a large box for every Credit Card you have. In the box put the CC name, put the total balance and then the monthly balance. You then create a space for the pay off ratio. To get the pay off ratio divide the total balance by the monthly payment. So for example:Debt Name: CC Debt – NAB
Total Balance: $20,000
Monthly Payment: $1,000
Pay Off Ratio: 20Now after you have worked out the pay off ratio for all your debt, find the one with the smallest pay off ratio. Put a big 1 on the right/left hand side of the box. That will be the first debt you will pay off. Do the same for the rest of the boxes.
After you have done that add as much extra to the debt with the number 1. Don’t try and share it around all the CC. It dosen’t work. You have to focus on one debt ONLY.
Now after you have paid off that CC debt add all the monies you put towards that credit card plus the new money you have freed up and put it to work aginst number 2 on your list.
If you do this you will be debt free (cars, personal, credit, house) in 5-7yrs. And no I’m not joking. I use the same system.
The last step is to go and buy ‘Money Secrets of the Rich‘ by John Burley. And look up Chapter 23.
ThHe important thing is to do this. Thats it. If you run the plan you will not only be debt free you will have the discpline to become a powerful investor. Good luck and let me know if I can help.
Hellman
Perhaps tax implications (CGT)? Or the investor might try to flip the property (that is reselling it). Or perhaps he wants time to buy and then refinance, Or perhaps they have to sell some other properties before they can buy yours (free up some equity), etc.
Of course there is nothing wrong with all the above (as many sellers want to keep living in the house for a while before they move and it gives them piece of mind that they have a buyer and of course time to buy a house they really want).
Hellman
1. All right say you pay cash and stack the contract. Considering you are haven’t doing anything illegal – how can it be fraud?
2. You goto the bank and get finance. The bank goes a long and orders a Valuation. Now the valuer will look at what you paid, but they will also look at what other people have paid for the property. Now the bank could come back and say, you’ve paid to high so we will lend on Valuation.
So where have you defrauded anyone?
If the bank do their job properly (like, perhaps order a valuation) then there is nothing to worry about. And as a side note if they don’t – it’s not up to me to tell them how to run their business (and considering they make many Billions each yr, I think they know their business pretty well… probably better than most people on this forum, including me…).
Hellman
As for the date 2012-2015 is when the Baby Boomers start to retire, of course there might be a panic before that, but in reality I think there will be more of a panic of where to invest their money into something safe and secure which will provide high enough returns. This will be a great time for those whom know how to invest well. My guess is that allot of smart money will be in hedge funds (which can short sell stocks).
As for Real Estate I think if you positive gear you should be okay and in fact ironically you might be worth more as “investors” (or lvl. 3s) run around trying to find good investments that offer safer returns (than the stock market) and that will give cashflow (I reckon the yield of bonds will be very low as Reserve Banks reduce rates to try and stimulate their economy).
Of course this is all speculation, but in the end something must happen, because while I have faith in GOv. & Reserve Banks, they cannot stop the stats or the cycles.
Hellman
Interesting to see some discussion on the next depression. But let’s put our crystal balls away for a moment. Does anyone know what causes a depression? For example, let’s look at the depression from 1929. Any thoughts on what caused this rather depressing time in history?
* Do you believe that it might be caused by a share market crash, because there have been plenty of crashes since then which haven’t had this effect.
> That is very true. But this situation is going to be different – mainly because we will have more people taking money out of the stock market than putting into the stock market, for the last 30 yrs it’s been the opposite.
* Do you believe that it might be caused by a really BIG share market crash, because the crashes since then have wiped much more money off the market than the one in ’29.
> True, but as I said before there have been larger injections of capital than ever before (superanuation/401Ks/IRAs), and considering that MOST western Governments are FORCING employees to put their money into the stock market the ‘boom’ will continue until older people start to withdraw their money…
* Do you believe that everyone just got ‘depressed’ about things? Because A LOT of people were depressed when the tech got wrecked. And no ‘depression’ then…
> Again because there is so much capital around, funds with billions of billions of dollars have to put it somewhere. And as such even after the stock crash super/401k’s were still having massive inflows and again had to put it somewhere, either bonds (and the yield for bonds is hopeless: 1%) or the only real alternative: Stocks…
* Do you believe that a property market crash might perhaps cause a depression? Imagine a bank not lending you money to buy property in the US? Sounds like ’89, but no depression.
> Imagine allot of peoples retirement (super) money goes from many $$$ to very few $. People look at their only other real asset and decide to downside (or sell their negatively geared IPs), unfortunately a large section of the population has had the same idea and a property crash occur. Prices keep falling and banks start to demand higher LVRs (to satisfy this new risk factor) meaning people wanting to buy have to put up larger and larger deposits to the point where people cannot buy. So you have a large scale stock market crash and a large scale property crash with next to no buyers….
* Do you believe that we all agree on a date, and then quit our jobs when this date arrives?
> No, but I guess if enough people are going to retire same within 3-5 yrs we should just assume everything will be okay, because it will be…. (since there all not leaving their job on the same day).
And as a side note for those whom want to keep in the work force that assumes employers will want to keep employing older people who are seen to be slower with technology….
* Do you believe that a war causes depression? No depression after WWII.
But there was the Depression after WWI…
* Or maybe you believe that the date of the next depression comes from a book, or one of your financial know-it-alls?
> No it comes from looking at raw data. For example say we have 10-8 workers to every 1 pensioner, can we really afford to have 2-1 workers pay for every 1 pensioner? The tax rate is already very high (though I wouldn’t know that [oink]) and how can these people save for their retirement? If you want to see how thats working out, have a look at Japans economic growth record (in fact the only reason why they are well off is because of the massive savings and investment Japan has (as a side note it’s investment earnings were higher than it’s export earnings recently)). Just pretend that pension costs didn’t go up, do you really think that medical costs won’t sky rocket?
