Hi All,
I'm currently purchasing a 2br house on 1100m2 for $235k with DA APPROVAL for subdivision.
The subdivision will make the land of the existing home 450m2 while the new, rear block will be 650m2.
I'd like to finance via an "interest only" "line of credit" loan so I'm able to draw on the tax free equity each year subject to healthy valuations. (Suburb with 12% ave annual CG over 10 years).
The vendors will be renting back the property from me for 12 months and the purchase price and rental return is cash flow positive.
I will build either a 4br house on the rear block or a duplex if council permits.
MY QUESTION/S:
If I take an "interest only" "line of credit loan" to purchase the property ($235k) then use MY OWN MONEY to subdivide the rear property (costs of driveway, fencing, council fees and 4br house build etc – 160k)… when the subdivision and house is complete and I have the bank revalue the NOW 2 properties – will the bank include the value of the new subdivided property and additional house as EQUITY INCREASE on the original house loan and valuation of $235k ?
Thus – if the NEW 4br hoiuse and property is valued at $250K and the original 2br house is now devalued to $200k (DUE TO LESS LAND SIZE) – the total value is now $450k. Thus – equity increase of $215k on the original $235k loan.
Can I then pull out that $215k equity increase – tax free – and pay myself back the $160k used to build the house and subdivide – leaving me with 55k equity – tax free profit to use however I wish ?
OR – would it be better to just have the bank loan me the full amount for the existing home and subdividing expenses and new home build expenses (they have pre approved the 400k approximate for all). Then have the bank revalue on completion at $450k – then pull out the 50k equity increase.
Notes: Bank has valued the existing property at the purchase price – 235k. Bank has valued the subdivision scenario as follows: existing house once land is subdivided: $200k. New subdivided land with new 4br house: $250k. Total new value $450k.
This is my first investment property and perhaps I'm trying to be a little too creative or ambitious, however – given the current status of my business and cash flow – I hope to buy an investment property every 3 months for the next 5 years – mainly properties with subdivision approval/potential with a long term strategy of hold two/sell one (based on buying older homes with subdivision potential – selling the existing older home and keeping the new duplexes for rental return, capital gain and depreciation benefits)
Hope some of you experienced investors may be able to assist me.
David.
Hi David
I think you are confusing the situation so let us see if we can work through the issue together.
A lender will initially lend against the original purchase price / valuation (Whichever is the lower based on the fact that you are not paying a premium for having the DA approved) of the property you purchase.
Assuming once the property has been subdivided and you have a separate Title (Some lenders do not like multiple dwellings on the same Title) your lender will advance either stage progress payments to assist in the construction of the rear block subject to valuation of if you decide to cover the costs of the building they will agree on completion to increase the line of credit loan in line with the new valuation.
Obviously if you have cash available and have no other non decuctible debt then you would be better off to use your own funds for construction (assuming you have no other use for them) rather than pay interest on the money albeit deductible.
If i have missed anything come back with further questions.
Richard Taylor | Australia's leading private lender
Thanks Richard – much appreciated.
Yes – the subdivided block will have a separate title.
what I hope to do is have the two titles/houses revalued once subdivision and construction is complete – then sell the older existing house on the now smaller block for the same price I originally paid. That would pay out the orginal loan. Assuming the bank has lent me 160k for the subdivision/2nd title and house build – then on completion the bank values this at $260k – will they allow me to pull out that $100k tax free as equity in a line of credit ? (Money for deposits on further investment properties).
I'm still trying to get my head around this line of credit concept. My understanding is that whatever equity increase there are – say 10% PA (not always obviously) – you can pull this out tax free and use it however you like ?. If I had of known this years ago – I would have focused more on property investment rather than building businesses.
Assuming you have interest only, line of credit loans on 3 x 300k investment properties which increase in value by 10% per year and which are cash flow positive – you can pull 90k per year tax free (equivalent to over 150k before tax) ?
Sorry why would the $100k be Tax Free?
Richard Taylor | Australia's leading private lender
Hi Media
You are the second person this week that I have seen confused by LOCS!
A LOC is a loan in which you can deposit and withdraw funds up to a certain limit – thats it!
The LOC will have a set limit. The limit is a monetary amount, not a percentage of the LVR. So the LVR won't increase as your property values increase. You will need to apply for an increase and will need to re-qualify for the loan proving income etc.
You may be able to pull out $100,000 by increasing the limit on the LOC. It will be tax free because you are just borrowing money. The way you put it sounds like you don't really understand this – sorry if I have misread you, but there is nothing 'magical' about it. You are just borrowing more money.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Gidday David,
Congratulations on what sounds like a bit of a steal. (which sets off a few alarm bells, so move carefully).
I presume from your post that the DA is fully approved and the final matters just need to be tidied up (i.e. payments of contributions, re-registration of title, and council compliance condiitons etc).
Putting aside some of the jargon confusion at the moment, the answer to your question is prettty straight forward.
If you borrow as much as you can at each stage (short of LMI thresholds), you will have the least amount of hassle when it comes to taking the next step.
By taking Interest Only and a facility such as a LoC, you can leave your Cash on Hand against the loan to mitigate interest costs of the additional borrowings, which is one of the differentials between your ideas. It ensures your cash stays liquid, circumventing time and money costs associated with a step-by-step approach when it comes time to use the money for construction or subdivision costs etc. But be careful. Make sure you budget carefully and think things though properly BEFORE you commit.
However where your post gets a little confusing is on the valuations and this is where you might be getting a little ahead of yourself.
I would be surprised if your lender would be willing to lend money now, based on value yet to be realised. (mind you, I get surprised at least once every day, so it wouldn't be a first!) i.e. If the title of the two blocks have not been finalised, most lenders will only ever lend on the single title valuation, even though the DA is approved and other numbers may be speculated on. Same too for the 4 bedder. If the plans aren't through council, the lender is unlikely to give you the nod on a valuation for that etc.
Terry's comments on the LoC are pretty fair. A LoC is just a Loan Type which is like a big, interest only credit card. Lenders have started to load their rates a little again (i.e. they are a bit dearer) which is an indicator that, like credit cards, people can get out of control on them. BE CAREFUL. Do your numbers, build your plan and stick to it.
Get to an accountant that is famililar with property deals as soon as you can. He or she can straighten out your 'tax free' confusion (which you need to do before you take the next step). You need to take independent taxation advice on structuring this deal including several important steps along the way to properly manage your CGT exposure. Just quickly though, there is no tax free, it's just that the tax you are focussed on is CGT and it only occurs on sale of the asset.
Given the number of changes you are likely to make with your borrowings, you would probably do well to find yourself a mortgage broker to do that run around and follow up for you, expecially if you get into multi-lender solutions. Don't ask the broker to choose the solution for you though, they have a massive conflict of interest. Just get them to do the legwork. Look for an ORP or SRP broker who is willing to offer mortgage rebates, then go with your conscience.
Hi Terry & Michael,
Just a quick note to thank you both for your advice and suggestions – much appreciated.
Apologies for not acknowledging you sooner… I was OS and offline for some time.
My confusion on the tax issue stems from reading one of Jamie McIntyre's books where he states with regard to equity increase on LOC loans – something along the lines of "Take this money out to use however you like – the ATO does not tax you on this as it's money out of thin air" (this isnt word for word – something along those lines).
David.
Yes, there are no taxes on borrowed money. Well no income taxes.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
You must be logged in to reply to this topic. If you don't have an account, you can register here.
