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  • Profile photo of trakkatrakka
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    @trakka
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    December 10, 2007 - 4:43 am

    Hi goldengoose, you're absolutely right to think in terms of the return on YOUR money, rather than the gross return on the overall asset. But where your thinking may not be crystal clear is that leverage (using as little of your own money as possible) only magnifies any profit or loss – it never turns a loss into a profit or vice-versa.

    So if your finance costs 8% and you're earning 4.5% in rental income, you HAVE to obtain a capital growth of 3.5% per annum to break even. If you only get, say, 1.5% capital growth, then your overall asset has "lost" 2% that year. If you only put in 10% of the money and borrowed 90%, the lender doesn't share any of that loss, so in fact you would have 20% of YOUR investment. (ie You lost 2 of the 10 pc that you put in.)

    But on the other hand, if you earned 5.5% capital growth, your overall asset has profited 2% that year, which you don't have to share with the lender either, and therefore you've EARNED 20% on the funds that YOU invested (ie your 10% has increased by 2%.)

    This is simplified, of course: you have to take into account the fact that capital gains dollars are more tax-effective than income dollars (due to 50% CGT concession if held > 12 months), and that you don't have to pay 8% interest on the 10% equity that you put in etc, but these are relatively minor matters in the big scheme of thing and I believe this simple example adequately demonstrates the principles.

    Best wishes!

    Tracey in Brisbane

    Profile photo of trakkatrakka
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    @trakka
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    December 8, 2007 - 10:00 pm

    wezwaz, I wholeheartedly concur with Paul and Karen – my solicitors have saved me far more than I've ever paid them. If your transaction is completely straightforward, then you may consider the $500 to $1000 spent on conveyancing and oversight of your purchase/sale as "wasted". But the problem is that a not-insignificant portion of transactions are NOT straightforward, and just one non-straightforward transaction can easily bankrupt you. I could give you a handful of cases where people who did nothing "unreasonable" ended up losing everything (or a LOT, anyway) through legal technicalities which could have been avoided if they'd had good legal advice.

    Here's one: let's imagine you have a contract to purchase a house here in Queensland. The contract goes unconditional and you're all ready to settle, but as you don't yet own it, you haven't obtained insurance on the property. The day before settlement, an arsonist sets fire to the house and burns it to the ground. Did you know that you still have to settle at full price? In Queensland, the property is at the purchaser's risk from the day after contract, not settlement. If you'd been aware of that, you'd either have purchased insurance well before settlement, or done as I do and insert a clause amending the standard contract such that the property remains at the vendor's risk until settlement. This is just one of many, many potential legal traps.

    It's good to be confident in your own judgement, but with respect, there's no way a layperson can be up-to-date on all the legalities of property transactions. Many lawyers aren't, either. But if they screw up, they are liable and have professional negligence insurance. If you screw up, you have no protection and could lose everything.

    I sure hope you've at least had legal advice on protecting your assets in structures; if not, you are a BIG gambler! I recommend that you go directly to a solicitor for advice on asset protection, at an absolute minimum.

    Regards,

    Tracey in Brisbane

    Profile photo of trakkatrakka
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    December 8, 2007 - 9:42 pm

    Hi atapiap!

    I feel for you – what a horrid experience as your first foray into property. Yes, you should have been better educated, but I hope people won't go too heavy on that point because I know you're well aware of that, and it really doesn't help you now, does it? Your English seems excellent to me, incidentally.

    I think you will certainly lose your deposit, which I hope was really minimal and that you can consider that forfeited money as an investment in your property education.

    The "somewhat good news" is that I suspect that unless you have lots of cash sitting in the bank – which if you were after a 100% loan I'm guessing you don't – then the vendor is almost certainly "bluffing" about suing you. Presuming the contract is binding, and I really don't know what potential "outs" there are, then the vendor certainly could sue you, either for "specific performance" (ie forcing you to buy it anyway) or for their losses as a result of your breach.

    BUT – having been in the vendor's shoes in the past, where somebody was unable to complete even though their contract was unconditional – the legal advice that I had was that it would cost me far more to pursue this through the courts than to just take the deposit and try and get the property back on the market as quickly as possible. This is particularly the case where the potential purchaser, ie you, doesn't have ready funds for the vendor to access. ie If they sued you, if you don't have the money to give them anyway, then they've wasted their time and more money on suing you.

