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  • Profile photo of quickchickquickchick
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    Whoa, my first effort at quoting and it didn't go as planned!
    Sorry.

    PaulandJo, I think you need to be sure on what your main priority is for having investment properties.
    We would all say, wealth creation, but from what you have said, maybe tax minimisation and retaining your family benefts are higher priorities? Tax minimisation is fine, but should not be the reason for buying or selling.
    In my opinion, the problem with some accountants is they are all about tax minimisation but not too helpful with wealth creation.

    If you make a loss on the negaitively geared loan, (increased by getting out of your fixed loan), your +CF will be free to finance more +CF property, eg deposit or stamp duty.  And you may be able to carry the loss forward against future taxable income.

    Your +CF property you want to sell, you state your CF is still positive but now your losses are higher…..
    ie your negatively geared property is more negatively geared?
    More reason to get rid of it, I would say!!

    I agree broadly with Colin, except perhaps that moving out of your PPOR is a personal decision and you have to be sure that you can find somewhere you'd be happy to live at a price you'd be happy with. (Is there a very low vacancy rate? If so, great for you to be the landlord but hard for you to be a tenant.) And with little kids, you're at the mercy of a landlord who may put your home on the market as soon as you move in.

    I see no benefit from selling your +CF into a trust. Income from trust (there must be some by definition, if it is more than maybe $1500 trust expenses per annum, plus ? land tax) will still be taxable for whoever is the nominated beneficiaries, eg you and hubby. But great to buy future +CF property in a trust. And terrible structure to buy property that doesn't end up being +CF after expenses!     

    If at all possible, your loans should be structured so that your PPOR has all the equity, and the investments, no equity (as interest is tax deductable on them). Depending on your total equity, this may mean cross-colateralising your PPOR and IP's, which also has its down side. Your choice. 

    Profile photo of quickchickquickchick
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    Well done on buying a positive cashflow property!  Not easy to do.

    I assume your other properties are negatively geared?
    If so, I think you are saying you plan to sell your fantastically performing property, to fund your losses from the poorly performing properties.
    WHY WOULD YOU DO THAT!

    (Sorry for shouting!)
    Wouldn't logic dictate you'd be better to get rid of one or some of the underperformers?
     And keep your best property?
    That's what I'd do, at least if you realise a loss you won't pay tax, and you'll keep your great property which should continue to appreciate as well as giving you cashflow! 
    Or you can keep the poor performers in the hope they may go up one day…. and have your borrowing $$ tied up in property that is not helping you realies your goals.
     
    If there is a reason to sell the CF+ property I'm not seeing, another thought is re-finance and take some equity out of your good property, to help you with the losses. (As Terry suggested.)

    If you do sell your positive cashflow and reap your profit, see Terry's numbers.
    If it is your only income, you will be taxed as though you earned $80,000, ie you may pay $20,000 to $30,000 tax.
    (Check with an accountant, I'm guessing.)

    It is better for that to be in your name, as your husband will be on a higher tax bracket ie will pay more tax.

    If you bought it in a family trust, you can choose who the beneficiaries will be, ie any charity listed as a beneficiary on your family trust will be given tax-free dollars, and you can choose which percentage goes to who according to their tax brackets.
    But once you have bought it in your name, paying stamp duty to transfer the title is going to negate any benefit.    

    Profile photo of quickchickquickchick
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    Hi Hankie Rich,

    My education connections were in Florida, so that's where we set up our LLC.
    However we're buying property in Phoenix, with our Florida LLC.

    We frequently visit family on the western side of USA so preferred to invest where it's convenient for us.
     
    Question for Jurgen: How much do you pay a year, getting taxes done for many different LLC's?

    Profile photo of quickchickquickchick
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    Can I just point out, that if you have set up your LLC in a non-disclosure state, and then want to borrow hard money, you will reacha dead end.
    I have been accepted for a hard money loan (Florida LLC), but had friends knocked back because they have a Wyoming LLC.

    Profile photo of quickchickquickchick
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    Hi Dragonflyz,

    Yes, there are many different opinions out there. And different goals. And different strategies to get to the same goals.
    It can be confusing.

    Maybe the wosrt outcome is to fall into "analysis paralysis" and never do anything.
    And maybe the next worst is to believe everything we see and fall for anything.

