Realising cap gain = income?

[Michael Croft]

One for you Rolf,

Thinking outside the square here

Lets assume the investor comes to you with $5m in property and a 40% LVR.
Rental income = holding costs (cash flow neutral).
Investor has small income $30k.
But if s/he sold a property (realised an assett) per year would have an income of say $200k.
Or if extrapellating capital gain at a conservative 5% per annum their realisable income (cap gain) could be $250k per annum plus.

Here's the loaded question; could this individual sign the stat dec for a light doc loan claiming they could realise an income of $200k per annum in all honesty? If yes fantastic news for all the equity rich cashflow challenged IP investors; if no - why not?

Regards, Michael Croft

 

[always_learning]

Isnft this almost identical philosophy to a Steve Navra's style cashbond driven strategy?

Steve suggests purchasing a cashbond annuity that is accepted by a bank as income (because it is income). With this suggestion of low-doc, no-doc finance would appear to be OK, but what happens in 5~10 years when new finance needs to be raised and the individual needs to sign a stat-dec declaring his/her income, from all I know the "potential" or unrealized/paper capital gains is not classed as income until you actually realize the gain by actually selling the asset.

What is the difference between using a non-recourse LOC finance (ie. based upon only the security of the property) and using a cashbond I donft know.

Gosh, $5M in property and they donft have an plan? I would have guessed anyone who has been able to focus their efforts and resources over many years to build up such a valuable property portfolio would be an intense planner and an even more focused plan executer.

 

[Alan H]

Interesting question Michael.

Also, as a slight variation to Michael's question, assuming you had to actually 'realise' a potential income source to truthfully state the income, and you had the cashflow to service say a $100K LOC, what would stop you setting up the $100K LOC and then stating on the Lo-Doc application that you had access to an 'income' of at least $33K(for 3 years anyway.....) to increase your borrowing capacity.

Not saying you would or wouldn't do this, but I would be interested to know the guidelines for stated incomes with Lo-Docs.....

Thanks guys.

 

[Michael Croft]

Hi A_L,

Slight problem with annuities is that investors need the cash in hand to buy them in the first place. Another problem is that investors are 'realising' their cap gain to produce said annuity (which costs 3-4% interest differential and set up costs). All OK if used for productive purposes of course and as part of a strategic plan etc.

What happens in 5-10 years? Well I am assuming that cap gain and rental growth haven't ceased to exist and that come year 5-10 a 50 -100% increase in both has been achieved. And this is on the increased portfolio ($5m became $10m in year 1 and by year 5- 10 was $15-$20m).

Ain't a lot of difference as far as I can see between lite/loc docs and 'cashbonds', but remember when Steve started promoting cb's there was a large interest rate differential between std variable rates and low docs and that did make a difference to cashflow.

I know several people who now have in excess of $5m worth of property (and modest LVR's) who stumbled into it without a plan and began only 5 years ago. They were a little intense once they realised that comparatively easy money was to be had

regards, Michael Croft

 

[geoffw]

Originally posted by always_learning
Gosh, $5M in property and they don't have an plan? I would have guessed anyone who has been able to focus their efforts and resources over many years to build up such a valuable property portfolio would be an intense planner and an even more focused plan executer.

I'm not quite so sure on this AL.

People might have had some very good plans. But I'd suspect that many people (myself included) have been caught by surprise by the amount of growth which has occurred.

I've been surprised by it- but I have been keeping tabs on it, and I'm ready to move again if any growth should happen.

I don't have a particular plan myself. I'm not focussed on a concrete goal. I know I want to be out of the rat race, but it's a slow process. If things happen more quickly (or more slowly), so be it.

But, thanks to unexpected growth, I'm way ahead of where I expected to be at thistime.

 

[always_learning]

Now I feal a little depressed!

It is easy to fall into a hole, but much harder to fall up a mountain. I hope one day I can fall up a $5M investment mountain!

 

[geoffw]

AL,

I'm way off the $5M mountain. I'm heading towards 2.

