Here's my predicament...

Hi all, we are in the following situation, and we would like to plead for your help in guiding us to better future decisions as we have made enough blunders! Will provide you with anything else you need to know.

Hubby and I built our ppor in Adelaide 5 years ago. We subdivided our block.
- in order to also build a house for hubby's parents to rent from us. It probably should be renting for $235pw but we give it to them for $180. We saw this simply as a way of forced savings, we knew squat about investment. We worked hard at paying down our own mortgage over this time. ( old school thought was debt is dreadful )

In September 2005, whilst still ignorant of investment principals this what we did:

Purchased a house from a friend at the eleventh hour. She was about to have her house reposessed by bank to recover unpaid motgage payments. Made snap decision to do this and NEVER recognized until now (too late) what a bargain we got it for. $162K. Bank would likely have sold it for about $155K. Thought according to the agent we had come in, to do a quick appraisal that it would have been worth $180K under normal circ. with some time on the market. Rented it for $190p/week after a weekend blitz to spruce it up. We kept the property for a year and a half, but were stressing over the rent shortfall.

This wasn't because we had to find $$ to cover it's costs but because we decided to build 2 project homes in new sub division and didn't "think" we could borrow the money,whilst still needing to top up the above loan payments. STUPUD! Note to self : always consult professionals, read books and ASK lots of questions before acting. Anyhow, we sold it.

But then went ahead and borrowed to build these two homes. We decided to build these initially because we could see, in the not too distant future, our source of income was going to be sold as we have absolutely had enough of our retail business! We figured if we built 2 homes for a quick profit this would buy us some time whilst we worked out where we were going to derive a future income from - ie. new business or get new job etc.
One of the houses is due for hand over nxt week. The other in about 8 wks.

Again, on set up we were still clueless about tax implications on loan structure! So here is where we stand now:

PPOR value $360K Debt $28K ( yes 28 )
IP 1 value $245K Debt $155K rent $180k
IP 2 value $360K DEBT $253K rent expected $335pw
IP 3 value $365K DEBT $305K rent expected $340pw (Ready 8 wks)


all of these properties are in Aldinga Beach.


Total equity $569K Total asset $1330000. We have a car loan of $35K (mostly for tax purp.) and a business loan of $34k. We will hopefully soon sell the business and expect around $260K from which we need to pay all stock and sundry business debt around $75k. plus cap gain which could be costly as we set the business up.

So, FINALLY question is how do you think we should move forward? We do not have friends who invest, a decent property accountant, (our current accountant is lovely but he's only all for super which we don't have) nor do we know how to fix our loans to work in our favour and who to see to do this Is it possible to live off some of the equity, somehow? We don't require more than $50k nett to live ( providing we don't need to contribute to property loans etc. and we have 2 kids.

In Conclusion, thankyou to anyone who bothered to read my hideously long rambling and looking forward to your pro active responses. Regards Jo and Mike
 
You are negative geared to the tune of about $23k per year (on your investments) before selling your business. This is based on rental expenses of 20% of gross rental income.

Depending on depreciation on the buildings and assuming a marginal tax rate of 30%, you may be negative geared about $10k per year.

What should you do ?

After the business is sold, you should get the car loan payed off and perhaps think about paying off the home you are living in. The remaining cash sould be put into an offset account against one of the IP's. This will give you some time to think.

I wouldn't even consider living off equity until my portfolio is very much cashflow positive. You will have a way to go before your three IP's are cashflow positive.

To bring the IP's into cashflow positive territory as fast as possibel you may want to sell one of them to help reduce some of the debt in the other two. To help redice CGT, you should aim to keep the IP at least 1 year before selling. Try to time when you sell the IP so that you sell it when you both have minimal income - this will mean CGT is payed at a low marginal tax rate.

How you want to move forward will depend very much on what you want to do after you sell the business. If you are prepared to get a regular job for a couple of years to help offset the negative cashflow you could probably keep all the IP's. If you are determined not to get a day job, you will need to reduce some debt - one example is by selling an IP to reduce debt on the other two.

Whatever you choose to do, keep on asking questions. The forum is a great starting place to gain some knowledge, understand financing, taxation and structuring. You will find that the answers will come to you the more you learn

Hope this helps
 
Don't be hard on yourself, you haven't made too many mistakes :) and if you think you've had a little beginner's luck...... welcome to the club. It's pretty common.

I'm a believer in simplicity. Too much complexity too early can be hard to unwind later.

Welcome to the forum, and I'm sure someone more knowledgeable than I can help with structure.
 
First question. Did you get a depreciation schedule done for your IP's? If not, get it done ASAP. You need a Quantity Surveyor for this.

Set up an offset account(s) so that when you sell your Business you can deposit all your funds into this until you decide what to do. Pay out any non-deductable debt.

The property that your inlaws are renting according to your figures is receiving greater than $50pw discount. Now, this is not a win/win situation. It is fine to give your inlaws a discount, but you also have to look after yourself in the process & interest rates are increasing, so are costs. Maybe sit down with your inlaws & suggest that while you don't mind giving them a discount, it needs to be fair both ways. A discount of 10-15% market rent will keep you out of trouble from the tax department on this one (they will deem you to be getting market rent & tax you accordingly. A discount of 10-15% will be acceptable as you won't be charged management fees).

If you sell your business in the new financial year, this could reduce your CGT liability if you don't have a job to fall into immediately.
 
Hi WillG, Sunfish and Skater,
Seems my next mistake was posting in the wrong place, sorry! Thanks for taking pity on me and replying anyway! So much to learn. WillG, we're not keen to sell an ip but I appreciate where you were coming from, we don't really expect to draw on equity ( even if only small amount ) at this stage, just trying to explore all possibilities at this time.
Sunfish if I've learned anything yet it is that at this stage we must ask as many questions as possible and hope for lots of kind souls like yourself to provide us with answers. Even if we don't like the answers we get. Thx for your words of encouragement...
Skater, please bear with me, I'm very green, please could you or anyone explain what the benefit of a quantity surveyer is on new homes we have built? I have heard of them but thought that they are only of benefit on older homes... like I said, lots to learn!
To anyone else who will lend an ear, it seems we need to organize a team to work with. Property accountant, solicitor, pointers please??? Regards Jo
 
please could you or anyone explain what the benefit of a quantity surveyer is on new homes we have built? I have heard of them but thought that they are only of benefit on older homes... like I said, lots to learn!

Depreciation works BEST with new homes not older ones. Basically, everything in your house, including the kitchen sink, can be depreciated at a particular %. And that comes off your taxable income. And only a Quantity surveyor can do this properly. Some things, (under $600 if jointly held) can be written off in the one year.

Am attaching a document for you to get the idea

I think it is too big, but go on to the ATO website and search for this document: NAT 1996–6.2007

and this one:
NAT 1729–6.2007
 
Hey BTW Jo...if you're after a good accountant I was recommended and now use Paul Sallis. He's based in the city..very property "savy".

http://accountantlist.com.au/845-Paul-Sallis.aspx

Also used BMT Quantity Surveyors here in Adelaide and they seem to be very professional and reasonably priced. Like Skater said, very worth doing. For what it costs you'll make it back many times over....

Rory:)
 
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