Hi Kim

Welcome to the forums.  I'm sure we all hope you enjoy your time here.

As the legal paperwork for Lease/Options and Instalment Contracts is so different, I think it's best to answer your questions under a couple of headings.

Lease/Options

The legal paperwork for a Lease/Option is, as the name implies, a residential lease (as defined in each states Residential Tenancies Act) and a Call Option, i.e. paperwork that gives you the right, but not the obligation, to purchase a property for a fixed price, for a fixed period of time.  If you don't "exercise" the option within the "term" of the option, the option becomes worthless.

I understand that a lot of the usual expenses (and hence deductions) like rates etc that you might have do not apply with these set ups, as they are in fact covered by the person who lives in the property.  All residential leases are controlled by the various state Residential Tenancies Acts.  All these Acts insist that you can't charge tenants rates and insurance, etc.  As you learn more about this technique, you will also hear about "on-going option fees".  These are quite flexible and relate to an on-going cost for the option. 

Does anyone know what sort of tax deductions can be made, other than the interest you pay on your investment mortgage?  Yes, the property remains a rental property until such time as the option is exercised and the property changes hands.  This means the property retains rental property tax deductions until such time as the option is exercised.

With lease options, is the property still considered a rental until the tenant chooses to take up the "option" to buy?  Yes the property is still regarded as a rental, with the Lease governing the rights of you and the tenant.

Can depreciation claims etc still be made by me, as the title holder?  Yes.

While you remain the title holder, can any equity gains in the property be used to obtain more finance?  Yes you can refinance and take out equity but, with a long term option, you'd have to make sure you don't increase your debt above the option's "strike price".

Instalment Contracts

The legal paperwork for an instalment Contract is, a standard Contract of Sale with an Instalment Payment Schedule added (usually about 13 pages).  As with a traditional purchase, contracts are exchanged, but settlement is scheduled e.g. 30 years after exchange or whenever the new purchaser can payout the loan (sell or refinance).  This addition of an Instalment Payment Schedule, effectively turns a standard Contract of Sale into a loan document as well as its normal function as a Contract of Sale.

I understand that a lot of the usual expenses (and hence deductions) like rates etc that you might have do not apply with these set ups, as they are in fact covered by the person who lives in the property.  All council rates, water rates, insurance and maintenance of the property becomes the new buyers responsibility under an Instalment Contract.

Does anyone know what sort of tax deductions can be made, other than the interest you pay on your investment mortgage?  New buyers can access the FHOG with an Instalment Contract (IC).  This isn't possible with a Lease/Option.  If you sell a property with an IC, the Land Tax liability for that property moves from you to the new purchaser and because all our buyers are owner occupiers, the Land Tax liability for that property effectively disappears.  Other taxes concerning depreciation, etc are Federal Govt taxes. As your name is still on the title, I suggest you talk to your accountant about these types of deductions.

With lease options, is the property still considered a rental until the tenant chooses to take up the "option" to buy?  With an Instalment Contract you stay on the actual title and the new purchasers gain what's called Equitable Title.  It is important to get IC specific insurance for these properties.

Can depreciation claims etc still be made by me, as the title holder?  You are still the title holder, so I'd suggest you talk with your accountant about this question.

While you remain the title holder, can any equity gains in the property be used to obtain more finance?  In NSW and Qld, you can refinance a property that's the subject of an IC but the debt must not be increased above the new purchaser's current loan debt.  In Vic, you cannot refinance a property that's the subject of an IC.

I hope that helps but please make sure you don't rely on it, i.e. it's vital to talk these issues through with both your accountant and solicitor. 

Cheers,  Paul

Hi jhk31

My wife and I started our Vendor Finance residential real estate business in 2003.  Happily for us, I was able to give up my job early in 2009 and we are now both enjoying working in our Vendor Finance business full time.

We'd suggest the main pitfall is believing that it's some form of get rich quick scheme.  Happily it's becoming more regulated by the new National Credit Code and this is helping to improve its image.