    I'm almost positive that the vendor will just cut their losses and get the property back on the market.

    Next time, make sure you have "outs" – clauses relating to finance, building and pest, and one to cover any other contingency that is unexpected, if you can get it accepted, eg "subject to due diligence". Get legal advice BEFORE you sign the contract!

    And for vendors, the lesson is to ensure that the deposit is large enough to cover your losses if the contract doesn't complete after going unconditional.

    Best wishes on your journey,

    Tracey in Brisbane

    Profile photo of trakkatrakka
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    December 8, 2007 - 9:24 pm

    Well, life is funny sometimes…. by coincidence, I recently ran into somebody who was intimately involved with Steve's early property dealings and I had the chance to ask him about this. What he told me is exactly what I suspected – that the strategy is "if they don't ask, don't tell".  It is possible to use this strategy in the sense that it can be done, but many brokers – as has become evident here – consider it unethical and won't become your "accomplice". I am surprised that Steve would openly advocate this.

    The majority of lenders would certainly not be happy about this if they were aware of it, but whether such conduct constitutes a breach of your contract with the lender hasn't been tested, as the people who are likely to try this strategy generally don't default because if they're at all smart they would only use it for positively geared property. Though I readily concede that if it were tested, you probably would be found to be in breach of your duty of disclosure and possibly other conditions.

    As I stated in a previous post, I was only interested in this strategy if it were legitimate. I will not be adopting the "don't tell" approach, but I like Alistair's statement about self-funding commercial ventures, ie that in many cases the lenders are aware of these additional debts but decide not to include them for servicing purposes because they're self-funding.  That makes sense and I should be able to take advantage of this as I'm fortunate to have a very positively geared commercial property which has a debt that is enormous relative to our personal income. So I definitely need to find lenders who think as Alistair portrays – and I'm sure they're out there.

    Thank you all for your input, and best wishes to all,

    Tracey

    Profile photo of trakkatrakka
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    October 4, 2007 - 10:53 pm

    Here here, Adam. Quite a lot of posters seem very willing to assume bad faith, imply fraudulent intent, and pass their judgement, without actually answering the question with any useful information.

    I've not used this strategy and have no intention of using it if it's not legitimate. I am making genuine attempts to ascertain whether it's viable, but rather than provide solid information about the legal distinction between guarantees and loans in your own name, or talk about whether they know of people using or attempting to use this strategy with success or otherwise, many posters would rather cast aspersions for even asking the question! Which, given, as you highlight, that Steve McKnight – who presumably we all respect since we're on his forum – advocates this strategy, seems a bit over the top.

    If what some other posters are saying is true, that you have to attribute all the loans that you guarantee as well as your own loans to your personal balance sheet, then I wonder how people like company directors – often required to give director's guarantees for their company's loans – get finance for their own purposes and buy a PPR, for example.

    If I'm incorrect in my assumptions, then I'm happy to be corrected – but with facts and references, preferably, not opinions and vitriol. And it would be a bonus if the respondent assumed the question was asked in good faith, which it is.

    Profile photo of trakkatrakka
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    October 4, 2007 - 2:52 am

    Gees I think there are some judgemental people on this forum who make incorrect assumptions.

    Profile photo of trakkatrakka
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    @trakka
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    October 3, 2007 - 1:28 am
    Yossarian wrote:
    Trakka,

    The lender doesn't ask about "liabilities in your name", they ask about "your liabilities". If you have obligations that, however constructed, will come to you should the proverbial hit the fan, you should declare them:

    (a) so you're not up for fraud; and
    (b) so you don't borrow more than you can reasonably afford.

    There is no magic pudding.

    Yossarian, I'm not suggesting committing a fraud, nor borrowing beyond my capacity to repay. I'd point out that even if all your properties are positively geared, my understanding is that there is an artificial limit imposed by many institutions as to what they will lend an entity. I don't have any guilt about using legitimate means to get around these artificial lending limits. If all properties are positively or neutrally geared, why should borrowing be limited?

