Scott,

Can someone inherit your debt on a property ? I mean you could draw down say 90% then sell for a small CG well under market value with a private sale, then get the buyer to pay off your debt to the equivalent amount that you undersold the property for. Hey they both win with less CG tax and less stamp duty. hehe.

Reckon that would be legal? Admittedly when the buyer then on sells, they will face a bigger CG tax burden due to buying it under market value up front. Perhaps there’s a meeting point half way somewhere. Draw down 50% and sell the property at an equivalent discount. Buyer pays off the 50% loan but pays the equiv amount for the sale.

1. Is it legal to pay off someone’s debt
2. Is legal to sell under market value.

I know it sounds a bit scammy, just a thought.

cheers.

Yeah I sort of see your point. Let me re-think it

…………..

OK it seems to me that this is a way of getting some income. I see to some extent the tax neutralization argument, but the point is that you get income to live on by making some properties positive cash flow, whilst carrying a large debt on another. I mean you cant actually use the redraw to fund living expenses and claim the interest as a tax deduction. Thus by re-diverting the funds into other properties you make them cash positive and thus still get access to funds that way. This income can then be legitimately used for personal use. The interest then still becomes tax deductible as its is paid against the redrawn amount that is channeled into the other investment properties. You are still paying income tax on the cash positive properties, but as you say its sort of neutrally offset by the loss on the property that you drew down on. So in effect you get a tax deductible income stream .

Do you think that makes any sense ?

Mikhaila,

I see your point and agree with it on the basis you have indicated. ( i.e. 1 investor to 1 IP in the syndicate would produce the same effect as a single lone investor in terms of negative cash flow funding ability )

Please note the example figures used are only to demonstrate the hypothesis and not based on real data.

I also was thinking more in terms of cash down from savings to better structure the debt on the property, so as to make it neutral cash flow. For Example; 2 people have $10,000 savings and thus deposit $20K on a $200K property that $20K deposit could be the diff between the property being positive and negative cash flow etc… that sort of thing. If each could save $10K per year then they could buy a new property each year with the correct debt structuring etc… resulting in cash neutral investments etc… or cash positive depending on their tax structuring needs.

I see two aspects of benefit

1. as explained above by pooling savings to inject as a cash deposit for debt structuring.

2. by sharing the burden of any out flows amongst several investors incomes per property.

I need to re-think this, but I was more thinking in terms of funding ability of say 2 or more investors to one IP. Thus

I’m thinking more in terms of the ability to structure debt through syndication not necessarily on a 1 to 1 ratio of investor and property, but rather 1 to many relationships.

As mentioned as a single investor I can only afford to acquire 2 quality brand new IPs in 12 months at best, as brand new IPs in good areas are normally cash flow negative in the first few years. But it will take at least 4 years before the first two go cash positive. So this if my outflows were $50 per week on each one then I could only sustain about 4 properties at $200 a week before my ability fund further investments would be limited. so really I would have to go at about 1 per year overall.

A syndicate of say for examples sake, 2 to 1 IP buying into brand new quality properties in Hot areas with High Capital Growth, could mean the debt is structured in a way that the cash flow situation is never negative. Thus the ability for the syndicate to acquire more properties faster seems evident to me.

It just means that in this example each property is owned by two investors of average income allowing them to more effectively structure the debt on each property to result in cash neutral or positive brand new property in good areas.

I guess the gist of it is that so long as nobody is loosing cash, they can invest as fast as they like in consideration of their ability to fund enough cash deposits to optimally structure the debt. As long as they choose the right new properties in the right areas.

Now it just means that when its time to sell, the profit from capital growth must be split. i.e. in accordance with the investor to property ratio. in this case 2:1 thus between two. But with the high rates of capital growth, this makes it still a worth while return, on top of rent and tax benefits obtained during the course of ownership.

You run out of puff, so to speak when you loose money on property i.e the holding cost, after all income, expense and tax effects. This effectively slows the single average income investor down to a grinding halt on brand new cash flow negative IPs after about the third IP.

You see its the lack of cash flow or liquidity that stops further investment into new property. On a 2:1 ratio with cash deposit injections for example, the property debt could be optimally structured to avoid this negative cash flow drain.

Now people will eventually run out of cash admittedly, but if you make bigger ratios, the cash injection burden per unit investor is lowered. Say you had 20 to 1 ratio. Now each investor may be able to save $1000 per month. Say they buy a new property every 3 months. Thus they are always putting down $60,000 in cash deposit and borrowing the rest, thus allowing the property to move closer to zero net cash outflows etc…

now because every property the syndicate acquires is zero cash outflow, there is no burden for holding the property. It effectively pays for itself after all rent expenses and tax effects, depreciation etc..

The other aspect is that if a sizable ( large ) syndicate can always buy up much of the quality brand new stock on the market in the best areas, it don’t matter that each investor only owns a small piece of the pie, on each purchase. as that stock will hold premium market appeal and CG value. The unit return will be higher per amount invested by each member. I guess its a bit like managed funds in a way but purely in property and the property is selected by the syndicate instead of some fund management group.

Simple Theoretical example only.

Hmm if there were only 5 quality houses and 5 average houses that came on to the market each year, it wouldn’t matter if the quality houses were owned by a syndicate 100 investors. They would get better unit returns on their investment share and their debt would be optimally structured on those 5 houses, through cash injections. Say those 100 investors could save $5000 a year in cash that’s $500,000 in cash injections for 5 properties. Thus $100,000 down on each property. now say each property cost $300,000 so the debt on each property is thus $200,000 optimally structured to result in zero cash outflows. etc… etc…

Now the $100K down is a good investment if CG is 5% to 10% on $300K per year. Thus $30K capital growth which in terms of the amount down being $100K actually represents a 30% capitalised ROI ( pre CG tax )

The average houses would perform weaker in terms of ROI but also, the single investor would have huge cash outflows and go to wall by not being able to fund the outflows, due to their inability to find the sufficient cash deposits to effectively structure the debt.

Does that make any sense ?

cheers.

You have made a good point there above.

Why I suggest is for reasons of debt gearing opportunity that may otherwise not be available as a single investor. i.e how many brand new quality investments are positive cash flow ?

Generally you either get old properties in rural areas that are cash positive, but land values fluctuate more and are at more risk and eventually they need repairs sooner etc…

Or brand new properties in hot zones, with high capital growth good depreciations but negative cash flow.

To get positive cash flow from a new property generally you need to put more cash into it at the start. Eg; Say 30% cash.

Now without the ability to do this cash up front thing, most single investors can only acquire so many properties that are negative cash flow with so much time, before their ability to service the outgoings becomes impossible.

So you may then say, well why don’t they invest in + cash flow property the next time around, which is a fair argument, but in the longer term the capital growth may not be there and may be less predictable.

If you are optimally geared and always investing in Hot Zone high capital growth brand new properties i suggest you can get the best of both worlds, being positive cash flow and high capital growth.

To achieve this however, you either need to find someone very rich as you suggested and act as agent or partner with them.

Alternatively form a buying syndicate where the number of members is such that each brand spanking new property, in the hot zones or about to become hot zones, purchased is instantly cash positive or at worst neutral cash flow all be them all negatively geared.

Thus the syndicate could buy up a whole area of prime real-estate in the hot zone before it runs out and the price goes up.

because they are always operating on positive or neutral cash flow they can always meet their out goings.

Problem areas I see are risk management, legal issues and tax issues.

I will leave that to the experts.
cheers