Hi Daniel,

Welcome to the Property Investing.Com forum and thank you for contributing your post.

I have a few minutes now and I thought I’d try to answer a couple of your questions…

You ask

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Is there more differences which would be significant enough to know about? I am particularly interested in the taxation or non-taxation of money received after refinancing a buy-and-hold type property to release equity. Dolf de Roos says it is not taxable, since it is a loan. How does the ATO see this?

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With respect to the American guys who come out here, there are many differences between investing in Australia and in other places.

That is, while the psychology of investing is the same and generally speaking we use the same phrases with different words (eg. settlement vs. close), the actual ‘how’ to do it is very different.

Especially when it comes to tax and property law.

In relation to what Mr. de Roos says as quoted from you, he is right when he says that the money (ie the equity that you are redrawing) is not taxed as you have not disposed of the asset. Capital Gains Tax is triggered when you sell rather than refinance.

However, there is another dimension to this issue which may not be discussed.

While the money may not be taxable, depending on the use of the money then the additional interest resulting from your refinance / redraw may or may not be deductible.

If you use the money to pay for lifestyle related expenses, such as a trip around the world, then the interest on the refinance / redraw is not deductible.

However, if you buy income producing assets where there is the appropriate connection between investing and earning income then the interest will be deductible.

The last thing that I would want to do is have a whole lot of debt that is not deductible that I then have to repay with after-tax dollars.

What I am saying is beware about using equity to fund lifestyle expenses.

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I also see australians talking a lot about wraps, yet americans (I hang out in US forums a lot) don’t seem to mention it. What is a wrap?

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I have explained this at:
https://www.propertyinvesting.com/files/content.asp?cid=wrapintro

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And foreclosures? How do they work in Queensland or generally in australia?

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I’ll tackle this in an upcoming newsletter, but for now let me just say that the privacy laws in Australia are a lot more strict than in the wild west that is North America.

The best way to pick up a bargain is to find a motivated seller via agents rather than lenders.

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What about the business behind mortgages, such as if the banks sell them to investors after a short period.

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I must confess that I am not the expert on this, although I haven’t heard of banks selling thier loanbooks to private investors before. But it might happen…

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What about asset protection? If I have a Pty Ltd company with one property in it, it would protect me from being sued from anything related to that property, (with exceptions according to ASIC) right? WHat about protecting our empires by attacks from outside? If I have the same property inside the company, and I am found liable for something outside this property/company, how can I protect it from being taken?

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Whoa, whoa… let’s take a pause for a minute as this question cannot be answered with a three line response.

The issue you describe here is broadly called structuring and encompasses:
– Asset protection, and
– Tax planning

There is no ‘right’ answer when it comes to what structure is best, but there is a way to control your assets and not own them via a complex company/trust structure.

But this is quite expensive to set up so you want to be serious before proceeding.

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And what about these tax differences? How does GST affect us? and CGT? How does the residential tenancies authority affect us? Can we hold security deposits (bonds) from other investors when entering a deal? Or is it required to send them in to the RTA?

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Daniel, you are asking all the right questions but I tell you what… instead of just providing you with the answer how about you try to find out and post your reply. I’ll check it for you and provide some further feedback as I do.

One final point – if you are serious about investing and will be back home in November, then I suggest that you book a seat at the Property Masters seminar on 9 & 10 November in Sydney.

I can tell that you will profit greatly from attending.

Hope to see more posts from you again soon.

Once again, welcome aboard.

Bye

Steve McKnight []

Hi,

I thought I’d provide a little light reading for a Friday arvo…

A few years ago I purchased a property for $38,000 when the original list price was $50,000.

I then turned around and wrapped it to someone else for $65,000 – only to have the original real estate agent call me ‘unethical’.

I was gobsmacked and speechless, since this agency charges above market commission on the basis that they provide a better service.

“Surely”, I said “I offer a different product and a better service and charge a margin accordingly – just like yourselves.” I also pointed out that the repayments that I received were still less than the rent that would otherwise be payable.

I suspect that what the agent was really saying was that he couldn’t get the price, so how could I?

Was I unethical…????… Well you need to decide… but the property two and a half years later is valued at $67,000.