    Also, I'd argue that loans that you guarantee are not your liabilities. If your son or daughter buys a car and needs you to go guarantor to get them the loan, do you think that the parents, when applying for their own mortgage, should declare that car loan on their statement of assets and liabilities? In this case, the liability is being counted twice, as presumably the son/daughter would declare the same debt on their position statement if applying for their own mortgage? Why should liabilities that are backed by guarantees be counted twice?

    For those Trust borrowings that I guarantee, my intention would be to not declare those debts, but I also wouldn't declare the Trust's assets or income. So I'm actually presenting the lender a picture – given the significant equity and positive cashflow within the Trust – that is WEAKER overall than if I did attribute the Trust's assets/liabilities/income/expenses to myself, purely to prevent "maxing out" the artificial borrowing capacity that some lenders impose. I would definitely agree that if the Trust was not financially self-sufficient, ie negatively geared, then the Trust's positions should be disclosed, and not disclosing them would be misleading the lender. I'm proposing misleading the lender to the lender's advantage, ie I'm actually in a stronger position than I'm presenting.

    I would also agree that the whole strategy sounds somewhat dubious, but given that someone as well-known as Steve was willing to put his name to it on CD, I thought it was worthy of further investigation… I'd still love to hear from Steve or Dave about this, or somebody else who's actually done it. And particularly anybody who has done it with the knowledge of their broker, and what their broker had to say about it.

    Profile photo of trakkatrakka
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    September 30, 2007 - 8:19 pm

    I did Wildly Wealthy Women in 2004 and 2005, and I'd have to add to the chorus of satisfied customers.

    For those who asked why you'd repeat, many women do it for the social interaction – it justifies getting away from the family for a weekend if you're going to an educational event! – but in my case it was because I didn't feel that I committed to the program sufficiently in 2004, and missed out on a lot of opportunities as a result. I made sure that I didn't repeat that mistake in 2005 and that really got me moving in the right direction. Many women went back AGAIN in 2006, but I felt that I was ready to move on. And I've joined a local group of WWW graduates who meet fortnightly to encourage each other, and that's invaluable. (http://www.brisbanewic.com)

    I must say that personally I find Sandy quite kooky, and I think she says some crazy things – like using the phrase "quantum physics" when she goes on to demonstrate that she hasn't the faintest idea what quantum physics is! – but there is a lot of useful information in the course, and the world needs some eccentrics. I was much more interested in the property side of things taught by Dymphna, than the wealthy psychology stuff taught by Sandy, but I know lots of women who think that Sandy has changed their lives and are very grateful for her work. I just get a bit scared sometimes that some people take her advice too literally, and have taken on her teachings to a degree that is cult-like. But that's not Sandy's fault.

    I've since done many of Dymphna's seminars and other courses, and I feel I've gotten my money's worth many times over. It took me a while to kick into gear, but my confidence and ability as an investor is soaring. Dymphna is extremely knowledgeable, has used a great diversity of strategies (not advocating absolutely for growth or cashflow, local or foreign investments, hold or sell, active or passive, etc), and is genuinely seeking to help people. I think she has the very highest ethics and integrity, and is very generous in sharing what she's learned. And as mentioned, I think she has a much broader base of investment experiences than many speakers. She really has a very wide range of properties in her own portfolio and has tried just about every strategy you could mention. I can't speak highly enough of Dymphna's knowledge and integrity, and personally I count myself extremely fortunate that I signed up for WWW. It was a real "turning point" in my life.

    I'm now at a point where my investments are going well enough that I've decided to invest $20K in Dymphna's forthcoming Platinum Property Partners 1-year mentoring program. This program will be for a smaller group and will include one-on-one mentoring plus access to amazing speakers (eg Bernard Salt), and monthly get-togethers on the east coast. I don't doubt for a moment that I'll get my money's worth. I'll try to remember to come back in 12 months and tell anybody who's interested how I got along!

    Warmest regards, Tracey in Brisbane

    Profile photo of trakkatrakka
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    March 20, 2007 - 12:40 am

    Dear katz,

    The procedure varies between states. Which state are you planning to buy in?