    Most of us learn more as we go along.
    So long as we don't ever reach the stage where we think we know everything about investing, we will learn more as we go on!

    And don't give up your dreams! 

    Profile photo of quickchickquickchick
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    Hi Dragonflyz,

    I can see that you are trying to prepare yourselves for a good financial future.
    Good on you!

    There is so much to learn, and a "small" hiccup can be quite costly  eg if your property doesn't have any capital gain for a few years, why bother?
    From my understanding, I think that depreciation claimed may have to be repaid if when sold, there is a capital gain?? A question for an accountant.

    I strongly recommend reading Steve's revised edition, and try "The Real Deal" by Brendan Kelly and Simon Buckingham, which is examples of recent property deals done in Australia. Leverage off others people's mistakes/successes, cheaper than finding out yourself by accident!  

    Profile photo of quickchickquickchick
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    I wasn't referring just to the first IP re you financing, just trying to demonstrate that negaitve gearing eventually will be self-limiting.
    Maybe you can reach IP3 within the next few months.
    But then your costs will start to add up.
    eg if all your properties cost you $8,600 pa out of your own pockets, that is after the rent. ie they make a loss every year (until they have enough capital gain, or the rents go up). It means that you will both have to keep working for a long time to support your IP's. 
    If you have positive cashflow properties, the more you have, the more your tax return goes up, and if you want you can eventually give up work and live from the positive cashflow.

    Good to spend some time deciding your strategy early, and make progress faster. (Have you read Steve McKnight's books?)    

    Profile photo of quickchickquickchick
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    Hi Dragonflyz,

    From our experience in investing, banks are very conservative about lending especially on a promised bonus.
    From their worst case scenario, what if hubby loses his job etc.

    It depends what you're investing strategy is.
    From a rough estimate, I think your IP1 may cost you about $8,600pa out of your pocket, to cover your expenses.
    As far as negative gearing goes, not too bad.
    Problem with negative gearing is, the more properties you buy, the worse off you are every week. 

    Positive gearing is worth a look at… see posts on this forum.

    quickchick

    Profile photo of quickchickquickchick
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    Hi Tobyson,

    We found during a mining lull, our property in Dysart with a pool wouldn't rent. Companies refused it.
    Solution: we got rid of the pool!

    If this property you're looking at already has a company lease though, I doubt they'll let it go at the end of the tenancy period unless they no longer need it.

    I wouldn't not buy it because of a pool.

    Profile photo of quickchickquickchick
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    Hey Property Investor 1,
    Thanks for this well-balanced viewpoint and the article.

    quickchick

    Profile photo of quickchickquickchick
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    Good subject, risk management.

    While I agree that it is a factor, on the other hand I would argue that if we are not prepared to stretch ourselves out of our comfort zone, we will not progress.
    If I only did things I was 100% sure were very low risk, I would never do anything. NOTHING is risk free, even government bonds! But even leaving money in the bank (as I have said before) is a risk. Inflation will be more than our interest! (Ask the banks if in doubt!)

    I agree, Andy, that the risk of Angel's Northern Beaches deal is that the property drops in value. 
    One that I would be OK with, my view of the market is not pessimistic. So it would be an acceptable risk to me. 
    And worst case scenario may be that the occupants move out at 5 years and market drops.
    If so, I would suggest that rents may not drop, but increase… as fear grows (eg recession) less people buy so more rent, which puts pressure on rent prices to go up. It helps to have an opinion of the market, and base your strategy on that.

    If you can buy or create positive cashflow ie property that pays all the interest, rates, insurances, and has a secure tenant base, THAT is low risk! If your property drops 30% in value but you bought for cashflow, your cashflow is still as good as ever and you should have no need to sell it in a hurry!  

    A well-educated investment is not really the same as a gamble. If you have done your due diligence and investigated your worst case scenario, you should be fine. eg we had an empty house during a local decline in market, but our other profit meant with 4 months vacancy, our other property in same location paid for the loss, and we were still ahead on cashflow overall through the year. Being in the sharemarket and not either having a stop loss, or a very definite strategy of closely watching and being disciplined to get out at a pre-determined point. Being in a margin loan for shares of course increases your risk which can become a big problem.
    Property is not like shares, it takes longer to go up in value but also longer to drop on value (if that even happens).  ie the bear does not fall down the stairs, like in shares.

