My new strategy/direction

[luce.rocks]

Not sure this will be any use to anyone else, but just though I'd share my change of investment strategy

Background:
My mum and I spent about 7 years getting together a small property portfolio of 5 IPs. During this time she was working (teacher) and I was a student (and did the renos), so all except one of the IPs are in her name. I know a lot of people advise against investing with family, but this worked fine for us.

Now she's is retired. This makes it pretty hard for her to access the equity, plus she's not really that interested in investing anymore. So, we've decided to sell 3 of the IPs.

The future:
The general idea/strategy is that if we can get 250K-300K from selling these IPs then I will have enough cash to do one of the following:

- Find a reno project in a regional centre that I can buy and renovate outright , without having to go to the banks. This sounds good to me, as I just quit my job and would like to not go back to work.

- Find a reno project in Sydney that would only require a small mortgage. Also sounds good because Hubby's job isn't very well paid.

- Find a reno project in Sydney that would require an 80% lowdoc loan, put $150K down, and use the rest to cover interest and reno costs.

- Find a small development site somewhere and do a small a small build project.


The general difference is that I used to be a buy and hold girl but now I want to take some of that equity and start using it to make my day to day living out of investing/developing, and never go back to a normal day job. Part of the reason I want to change my investing approach is that Hubby and I would like to start a family, so we'd like to rearrange our finances so we don't have to have both of us working in 9-5 jobs.

Anyway, that's probably not much use to anyone, but seeing as I just made a post in another thread about how people don't seem to be sharing as much about their current projects/strategies as they used to, I thought I better step up and make a point of letting you know where I'm at

 

[Terry_w]

Some things to consider:
- Centrelink issues
- asset protection issues
- estate planning issues

e.g How is your mum going to give you access to the money? Gift, loan, via gifting to a discretionary trust etc.

- Taxation.
It may work out better to sell those properties over a few years to reduce the CGT. There may be a few other ways to reduce it too.

- Loans
You may be thinking it is easy to get that low doc, but things have changed. You may need to prove your income to get a low doc. So plan carefully about ownership structures and loans. You wouldn't want to plan it all out and then find out you cannot proceed because of inability to get finance.

 

[Aaron_C]

Your future strategy is clearly not a buy, get a loan, and rent it out. You don't want to work a 'job' anymore, which means getting any loan is going to be extremely difficult. Even if you did get a job, you may have problems with being too 'rent reliant' (common problem these days with professional investors).

Without suggesting anything property-related, I think you/your mother should register for an ABN (if you don't already have one). This will allow you to access the lo-doc market which can give you much more flexibility. I can see that after selling your IPs you will be cash rich but cashflow poor. Most lenders require an ABN and GST registration for at least 2 years. Probably best to have a trust/company get the ABN for future use. You don't have to prove income with a lo-doc loan, especially if it is a commercial loan. If you can show some income (BAS, bank statements) the rate is cheaper but there are others who just need an accountant's declaration. So if your accountant isn't co-operative this could be a straitjacket on your future investment.

Terry raises some good points with tax/gift issues. You should have a good chat with your mother about this.

 

[luce.rocks]

Our idea is (and please let me know if this isn't possible) that the next thing we buy would be co-signed by 3 people: mum, me, and hubby.

Mum would put in the bulk of the money but co-signs for only nominal ownership of the property. This way she effectively transfers the bulk of the equity to Hubby and I without us having to pay gift tax?

Any mortgage we would get would be secured by Hubby's income, which is pretty low but enough to support a loan of 200-300K at the moment.

Does that work?

 

[Terry_w]

That would be possible, but would it be wise?

There is no gift tax in Australia. But gifting can affect pension entitlements.

 

[Aaron_C]

luce, the thing you are talking about can be done in two ways.

1) Family pledge - your mother offers part of her other property as security for the new loan. In this arrangement your mother will be liable for a guarantee limited to the amount of equity she's given you.

2) Gift - your mother refinances her own property and extracts the equity. She then gives you this cash for you to use for the new property. This way she is not liable for anything and she won't be a guarantor on your property.

In either case your mother does not have to be on the title because she's your mother so the 'benefit' to her is established. Option 1 is only viable if your mother is not working and/or can't prove income to get the equity out with Option 2, or if she doesn't want to gift money to you.

 

[luce.rocks]

That would be possible, but would it be wise?

There is no gift tax in Australia. But gifting can affect pension entitlements.

Yeah, that's the other thing we were thinking. Mum's not allowed to just give me the cash outright without her pension being affected, so we figured if she puts it all into a house that we co-own, then we'll have circumvented the pension issues? Then later, when we sell the new co-owned place, we will have effectively transferred the equity from her to us without having been hit with stamp duty or tax or having her pension affected?

 

[luce.rocks]

luce, the thing you are talking about can be done in two ways.

1) Family pledge - your mother offers part of her other property as security for the new loan. In this arrangement your mother will be liable for a guarantee limited to the amount of equity she's given you.