It seems to me that people are quick to point the unethical finger when the buyer is paying seemingly above market value for a property, without understanding that it is a win-win outcome over 25 year agreement and that the buyer gets all capital appreciation.

Just another example of the victim and poor me attitude that afflicts a few people who expect others to constantly bail them out of trouble. It suits them while it suits them and then it’s someone else’s fault when they have no more need.

Bollocks to that.[]

Have a great weekend – go bombers []

Bye

Steve McKnight

Hello Matt,

You seem to be on the right track.

The finance left in the deal would usually be a second mortgage. The only ‘x-factors’ in such a deal would be the time of the loan and the interest rate. Most 2nd mortgages that I have seen haven’t been for more than 5 years… but this is certainly something that can be negotiated on a case-by-case basis.

You could do up a simple spreadsheet to cope with the numbers using the @pmt function.

I might have a go at something and put it up for people to download as a freebie if enough people ask.

Bye

Steve McKnight

Hi Rolf,

Welcome to the Property Investing.Com community. I appreciate your post and welcome you to contribute at any time.

You write:

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can you define the difference between a guaranteed loan and a real loan where start-up company loans are involved, where the directors have either minimal funds and or experience in property related projects ?

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Let me say up front that if you cannot pass the usual lending requirements for funding then you will find it hard to proceed to secure finance in your own name.

Such people shouldn’t give up… they just need to either:

1. Seek money partners
2. Look to do no-doc loans

My structure / strategy has worked very well for me though considering that I’ve been able to borrow over $6m on a taxable income of less than $40,000 per annum and next to no personal assets.

It would work even better for people with more income / assets (such as their own home etc. (I rent)).

A problem that many investors find is that they quickly become ‘maxed out’ when the borrow in their own names because lenders impose a debt servicing ratio of roughly 30%.

This means that once your loan service costs reach approx. 30% of your income then you may experience trouble gaining further finance on the same terms as the loans you have already secured.

The way I have worked around this problem is to borrow in a company structure and then go personal guarantor.

This works in two ways…

1. Once the company structure has reached a maximum lend then we just replicate the structure

2. We place multiple guarantors under the structure – being me, my business partner and also our accounting practice.

The effect of doing this is:

1. Because we only guarantee rather than borrow in our own name – we are not personally ever maxed out. The Company structure may be (and that’s when we replicate)… but me/we as individual guarantors are not.

2. Becuase of the multiple guarantors under the loan – we can leverage off a greater pool of money (ie. combined gross income)and borrow more money.

Now for a few words of warning…

A. Just because I do this does not mean that it will work just as well for everyone else. But it does mean that it is possible and perfectly legal too.

B. I always provide full disclosure… but I can only answer the questions on the loan application forms presented to me. To date I have never been asked to specify what loans I am guarantor for since these are contingent and not real debts. (Although they become very real if the contingency crystalises!)

C. I am not looking to deceive or hoodwink anyone here… it’s not a loophole, since that implies something that is just not the case. It is a legitimate way to structure your affairs to gain asset protection and has been used by many, many wealthy people for many, many years.

D. Finally, what I have provided here is the briefest of overviews. The way that I do this is much better explained in the Masters Of Property Investing Seminar Notes.

Once again Rolf, thanks for your post and please let me know if something that I’ve written conflicts with your knowledge / experience.

Regards,

Steve McKnight

P.S. People with minimum property investing experience need to become educated first well before trying to implement advanced financing structures such as this.

Wei,

Why were you slammed?

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How do you guys go about structuring it? Is it as simple as purchasing in a trust using a corporate trustee (like every man & his dog does), and then borrow up to the limit, and then replicate the structure? The guys on Somersoft seem to agree that the loans guaranteed by an individual will be recorded against their personal credit history, while Steve mentioned that this is not the case.

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I can only speak for me where it is not recorded… but even if it is… so what? It’s not a real debt as such…

To date I have never been asked a single question about going guarantor on the loan for any of our investment properties purchased via the structure outlined at the seminar and included in your course notes.

Mate… when it comes to structuring there is no perfect answer for all people. If you have made your mind up about the right structure for you then the next step is to actually buy something.

