FAQ: Where to Start in Investment Property

FAQ: Where to Start in Investment Property


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I have been asked several times about how to start, what are the first steps to investment property. Many people a vague notion that property investment is something they want to do, but donft know to start. Given you are probably reading this on a the Somersoft forum, I assume you have at least got this far, so well done!

So the question is: I want to find out more about investment property and if it is right for me? In is my honest advice to first start with education, build your knowledge about what investment property can and cannot do for you.

Step 1.
Thus I recommend for beginners to read 3 books before doing anything else:
  1. More Wealth from Residential Property by Jan Somers
  2. The Seven Steps to Wealth by John Fitzgerald
  3. Real Estate Riches by Dolf De Roos
For a total investment of $100 plus your time you are well on your way to understanding the basics and the power of investment property.
Concurrently to reading the books I would be visiting some open-for-inspection houses in your neighborhood, donft buy, just take a look, ask the expected sale price, ask the expected rental return, this will give you some feeling of reality in comparison to the books.

Step 2.

After step 1 you will have a better idea if IP is for you, and who it could be used to form a part of your investment for your future. Ask yourself some mental "what if" questions; If the Hot Water Service leaks and I get a bill for $1200, and then the tenants run away in the middle of the night, would I panic or just deal with it? buy the new HWS, get new tenants? Bad things can and do happen when you tenant your property; the good stuff is the wealth it generates; so I recommend you prepare yourself mentally for occasional trouble, then when trouble happens you just deal with it, without pushing the "Panic-Sell" button. BTW trouble is not normal, I have found in general tenants are good people and pay the rent on time and take reasonable care of the property.

Since you are now interested and understand IP I recommend the following three action items.

  1. Legal Holding Structure: One of weaker points of the above books is a discussion/understanding of the best holding entities for your IP, you may decide to buy personally in your name, however I would first recommend you buy the following book about investing thru a "trust", thus I strongly recommend reading Dale Gatherum Gossfs "Trust Magic" . OK it's $99 for a book, I know, I know, itfs expensive (for a book), but if you are serious about long term wealth via property investing, it could be $99 well invested.
  2. Finance: Ask your friends if they can recommend a good mortgage broker? Contact a couple of mortgage brokers and have a private discussion about your current income, existing assets and get a feel about your borrowing power etc. Can you get a Line Of Credit? There are a few on this forum such as Rolf Latham http://www.asapfinancial.com.au or Simon Macks
  3. Long Term Goals: Talk with your partner about investment goals; Janfs Somers book has some examples of realistic goals you could set yourself.

Step 3.

Now you have graduated to status gEnd of the Beginning, Congratulationsh
Remember you donft need to know everything to start investing! Some people are too lazy to even learn the basics:- you can guess where they will be in 5 or 10 years!

OK, You are ready to go! What to buy, where to buy it, how much to pay, negative gearing , cashflow postive yada yada yada? :- you can read all about it in this forum, http://www.somersoft.com/forums . A word of warning; there is so much information you can be paralyzed by the options and opinions, donft worry about finding the perfect deal, get something 80% right for you! Another word of warning; there are sharks out there with the perfect tailor made investors dream deal ready for youc.be skeptical about anything/anybody who seeks you out

Many have found Steve Navrafs $286 weekend course excellent http://www.navra.com.au/courses.html

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[size=-2] Last Updated By: Always_Learning on 2003/June/11[/size]
 
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Above is my FAQ on where to begin with IP.

I strongly recommend anyone who is interested in helping potential IP investors to recommend there tips/links and/or write/rewrite a paragraph or two!
 
Agree re the ownership structure not getting much attention in most books. However I wonder why you recommend a trust to hold IP's rather than LAQC. Maybe its different in Oz - but in NZ a trust cant pass losses back to the beneficiaries while a LAQC can pass back losses to the shareholders. LAQC is a helluva alot cheaper to set up and a lot easier to understand too !

A book wtih a different twist is Martin Haes and Joan BakerGet Rich Stay Rich - not specifically about prperty and he does prefer commercial to residential but hsi examples with separating out security assets and wealth producing assets (and how IP's can be both ) I found very enlightening
 
G'day Lissie,

Well, I've seen it a couple of times now - and it still hasn't clicked.

Please tell me - what is LAQC?

A FLA that I haven't come across - is this a Kiwi one??

Regards,
 
LAQC? That's a new one for me.

As far as a trust passing losses to beneficiaries- look in the forum for hybrid trusts.
 
LAQC

I think it probably is just a Kiwi one.

A LAQC is a Loss Attributing Qualifying Company.

It was introduced in 1992. LAQC companies and their shareholders are treated as one for income tax purposes. Similar to the way in which partnerships are treated. A LAQC has the same limited liability as normal companies, that allows protection from creditors, and the ease of sale of ownership via the sale of shares. Losses incurred by a LAQC can be passed onto its shareholders. These losses are then claimed as a loss in the shareholders individual tax returns. In addition, capital gains can be distributed tax-free without having to wind up the company.

The main condition to be met for becoming a LAQC is that it must have five or fewer shareholders at all times and the shareholders become personally liable to the IRD for any income tax not met by the LAQC.

The benefits are:

A couple buy their first house, under joint names, and gradually pay the mortgage off. They then move up market into a second house, and rent the first house out. When their tax returns are filed, the interest on the mortgage for the new house is not claimable against the rental property, as the new mortgage was used for private purposes. This can cost thousands in lost tax refunds.