    Regards,

    Tracey

    Tracey Bryan
    Brisbane

    Profile photo of trakkatrakka
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    March 15, 2007 - 1:19 am

    With regards to holiday letting, it largely depends on the nature of the property. If it’s an apartment in a complex with existing onsite management and there’s demand for holiday accommodation in that area, then it may be worth a try. But if it’s a house in the suburbs (ie not in a prime tourist or business location), I’d be concerned about whether there’s sufficient demand, and the hassle of trying to arrange the increased management (cleaning, inspections, care of furnishings/fittings etc) from a distance. I’d very much tend NOT to get into holiday letting unless you’ve bought an apartment in a top resort.

    Re difficulty of saving a deposit – yes, that’s extraordinarily difficult, in fact I try to avoid it [biggrin] As I said to my mortgage broker just yesterday “I try not to let the fact that I have no money stop me from buying more property!” [suave2]

    Apart from it being difficult to save up a deposit, having the money sitting in a bank account while I accumulate it just isn’t having that money working hard enough for my liking. I have bought my past 4 properties without “saving” a deposit.

    How do you do it?

    1) Draw equity from other properties. Has the first property you bought gone up in value, either by the market or (better) because you’ve added value via a renovation/change of use/strata titling etc? Do some research and if it’s gone up in value you may be able to draw some more equity out of it by extending your mortgage.

    2) Vendor finance. Admittedly this is not available on lots of deals, but if you find a “distressed vendor” or a more experienced vendor then they may be more open to the idea. As an example, you could ask the vendor for 20% finance for, say, 2 years at 8%. The bank pays the 80% you borrow to the vendor at settlement and they agree that you can pay them the 8% interest on the remaining 20% in, say, monthly payments for the next 2 years, then after 2 years your property will have gone up enough (if you’ve bought well and/or done something to add value) to enable you to refinance and repay the vendor their 20% as a “balloon payment”. If you obtain vendor finance you have to be careful how you structure the purchase contract and loan application so that you are careful not to alarm your lender, whilst of course remaining completely truthful. Many conservative lenders don’t like seeing “vendor finance”.

    3) Borrow up to 100%. Some financial institutions will allow you to borrow very high LVRs, up to 100% of the value of the property. Yes, you pay LMI (Lenders Mortgage Insurance) of up to 2.5%, but to my way of thinking, if it gets you into the property more than 6 months sooner than would otherwise have been the case, it should be well worthwhile in terms of the capital gain that you make.

    4) Extended settlement. Sign a contract to buy at an agreed price – today’s market value – with settlement a year or more in the future. Market growth may allow you to settle without having to put in any cash. Or you may have an agreement that you can do things to the property in the meanwhile to add value, eg subdivide, get a tenant (if commercial property), renovate etc.

    There are lots of other ways – I haven’t even started talking about wraps or lease options etc – but these are some of my preferred methods.

    Good luck!

    Tracey Bryan
    Brisbane

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    March 5, 2007 - 12:01 pm

    Hi Max! It certainly does depend on your particular circumstances but I can think of 4 main issues that may sway your decision:

    1) FHOG – can only be obtained if owned personally/joint (Trusts and Companies ineligible) – personally I don’t think this should be a primary consideration and is generally given much more significance than it deserves

    2) Income tax payable on profits/losses of investment property
    a. if positively geared
    * owning personally/jointly – inflexible but can have lower income spouse owning majority as joint tenants to minimise tax
    * owning in a Trust allows you to direct profits most tax effectively year by year (eg to a spouse not earning as much income)
    * owning in a Company – don’t know a lot about this – but may be advantageous in terms of paying company tax
    b. if negatively geared
    * owning personally/jointly – inflexible but can have higher income spouse owning majority as joint tenants to take full advantage of tax benefits of negative gearing – but beware if owning for long term that in time the property will almost certainly become positively geared and then that same person has to pay tax on the profits at the highest marginal rate
    * owning in a Trust – can’t distribute losses to take advantage of negative gearing benefits (must hold to offset against future earnings) but may be worthwhile if the Trust has other positively geared assets
    * owning in a company – no benefits that I’m aware of

    3) Capital Gains Tax concession
    * owning personally/jointly – receive it
    * owning in a Trust – beneficiaries to whom the capital gain is distributed receive the concession if they’re eligible (ie if beneficiary is an individual they receive it, but a company who’s a beneficiary loses it)
    * owning in a company – lose it – main reason why this is rarely done