Don’t worry too much what other people think… it’s what you think that matters most.

Bye

Steve McKnight

Hi Akira,

The First Home Owner’s Grant is an incentive introduced by the Federal Governemnt and acts as a subsidy for genuine first home owners.

The grant currently sits at $7,000.

The FHOG legislation allows the grant to be payable in vendor finance / installment sales contracts with varying conditions depending on the State that you live in.

In Vic & NSW, the grant is payable when the person moves into the property, which allows the investor to receive back an immediate cash injection and reduces the nett amount of money left in the deal.

If the person moves out of the house then it is his / her responsibility to pay it back.

I usually take the FHOG as my lead’s deposit, which is how I am able to offer what I do for people without savings.

As far as more information on wrapping goes, visit:

https://www.propertyinvesting.com/files/content.asp?cid=wrapintro

Bye

Steve McKnight

Hi,

You can do absolutely anything that you want when you have the vision and energy to do it.

You can certainly do wraps out of town, but only when you have the systems and procedures behind you.

The system that I use is well explained in my Wrap Library.

Regards

Steve McKnight

Hello Camilla,

I thought that I would do some research on this topic for you…

The Reserve Bank

The Reserve Bank of Australia is an independent organisation to government and is charged with the responsibility of settling monetary policy.

Monetary policy is the way that an economy can be stimulated or restrained by affecting the price of money. In times when spending needs to be constrained then the cost of money increases – when stimulation is needed, the price of money falls.

The Reserve Bank of Australia controls monetary policy via setting a key benchmark interest rate called the ‘Cash Rate’ – which is the rate generally applied on overnight money markets.

Lenders then take the base case rate and add on a margin when setting home loan interest rates… so as the Reserve Bank changes the cash rate, so too do lenders who price their loan products at the cash rate + % margin.

An excellent link to show how the cash rate has moved since January 1990 is: http://www.rba.gov.au/Statistics/cashrate_target.html

Changes To Interest Rates

Movements in interest rates must be ratified by the Reserve Bank of Australia Board. The Board consists of nine members and meets generally 11 times per annum on the first Tuesday of each month.

Monetary policy is discussed at these meetings and movements in interest rates are generally announced on the day after the meeting.

Once a change is announced then it may take a few weeks for lenders to pass on the movement as they must also manage their internal credit risk and mix of loans:deposits.

Advising Wrap Clients

Provided you run your wraps under a system, advising of changes to interest rates is not a administration problem at all… it’s just a standard letter to each wrap client. Less than ten minutes work.

I hope this has helped.

Bye

Steve McKnight

Hi Rod,

Interesting post…

My thoughts are that there are plenty of people who are interested in wraps. As such, people may disqualify themselves for any number of reasons – such as a prior criminal history, poor credit history etc.

It’s nothing personal, but I would just say that the risk is too high for the return and then turn my attention to helping other people.

Re: your idea about not putting them on the policy… BAD IDEA! If something was to happen then you can bet the insurance company will find out about it and deny the claim. That’s a risk that I wouldn’t want to invest with.

I think that if you must wrap to these risky leads, then it can only be done so on the basis of full disclosure to an insurance company under the guise of expecting to pay a higher premium. Perhaps go to insurance brokers rather than a company, since I’ve heard of some brokers who are experts at high-risk deals.

Bye

Steve McKnight

**edited to fix up a few typos**

Edited by – [email protected] on 08/08/2002 10:45:09 AM

Hello Alison,

Thanks for making your first post and welcome to the forum… great to hear from you []

When it comes to qualifying wrap leads you need to understand that you are not just dealing with “bank rejects” and as such a poor credit risks.

There are lots of people who would be great clients but the major lenders have ignored… self-employed, older persons, high income earners but no savings, ex-bankrupts that went under for personal or domestic reasons (divorce etc.)…

Now as for qualifying leads… the 10 critical questions that I ask, which are outlined in the Wrap Library, all focus on trying to determine if the lead is someone with a victim mentality.

If they are then I won’t go further as from my experience these are the people that will default later on when some other need becomes more urgent (like a new phone etc.)

Hope this has helped.

Once again… thanks for your post.

Bye

Steve McKnight