Forum Replies Created
Whether they are easy to rent out or not depends on
1- The quality of the dwelling (is it a cheap and nasty granny flat or a genuine secondary dwelling)
2- Where it is located. They are easy to rent in good locations but can be hard to rent in poor locations. Of course everything can be rented if the price is right.Where are you located? And what is your budget (including plans and approvals)? Are you going to be an owner builder or get an experienced and liscenced builder to build the granny flat?
Cheers,
LukeSounds complicated! I am assuming that a company (say xyz pty ltd) is the trustee of a trust (abc discretionary trust). And you are negotiating to buy a 90% share in xyz pty ltd?
I would think that how the company distributes profits depends on the trust deed of the trust. If you are not listed as a beneficiary of the trust then I dont think that you can recieve profit distributions so even though you own the company (which sounds like the trustee) you dont really control the coffee store.
Another thing would be the appointer of the trust can fire the trustee at any time. So after you take a 90% share of the comany (the trustee), the appointer could fire the trustee and hire another company as the trustee. Which leaves the company that you own 90% in control of nothing and you royally screwed!!
This is one for the lawyers out there!
Cheers,
LukeThe banks recently raised rates independent of the reserve bank by 0.10% or so. The Reserve Bank cuts rates by 0.5%. The banks will now pass on 0.35-0.4% rate cut.
So the net reduction in rates will be about 0.25% – 0.3%. As I see it, the reserve needed to reduce rates by 0.5% to get a reduction in variable mortgage rates of 0.25%.
Cheers,
LukeAALLII wrote:Hi a little unrelated to the intial post but nonetheless relevant to topic heading…I have been advised that to get a loan with no financial backing except a stable and high income I can form a discretionary trust structure, have myself as a beneficiary and one other person as a beneficiary (i.e. parents) who have a fixed security (personal home equity). If all the beneficiaries become guarantors, the trust may be able to obtain a loan given that servicability is satisfied with my income and security is satisfied using the security.
Please advise if any finance gurus here?
You can do this without a trust so it isn't exactly a genius idea.
The problem with the strategy that you have suggested is that the bank has security over 100% of your parents house. If the investment goes bad and they force a sale of the investment property, the bank can force the sale of your parents house to recover any money owed.
A much wiser strategy would be using a LOC secured against the existing prooperty and lending the money to the trust. If things go bad then at least you can keep making the LOC payment and the bank can;t force the sale of your parents house.
But the question I would be asking is why do you need the securtity of your parents house if you have a high income? I dont mean to be rude or offend, but you should be able to provide a deposit yourself if you have a high income. It sounds like you have a spending problem if you hava a high income but no savings, so you really need to fix that instead of relying on your parents to prop up your investing.
Cheers,
LukeThanks Terry, I have really only heard people discussing it off hand but not heard a lawyer saying it can actually be done and that it works. I will look into it and get good advice when (or if) that time comes.
Cheers,
Lukeworldinvestor wrote:Luke86
Hotspotting does not necessarily mean speculative to me.For example look at areas where rezoning is on the agenda.
Craigie is looking good, older homes, good infrastructure where you can pick up properties under $400K. Check out realestate com, you will note that houses appear to be snapped relatively quickly, good sign in this market.
Mirrabooka, Koondoola these are areas which Council is currently re-zoning, close to city, good infrastructure, ticks many boxes.Try purchasing an old run down home on duplex block in Mt Lawley will set you back $1.1M at least, as an investor you will need deep pockets to hold this type of property. However, in saying this, I believe the blue chip areas do represent great buying at the moment as most have dropped backed. Good time perhaps to upgrade your principal property.
heers, WI
Hotspotting is a term generally thrown around for looking for the next big thing so that is speculative for me.
Anyway, I still think developabl blocks in those inner areas will be the best performers over the next 5-10 years.
E.g: House in Mount Lawley, 874m2 corner block zoned R50 which you would build 4 units/townhouses (3 at worst), listed for $1.05m – $1.1m:
http://www.realestate.com.au/property-house-wa-mount+lawley-110186849
This took me less than 5 minutes to find on realestate.com.au so am not sure if it is in the best area of Mount Lawley, but I think with more research and searching you could find better houses.
