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From: Ian Redman


Hi Guys,

Just read this message and it made me think of a question. It is:-

If my fiance and I are both fully employed with a combined gross salary of $85K/year and we are about to settle on an IP unit in Jan '02 for 150k and we have the borrowing capacity to borrow more than this amount. Can we use the extra over and would the banks lend this to us now?. Would we need to structure the first IP in one name or are we OK with 50/50 share?

Thanks in Advance

Ian Redman
 
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Reply: 1
From: Roderick Aguilar


Hi Ian,

There are two things that the banks will look at before lending you any money:

(i) The amount that you are borrowing should not be more than 80% of what they think the value of the property should be. For example, the banks value properties as low as they can to give themselves more breathing space should things go wrong. Say you think a house is worth $110,000. The bank will value it at say $100,000. And they will only lend you $80,000. In other words, 80% only of what THEY think your house is worth. This requirement by the bank is called your LVR - Loan to Valuation Ratio.

(ii) The other "rule" that they have is based on your income. They look at all your existing debts, your expenses and all the money coming in. They have to be sure that you can afford the monthly repayments. This is called your DSR - Debt Servicing Ratio.

If you satisfy both of these then the bank should be throwing money at you!

If the bank says it is prepared to lend you up to a maximum of say $300K and you purchase a property for $150K then I suggest you would have to wait a little bit longer to purchase your second IP. This is because on top of the $150K purchase price there are other costs involved to buying an IP. eg. stamp duty, legal fees...etc which say add up to $15K. You have now effectively borrowed $150K + $15K = $165K. So you couldn't really afford to buy another IP at the $150K mark only cheaper.

As for the structure, below are a few scenarios:

After marriage, wife stops work, start family - then the first few IPs should be in your name as you are the one earning the income and you can use the IP to lower your taxable income and hence pay less tax.

After marriage, both will work indefinitely until wealthy - then I would do 50/50 so both of you can get a tax benefit.

After marriage, win lotto and retire - then will use Trust and 2 companies structure for asset protection rather than tax minimisation. As you get wealthier you experience a different set of problems. They say at the start, getting the money is hard but keeping it is even harder!

Cheers,

-Rod.
 
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Reply: 2
From: Steve Piggott


Well Ian,
I think that a discretionary trust would most suit your needs. Set it up prior to settlement. Use your remaining borrowing capacity to purchase another property with the banks consent, settle that also in your new D/T.
As always ask for advice from those qualified to give it. ( helps if that person is also a property investor )

Happy Investing
Neb:)
 
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Reply: 2.1
From: Roderick Aguilar


Hi Neb,

I had a chat with Ian prior and as I understand their situation, being a newbie it would stretch them a bit to set up and maintain a discretionary trust structure. Setting up a Trust cost me about 2K and I then there's the annual running costs. I agree that Trusts are the way to go in the long run once you have found your feet in property investments after say 2 properties. But it gets a bit expensive when you're just starting out from scratch.

Cheers,

Rod Aguilar
 
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Reply: 2.1.1
From: Steve Piggott


I'm Still puzzled as to how it can cost 2k to set up a discretionary trust with a couple of beneficiaries. Last time I checked it was less than $300.00 with ongoings of under $200 pa.
Small price to pay I think.
Look at it as the cost of doing business!

Happy Investing Neb :)
 
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