    4) Asset protection
    * owning personally/jointly – the property is vulnerable to liabilities resulting from the actions of the individuals owning the property
    * owning via Trust or company – precluding fraud and some other circumstances, the property is generally only vulnerable to liabilities resulting from other activities of the Trust or company, so if, for example, the Trust owns a property but doesn’t engage in any legally risky activities such as running a business, then the property would usually be pretty safe from litigation

    In the above, I’m assuming the Trust has only individuals as beneficiaries. But this picture is much more complicated by the fact that you can have hybrid trusts (where assets are owned in a different proportion than that in which income is distributed) and that companies can be beneficiaries of trusts and trusts can be shareholders in companies etc. There are virtually an infinite variety of ways to structure and you really need somebody who knows this area very well. (I’m happy to make a recommendation if you contact me personally.)

    I am NOT an accountant or lawyer, only an amateur who’s tried to take good notes in seminars [specs] Generally, my “big picture” understanding is that if you’re a personal investor/developer (ie without employees), it’s usually best to hold your property in some kind of Trust for taxation benefits, and use insurances, debt, wills and other measures to protect the assets.

    Again – I’m an amateur and this is NOT advice, just me sharing my understanding of the broad issues [whistle]

    Tracey Bryan
    Brisbane

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    February 9, 2006 - 4:35 am


    I’m wondering if the adverse response that we sometimes experience has anything to do with our attitude at the time…
    If we’re thinking “these people are going to be jealous because they’re small-minded and unambitious and if that’s the case I’m just going to ditch them and find somebody more ‘positive’ to be around”, [blush2] then maybe others pick up on that and – understandably – aren’t in the right frame of mind to be happy for our success. [eh]
    I’m aware this is an exaggeration, but I think that if, as Luke suggests, we encounter every individual as a valuable human being with something worthwhile to teach us, then we’ll project a spirit of acceptance that is more likely to be reciprocated.
    This can be tough, and I don’t claim to have mastered it, but I think it’s always worth looking inward, rather than automatically “writing off” the other party, after a negative experience.
    With best wishes,
    Tracey [smiling]

    Tracey Bryan
    Brisbane

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    August 5, 2005 - 11:05 pm
    Originally posted by TMA:

    Ask your lender if they will separate securities. If they will you will not need to refinance. If they won’t, you can refinance within the same lender or find another lender. You need to split your loans so the LVR on each property is at acceptable levels to be able to stand alone. It is not a difficult task.

    Example of cross-collateralisation…

    4 x properties worth 250k each
    1 x loan at 800k

    Example of stand alone properties…

    4 x properties worth 250k each
    4 x loans at 200k each

    C2, I just want to add to TMA’s reply because there’s potentially a trap here that I only became aware of recently… Simply asking the bank to separate securities, or even refinancing with the same institution, will NOT provide you with the necessary separation of your assets to protect them against financial risk.

    As far as I’m aware, ALL Australian lending institutions have a clause in all their mortgage documents that is commonly referred to as an “all monies” clause. Effectively what this says is that the bank has the right to pursue any monies that you owe to them from any assets that they have a claim against (eg deposits with that bank, and properties that they hold a mortgage on), irrespective of whether the money you owe to them relates to that property or not. Therefore, all properties that have a mortgage held by the same institution are effectively cross-securitised anyway.

    The only way to protect your properties from a claim relating to the debt of another property, is to have the mortgages with different institutions (if the properties are owned by the same entity).

    This is only one type of asset protection – you also have to protect your assets against legal risk (eg somebody suing you after a car accident or something) and many others. Asset protection is an enormous subject which I think that most of us would be well advised to learn a lot more about. There are volumes of cases where people have lost everything in cases that could easily have been prevented through appropriate structuring, a valid will, and/or appropriate insurance.

    Dymphna Boholt is extremely knowledgeable in this area; see https://www.dymphnaboholt.com/ModCoreFrontEnd/shop.asp I have no affiliation, other than having participating in Dymphna’s “Wildly Wealthy Women” program and been impressed with her knowledge on this topic.

    Tracey Bryan
    Brisbane

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