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Hi everyone - my situation/advice

Discussion in 'Introductions' started by rosewaterwrx, 29th Apr, 2008.

  1. rosewaterwrx

    rosewaterwrx Member

    Joined:
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    Adelaide
    Hi everyone, just stumbled onto this site and its fantastic.

    For years I basically lived from paypacket to paypacket but have been actively attempting to educate myself financially and formulate long term plans and strategies.

    My situation is :

    I have 1/2 share in 1 rental property owing $60,000 - current value $260,000
    I have another 1/2 share in the house I live in owing $230,000 - value (assuming I spend $20,000 renovating) would be about $310,000.

    My income is about $65,000 PA.

    What I was considering doing is:
    - use my share of the equity in the first property to purchase shares via 2 managed funds.
    - build equity / save over the next 2 yrs and purchase a 3rd investment property (relative to how the economy etc is faring)
    - hold onto the shares and properties , perhaps purchase more shres/property
    - in about 7-10 yrs start/purchase a business (having done business courses in the meantime)


    Whats peoples opinions of using the equity in my investment property to by shares via managed funds?? Is it the best use of this equity?? feasible?? risky??

    Also with my long term plan of owning a business is it in my best interests to start a company to purchase these shares/future property?? Then later on start the business in the same company name??

    Im very new to investing so any advice would be greatly, greatly appreciated.

    Thanks
    David
     
  2. samaka

    samaka Well-Known Member

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    I'd say no. The last thing you want to do is mix your personal investments with the business accounts.
     
  3. rosewaterwrx

    rosewaterwrx Member

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    ok thanks.

    But wouldnt a business account be a personal investment effectively anyway??

    As I said im very new to this and early on in my self education.

    I was thinking that because a company can hold onto tax losses for yrs I could write purchase my shares/property in a company name then when i set the business up, and hopefully making a tidy profit write all these previous losses off and pay company tax rate.

    The company concept is just a brainstorming idea and its the area i understand least.

    More importantly at this stage is what to use the equity in my investment house for.
    Even more importantly is the idea of gaining a loan using the property equity to invest in maganged funds a good or bad idea?? My finiancial advisor mentioned it but with his fee's , the fee's for a managed fund and the loan fee's is it really the best way to utilise this equity????
     
    Last edited by a moderator: 30th Apr, 2008
  4. samaka

    samaka Well-Known Member

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    Well yes there are benefits to holding your assets in a company structure - however you would want to be very careful how you do it.

    If your business goes under and you (i.e. the company) owes creditors money, then you don't want them to be able to touch your shares or property.
     
  5. rosewaterwrx

    rosewaterwrx Member

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    The pro's and cons of setting up a company structure at some point will be something I will have to read up on and get advice.

    My main query at this stage is with the equity I have in my investment house is wether it is a goo/bad idea to use this to purchase shares via a managaed fund and use a financial advisor to do this.
     
  6. C3PO

    C3PO Well-Known Member

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    Rosewater, I think your idea does make sense.

    Based on your post, you seem to have about $100,00 of equity to play with in the first property (i.e. half of $260,000 less the $60,000 that is owing) and in the second property you seem to have roughly $30,000 of equity (without renovating).

    I wouldn't recommend investing with the equity that you have in the house you are living in. I would use equity that you have in the investment property, and even then only a part of that (say max 75% i.e. $75k). Bear in mind that your bank will want their own valuation of the IP.

    As the loan you take out is completely for investment purposes, the interest paid should be tax deductible. I would recommend that you avoid a margin loan, tax deductibility becomes a greyer area with these.

    It is important to bear in mind that your objective in investing will ultimately need to be to achieve returns that are higher than the interest you pay (putting the tax deductibility of the interest to one side). If you're paying interest at 9.5% for example you will need to aim for returns in excess of that.

    Personally I would not want to attempt to achieve this in the market at the moment, if it was me I'd wait for a year, but that's a personal bearish view on Australian stocks. I think most fund managers will tell you that their expectations for returns this year are lower than in previous years.

    If you feel confident of achieving returns better than your interest rate in the next couple of years, then go for it, but ensure that you are not too aggressive as you need to protect yourself against:

    - Devaluation in Australian house prices
    - Low returns from your share investments that don't cover your interest bill
    - Higher interest rates if you are on a standard variable loan
     
    Last edited by a moderator: 3rd May, 2008
  7. rosewaterwrx

    rosewaterwrx Member

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    Thanks C3PO.

    Excellent advice and greatly appreciated.
    This was pretty much in line with my thought process. I only intend to loan perhaps 75% of the equity in the investment property.

    I will gain further advice as to timing on the share market, but I am slightly more bullish by nature . I would consider using two fund managers. Perhaps dip my toes initially using 50% of the funds with a more circumspect safe fund, and then invest the other 50% into a more growth orientated one in a few months.

    I will make sure that I can allow for repayments with my income assuming a worst case scenarion though.
    Initially I am aware that I should be somewhat cautious until I have educated myself further.

    Thanks greatly for the advice , and any additional thoughts would be appreciated.
     
  8. C3PO

    C3PO Well-Known Member

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    No problem, glad to be of assistance. Some further ideas:

    - Be prepared to take a very long term view with your share investments, and go for at least some stocks that will pay you some dividends. (i.e. if you only have capital growth but no dividend yield you don't want to have to sell shares to cover your interest bill).
    - Prepare to have negative cashflow to start off with as your monthly interest bill for the $75k loan will keep on coming in and you will need to cover that from your salary.
    - Make sure that your interest payments on the IP and share investment are easily separated from everything else, so there is no confusion about which interest payments are tax deductible & which are not.


    As regards incorporating this strategy into your your longer term plan to own a business, I would suggest that you consider establishing a discretionary trust to own both the shares and the loan you take out. You should take professional advice on this and maybe do some reading up. There are a few good books around that explain trusts much better than I can.

    The trust is useful because you can nominate beneficiaries and distribute income to those beneficiaries at the discretion of the trustee (you can't hold profits in a trust, all income must be distributed).

    One disadvantage of having a trust that is negatively geared is that losses are locked into the trust (losses can't be distributed), but if you are prepared to take a long term view then it may be quite beneficial for you. Because you will have to fund any shortfall between the loan and the investment income, your trust may end up owing you money for a while unless you get really good returns in the first years (in which case you just distribute the income to your trust's beneficiaries). So you have to be really confident that eventually the investments will come through. (It would be great if your IP was held by a trust - maybe do this for the next one? :) )

    Down the track, consider the trust as a possible entity for owning your business. You can have either an individual or a company as trustee for a trust, and a company can also be a beneficiary. Recommend you speak to a good accountant to further check out if a trust is right for you.
     
  9. DaveA

    DaveA Well-Known Member

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    I know the thread is a few days old, but have you considered refiancing one of the properties to purchase the other half of the property? This will only work if they want to sell, but owning 50% is always going to hurt your furture ambitions with banks etc. Id say rather than entering the share market id try and clean up your current transactions.

    Also if you plan to be a business owner, then asset protection is important. Therefore it might be wise to set up a trust now to own your shares so that way there can be no recourse to the shares if trouble arises....

    Perhaps an accountnat may help you in your situation more than a financial advisor will who will only want trailing commissions.. Id suggest you spend some time with both
     
  10. rosewaterwrx

    rosewaterwrx Member

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    Thanks for the advice guys.

    Any additional points of view would be greatly apprciated.
    Especially regarding wether taking out a loan to buy shares via a managed fund (using 75% of the equity in an investment property) in the current market is a good or bad idea.