LAQC's can overcome this problem. It purchases the rental property and then raises a mortgage to pay for it. The interest on this loan is then claimable for tax purposes. It then pays the couple for the rental property, who in turn pay off the mortgage on the house that they live in. The losses from the LAQC can then be passed onto the shareholders.

If a rental property is making a loss and is under both names of the couple, the losses must be split between the two of them. If one of the two is on a high income and the other on a low income, or not earning any income, there is a problem. Half the losses are claimed at 33%, but the other half can only be claimed at 19.5%, or not at all. With a LAQC, the predominant income earner in the family can own all the shares, and have all the losses claimed at 33%. This can also amount to thousands of dollars in tax refunds. The other partner is still covered legally as the Matrimonial Property Act would apply to the LAQC.

Another set of benefits are once the rental property starts to make a profit, the shares in the LAQC can be sold to a Family Trust without depreciation clawback implications. There are also the savings of not having to pay the legal fees for the change of title of the house.

LAQC's are not the be all or end all to property ownership and tax. They are only a tool and in some instances large savings in tax can be achieved.

Sorry for babbling on:)
 
Sounds like a good deal QB. I (for one) would not mind having that sort of deal available over here.

Thanks for the explanation.
 
BTW Can someone remind me of the treatment for tax purposes for books and seminars for the purpose of then buying an investment property. ie. Lets say you spend $700 on your education about IP, then purchased an IP, can that $700 be claimed as an income generating expense?

I understand it is.
 
AL, It used to be that you could.

I gather now ATO are getting more fussy.

It used to be the case that you could deduct that $700. My accountant always deducted any investment expenses without question.

But now, I am asked about the nature of the book or seminar.

If it relates to what I currently earn income for, then he will allow me to claim it. If it is learning a new technique, then he will not let me claim it.

So, if, for instance, as a person who already buys (and sometimes improves) a property, then I will be allowed the cost of a seminar about, for instance, improving value.

But I will not be allowed the cost of a seminar which covers, for instance, wraps, when I am not involved in wrapping.

Where there is a mix, I am allowed to claim the percentage of the book or seminar which relates to the way my income is being earned already.

It seems to me to be an extremely fine line. If I need to get an education in something, it might even be argued that I can never claim a deduction, because I am learning something new.

But I suspect it's a reaction from ATO from the claiming of some very expensive seminar fees by some promoters.
 
BTW Can someone remind me of the treatment for tax purposes for books and seminars for the purpose of then buying an investment property. - AL
Dale has commented on deductibility of seminars in the following links:

http://www.somersoft.com/forums/showthread.php?postid=40775#post40775
http://www.somersoft.com/forums/showthread.php?postid=51512#post51512

Dale says, "There is no formal ATO position on this issue, but, the tax office have flagged it as one they are watching."

I think Geoff's accountant is being overly cautious. I do my own taxes and depreciate the educational expenses. Since the yearly claim is relatively small I don't expect the ATO to take issue. They haven't so far. Until the ATO state their position on expensive wealth creation seminars I won't be attending them. I would and do attend low-cost seminars and purchase books. I depreciate them and because the yearly claim is relatively small I will continue to do so unless the ATO ban small claims also.

I do own 3 IP so I feel I can morally justify making small claims. However, I wouldn't consider making claims for educational expenses if I had no IPs. The rules are a lot clearer when you have no IPs. Since the books and seminars don't relate to income producing activities you can't make a claim. It's that simple. So, before attending seminars, go buy an IP.

Regards, Mike
 
LAQC Adv

Loss Atributing Qualifiying Companies are - apart from their treatment of tax losses/liabilities in all other respects a Ltd company. This means its really easy to keep your business activities separate from your personal activiities. My LAQC has a LOC and a cheque books so this operates as the cheque account for the company - or income in, all expenses out - makes it very clean and neat.

We didnt actually sell our PPOR to the LAQC as Queen Bee describes above (which is very common). We have purchased all our IP's in its name though and it works really nicely. In fact the Vendor doesnt need to know that a company is bying either - depending on the convenience factor I or my partner makes the offer with the words "Or nominee" after our name. During the conveyancing process this allows the property to settle on any agreed parties name - in our case our LAQC ! Non investors dont know how common the LAQC thing is and may be confused/suspicious if they saw XQC Ltd ratehr than Mary Jane Smith on the the Purchase & Sale Agreement
 
thanks Always Learning ...

at least 80% as good as I could do ;) ... so I won't try to add anything. the order is appropriate however ... as i'm somehwere in the middle and can closely relate to what will fit where (however simple the steps to learning may look to many).

Comment regarding TAX Deductablity ... many people may find an investment book maybe closely relate to directly relating to improving their ability to perform their ''day'' job ....

.. the fact it allows you to improve your ability to invest in property (when you so choose to do that) .. does not reduce it's deductability.

enough blabber .. i need to do some more reading and property searching!

cheers,
coolstyle
 
Note that in other threads (do a search and you'll pull them up) Dale says that LAQCs don't exist in OZ. So don't come into contention for OZ investors as an IP investment structure.
 
Property Evaluation

I just need some help with evaluating a property in Perth that i am interested in buying.

The address is 5/57 Mc Master, Victoria park i am seeking a professional service to look at the property.

Can anyone suggest a company that I could call.

Thanks in advance
 
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