    Angel, check your personal messages!

    quickchick 

    Profile photo of quickchickquickchick
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    Hi Angel,

    I appreciate your comments.

    I agree that there is risk whatever you do. To me the worst risk of having money in the bank is inflation… eg $100,000 this year will not buy as much next year!

    5 years is a long time, and I’m sure you will be in contact with your buyer and know in advance if they will want to extend the contract period.

    And your SA property sounds like a good deal too!

    quickchick

    Profile photo of quickchickquickchick
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    Hi Angel,

    Thanks for sharing your story.
    It is encouraging to hear of your creative tactics to buy a big pricetag property with very little money down, and a built-in profit!

    I have been thinking through the deal,and have taken the liberty to analyse it (to the best of my knowledge.)

    RISK:
    I guess the risk in the deal is that by the end of the lease, "if" the price of the property is less than $1.6m (unlikely)  and the vendor does not take up the option to buy.hoice. (Depending on how the contract is worded, whether they have the ability to back down on the purchase.)  

    CASHFLOW ANALYSIS:

    Rental income:
    (Do you have an annual rental increase at CPI or market written in to your lease?)
    $1500pw x 52 = $78,000pa
    (If you claim depreciation, you will have to pay it back from your profit at sale. May be worthwhile for your cashflow in the meantime?)

    Costs:
    1. land tax $8,000 pa per NSW land tax website. I expect that you would have to pay this, can't pass on to the end vendor?
    2. costs for rental management (presumably none, you are managing yourself?)
    3. rates etc Is this your expense, or the vendors? (I'm not sure of this cost).
    4. interest bill on $970k loan = $67,900 if loan was 7% interest only (no principal repaid).
    5. I presume all maintenance costs are paid by the tenant/buyer, including insurance?
    1. + 4. =$75900 (at least, maybe plus 2 and 3)

    I couldn't call this cashflow positve… maximum $2,100 wouldn't justify the purchase price on the cost/risk analysis.

    HOWEVER for a deal with none/minimal holding costs and very little money down or ongoing expense, you have a very good prospect of significant profit in 5 years that I would be pretty happy with!

    CAPITAL GAIN:
    (calculated on money down, and deal as outlined. Insurance not included.)

    Expenses: stamp duty net $22,000.
    deposit NIL!
    interest on approx 20% loan NIL! 

    In 5 years:
    !,600,000 – $970.000 loan If loan was interest only) = $630,000
    Less loan repaid to original vendor = $230,000.
    Profit $400,000

    less tax…. if I had a profit od $400,000 for $22,000 cash down in 5 years with propbably low risk, I'd be happy to pay the minimum legal tax! And pay for good accounting advice!

    Congratulations!

      
     

    Profile photo of quickchickquickchick
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    Hi Manoj,

    I appreciate your comments.
    I am sure you know more about super rules than I do. 

    If I were to live solely off my super from age 55, I would be broke and on the pension at 67 for sure!
    ie. we don't have a lot!

    We have $60,000 net income from a pair of duplexes and a block of 7 units.
    (Which is a bit more than net of what I would earn working full time. But I don't have to.)
    ie 2 properties that contain 9 seperate tenants.
    We have $370K in capital growth in the 3 and 6 yrs since we bought them.
    That is after paying interest on combined mortgage of $600K between the properties.
    There is no CGT unless we chose to sell.

    The property we did choose to sell and made $226K on, after costs $180k. 
    So that is $90K after the 50% CGT concession (having held for more than a year).
    Deduct set up costs of Family Trust.
    Divided between us both per Family Trust, only taxed at our personal tax rates.
    We didn't end up paying a lot of tax, legally.

    I am not working hard for my money.
    My money is working hard for me.

    I won't need 20 separate properties to achieve an income of $100K.
    We have had single houses that net $100pw cashflow in our pocket each.

    Hope you can see the other side of the story.

    quickchick
     

    Profile photo of quickchickquickchick
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    Interesting to hear where you are coming from, Manoj.

