I have a couple of questions in regards to a strategy I am trying to implement currently, would love to hear if anyone thinks its a bad idea and why.
2x couples looking at investing in property, (combined income of $270k) our main goal is aiming for + geared property in Gold coast/ Brisbane- Mostly around the $300k mark, outskirts, needing a renovation or granny flat to add value & yield, but wanting to build 1 new property every now & then. Now as we all know its getting tough to find property in decent areas that are geared +. 1x PPOR each. Maybe $200k equity. Not planning on selling, would like to build a large portfolio.1. Does anyone take depreciation into account with figures? the way I see it, by building new as long as its neutral, any depreciation off set against income will make these cashflow positive come tax time.
If you consider we are paying $60k+ in tax between the 4 of us, along with any income made from positively geared properties, my thinking is we should build a new property or 2 or 3 to keep reducing our income tax. In the short term giving us more cashflow to expand more rapidly. (providing these new builds are neutral of course)
Another thought I had was start a business, small scale (have a couple ideas) and finance/leverage equipment and run high costs for the 1st 2-3years, running at a loss but paying off equipment. Also using the 100% 20k GOVT tax deduction, and off setting income on paper this way to convert our $60k tax bill in to actual funds we can use.
I may be completely wrong as I have only had advice from 1 accountant so far and he didn’t really have any concerns apart from sounding surprised that I am looking for any way possible to stop paying tax and using the money myself. My first concern as that’s what I need him for! :)
Hi.
I can’t help with the majority of your questions but I’m interested in what people say. The obvious problem is having 4 people involved means more issues moving forward, loss of income, separation etc.
The business idea is interesting but I’m not sure how you’d get loans for property of you’re making a loss, and you’d probably still have to put in money / equity anyway. There is likely GST implications and extra admin overhead as well. I’m interested to hear what others say too.
In regards to lowering income tax, which seems to be one of your key goals. All I’d say is there is a difference between saving money (paying less tax on your day job) and making money (generating income from somewhere else). While saving money is important, you should be focusing on how to generate the income first. So don’t buy property because it has good deductions, buy it because it can generate income. In the end the most you’ll ever ‘make’ is $60K a year and it’s a deduction because you’re expected to replace carpet, etc over time which eats back into your savings.
Also, depending on how the income is split Ie. $70k by 4 or $200k by one person, you’ll be paying tax in low tax brackets so you’ll need a lot of deductions to save much.
Thanks for your reply,
You are correct its 70k by 4 ways, and also correct on our focus of generating income, this is our main goal however, If we could some how figure out how to make that $60k work for us that’s a lot of cash we can use for a deposit, 2x decent renovations, servicing a couple loans for a year etc etc the list goes on.
Do you know, in terms of finance, is this going to be beneficial having 4x incomes involved? as I understand even though liability is shared, say 25% each. We are still 100% liable if it hits the fan so to speak..
How are you proposing to own the properties? Sounds like 4 names and this may need a rethink for a few reasons such as:
– joint and several liability = risk
– effect on borrowing capacity
– land tax
etcIt may work out better to buy 4 properties in one name each rather than 4 in 4 names.
Investing in property is not generally considered a business.
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
Thanks terry, those are defiantly the questions I don’t know the answers or pros & cons on.
Would you give your opinion on those 3 things?
Borrowing capacity (in my mind this is well increased because 4 people are able to service it.
Joint liability (also in my mind this is a good thing, things turn pear shaped for 1 individual there’s still 3 to carry the load)
Land tax (something I know nothing about, would have thought it would be no different as to 1 person buying)
Speaking to my accountant was vague, hence why I’m looking for another one. But as far as options go, a simple company sounded far easier than going with a trust structure.
Hi Codie,
One of those little traps is wrapped up in the Phrase “Jointly and Severally Liable” (think of severally as meaning separately – which it does).In essence, each one of your group of 4 is considered to owe ALL of the debt for a property (separately liable) – but, if income producing, only one quarter of the rent is allowed to be apportioned to that person when considering their borrowing capacity. That will CRUEL any chances of further loans as their borrowing capacity takes a massive hit. This whole “severally liable” area doesn’t make much sense to Joe Average (or to me) – but it is “the way things are”, so best to be well aware of its massive implications.
This is a major reason why you will often read on here from Mortgage Brokers about the importance of “structuring your loans”. Get that part wrong, and things can go pear-shaped quite quickly.
Good on you for asking the questions – the answers to them are ones that all investors should take notice of.
I’m sure Terryw will confirm my point above, but, re the land tax and other questions, I will leave all of those to him as my knowledge is quite limited. That is another complex area that should be fully discussed before making any moves.
Benny
Thanks terry, those are defiantly the questions I don’t know the answers or pros & cons on.
Would you give your opinion on those 3 things?
Borrowing capacity (in my mind this is well increased because 4 people are able to service it.
Joint liability (also in my mind this is a good thing, things turn pear shaped for 1 individual there’s still 3 to carry the load)
Land tax (something I know nothing about, would have thought it would be no different as to 1 person buying)
Speaking to my accountant was vague, hence why I’m looking for another one. But as far as options go, a simple company sounded far easier than going with a trust structure.Serviceability will be increased for the 4 people as a group, but if one of the persons wants to buy something on their own separately then they will be assessed on 1/4 of the rent, but on the full debt. THis will hurt their serviceability.
Also all 4 going separate may result in a similar borrowing capacity overall compared to 4 together, although it may be slightly less.
Another way is to buy separately early on with 4 coming together later once the individuals cannot buy.
Joint liability is not good because of the above, but also more importantly because one person can drag the rest down. As a lawyer I sometimes have seen one joint owner do a runner leaving the others to take the load. Once spouse and his wife purchased a house together as an investment with the value dropping. He disappeared leaving her to keep paying or default. This was made worse by her parents guaranteeing the loan.
Land tax varies from state to state, but generally one group of owners will be assessed as one person and therefore get one threshold (In NSW anyway). I just spoke to a NSW client with 4 investment properties jointly owned. If he split up the last 2 which hadn’t settled yet he and wife will save around $7000 per year – which is a huge sum.
A trust or a company (or several) may work out better.
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
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