A few web resources that may help in your search for information about vendor finance in residential real estate are:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/strategies/lease-options
http://www.jvpropertypartners.com.au/index.php?option=com_content&view=article&id=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/   The Vendor Finance Association of Australia

Cheers,  Paul

Hi ducata

We have a strategy we use for this type of situation, we call "negative2positive".  It involves selling the property with vendor (seller) finance to an owner occupier.  We have always found that, if you make a property easy to buy, you also make it easy to sell.

Many buyers will pay a premium price for their PPOR if they are unable to get a traditional home loan and a property is offered to them with vendor (seller) financing.

We normally find this type of transaction generates cash flow at three points, i.e. the deposit the new buyers pay, the positive monthly cash flow and the "back end" profit when the new buyers refinance into a traditional home loan.
 
Of course, you are selling the property, so this strategy only works if selling the property is something that fits into your plans.

Cheers,  Paul

Hi Daniel

I think the point here is in your original question, i.e. "after settlement".  If they wanted to rent the property prior to settlement then your solicitor would use a "licence to occupy" (LTO) and in NSW and Vic too I believe, a LTO is not covered by the Residential Tenancy Act.

However, because the Vendor currently occupies the property, there's no reason to go for a LTO.  As mentioned above, just get your solicitor to write up a Special Condition and that should satisfy the Vendor that they're going to get their requested lease after settlement.

Cheers,  Paul

Hi Jaffasoft

Just get your solicitor to put it in the Special Conditions area, i.e. the extra clauses added to the standard Contract of Sale.  Here you can nominate just about anything you like.  Just have it written up something like; "The Vendor agrees to enter into a xx month residential tenancy of the property, at $xxx per week, prior to completion of the Contract".

Your solicitor will be able to word it correctly.

Cheers,  Paul

Hi Basman

Dan42 is right.  However, just for her information, it's worth knowing that the Family Law Court has been very successful in unraveling trusts that have had assets placed in them after a couple started cohabiting.

Cheers,  Paul

Hi

We recently got a company/trust structure for $1,500 via our accountant.

If you settle on a property in, say, your name and then transfer it into a trust, then yes new stamp duty will be incurred and associated legal costs.

As always, check with your lawyer.

Cheers,  Paul

Hi Ben

Here are a few ideas:
ACCOUNTANT:  Bruce Whiting, Business Artisans P/L, Ph: 02 9521 6942
LAWYER:  Tony Cordato, Cordato Partners, Ph: 02 8297 5600
BROKER & FINANCIAL PLANNER:   Richard Taylor, Residential & Commercial Finance Broker, Ph: 07 3720 1888
BROKER:  Terry W and the other great brokers you'll find in the Finance (& other) sub forums on this site.

Also, search around for the best Building and Pest inspection services you can find.  There is new technology available in the pest inspection business and we find it useful.

Cheers,  Paul

Hi Dr Spock

My wife and I started out in Vendor Finance in 2003 and it's been a great business for us.  So much so that we both spend all our time building the business these days.

We did have one advantage though and that was we started off with some equity in our house that we were able to use to buy our first property, that we subsequently on sold with a vendor finance Instalment Contract.

If you're currently unable to get a loan you're more than likely going to have to use a vendor finance (VF) strategy called a Lease/Option.  About the best "getting started" manual for this technique is Rick Ottan's "Massive Passive Pack".  I've seen one or two of them available, second hand, around the forums these last few weeks, so you may be able to pick up a bargin.

Starting off on the Lease/Option route is harder than the way we started.  However we've seen numerous people start off in the same position as you, who now work their VF businesses full time.  Like all things, your success is directly correlated to your ability to remain focused and stick with it.  Good luck.

Cheers,  Paul

Hi dcn08

I'm with Richard and Terry, i.e. they work very well here.  Just in case you're new to the idea, Lease/Options are one of the two most popular vendor finance strategies in Australia.  The other being Instalment Contracts (sometimes called Wraps).

Three quick spots to read up on these are:
https://www.propertyinvesting.com/strategies/lease-options
https://www.propertyinvesting.com/strategies/wraps
http://www.vendorfinancelawyer.com.au/

I hope that helps.

Cheers,  Paul