    You speak of buying property in a SMSF.
    I agree that that can be an effective way to make the most out of super.
    The problem with super is, that you can't reap the benefits until you reach 67 (or similar retirement age).
    And if we have another sharemarket dip before we have enough super to buy property, we will take a long time to build a property portfolio from our Super. 
    For most of us, "retirement"  from the government is a while off, roughly 20 yrs in my case.

    Meantime we have had positive cashflow properties with 105% borrowings against. (ie no cash put in, just home equity to enable borrowing.) They are held in a trust, so we can direct the profits where we choose (including us and charity) before paying tax.
    Some of these have also had phenomenal capital growth as a bonus. The home is paid off as a result, perhaps 10 yrs before "schedule".

    If our main strategy was to avoid paying tax, we would not have made the progress we have done.

    Meanwhile, we are working part time and travelling more and more.
    "Estate planning" is about retirement and when we die.
    Some of us are not prepared to wait that long!

    It depends on how aggressive you want to be in property investing.

    We have spent a lot on education but it has paid multiple dividends!

    Profile photo of quickchickquickchick
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    Manoj, I have been reading your posts and have a few questions…

    You have just stated that "hopefully there will be no income after expenses and therefore no tax to pay".
    The whole point of the strategy this post is about, CF+ deals, is to make cashflow from our investments.
    In fact, with the unltimate goal of replacing our job income and freeing us not to work.

    Minimising any income is then counterproductive to the whole idea.

    If I make money from property investing, then I am happy to pay the (legally minimum)  tax.

    I want property that brings me real cashflow, not "virtual" savings.

    I am not a tax advisor, and would appreciate further comments from you.

    quickchick

    Profile photo of quickchickquickchick
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    In other words, buy the property in the Trust in the first place! Or waste a lot of money,  in stamp duty and conveyancing.
    If you are putting in an offer  and need to set up a trust in a hurry, you can put your offer in as "Bill Smith and/or nominees".
    Trusts can be set up within about a week usually.

    If your property doesn't make you money, (ie cashflow positive  from day 1), ask your accountant if it is worth buying in a Trust.
    (Maybe not) as it costs you $ each year to maintain a Trust.

    Profile photo of quickchickquickchick
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    Just a word to all the cynics out there…

     I spent 3 months searching when I started looking, for CF+ properties.
    Quite frustrated at times.
    Decided I was looking for the wrong thing…. "a solution" and started changing my criteria.

    The question is, what could make a property CF+? Or, what could I do to make a property CF+?

    If you are looking for CF+ in the middle suburbs of Melbourne or Sydney, you are quite right, you'd have to be kidding yourself.

    So what to do you need to do differently, to get a different result?  
    These investments are NOT easy to find. But they can be found. Today.

    "Seek and you will find".

    We did, and it has worked for us.

    Profile photo of quickchickquickchick
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    Hi Chalkey.

    There is so much detail in  your question above….
    Congratulations on the success of your business.
    And it sounds like you intend to build a very nice home/office combo.

    A few thoughts from me, for what they're worth.

    1. Is the land zoned for combo business/residence? Council may not allow you to build this.
    I would ask this question first. If they allow it, they may put onerous conditions eg parking for clients, circular driveway for traffic management, operating hours etc. If they don't, then the rest of your questions are irrelevant. 
    2. Who's name is the land currently in? To change it, you will have to pay stamp duty.
    If it is in joint names, you will have to pay half (probably current) value to change it to your wife's name. Or full duty to put it in your business name.
    3. If you sell it one day, (eg when you retire if not sooner), who will want to buy it?
    If it is not saleable, that could be a problem.

    As for all the legal and tax ramifications, too hard for me!
    May I suggest you get legal and accounting advice, and you may save a lot of money!
    For the size of your costs, the  fees will be inexpensive comparably.

    quickchick

    Profile photo of quickchickquickchick
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    If you plan to sell the house after 2 years, ask local agents and look around yourselves…
    Does a pool add to resell price in your area?
    (In most areas, I would think not. But if you are selling someone's "dream home" MAYBE a pool will add value. If it is expected in that market.)

    If you plan to rent, I wouldn't think of it!

    Sometimes we all make purchases which are simply lifestyle choices, and we are prepared to pay the price for them.
     A pool is a big lifestyle expense! Maintenance after purchase.

    quickchick

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