Join our investing community

what sort of security ?

Discussion in 'Accounting, Tax & Legal' started by salsa, 23rd Jun, 2008.

  1. salsa

    salsa Well-Known Member

    Joined:
    23rd Oct, 2005
    Posts:
    49
    Location:
    Brisbane
    Hi,
    I am very fortunate to have a large LOC which I don't really need (I don't wish to invest for myself further, my needs are simple). I would like to help me nephews by lending to them to assist them in their early stage of investing.
    If banks lend them money to buy IPs banks will mortgage the properties. What sort of security can I have in lending them $$ ? Can I also mortgage the properties ? Or any contracts/conditions could be formed between us ?
    Trust is not the issue here but obviously there are many thinngs that could go wrong, or change ...
    I could lend them a large deposit to make financing the rest a bit easy, or just lend them the whole lot. The former is preferred but could get messy if both bank and I are lenders and both want some sort of security ? The latter may be easier ?

    Thanks,
     
    Last edited by a moderator: 23rd Jun, 2008
  2. Saskatoon

    Saskatoon Well-Known Member

    Joined:
    17th Oct, 2005
    Posts:
    67
    Location:
    Aldgate, SA
    Hi salsa,
    perhaps the best way may be to buy IPs in joint names with your nephews. If the investment goes well over time your share can be bought out by nephews; if any problems arise you will still have your share of the equity. Try to structure things to avoid potential problems with your sibling(s) as well as the nephews e.g. a nephew getting married/divorced/needing money to go O/S may change matters in unexpected ways.
    Personally, I went the way of setting up a discretionary trust; relations put capital in and will receive back in proportion to their contributions. More complicated, but recommended by planner & accountant.
     
  3. handyandy

    handyandy Well-Known Member

    Joined:
    6th Jun, 2006
    Posts:
    312
    Location:
    Sydney Nsw
    You can register a second mortgage on the property.

    Registering a second mortgage should have minimal impact on the 1st mortgage holder (the bank).

    I would suggest that you also have a loan agreement in place which provides some resolution should things go wrong.

    Cheers
     
  4. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    i like the DT trust idea... otherwise taking a 10% equity stake is a good idea as well... ie you provide a 10% deposit and purchase your share, your nephew gains a 90% loan for his share... (will work quite well if you can stay off the mortgage documents)...

    alternatively, you can take the mortgage in your name (and security of the property) so the risk is in your name and write a put/call option to your nephew so the risk and rewards have been passed to him but you still have legal title... this is how alot of the big listed trusts do it and may cost $5-8k to set up but would be worth it if you dont like the above options....

    this isnt finacial advice is is just brain storming... is strongly recommend that each side gets independent legal and accounting advice before anything is set up.... the creation of a partnership agreement (by a legal professional) would be critical to ensure the original motives are maintained through the long term... the benefits will far outweight the short term costs...
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    DaveA is right. set the deal parameters now.
     
  6. salsa

    salsa Well-Known Member

    Joined:
    23rd Oct, 2005
    Posts:
    49
    Location:
    Brisbane
    Thank you.
    Of all the suggestions, I feel the "taking second or first mortgage" may suit best as I am hoping once the equity has grown a bit, they can refinance and I can just disappear from the picture ...
    Put the properties in a DT won't allow negative gearing !

    (hi andyhandy :) )
     
  7. Tim Somerville

    Tim Somerville Member

    Joined:
    10th Jun, 2007
    Posts:
    6
    Location:
    North Sydney, NSW
    With the second mortgage idea, a problem can be that first mortgagees may require that there is no second mortgage. I know this is irrational, as their mortgage comes first, but many still insist on it.