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Discussion in 'Real Estate' started by NoAssets, 10th Nov, 2012.

  1. NoAssets

    NoAssets New Member

    Joined:
    10th Nov, 2012
    Posts:
    3
    Location:
    sydney,nsw
    Firstly I must say this forum has great place for newbie like myself and it has some great property investment gurus !!

    Inspired by Steve’s book 0-130 properties, I am planning to pursue collecting +ve cashflow properties and then at some later stage buy debt free commercial property, to become financially free in 8-10 years time. I am currently 32.

    I own a PPOR and house and loan on my name.My family includes myself,spouse and 8 month bub.

    My Current financial state is as follows

    Before Tax Income = 130K (myself) + 100k (spouse) [permanent jobs]
    Loan Balance = 120K
    Savings in Offset Account = 50K
    Equity = 340K (current value of the property) - 120K (amount owing on its mortgage) = 220K

    Need advise on following

    1) Setup family trust and company - Since we both are in high tax bracket, I am planning to set up a company and distribute 100% of investment property income to the company as a trust beneficiary. Am I thinking in right direction? Keeping in mind that I have to buy may 8 or 10+ properties to become financially free and would need loan, should I become trustee or setup a 2nd company and make it trustee (I being the director of the company)

    2) Deposit Money - Should I use money in offset account or house equity as deposit for my first IP? Adv and Disadvantage of each option? Can I buy IP on trust name using house equity(house is on my name not trust)

    3) Location - I am in located in Sydney West. I am aware of advantages of buying regional property but don't have confidence/knowledge on regional areas. Any tip on which regional areas should I focus on? like in NSW lower hunter valley area?

    Looking forward for your advise and help.
     
  2. Terryw

    Terryw Well-Known Member

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    9th Jun, 2006
    Posts:
    653
    Location:
    Sydney

    Good to look at trusts, especially discretionary. Have you considered land tax?

    Look into unit trusts too - ability to trasnfer to SMSF later. income/cgt free inside super when in pension mode.

    2. Don't use offset money = increased interest on your home loan with no deduction.

    You say you are going to use a trust - consider how you get the money to the trust. Gift or loan? consequences for tax and asset protection.

    3. stay away from regional - lower capital growth potentional. Read more broadly too.
     
  3. JoTPCA

    JoTPCA New Member

    Joined:
    15th Oct, 2012
    Posts:
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    Location:
    Tuggerah, NSW
    Hi NoAssets
    There are some areas of the outer suburbs of Sydney that are good to consider, such as Camden, Leppington and St Marys which are showing signs of good capitol growth. In regards to regional the best places to consider are Summerland Point (Central Coast) which was nominated in the top 100 suburbs to invest in, Cliftleigh Estate in Heddon Greta (lower hunter) which have shown a good growth in the past 3 months, Morisset and Rutherford.
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
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    Location:
    Berwick Vic
    NoAssets,
    It sounds as if you need a plan and strategy to get there.
    Different strategies work for different circumstances.
    You seem to have a level of equity obtainable of about $150k plus your offset.
    You have good borrowing capacity with good dual income.

    Your initial mid term constraint will be equity available to fund acquisitions. This will mean you need to initially target capital growth properties and areas and/or look to add value so you can use a revaluation and refinance strategy to extract equity.

    At a later point in time you may need to add positive geared properties to support your servicing ability.
    The use of a trust may be beneficial but understand the costs and restrictions. Trust is primarily about asset protection. They are not necessarily useful for all circumstances.

    It sounds as if more research and advice is needed to clarify what your goals are and how then to best reach them. There is much detail to add, the LVR best needed against LMI cost and available equity, the use of lenders and what order to use them, what type of loans, where to invest, what capital growth and or rent yields do you need to target, land tax issues etc.
    Let me know if you need anything more.
    Good luck
    Greg
     
  5. Jtstepbystep

    Jtstepbystep Member

    Joined:
    3rd Dec, 2012
    Posts:
    5
    Location:
    Gold Coast
    Hi,

    I like that you want to purchase positively geared properties I think if you keep this strategy you will grow your wealth to a very considerable size. I have seen this strategy used with a lot of success. I currently only buy positively geared investments. I will now do my best to answer your questions.

    1. I myself have the structure you are talking about. A family trust with a corporate trustee and a second company which I previously planned to use as a dump company. I do not use the second company to dump money into as my understanding is that the ATO has started or is cracking down on this as the sole purpose is to reduce tax which is captured under Division 7A. Therefore what I have done is started a small online business in the company. This is a very complex issue and it would be a good question to ask the lawyer or accountant you use to set up your structure. That is if you decide to go down that path. I would really consider the pros and cons of a complex legal structure before you go ahead.

    2. I would use equity to pay for the deposits of an investment property. Assuming an investment property is in a trust there are not any real tax benefits of using the equity over the cash. It would seem to be better to have the cash offsetting the non-tax deductible debt on your home. A benefit of using the equity is that one can maintain access to the funds in the offset account. If you did not go for the legal structure the equity option would be better from a tax perspective.

    Yes one can use the equity in their home to purchase a property owned by a trust. The paperwork is very extensive but it is possible. The most important thing is that the legal structures are set up correctly. I set up my structures incorrectly at the start. It only took a few forms to be lodged by my accountant and it was all good. A good thing to do is check with the bank you are borrowing from how that require the structure set up before you establish the company and the family trust.

