Hello. I'm new to this forum. I have been reading up on property investing (and wealth creation generally) for sometime and would value feedback regarding some ideas I have. I'll try to give you the basic information succinctly but my apologies in advance for such a long initial post.
It seems like an important first step to financial independence is to set up an appropriate structure, such as a trust, for protecting assets & minimising tax obligations. I will be discussing this with an accountant soon but would appreciate other people's opinions so I can make some informed decisions and save myself problems later.
The following is our situation:
I am a sole parent with 3 children, 2 are adults, 1 is a minor. My primary income is a Centrelink payment. I've just started driving the local school bus which will increase my income a little. I am also starting an home based business in the next few months.
The adult children are both employed casually and live independently in different parts of the country. We keep in touch regularly and have a good relationship. One has been working in hospitality for about 4 years and recently changed employers though still doing the same work. The other has been employed in construction for about 4mths but seems quite secure in his job with the company taking on new contracts regularly.
They have rents to pay and the usual cost of living stuff. I have a small mortgage and all associated costs of property ownership & living.
We are all agreed that we each want to be financially independent with a comfortable passive income in the next decade and are willing to combine resources to that end. Presently we each contribute a small, regular sum of money into an account to seed fund this goal.
The property I own was originally a shop which had a residence built onto it around 1995. It has several titles about 1acre in total. It is in a very small rural township in SA. The bank put a value of about $85k on it around 8mths ago. My mortgage is just under $25k. I also own an adjacent block of land outright which has two titles (another acre). I would estimate this land would sell around $35k.The idea:
I have is to have two x 3bed transportable type homes put onto the properties. One on the front block with main road frontage, one on the back block. Each house would cost approx. $110k completed. A local real estate agent suggested the properties thus developed would probably sell for around $150k each. We would look at renting them for around $200/wk each. (Ultimately I'd like to use the back one to operate a B&B from). Until recently there were no rental properties in this town. I know of 2 now which fetch $120/wk (very old & rundown…property only worth land value) and $195/wk (also an older property but considerably better living conditions). There are some developments happening or likely to happen in the region which should also boost demand for rental properties so I am confident that we will find tenants without too much trouble.This brings me back to appropriate financial structure. I'm thinking we should establish a property investing trust into which we contribute our regular payments. That I transfer ownership of my property into the trust (not sure how to do this in terms of paying out the mortgage…or maybe I just transfer those titles which don't have a mortgage on it for development….your ideas?)
Once the property is owned by the trust, finance will be sought via a mortgage broker (I'm thinking Mortgage Choice as it seems to have access to the greatest number of lenders to choose from). Ideally, I think a line of credit type loan of around $220K (or a $250K if my home is also included to be paid out and used as additional security) would be the most suitable. This way our individual regular payments plus rent from the 3 properties (I'll rent my home back for $150/wk) will go back into paying down the loan but still give us easy accessibility to funds when we are ready to acquire more properties (or venture into other forms of investment).
Does this all sound like a do-able path to take towards achieving our ultimate goal of financial freedom? Are there obvious 'land mines' I should be aware of? Have you any suggestions you think could work better considering our resources and limitations?
I thank you in anticipation of your considerations.
For the Earth,
Susan.
Hi, some fantastic ideas there, Susan & the sooner you start, the better. The reason is very simple: raw land has far less value than improved land.
I'd suggest comparing the pros & cons of selling or holding for rental. The agent suggests $150K sale on a $110K house? Who would enrich more, you or the agent or the govt? Profit = $40K, $4K to the agent, $5K to tax? You end up with no land, and only $100 thousand in hand.
On the other hand, if you have the rentals, $150 pw [you'll nett about $6K p.a.] from each house.
You're barely breaking even.
Is there a way you can lower the cost of putting the house on the block?
KY
Thanks for your comments KY.
In effect there would be potentially 3 rentals: 2 new houses @ $200/wk each plus my renting of existing shop/house for $150/wk. So total income potentially is $550/wk less expenses. About $28k/yr less expenses.
I would ideally prefer to keep all of the properties but might look at selling one of the new houses and paying down debt if it seemed like the most profitable way to get ahead….free up some cash for deposit(s) on next properties.
It could be possible to get the houses cheaper. The $110k cost is the upper expected cost and includes connections to mains water, power, a Biolytix waste system (type of septic…there's no sewerage system here), flooring, fencing, rainwater tank etc. I anticipate being able to negotiate some economies of scale by purchasing two of each system at the same time. Figure it's best to work on upper costs rather than lower.
Hi, I thought you were talking about the other block of land.
So, $110K x 2 = $220000[say $250000]
$28K rent p.a. can support a loan of $320000
Seems quite comfortable without having to sell. You need to factor in holding costs – the faster you can do it, the less the cost but in your case, it's really not difficult because you can use the existing equity in your house.
Re the trust, I'm not conversant with family trusts but I'd suggest you find out the accounting costs. Your income [pardon me] doesn't seem high enough to warrant fancy structures.
I'm excited for you. Good luck & I hope you prosper.
KY
Thanks KY.
You're right about my income being miserable which is why I can't do anything financially on my own and will need the involvement of my kids. Inspite of having always paid more than minimum on my mortgage(s) (on different properties) for nearly 20yrs, and acquiring other unmortgaged property besides, the banks won't loan me anything for anything because of my lack of income. It's very frustrating!
The purpose in establishing a structure first is because I am ambitious enough to see that we could need it once we do become successful in building a significant property portfolio. Also because relationships fail and I think our assets are best protected against claims by any future partners my children may connect with (or me for that matter but that's very unlikely.) The proper structure should help prevent disputes over who gets what in the event of the death of any of the beneficiaries and allow for pre-determined portions of the assets to be distributed accordingly. It could allow for the entry & exit of beneficiaries and it keeps our investing to create financial freedom seperate from our personal lives & incomes. It can be managed as a business without entangling emotions. I am definitely discussing the workings of such things with an accountant before moving ahead with our development plans. I think the costs of operating our investing business are valid tax deductions so it should offset what is spent on accounting.
I, too, am excited about our plans and am eager to proceed….just being careful too.
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