Cheers,
LukeI understand there are structures where you gift money to a trust (the value of the house) and then the trust loans you back the money to pay for the house and takes a first or second mortgage over the property so there is effectively no equity in your PPOR. In the event of bankruptancy or being sued, there is no equity in the PPOR and so no assets to sue for.
I would be seting up discretionary trusts or some other appropriate structure now if I were you and not waiting for 10 years down the track when you have $10m of equity/assets before realizing you have a tax, asset protecting and succession planning problem.
Cheers,
LukeI would certainly be paying for quality advice for this development and not relying on information from a forum. I doubt many people on this forum have any idea whatsoever about this level of development (maybe Richard Taylor, Nigel Kibel or Alistair (I cant remember his last name but he is a mortgage broker with development experience I believe) )
Cheers,
LukeWhy do you want a hot spot? I would be looking for areas with evidence of historical high growth.
Hotspotting for me means speculative areas, typically regional and mining towns not a capital city area.
Having said that I think the areas of Perth that will experience continued growth are inner north (North Perth, Leederville, Mount Lawley), inner east (Lathlain, Victoria Park) and the western suburbs (Nedlands, Claremont, Cottesloe). Particularly larger blocks of land where it is possiible to build 3-4 units/townhouses or a duplex.
Cheers,
LukeI agree with TVC. Renovation for profit requires time and effort, and is extremely risky if you dont have the necessary skills.
Also agree with Terry. I think that selling a property because it is negatively greared just to buy a positively geared property is a terrible idea. Big deal, you might get $2500 per year cashflow from a positively geared property, but what happens when interest rates rise? Are you just going to blindly sell that property because it is now negatively geared? And what if your current property is in a growth area and you expect capital gain? You are saying that you will sell a property that is expecting capital growth to by a property that might get you a couple of thousand dollars a year cashflow?
I think residential property investing is predominantly a growth asset, and cashflow is a bonus that comes later. If you are interested in cashflow, then you should buy commercial property or invest in another asset class (in my opinion), Sure some people get amazing cashflow from residential property (like Steve McKnight or Nathan Birch) but they do things differently- they dont just buy a house and sit on it.
I have heard Steve say that residential property is great for slow and steady growth but terrible for cashflow, and you should get into comercial property if you want cashflow. So even though he indicates in his books that you can get really good cashflow from buy and hold residential property, he doesnt really promote this when he talks. And you should also realise he didnt make his money from buy and hold residential property- he used vendor finance to build a cashflow business.
Cheers,
LukeAlso, I doubt houses in Laverton North have increased by 44%. Maybe the statistics show that they have, but like for like houses certainly haven't. The problem with median house statistics is they are easily skewed by new developments or lots houses in a particular price point selling for some reason or another.
Cheers,
LukeFreckle I dont understand what you are trying to prove. You just spat out exactly the same figures as I wrote down.
Invest in cash and you will get a return of 5-6%. Invest in property and you will get a return of 7% if the market performs way below the historical average and only generates 3% price increases, nut more likely 15% or so if it keeps ticking along as it always has.
What are we mean to be investing in?
Cheers,
LukeFreckle wrote:simple wrote:I would disagree. You buy a house for 500K, rent it out and if properly done brake even, not even considering tax. That at 100% finance, with zerro capital outlay. Now, in 5 years from now, your loan is still 500K, but tenants pay more (min 3% rent increase/year). So, you have an income, thank you inflation. Now 20 years down the track, loan is still 500K BUT rent is +3% every year. You take your yearly rent and pay down debt. Result – you own property, you have rent paid, and you spend NO MONEY in process. If not for inflation, this financial vehicle will not functionSo income rises with inflation but expenses don't. With that logic all properties should be positively geared because of inflation over the last 50 years. With that logic income should just keep increasing. The Freckle
If you buy a negatively geared property, then with inflation the property will become positively geared over time. Of course proeprty related expenses will increase with income, but because debt doesnt, the property becomes positively geared.
e.g.
