I think this is pretty normal, and valuers should be able to do this.

Terryw
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Here is an example.

$100,000 property with $100,000 loan
LVR = 100%
Equity = nil

after 5 years
$150,000 property, loan $100,000 (interest only)
LVR = 100,000/150,000 = 66.67%

You can generally borrow up to 80% of the value without incurring LMI.

So in this situation you could increase the existing loan to $150,000 x 80% = $120,000. But you already have a $100,000 loan, so that is $20,000 extra you have drawn out.

You will still have 20% equity in the property after you have drawn this money out.

You can then use this $20,000 as deposit on another property. eg. $100,000 property, $20,000 deposit, $80,000 loan. You have effectively borrowed 100% of the property value, but now have 20% in this property too.

wait another 5 years and both properties may be worth $200,000 each.

Total value = $400,000
Total loans = $120,000 + $80,000 = $200K
= 50% LVR

So you increase both loans to 80% = $320,000 less current loan of $200,000 = $120,000 extra.

use this to buy 6 more houses.

Terryw
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Sounds messy and could be costly if you want the accountant to work out the interest you wish to claim. Why do you want to do it like this?

Terryw
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Superfunds pay 15% tax, so yes you would be paying less. But is this the best way? You cannot mortgage it, and leverage off the equity.

Do you have a loan on your own home? If so, maybe selling the investment house to your own trust may be an option. Use the funds released to pay off your home loan, and you or the trust (depending on structure) will be able t claim the interest as a deduction.

You can then reborrow the money against your home and invest further.

Terryw
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Yes.

One of my Discretionary trust deed’s states that a charity is a beneficiary.

Charity is defined very broadly in the deed too, including

a) any body, corporation or unincorporated association being a church, religious institution, charity or benevolent institution and gift deductible bodies and any charitable purpose

b) the trustee (in its capacity as such) of any trust or settlement established for charitable or benevolent purpose

c) any charitable trust, society, authority, institution, church, religious order, person, entity which at the time of distribution of the income of the trust is exempt from income tax or at the time a tax deduction would be available for a monetary gift to that entity or person.

Terryw
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also check out http://www.gatherumgoss.com

Terryw
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Hi

‘business’ is a vague term.

Most people who say business are probably actually sole traders. If you just have a business name, then you are probably a sole trader. This is not an entity. The business is yourself, legally.

But if your business is a company, then this is a separate legal ‘person’.

If this is the case, then your company would earn $80,000 but pay you $60,000. Netprofit of the company would be $20,000. So the company would pay tax on this at 30% – assuming it had no other expenses. It could then lend you some of the left over money to buy a property.

However, there are various rules about borrowing money from your company. So discuss this with your accountant. Depending on your overall income, it may be better to just pay yourself also.

Terryw
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And for all those DIY Trustees out there, if you are going to add or remove beneficiaries this can be extremely dangerous to your wealth.

In many instances this can cause a resettlement of the trust. If this happens then it is the same as winding up the old trust and creating a new trust. And all the costs of stamp duty and CGT for transfering assets would be incurred.

For more on Resettlements, look at this paper:
http://www.taxlawyers.com.au/Publications/trustacc2.doc

For a very good and easy to understand account of the various roles in a discretionary trust see:
http://www.taxlawyers.com.au/Publications/New/Trustacc1.htm

Terryw
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How to calculate the figure will be included in the terms and conditions of the loan. Ask your lender for a copy of the terms and conditions booklet.

Basically, they will work out 2 loan schedules. One at your fixed rate and one at the rate when you get out of the loan. Any shortfall in interest they would have received would be payable as a break cost.

Terryw
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There are many things to consider, eg how many trustees? I see a lot with husband and wife as trustees, but I don’t think this is a good idea if you are investing in property as it can lead to each giving a guarrantee. This creates more risk and decreases borrowing capacity.

There is also the ability to name beneficiaries. But why name someone if they will be included anyway as a general beneficiary? Some lenders want guarrantees from all adult people named in the trust deed.

In some cases it is better for a company to be trustee. It is safer from an asset protection POV and also easier if you want to change directors and hence change the guarrantor for the next loans etc.

Sometimes when dealing with solicitors or accoutants, they do not realise the lending issues.

I had an argument with a clients solicitor a while back. The client was trying to buy a property and hide it from his ex spouse. The solicitor suggested he set up a trust with a friend as trustee. They did that, but they did not think about who would guarrantee the loan. The mate didn’t want to do it. The soliticor just told me to tell the lender the client would guarrantee the loan, even though he was not mentioned in the trust. He didn’t realise that no lender would accept this and lend money this way.

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