Okay I think I'm Ready: Strategy, Structure & Finance

[Thunder]

Hi all,

After much reading and listening, hubby and I think we're ready to take the plunge, so interested in your feedback. Some info first:


CURRENT FINANCIAL POSITION

Husband & Wife (40y/o), HH Income of $300,000
PPOR valued at $1,050,000
Debt on PPOR $630,000
Current Offset Balance $40,000
Surplus funds after mortgage repayments $2k pcm =pa +$24,000


OUR 10 YEAR GOAL
• 5 to 7 years pay off PPOR and one of us quit work and have net income from property of $150k pa. At 10 years, the other can quit and live in the Bahamas
• Free up time to be with kids
• Earn enough to travel overseas once a year


STRATEGY
• Buy Hold and Rent with minor cosmetic renovation
• Opportunistic major renovations but not in first years of strategy
• Cash Flow neutral to positive, therefore yield 7%+
• Minimal negative gearing, overall portfiolio CF+
• Capital Gain potential 8%+ required to turnover equity
• LVI average 10%
• Properties $150k to $400k range, houses and units
• Diverse mix of metro, regional, coastal and mining to spread risk
• Estimated number properties required 10 to 25 (depends on ave$)
• Purchase 5 in year 1, deposits from LOC $180k, retain approx. $30k
• Draw on IP equity YoY to purchase additional properties


STRUCTURE
• Establish Discretionary Trust
• Establish Company as Corporate Trustee
• CF neutral and positive properties purchased in discretionary trust name
• CF negative purchased in Individuals names to offset tax
• Isolate PPOR lender from IP lenders
• LOC deposited into PPOR offset?
• PPOR currently owned in wifes name. Mortgage in joint names.


RISKS
• Life insurance, Income Protection, Critical Illness, Wills, Power of Attorney (Financial + Medical) all in place.
• Unemployment risk mitigation = balance of $40k in offset (seperate to LOC)
• PPOR equity to be min 20%


I'd appreciate your collective guidance on the following:

1. Are our goals to retire at 50y/o realistic?

2. I have the LOC docs from my bank (Westpac) ready to sign is there anything I need to be aware of? My Bank Manager has suggested I redraw first and then take LOC, which I think is perhaps not the best way to go if I want to pay off the PPOR?

3. Have I got my structure right? I have docs from our Accountant and he's recommending +CF purchase in Discretionary Trust and -CF in my husbands name first (both our incomes are $150k each but PPOR is in mine)?

4. Am I going to run out of equity and finance with this structure/strategy?

5. Anything else screaming alarm bells from my notes above?

Love this forum, read it every day and appreciate whatever opinion you have before we put our testiclays on the line

Thanks everyone!

Thunder

 

[Ace in the Hole]

Welcome to the forum and good luck with your goals.

It seems like you could achieve the 2nd and 3rd of your 3 goals instantly.
The first goal, depends.
Is there no way you could keep more than 24k of your 300k per annum?
It would help speed things up alot, for your 1st goal.

 

[Magpies]

Hi all,

After much reading and listening, hubby and I think we're ready to take the plunge, so interested in your feedback. Some info first:


CURRENT FINANCIAL POSITION

Husband & Wife (40y/o), HH Income of $300,000
PPOR valued at $1,050,000
Debt on PPOR $630,000
Current Offset Balance $40,000
Surplus funds after mortgage repayments $2k pcm =pa +$24,000

OUR 10 YEAR GOAL
• 5 to 7 years pay off PPOR and one of us quit work and have net income from property of $150k pa. At 10 years, the other can quit and live in the Bahamas
• Free up time to be with kids
• Earn enough to travel overseas once a year


STRATEGY
• Buy Hold and Rent with minor cosmetic renovation
• Opportunistic major renovations but not in first years of strategy
• Cash Flow neutral to positive, therefore yield 7%+
• Minimal negative gearing, overall portfiolio CF+
• Capital Gain potential 8%+ required to turnover equity
• LVI average 10%
• Properties $150k to $400k range, houses and units
• Diverse mix of metro, regional, coastal and mining to spread risk
• Estimated number properties required 10 to 25 (depends on ave$)
• Purchase 5 in year 1, deposits from LOC $180k, retain approx. $30k
• Draw on IP equity YoY to purchase additional properties


STRUCTURE
• Establish Discretionary Trust
• Establish Company as Corporate Trustee
• CF neutral and positive properties purchased in discretionary trust name
• CF negative purchased in Individuals names to offset tax
• Isolate PPOR lender from IP lenders
• LOC deposited into PPOR offset?
• PPOR currently owned in wifes name. Mortgage in joint names.


RISKS
• Life insurance, Income Protection, Critical Illness, Wills, Power of Attorney (Financial + Medical) all in place.
• Unemployment risk mitigation = balance of $40k in offset (seperate to LOC)
• PPOR equity to be min 20%


I'd appreciate your collective guidance on the following:

1. Are our goals to retire at 50y/o realistic?

2. I have the LOC docs from my bank (Westpac) ready to sign is there anything I need to be aware of? My Bank Manager has suggested I redraw first and then take LOC, which I think is perhaps not the best way to go if I want to pay off the PPOR?