Year 1:
Mortgage Interest (7% of $500k, LVR 80%) – $35 000
Rent (say 4.5% Yield on the property worth $625k) – $28 125
Expenses (allow 1% of value) – $6 250
So cashflow is -$13 125 (i.e. $13125 loss)
Growth of 3% (this is a low growth, only equal to inflation) – $18750
So you end up with a gain of $5625 based on a growth of 3% (which is a bad result, equal to inflation)After 10 years of poor growth of 3% per annum,which is equal to inflation:
Mortgage Interest – $35 000 (you pay interest only on investment loans)
Rent- $37 797
Expenses- $8400
Annual Cashflow is -$5603 (a small loss- after another 3-4 years of this growth it will be positively geared)
Value of House- $840 000 (growth of 3% per year)
Equity- $340 000So you started with $125 000 in equity, incurred cash losses of qpprox $93 640 and finshed with $340 000 in equity. The gain of $121 360 is equal to a gain of 97% over 10 years or 7% per annum compund growth. This is better than cash and not a bad result seeing as I assumed capital growth and rental growth of only 3% per year, and the historical average is closer to 8% per year. Even assuming a capital growth of 5% per year which is still way below the historical average, you get an extremely good return on equity over 10 years. Which is why if you buy assets that grow faster than the pace of inflation, you will do very well, and if the assets happen to only grow at the pace of inflation (which is unlikely if you buy a decent investment) you will still do ok.
In my opinion, if the price of houses only grows at the pace of inflation (3% per year), the economy would be struggling and so 7% would be a comparitively good return.
And yes, incomes will continue to go up and up. Although so will the cost of living (food, electricity, fuel etc) so you wont neccesarily be able to buy more with the increase in income.
Luke.
The occupancy certificate can be issued by the local council or a private certifier.
To buy an unfinished house will mean you need to find someone willing to sell you an unfinished house. Which is not easy as builders/developers will want to finish the house themselves so they can make money, as opposed to selling it to soemone at a loss. One way you might be able to do this is to buy unfinished products from developers/builers who have gone bust during the process but this is not common.
You might be better off completing the entire development yourself- buy land, obtain approvals and either build yourself (if you have a builders liscence) or employ a builder to build the development.
Cheers,
LukeI still dont understand why you think inflation is bad from a propertys perspective. In ten years time, the debt you have on that house will still be the same. But inflation means that the house is worth much more. Even if it only grows with the rate of inflation, and rents only rise at the rate of inflation, it will be worth much more than ten years ago and the rent will also be much more.
High interest rates combat rampant inflation, and because this generally co-incides with rampant growth of assets, then it is a good thing (assuming you have the ability to meet repayments, which you will if you have the correct structuring).
So all things being equal, inflation is very good for people who own appreciating assets (like property) but bad for people who hold cash or other assets (like bonds) that generally dont increase with inflation.
Cheers,
Luke??????
I thought inflation is a property investors friend.
Inflation means assets, incomes and rents generally rise in value while debt remains the same. How is inflation bad for property investors?
Cheers,
LukeTracey B wrote:This probably also ties in with another post of 'house vs units' eg. if you own a unit in a block of eight only 1/8th of the total land value applies to your dwelling.At one of our properties the value of the land value attributed to each apartment is just $25K which helps minimise the land tax situation.
But you want as big a land component as possible, as buildings (generally) depreciate and land appreciates.
Units can have a large land component though- If you own a townhouse in an inner ring subrub in a small low rise complex of say 6 units you would probably find that the land component is worth more than that of a similar value house on the city fringe.
Cheers,
LukeAre the properties held in a trust or in their own names?
If they are held in their personal names I think that you are out of luck. There are rukes about "at arms length" transactions and so transferring/selling the properties into a super fund breaches these rules.
Although I am not an accountant so dont know exactly.
Cheers,
LukeLand tax is not that big a deal in some states. In WA it is irrelevant but in NSW it is quite high (2% I believe for the portion of land component over $400k). You wuold have to do a quick calculation to see if the land tax payable really makes a difference to your investing strategy.
Google search Land Tax in (state) to find the answer, it should be the first hit you get.
Cheers,
LukeHi NHG,
It sounds like option 2 is the way to go, although there is not much information there so hard to say.
I am under the impression that typically the bank will not take into account the granny flat when valuing the property (or only increase the value slightly to take it into account). This is because owner occupiers buy houses and so they wont pay much extra for a granny flat.
Depending on what stage you are at with your investing would also affect your decision. It sounds like you are expanding your portfolio and growing your asset base, so you would probably be better off looking at the option that increases the value of the property by the most amount and allows you to borrow against the added equity to purchase more property.
Cheers,
Luke
