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Land banking / agreements

Discussion in 'Real Estate' started by TryHard, 25th Jan, 2007.

  1. TryHard

    TryHard Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    863
    Hello all

    Some acquaintances and I have been toying with the idea of land banking some low-end waterfront property. Well not so much land banking in the traditional sense, but purchase of a lower end beachfront property that none of us would dream of affording individually. The aim would be for everyone to buy a share up to a max of around $50K per party, then have an Agreement to sell at market value in 10 years. It would be chosen purely for likely capital growth, with the expectation of making little or no income from the initial investment.

    The initial concern is to make sure current friendships aren't affected by unforeseen events, so the structure and agreement we'd intend to be completely business-like so any potential investor could join, known to us or not, and leave by selling their units on to others.

    I was wondering if anyone has experience with the structure, research, or logistics of such an excercise ? I guess the company/trust or whatever structure applies would need to have the money available before it made the offer on a suitable property, so the documentation would need to be complete enough for potential investors to put the money into the structure.

    The only similar structure I've seen was mention of Peter Spann's group land banking $4M riverfront in western brisbane, but we're talking similar concept but much smaller sticker price.

    Any ideas much appreciated
    Cheers
    Carl
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    You'd need a joint owners' agreement. is one example of an agreement you could use.

    I guess one thing to watch is how to finance the purchase. If you're all just using LOC funds and there'll be no mortgage over the property then okay, but it will massacre your servicability if you're all jointly and severally liable for a huge loan secured over the property...

    N
     
    Last edited by a moderator: 25th Jan, 2007
  3. D&K

    D&K Well-Known Member

    Joined:
    14th Nov, 2005
    Posts:
    206
    Location:
    Canberra
    Hi TryHard,

    I've looked at a similar idea with a commercial proprty and, at the end of the day, it all came down to a decision about how the investment stacked up against other options.

    The main advantage of property (as I see it at least) is one of maximum leverage using OPM. To avoid the bank scrutinising every borrower we looked at a loan based on a minimum deposit of 30% (made by individual deposits / LOCs) instead of 20%. I'm trying to think of the best words, but this "diluted" the leverage so that the CG result wasn't as good when it got split up.

    Maybe an extremely simplistic example will help (or confuse!)...

    Property cost $1m and 10 people put in $100k. In 7 to 10 years the property is worth $2M (and income in the mean time), gets sold, and the 10 people get $200k each, and then start paying CGT. Capital Gain after tax of around $75k on $100k over 7 - 10 years :( ... but you did get income.

    Versus ...

    Property cost $500k and you put in $100k and IO loan $400k. In 7 to 10 years the property is worth $1M, you sell and payout the loan, gives you $600k or maybe $450k after CGT :) ... but you did not get the income for all of 7 - 10 years if it started negatively geared (it could be positive by the end).

    It comes down to balancing the CGT against income, etc, and what else you could do with the money. But basically, when you reduce the leverage the benefits begin to dilute also. There's a fair bit of number crunching required to work out the best option.

    In the end we didn't go into the commercial property because the diluted CG was less attractive, plus additional costs of trusts and agreements, and a couple of independent valuations came in lower than the asking price (although the vendor did reduce the price to the higher one). I know I'll miss out on any gain on that property, but I hope to make more elsewhere.

    Waterfront property can only increase in desirability (caveat: global warming and oceans rising), but emotions aside it comes down to the numbers. Helps if you've got a crystal ball also! :D

    HTH, Dave
     
  4. TryHard

    TryHard Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    863
    Hi Nigel and D&K

    Nigel I hadn't thought of impact on serviceability cos of jointly and severally liable - yuck - what a good point ! :(

    D&K - just as I drove out today after posting the CGT thought finally entered my head :( and your explanation clarified that thinking. Because the type of property we had in mind won't be a great rental prospect other than peak holiday times, there is unlikely to be a lot of income, so the particular places we have in mind exacerbate the CGT issue at the end of 10 years, as there won't be much income along the way.

    Hmmm off to think a bit harder about this idea - it might only be good for the very well-heeled who can afford not to have to ask the banks for more money later :)

    Thanks for the thoughts guys and Happy Oz Day 4 tomorrow

    Cheers
    Carl
     
  5. Jacque

    Jacque Team InvestEd

    Joined:
    16th Jun, 2005
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    1,885
    Location:
    Sydney
    Hi Carl

    Nigel has touched a very valid point with the joint liability issue. There are possible ways around it (via setup of a unit trust structure which has been explained in another post by Nigel- do a search and you're sure to find it) but then comes the issue of other costs such as setup, running costs p/a for the trust structure, as well as land tax (trusts being exempt from thresholds in some states inc NSW) and, most importantly, your cashflow costs during the year. When you do your sums, it may well not be worth it as a long term project. You'd need to be pretty sure that the asset was going to increase or double over the set period and that your running costs were going to be well and truly offset by the expected cg at the end of the project.

    Having joint and several liability also limits your borrowing capacity for other investments over the period. Something to consider.