3. Have I got my structure right? I have docs from our Accountant and he's recommending +CF purchase in Discretionary Trust and -CF in my husbands name first (both our incomes are $150k each but PPOR is in mine)?

4. Am I going to run out of equity and finance with this structure/strategy?

5. Anything else screaming alarm bells from my notes above?

Love this forum, read it every day and appreciate whatever opinion you have before we put our testiclays on the line

Thanks everyone!

Thunder

Have you forgot about land tax?

Surely this will end up costing you heaps or does putting them into the discretionary trust mean you pay none?

 

[Thunder]

Hi Ace,

Thanks for replying, yep you're right with 2 & 3 and I should mention our 1st daughter is in child care which costs more than private school so we're pretty committed financially but comfortable with our lifestyle. We have a 2nd child on the way so have allowed some buffer for that also and already are fortunate enough to travel o/s every 3rd year.

The goal to free up time with the kids will be when they're around 10y/o so I'd prefer not to have to work full time and can do the soccer mum thing

We could tighten the belt and move faster to our 1st goal but are happy with the slow and steady for now.

Cheers,
Thunder

 

[Terry_w]

Hold on!

What is a HH income?
What is LVI?

I am concerned by:
Mortgage for PPOR in both names

LOC deposited into PPOR offset?

What does this mean?

How is your trust structured? How is the corporate trustee structured?

Bank manager saying redraw first is a concern - redraw for what?

Do you have testamentary trusts set up in your wills? Are these optional?

Are your insurances held in an appropriate structure?

Have you a Binding Death Benefit Nomination for your super? Who do you wish it to pass to? Sought tax advice on this?

To pay off your loan in 5 years you would need to pay an extra $120k or so per year off the principal. Yet you say you only have a spare $24k pa after paying the mortgage...Whats the plan.

Good start to your journey. Well done.

 

[Rolf Latham]

I will leave most of this alone for others to "play" with.

I have only2 comments at this stage

1. with regard to the WBC loc is, I can tell you haven't read the mortgage docs in detail

Repayable on Demand.


Consider having a Dilmah over that.

Given your "millstone" non deductible mortgage a capitalising LOC may be useful for debt recycling, however an awareness of product risk is never wasted.

2. Is your banker aware of your goal? If not why not ? If they are, have they SHOWN you how to get to you 25 ips. I know the answer, because you have already said that you are unsure about your finance/equity , but I just wanted to HIGHLIGHT that Large potential gap that exists here.

Your Biggest challenges moving fwd will be risk management along a number of fronts, but will likely be mainly finance related.

Perhaps, either,.... learn how to structure your Credit/lending or find someone that can do this WITH you that has a demonstrated sufficiently global view. By definition, an employee of ONE lender does not have such vision.

When would NOW be a good time to look at your credit structure?



ta
rolf

 

[coastymike]

Why cf- in husbands name and not a unit trust with units held by husband ? Having in his own name will prevent moving them to super at a later stage , utilising the refinancing principle or lower cost stamp duty transfers to children at a later stage if that was ever desired.

 

[DaveM]

Why cf- in husbands name and not a unit trust with units held by husband ?

I would expect due to wanting to access gearing benefits? With a unit trust, gearing losses are trapped inside the trust.

 

[JIT]

I would expect due to wanting to access gearing benefits? With a unit trust, gearing losses are trapped inside the trust.

No it isn't.

 

[Terry_w]

No it isn't.

Sort of.

Losses are still trapped in the trust. But if the individual borrows to buy the income producing units they may be able to claim a deduction themselves. ie against their personal income.

 

[Aaron_C]

It all sounds do-able but the choice of lender is quite important from here on in.

 

[Terry_w]

Why cf- in husbands name and not a unit trust with units held by husband ? Having in his own name will prevent moving them to super at a later stage , utilising the refinancing principle or lower cost stamp duty transfers to children at a later stage if that was ever desired.

Or even nil stamp duty if the property is in NSW and the laws are changed on 1 July as announced.

 

[Thunder]

I am concerned by:
Mortgage for PPOR in both names

What does this mean?

How is your trust structured? How is the corporate trustee structured?

Bank manager saying redraw first is a concern - redraw for what?

Do you have testamentary trusts set up in your wills? Are these optional?

Are your insurances held in an appropriate structure?

Have you a Binding Death Benefit Nomination for your super? Who do you wish it to pass to? Sought tax advice on this?

To pay off your loan in 5 years you would need to pay an extra $120k or so per year off the principal. Yet you say you only have a spare $24k pa after paying the mortgage...Whats the plan.

Good start to your journey. Well done.

