Property Investment

[m.j.h]

First up if this is in the wrong section could the mods please move it, not sure where to post/ask and thought in here would be the best

Now this being a car forum and all there seems to be some very switched on people when it comes to non car stuff and I thought this topic might be one of them

First a bit of background , the wife and I were taking the kids out the other day when they asked about buying a house. How much do you need, how do you get a loan etc etc.

We answered the questions at the time and I didn't give it much more thought until an idea struck me the other day. Now it seems like a good solid idea and would need to be done the right way but like all ideas there are pros and cons

Now the idea I had was to set up an account that myself, my wife, my stepson and his girlfriend ( if she chose to and could afford it ) could put a set amount of money into each week (say $200-$250 ) and let this accumulate for 12 months.

Now after the 12 months we would go and buy a house somewhere and rent it out. Now I'm talking a half decent house in a good area not some shitter out the back of no where that no one would ever want.

Once the house was purchased we would continue to pay the same amount each week only this would go off the mortgage and the first 6 months rent would top up the balance in the account so money was available for any repairs or emergencies that may happen (hot water system shits itself, plumbing goes to lunch whatever)

Now after the 6 months the rent would also go to paying off the mortgage till and we would continue to pay until the loan is payed off or all but payed off.

At this point it would be time to use the equity in the first house to purchase a second house and rinse and repeat for more later on with the goal being to setup myself and the wife for retirement as well as give the kids a head start

Now my wife and myself want to get an investment property but also see the kids do alright at the same time and I thought this would be a good start for and make it easier and cheaper if the four of us did it this way.

Obviously I would need to talk to an accountant about how to set it up properly as well as some sort of legal agreement between all parties involved but can anyone think of anything I've missed?

Anyone been involved in this sort of thing or can think of any cons involved

As I said it seems like a great idea but may not be so in reality

Any feedback welcome, or if you don't want to post in here shot me a PM

Thanks

Martin

[portaz]

In theory it's fine but in reality you need to be able to afford all the mortgages if the houses become vacant at the same time which does happen. The area is most important I had some in launceston that actually paid for themselves which is nice but in most places its not the case the mortgage is usually more than the rent. If you can all afford the mortgage repayments if they are empty then go for it. You can borrow more for investment properties though but get good accountant and broker and agent and u should be ok.

Scott

[Yo-Yo]

There is nothing wrong with what you are proposing but like you said get advice from your solicitor/conveyancer as well as your accountant.

The bank will need to take into account all your ongoing debts for all applicants, this includes mortgages, credit cards, personal/car loans renting appliances/furniture etc. Existing debts can have a much bigger impact on borrowing capacity then people think. best way will be to go to whoever you want to get your loan through & get them to run through all the scenarios including what your possible borrowing power can be down the track assuming you buy this property then want to buy another one down the track. Even if you have enough equity, your borrowing capacity will determine if the bank can provide the total loan amount you are after.

Be aware that if all 4 of you are chipping in to buy a home all 4 of you will be on the property title & loan. If something was to happen that would mean taking someone off the title for any reason the Land titles office will charge equivalent stamp duty for that persons share being taken off. In your case if all 4 of you are buying the property by default you will each be allocated an equal share (25%) of the title unless you agree to a different share before settlement. This has a flow-on effect to how much each of you can potentially claim on negative gearing. So eg. If one person wants out on the property for whatever reason their 25% stamp duty that was paid at the time now has to be paid by the remaining 3 title owners. There can be exemptions in the case of owner occupied properties but you need to put some research into this for your situation.

There are a few other things that can eat away at the profitability of what you are proposing but by all means don't let it scare you off, just be aware of the big picture...

Most banks will charge Lenders Mortgage Insurance if you have less than a 20% deposit upfront. The total premium you will be charged is based on the total % of the loan versus the value of the property.

If you rent out the property you need to have landlords insurance, there are council bills/(+ strata if a unit or townhouse) water/ electricity. Property managers will take their % of the rent if you go that way.

Hope that helps. Good luck with whatever you are trying to do

[Shazbanger]

Hi Martin,

It seems like you have a fairly solid game plan there. Investment properties can be an awesome way of increasing wealth, so long as you plan ahead. One of the first things to consider, is if you are going to go interest only (IO) or principal and interest (P&I). If you're going for investment, I would recommend Interest Only. The reason behind this, is that the interest you are charged per year, can have a rather advantageous tax deduction against your taxable income. I would definitely recommend speaking to your account, and running through some figures to see if it is financially viable. It can differentiate quite a bit between individuals, but generally, it works quite well.

