current situation/goals advice please

always interest only with offset account.  remove the idea of paying off the principal and replace it with the concept of filling the offset account with money up to the value of the principal.  that way you'd eventually pay no interest, and the cash would be in the offset either to one day pay off the principal, or pull it back out again and sink it into a separate property.  you can't do this if you paid down the actual loan itself.  you'd have to refinance and pay all the associated fees to do so, which adds up.

Hi Ben

Yep, stick with interest only with an offset attached. It provides you with more flexibility and control. The reason being that you can access the cash in your offset account whenever you like. On the flip side, if you were paying down the principle on a principle & interest loan and wanted to access some of the equity down the track, it's harder to get this cash-out (and it will usually cost you some money).

To get the ball rolling, you might want to consider a 95% loan with the Lenders Mortgage Insurance (LMI) capitalised onto the loan. That way, you only need to bring a 5% deposit and completion costs (stamp duty, ect) to the deal.

However, the issue with 95% loans is that they can be tough to get accross the line – they tend to make lenders and mortgage insurers a little uncomfortable. You will need to demonstrate a genuine savings history (generally over a three month period) and neither of you can be on a probationary period with work (which I suspect may be the case if you're starting in new jobs).

Most of the big banks offer 95% loans to "existing customers" – an existing customer can be someone that's had a credit card with the institution for at least 6 months……something to maybe consider. There are other lenders that will provide 95% loans to new customers also.

If you can save like crazy for 6 months then this might be the best approach. If you want to buy sooner than you'll probably have to bring a bigger deposit to the deal.

Best of luck with reaching your goal – you sound determined and switched on, I think you'll do fine.

Cheers

Jamie

Saving a 20% deposit will take some time. I'm not sure how much properties are going for in Alice Springs but if you were to purchase something for around $300k, you'd need to save a $60k deposit as well as the funds to complete (stamp duty, legal fees, ect).

By paying some LMI, you can enter the market quicker (and you can often add the LMI to the loan – so you don't have to use your own cash up front). Personally, I don't see a problem with paying LMI. For first home buyers, it enables them to get into the market without saving for years for a property that continues to go up in price. For investors, it enables us to purchase more with less – especially in the early stages.  

There's been a few threads on the pros and cons of LMI – do a quick search and you'll find plenty of info.

Cheers

Jamie

I'm not particularly au fait with the finer details of trusts, but from reading Dymphna Boholt's "From Virtually Zero to $3.5 Million in My First 18 Months in Real Estate" the impression I was left with was that only a very good accountant could keep track of the complexity of such arrangements, and I've never met an accountant in whose faith I could put this much control of my financial affairs. Nor would I want to pay the setup and maintenance costs of the tangled structure she espouses, or fill in the multiple tax returns and study CCHs regularly looking for new loopholes and changes.

A company merely keeps property dealings at arm's length so that your PPOR isn't on the line should anything go wrong. Since my strategy is to hang onto property indefinitely, potential CGT losses are fairly irrelevant. More important when starting out is maximal availability of expansion funds and a simple but workable structure. There is still adequate tax flexibility in the sense that you can leave funds in the company and pay 30% maximum or distribute franked profits to directors if needed. And further down the track if something more substantial is required, it can be converted to a trust.

I don't quite understand your point about fixed shareholdings and dividends, the OP was asking for advice for himself and his partner on property investment and not trying to set up a megalithic corporation. The average property investor only ever buys one investment property, and very few have more than four.

Mate, you are crazy for not looking into trusts. A company is not recommended for owning appreciating assets – usually just for trading because of the limited liability factor. in fact I have never heard anyone recommending a company for owning property.

Trusts can be complex (but so are companies), but if instead of using a company you use a trust it is only a trust tax return rather than a company. Shouldn't cost anymore in accounting fees.

a simple example with tax may change your mind.

Say they only even buy one property. Over time the income from rent, after expenses reaches $10,000 pa. If they had a company with 50/50 shares each then they would generally get $5,000 each in dividends – or leave it in the company and pay 30% tax. Say the man was on a high income – he would pay more tax, and the wife was on a low income – she would pay less tax, and maybe get some back because of the franking credits. But there would be no flexibility in changing the arrangement – you couldn't give all the income to the wife for example, because she only owns 50% of the shares. The company could employ her – but then you have to worry about taking tax out, paying super etc.

Now say the property was held by a discretionary trust. The trustee would decide, this year, to distribute all the income to the wife. This would result in low, or even no tax (adults can earn $16,000 pa tax free now). The next year the wife may be back at work and the husband off having lost his job, then the trustee could distribute all the income to the husband and no tax would be payable. If it is a company then you won't have this flexibility.

Then imagine the savings is sold – and you never know when you may need to sell – a person pays a maximum tax rate of about 46%, with the 50% discount this is 23%. that is a 7% savings over a company and you would also distribute to lower income earners first so you may not pay this high anyway.

Now think of the asset protection issues. Say you are sued and cannot pay and go bankrupt. Your shares are treated as property under the bankruptcy Act and are available for creditors – the bankruptcy trustee will stand in your shoes and take ownership of the shares and thereby control your company.

If you had owned the property via a trust – property held on trust is not defined as property under the bankruptcy act. ie not available for creditors – usually. Being a beneficiary of a trust is also not property – your trustee would simply stop distributing to you while bankrupt, otherwise the money received will be seized by the bankruptcy trustee. Once you are out of bankruptcy you can safely start receiving distributions again.

Costs from $0 to $10,000 to set up, and running costs from $0 to thousands to run. It all depends on how complex it is. It is another tax return, so a bit extra there, but having 10 properties in your own name v 10 in a trust shouldn't cost much extra in tax agent fees.

I forgot to add above that you can only change ownership later at considerable cost and the loss of considerable asset protection. So it is best to do from the beginning.

You can have multiple houses per  trust, but ideally 1 for greater asset protection. Imagine if you had all your eggs in one basket and the tenant sues you as landlord = all your houses may be exposed. Having them in separate trusts also has added estate planning benefits – easier to pass control to different people down the track.

Hi Terry,

Thankyou for your reply.  I'm in the process of purchasing something at present – proposed to be in my name.  The finance is all approved in my name.  Might be a bit tricky to now ask the bank to redirect the finance into the name of a trust?

Ben

Don't worry too much about the various definitions of postive cashflow/gearing. What you want is a property that does not cost you money. So do some spreadsheets and play around with the numbers:

eg. say you had an rental income of $10,000 pa, but expenses out of pocket of $9,000 pa. That would mean it is putting $1000 pa into your pocket – but then you add in the non cash deductions, such as depreciation and borrowing expenses (these are deductions that don't cost you anything any further – you paid on purchase). Say the non cash deductions add up to $2,000 pa. Your property would be running at a loss of $1,000 pa, but at the same time giving you $1,000 pa income. It may be classed as cashflow positive but negatively geared.

BTW if this property was held in your own name this loss could decrease your personal income, so you may get, say, $300 back on tax. If it was held in a trust you cannot offset your personal income and you would get nothing back, the loss will be carried forward to next year.

Also note too that in some states trust don't get the land tax tax free threshold, so buying in a trust may result in higher land tax. But after you get a few in your name you will be paying the same land tax whether in a trust or your own name.

Thanks boys.  All very valid points.  I had thought that I would keep this one in my name in order to write the losses off against my income, and purchase any additional properties through trusts.