    3. I am not really aware of what areas to invest in currently however I know that if you want to find positively geared properties you will need to spend a decent amount of time researching. Some property buyer’s agent may be able to help but most of them just have properties that they want to sell rather than find one that fits your criteria. Some of the other members on this site may be able to help with this one.

    Now I hope I have provided some useful information. Can I suggest that you clearly understand what you are trying to achieve. I can see that you are in a decent financial position and think you have a lot of options. I think you may obtain a better outcome if you understand what you are trying to achieve and why. I welcome any feedback or further questions.

    Cheers,

    JT
     
  6. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney
    Hi JT,
    Could you please elaborate on how you ended up setting the structure up incorrectly?
     
  7. Jtstepbystep

    Jtstepbystep Member

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    Location:
    Gold Coast
    Sure, I will do my best to explain.

    First of all my structured was set up so I could use the equity in my father’s property to purchase multiple investment properties through family trusts with corporate trustees. For servicing reasons and to make it a family affair my brother was also in the mix.

    I wanted to use a portfolio loan with the NAB so different banks may want things structured differently. Anyway the structure ended up being as detailed below:

    Appointer of Family Trust: Law firm (Company) who I had establish the entities. This is to make sure the trust cannot be said to be a see through trust (null and void). Also if the law firm ever did do something unreasonable I can inform the Law Society and ASIC.

    Settlor of Family Trust: My lawyer (Person).

    Trustee of Family Trust: Company (owns nothing and was set up solely for the purchase of a property).

    Directors of the Trustee Company: Me, Dad and Brother

    Shareholders of the trustee company: Me and Dad

    The Nab is really fussy and they make sure your trust only lasts for 79 years and 364 days. My deeds were fine as my lawyer had previously encountered this problem with the Nab.

    Let me know if this answers your question.
     
  8. Jtstepbystep

    Jtstepbystep Member

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    Location:
    Gold Coast
    Sorry I just reread the question.

    The way I ended up established the structure incorrectly was that I set them up before I spoke to the bank I was using. My plans also changed during the process of setting up the structures and applying for the loan.

    The error I made was that I did not have my brother as a Director. As he was going on the loan for servicing he needed to be a director of the trustee company.

    I hope that clears things up.

    Cheers,

    JT
     
  9. Terryw

    Terryw Well-Known Member

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    Location:
    Sydney
    Thanks JT,

    I would have set things up completely differently to the way you have done it.

    My take on this is that it is extremely dangerous to have a third party as appointor. I have never heard of this happening before. Depending on the trust deed there would probably be nothing to stop the appointor law company from sacking the trustee and replacing it with a trustee they control. They may not be beneficiaries of the trust but they could simply amend the deed and add themselves as beneficiary or benefit themselves indirectly. There would be nothing the law society or ASIC could do as they may not be breaching any laws or any duties they have. I have had a client who lost control of his trust to a lawyer and accountant. It does happen.

    The role of appointor is not property and doesn't pass on bankruptcy. There was one case, Richstar, which saw through a trust, but this is unusual and woudn't apply to most situations and this decision hasn't been followed in subsequent cases. If you are worried about this aspect then you could appoint one appointor outside the family group.

    Having 3 directors is also very dangerous. It means 3 personal guarantees for every loan and lease etc. It can also hurt serviceability. I would suggest only 1 director.

    Setting up the deed on the bank's instructions is also very rare. Why let a bank dictate how you set up your structure? Banks should let family other than directors guarantee the loans because they would be beneficiaries and could be shareholders of the company too.

    Thanks for your reply. It is good to hear about different ways of doing thigns.
     
  10. Pete Ramoza

    Pete Ramoza Active Member

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    29th Jul, 2012
    Posts:
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    Location:
    Brisbane, Qld
    Boy NoAssets, that is one hell of a way to start as a newbie! There are some good answers above and some very clever people who post here...you are in goods hands :)
     
  11. Jtstepbystep

    Jtstepbystep Member

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    Location:
    Gold Coast
    Hi Terryw,

    I am not sure if this is starting to head off topic. Thanks for your concern. I am sure what I have done is right in my situation.

    I know it may seem very different. I understand the risks you pointed out.

    If you wanted to purchase an investment property owned by a family trust using a portfolio loan how would you set it up?

    Cheers,

    JT
     
  12. Terryw

    Terryw Well-Known Member

    Joined:
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    Posts:
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    Location:
    Sydney
    Sounds like you may have also cross collateralised some properties too.

    This is how I would do it.
    Corporate trustee. 1 Director. 2 shareholders - trustees of other trust(s).
    Fixed Unit trust to own the property

    Units of the unit trust to be held by a discretionary trust. No named beneficiaries with trustee not being a beneficiary either.
    Appointor would be myself (don't trust anyone else). Back up appointors x 2 in case I die.

    The deposit for the first property could come from a LOC held in a personal name. These monies would be on lent to the trust with a written loan agreement in place. If I had spare cash sitting around I would gift it to the discretionary trust. Each loan would be secured by one property, no cross collateralisation.

    I would add in a unit trust on top as it is the only way a property, residential, could be transferred to a SMSF in the future. Also beneficial for extracting cash of of the trust and having the interest deductible and then use the funds for private expenses. Also good for selling the property later - just transfer the units, lower stamp duty in NSW and this is due to be abolished in 2013.
     
  13. Jtstepbystep

    Jtstepbystep Member

    Joined:
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    Posts:
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    Location:
    Gold Coast
    That is some quality information.

    I agree your way is the ideal structure. Due to my financial situation I was unable to use a structure such as the one you outlined.

    Thanks for answering my question.

    Cheers,

    JT