The second thing to consider is that you are going to have 4 of you on the loan, and the title. In terms of legal documentation, a fully executed contract stating that all parties have an equal 1/4 share will generally suffice. From the bank point of view, you are all jointly and severally liable for the full debt, regardless of if you setup the loan with 4 seperate loan accounts, all with an equal share. The bank will want to understand your 5-10 year plan as well, so make sure you have a good think of what you want this property to do within the next 5 years. Using the equity to fund the deposit of a second property is easy enough, and you can do what is called "Cross-Collateralisation" which uses both properties as security, against the total loan amount.

As someone mentioned earlier, generally try to save a 20% deposit for the property you are after. I realise that if you're looking at a $500k property, that means you need $100k deposit, but it does make it better off in the long run. Any LVR (Loan to Value Ration) above 80% will incur LMI (Lenders Mortgage Insurance) costs, on a tiered basis ranging from 80.01% to 95%. The cost can vary, but I have seen it anywhere between $1500, and $15,000.

The other thing to consider at the moment, is fixed rates. I've seen them at about 4.84% for 2 years fixed, which will give you stability for the first few years at least. You will know exactly what you need to pay, and it won't change for that period. The other thing you could do is split the loan, half variable, half fixed. This works well if you want stability, but also want to have the ability to make additional repayments. You would definitely attach an offset account to the variable portion of the loan, and get a salary to go there. Any money in your offset account, caluclated daily, you don't pay interest on the mortgage. It also gives you free access to the cash, and its not tied up, and its saving you money.

I work as a Branch Manager at one of the big 4, so if you wanna run some figures past me mate, I'm more then happy to help.

Cheers,

Shaz

[m.j.h]

Thanks all for the replies

Good advice and a few things I hadn't thought of/didn't know

Will let you know how this progresses

[GTR-N1]

Plenty of valuable advice above.

Shazza, regardless of -ve or +ve gearing...

* Would setting up a family trust (via Martin's accountant) help with paperwork should for example, any of them get brain damaged in an accident or through meningitis?

* Otherwise would it be best if each child sets up a will as well as the parents?

* Might it be best to buy a property that satisfies 2 criteria; a) good rental return (and demand) b) good capital growth?

[MBS206]

How you want to do this is also very dangerous.

Think for example if that GF leaves your step son, it's going to be costly for everyone in terms of stamp duty etc, plus having to buy her quarter out etc.

As for trusts, id be personally leaving them out of this arrangement. They're only good in a scenario of one person purchasing a house if they are setup correctly. 95% of them out there are setup so that others (such as a defacto) can stake a claim at the property if they leave the relationship, even if the property was purchased before hand.

Teach the step son to save that money himself and let him buy his own property. I did some splitting up of loan repayments etc and while people tell you it works, in the long run the numbers don't add up a lot of the time...

[ianjb]

Dad's a real estate agent and we were speaking about this the other day. A lot of foreigners do this, Indians are especially good at it. But they go beyond the immediate family.

[Shazbanger]

Plenty of valuable advice above.

Shazza, regardless of -ve or +ve gearing...

* Would setting up a family trust (via Martin's accountant) help with paperwork should for example, any of them get brain damaged in an accident or through meningitis?

* Otherwise would it be best if each child sets up a will as well as the parents?

* Might it be best to buy a property that satisfies 2 criteria; a) good rental return (and demand) b) good capital growth?

The family trust isn't a bad idea, however, they can be very long, and costly to setup. A simple executed contract as such, that is legally binding, with the correct wording around medical issues, marital breakdowns, etc. would generally suffice. I am no lawyer though, so I would definitely advise to seek professional legal advice in regards to this. I'm mainly going off what I've seen my clients do before, and they seem to think it works well.

The childrens will won't really be of much help, as the asset is in the parents name. Certainly reviewing your will, and adding a clause around settlement figures should the worst happen, and the breakdown percentage wise as to how much share of the asset each child has would help.

Cheers,

Shazza

Edited March 22, 2013 by XS80ST