What do you believe………….?
> I believe that the stats point to a depression, and of course so do looking at cycles. I believe that the reason we haven’t had a depression is because the baby boomers are at the very top of their earning potential. So there is massive capital – in fact there is to much capital – that’s why stock market jitters have been shrugged off, and that’s why there are still unrealistic P/Es on tech companies (google for example has a P/E of roughly 120). The Chinese have a ‘curse’ that goes along the lines of “may you live in interesting timesâ€. Well times are going to get allot more interesting pretty soon.
Hellman
Basically I have the same understanding. For example say if you default under one of the IP loans and they then sell the property and say they do not recover enough of the back payments (so you still owe them money) then they can force you to sell your home to recover the outstanding monies. But it must be noted Banks are loath to reposes property.
Hellman
I read somewhere, probably “The Rise and Rise of Kerry Packer” throwing the young adult into the deep end is exactly what Con did to Frank, Frank did to Kerry and Kerry did to James to toughen them up a bit and give them some real life experience. We reckon if it’s good enough for them it’s good enough for our kids.
A relative of mine knew the packers quite well during the Frank to Kerry stage, and while you might be presenting it as a neat little thing, it was hardly that.
It shattered the family and ripped it apart.
As a side note I take a different view to you, as I see wealth as a very inter generational ‘thing’ (for want of a better word).
Hellman
To my understanding you don’t pay CGT on wraps:
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“If the Vendor Finance arrangement has the following features the income stream received, once the wrap arrangement has begun, is considered to be principle and interest by the ATO. The income stream received before the wrap arrangement is entered into is considered rent. Reference ID2003/968.
Typical Features of a Wrap (Vendor Finance Arrangement)
1) The purchaser pays a deposit at the time of entering into the arrangement.
2) The settlement (change of the title deed to the purchaser) does not take place for several years after the arrangement is entered into.
3) The purchaser has the right to occupy the property prior to settlement
4) The purchaser pays a weekly amount (regardless of the name it is given in the arrangement) for the right to occupy the property
5) As part of the arrangement the purchaser pays the rates, taxes and insurances on the property.
6) The balance of the purchase price to be paid on settlement of the arrangement is reduced by the weekly instalments.
7) If the purchaser fails to complete the arrangement the deposit and weekly instalments are forfeited.Now what about the profit on the sale of the property? Is that normal income or capital gain and when is it taxable? Assuming an agreement similar to that described above the answer to this question revolves around whether the vendor is in the business of selling houses or an investor just realising an investment. The key issues in differentiating here, according to ID2004/25, 26 & 27 are:
1) The Vendor did not use the property for any other purpose than to enter into the wrap. A straight rental of a property before entering into a wrap arrangement would avoid this point.
2) The property was sold at a profit
3) The wrap arrangement was entered into within 6 months of the vendor purchasing the property.
4) The Vendor is in the business of purchasing properties to resell. It would be difficult for the ATO to argue this case if the Vendor only bought and sold one property.If you are caught by all of the above then CGT cannot apply to the sale of the property as the profit on the sale is revenue in nature. If a transaction is caught as income, CGT does not apply or in other words CGT is the last option if income tax doesn’t catch it. But even if you weren’t caught by the above and CGT applied there would be no discount if the property was held for under 12 months. If you did hold the property for less than 12 months before entering into the wrap it is better to argue that you are in business and caught by the above because the profit on sale would be revenue in nature and as a result not assessable until settlement which could be 25 years away (ID2004/27). If you hold the property for less than 12 months but it is subject to CGT you don’t qualify for the discount but would be assessable on the profit when entering into the wrap.
Section 104-15(1) of ITAA 1997 states that a CGT event happens when the owner of a property enters into an arrangement with another party to allow them to live in the property and title may transfer at the end of the arrangement. Section 104-10(3) states that the time the CGT event happens is the time of entering into a contract for the disposal of the asset, not when settlement (title passes) takes place.
For example this means that the vendor who enters into a wrap on a property that has been previously used as a rental and held for more than 6 months will be subject to CGT on the property in the financial year the wrap agreement is entered into. Accordingly, if at this stage the property has not been held for 12 months no CGT discount will be available even if they eventually end up holding the property for 25 years under the arrangement.More information on rental properties is available on my web site in the rental property booklet. All free http://www.bantacs.com.au
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This issue is discussed in Chapter 6 of the Wrap Kit. I’m an avocate of the emerging profits basis and from memory there are worked examples to help you understand how to cruch the numbers at tax time.
Steve McKnight
I am assuming you are not using a mortgage broker. If this is the case I suggest you find a good one (good ones are on this forum). Terryw is quite good, as well as Stuart Wemyss and Simon Macks.
This is why I use Mortgage brokers, they have all your details and if you are declined by one lender they can resubmit to other lenders (alot of the time the bank that has declined you will probably notmark your CRA), while people who don’t use mortgage brokers can waste a large amount of time submiting and re-submiting loan applications.
As for you problem, you can either take the money out of your existing equity ($100K) and pay cash for the property (and then refinance) or you could put down a 20% deposit and hopefully the deal will finance on it’s own.
I would highly suggest you talk to a mortgage broker on this forum.
In America it is possible to get 100% financing, non recourse finance on commercial property.
Of course were not in the dark ages with banks still demanding 35% deposits, higher interest rate (usually), and of course no recourse loans….
Maria – check out http://www.jaffasoft.com for crunching figures.