2) Gift - your mother refinances her own property and extracts the equity. She then gives you this cash for you to use for the new property. This way she is not liable for anything and she won't be a guarantor on your property.

In either case your mother does not have to be on the title because she's your mother so the 'benefit' to her is established. Option 1 is only viable if your mother is not working and/or can't prove income to get the equity out with Option 2, or if she doesn't want to gift money to you.

But she's retired, so won't it be hard for her to refinance?

 

[Aaron_C]

But she's retired, so won't it be hard for her to refinance?

Yes in that case option 1 is probably the best option unless she sells the property.

 

[Terry_w]

Yeah, that's the other thing we were thinking. Mum's not allowed to just give me the cash outright without her pension being affected, so we figured if she puts it all into a house that we co-own, then we'll have circumvented the pension issues? Then later, when we sell the new co-owned place, we will have effectively transferred the equity from her to us without having been hit with stamp duty or tax or having her pension affected?

But how will the profit affect her pension.

I suppose if she is 1% owner then it won't have much affect. She could also own up to a certain amount of assets before the pension is reduced.

Its worth considering.

I think pensioners can gift $10k pa or $30,000 over 5 years before it affects the pension.

Another possibility is to loan the funds interest free.

 

[luce.rocks]

Yes in that case option 1 is probably the best option unless she sells the property.

Sorry, I didn't read your post properly. The idea of a family pledge is interesting and we hadn't thought about it. Still, maybe it's not for us as we really need the equity as liquid cash, so we can put it towards a purchase. Unless I've misunderstood how the family pledge works?

 

[Aaron_C]

Sorry, I didn't read your post properly. The idea of a family pledge is interesting and we hadn't thought about it. Still, maybe it's not for us as we really need the equity as liquid cash, so we can put it towards a purchase. Unless I've misunderstood how the family pledge works?

I'll illustrate with an example:
Say your mother owns an unencumbered property worth $500,000.

You go buy a new property for $400,000. You need a 20% deposit + stamp duty of 5%. So you need cash of $100,000 to buy the property.

With the family pledge, your mother will give the bank her security, with her liability limited to $100,000. The bank will use this $100,000 to put towards the purchase of the new property. The remaining $300,000 is borrowed by you/your husband in your own names, and you are responsible for that.

Hope this clears it up.

 

[devank]

3 people: mum, me, and hubby.

I think that would make things a bit more complicated in the long run. You never know where the next problem will creep in from. For example, are you sure (because I'm not) that you won't get hit with land tax because of your mum's other properties?

Is it worth considering buying her properties (at a lower price) under a company setup?
Is it worth putting the property for auction (ignoring the current clearance rate) and you participate as one of the serious bidder. Never know you mum might get really lucky.

 

[Peter_Tersteeg]

devank raises a very good point. Probably the easiest way to get access to Mum's equity is to buy a share of it from her at a nominal cost. Essentially buy the property from her.

You'd obviously have to pay stamp duty. Hard to say what your Mum would be up for in terms of capital gains and there could also be pension flow on effects there.

This would take her out of the borrowing equation however, which would make life easier as your serviceability is likely to increase in the future whilst your Mum's isn't

The lo doc option is unlikely to work for you in the future. It's easy enough to have an ABN for a few years but you've also got to have additional paperwork to back it up, such as accountants letters or BAS statements and the corresponding ATO receipts. In a nutshell, lo doc only works if you really are self employed.

 

[luce.rocks]

Stamp duty for me to buy them from her would be more than we'll pay in CGT. She can claim a PPOR exemption for one of them, and the other two we'll try to organise so that one sells in this financial year and one in next financial year.

She'll get the 50% CGT reduction for both because we've had them long enough. Because she's retired, having one sale in each year will give her an income of about 100K. With the 50% CGT reduction, and with the normal IP tax deductions she can claim, it won't end up being too much tax.

Plus, we can't really sell the IPs to me because no bank is going to lend me the money to buy them. And even if we found a bank that would, then I'd have no serviceability left to do anything.

I'm very open to other ideas, and thankful to everyone for taking the time to think about my situation, but without mum or I being able to borrow, the only way I can see of releasing the equity is to sell.

 

[Terry_w]

Luce,

Do you know what the centrelink rules are on lending? ie if your mum lent you or your husband $100,000, Would this affect the pension?

 

[luce.rocks]

Luce,

Do you know what the centrelink rules are on lending? ie if your mum lent you or your husband $100,000, Would this affect the pension?

I'm not sure. We've looked at the rules for gifting, but we haven't looked into rules for lending. We didn't even think about it! Perhaps she could lend us the $250,000 and then she wouldn't need to be involved in the purchase of the new house? I'll start researching. Thanks.

 

[Aaron_C]

The only way around it is to move into commercial property. With commercial they are far more flexible in determining how much you can afford to borrow. You can get commercial loans that just rely on your rental income, without the need for additional PAYG/self employed income. This is why professional investors usually migrate to the commercial space.