All good questions thanks Terry, some I don't have the answers to so will get some further advice. Re the PPOR being in both our names; the title is in my name and the mortgage was taken in both our names because at the time my husband owned a business (which we've now sold) the advice we received was to protect the asset (somewhat) but putting it in my name. Should I change this?

We've yet to establish the trust, and after initial discussions with our accountant he has recommended a discretionary trust with a Corporate Trustee, the company Shareholder being 100% myself (actually not sure why but will check it out) and the Beneficiaries and Appointors of the trust being both of us.

Re the Bank Manager, I enquired about a LOC and he quickly whipped me the paperwork (no surprise there) said "It is noted that whilst the limit on your account is $683, your actual debt as at today is $656 ; accordingly, if the available "redraw" was removed (ie the limit is reduced to $656), then the available equity would increase to $184".

Thanks for the heads up on the wills, insurance and super, I clearly haven't sought in depth legal advice yet

The plan to pay off in 5 to 7 years was to use the cash flow from the IP's and to add additional properties to get to our target. I've used a couple of the spreadsheets here on SS and it looks good in theory. Will need to have some scenarios checked with my accountant so I can be 100% in the plan.

Cheers and thanks for the advice

 

[Thunder]

1. with regard to the WBC loc is, I can tell you haven't read the mortgage docs in detail

Repayable on Demand.

Consider having a Dilmah over that.
.

Errr thanks for the heads up, I love a good cuppa and you're right I haven't read the docs as yet. Will though

2. Is your banker aware of your goal? If not why not ? ....

Perhaps, either,.... learn how to structure your Credit/lending or find someone that can do this WITH ....

When would NOW be a good time to look at your credit structure?

ta
rolf

Haven't yet spoken to my Bank Manager in great detail as am planning to find mortgage broker... yep NOW would be a good time

 

[Thunder]

I would expect due to wanting to access gearing benefits? With a unit trust, gearing losses are trapped inside the trust.

Correct that was the advice given. But I seeTerry's note a bit further down the thread so thanks folks I'll have another convo with my accountant

 

[Thunder]

It all sounds do-able but the choice of lender is quite important from here on in.

Cheers Aaron, thanks.

 

[Thunder]

LOL new I could count on you all to give me a shove along. Got my work cut out!

 

[Aaron_C]

LOL new I could count on you all to give me a shove along. Got my work cut out!

lol. Just try not to overcomplicate things at the beginning because it will stop you from doing anything.

 

[Terry_w]

Hi Thunder

Who advised on the PPOR set up? This will provide very little asset protection because you are basically acting as trustee for your husband. Having him on the mortgage destroys any little protection there was. I guess you may not have been working at the time and couldn’t qualify for the loan. If this is the case then not much you could have done, but if you were working then best to leave him out of it completely. If you qualify I would change the loan to your name only. This may also assist with borrowing capacity a bit, depending on many things.

Your accountant is providing legal advice! What would happen if you died? Who is the director, husband probably? Imagine if you died and there was a problem with the will. Appointed husband executor, but he cannot handle the job and someone else is appointed, family, or public trustee company. They will control the shares of your trustee company. They could sack the director and appoint themselves as director. They could then distribute trust assets to benefit themselves. If they are not beneficiaries they could simply amend the deed (depending on wording) and vest all the trust assets to themselves. Your husband may be a surviving appointor, and could sack the trustee. But this can all be done before he gets wind of it. It is also a major hassle changing trustees.

If you were the sole shareholder and director and die then the trust would be unmanned until probate is granted. Bills could not be paid etc. The corporations act allows your legal personal representative to take control until a new director can be appointed, but you won’t have a LPR until probate or letters of administration is granted by the Supreme Court. This could be 6 months to a year or more away.

With the LOC the names on this will be the names on title to the PPOR. Again to reduce risk and to preserve borrowing capacity it would be good if you could leave the husband off. Let him start afresh with guaranteeing the trust loans. And structure the trust so that only one guarantee is needed. No sense in both guaranteeing something as it doubles the risk and halves the borrowing capacity of future property.

I like LOCs for tax reasons. It is easy to pay for expenses and write a cheque. But one the money has been used then best to change them to term loans. Eg. You spend $100k on a deposit for the next IP from your LOC. After settlement just change this $100,000 to an IO loan. You may get a lower interest rate and it may not be payable on demand.

You will also need to carefully consider how the trust will access your LOC. Possibly a written loan agreement is needed and consideration of the interest charged is also needed.

Also if buying in VIC you may want to consider buying in one of your personal names. You can then take advantage of the stamp duty exemption and do the ‘spousal sale strategy’. Wait for growth and then sell to the other spouse. No stamp duty payable, increase deductions to the purchaser and the cash released to go off the non deductible home loan.

 

[K_Raheja]

LOL new I could count on you all to give me a shove along. Got my work cut out!

i bet you did not expect these many responses in such a short time
btw you mentioned living in bahamas and travelling etc
google 'Tim Ferris'

good luck