That's well more than double where I was one year ago.

Thanks to Jan Somers, Peter Spann, and a property boom not predicted by many.

But we're all waiting for Rolf to answer Micheal's original question.

 

[handyandy]

Hi Always learning


They had a plan and were intense about it at the start but as you know realestate is a long term investment and other things and interests happen in your live.

We started with a mud map 23 years ago. "Need 7 IP's to be able to live off the rent." That was it, no real idea how I was going to do this but at that point a real intensity about wanting to do this.

Currently my plan is to revalue all my property holdings and tranfer the loans to LOC's which will then allow me to react to any oppurtunities as they occur. Don't know what they will be.

Cheer

 

[Rolf Latham]

Hi MC

Been at a Brian Tracey Seminar ..................

In short Yes, and no

Many a good lo doc product say for eg Integris, there is no stat dec, indeed for most of them its an unwitnessed declaration.

The primary purpose of the declaration is that the lender/insurer is covered should the borrower ever come back with "you knew I could not afford the loan".

In reality any income stream would suffice, be it a cap gain realised by sale, equity growth realised by refinance or top up, or indeed equity return in portions through the use of an annuity.

These are all legit forms of income, especially the cap gain by sale because it commonly attracts a CGT or income tax depending on circumstances

Ta

rolf

 

[Alan H]

Thanks Rolf.

As always, a fountain of financing knowledge......

I haven't heard the name Brian Tracey before. What does he espouse?

 

[Rolf Latham]

Hi Alan

Thanks for the kind words.

Brian Tracey is an American sales professional that has been around for donkeys years.

Very good at his craft, and is also a very well established author.

He has produced a brilliant tape series called the Psychology of Sucess - mandatory consumption for those that want to get ahead.

Ta

Rolf'

 

[Michael Croft]

Ta Rolf,

Just what I wanted to hear, my friends will be most happy and will be intouch.

Hadn't heard of Brian Tracey until now but will follow up and see what he does. My mind is a little elsewhere at the moment - spent the weekend buying a stud belted Galloway herd. How's that for a different form of investment aka lifestyle choice - also need some capital expenditure before years end

regards, MC

 

[Alan H]

Just remember to change your 'value adding approach' with the herd MC.

Your going to scare the day lights out of them if you approach them with a paintbrush and circular saw!!!!

 

[Michael Croft]

Hi Alan,

I was planning on letting the bulls do the value adding bit!

regards, MC

 

[geoffw]

So now you're talking share market Michael?

 

[Michael Croft]

The share market is far more adept at 'having intimate relations with' people. If it did the same to animals the RSPCA would be called!

MC

 

[geoffw]

Michael,

I was only thinking of a bull market adding value.

Obviously you were thinking "outside the square".

 

[always_learning]

Investment Mountains Well I hope to be well over the 1M mountain by the end of this year, and if Mrs Always Learning let's me preparing the ground for 2M moutain in 2004. The problem is then the next step ie. the 3M mountain as then I will be getting close to servicability limits and my own concerns about risks associated with any future interest rate rises etc.

Belted Galloways I had the pleasure of raising one from a calf, what lovely animals. It broke my heart to sell it (and for those who dont know the use of a belted galloway, well they are not raised to look pretty, or provide milk, you need to use words like "tender" and "tasty"). I'm not a "farmer" by natural tendancy, so the HiFi which I purchased with the profits was permantly tainted by my guilt about the blood sacifice by this animal who trusted me!

Brian Tracy I couldnt agree more, strangely enough I was listening to his "The Pyschology of Achievement" (which I think is his best) this morning, thinking exactly as Rolf. Gosh, very powerful, very simple, why did I wait 34 years before exposing myself to this information. Naturally some bits are "cr.p" but dont worry ignore those bits, for an Australian audiance we probably need to turn down the hype detector down 50% and listen to his message with the understanding he is an "American". Brian has 50% off promotion for audio cassette programs this month ( ie people buy the CDs so obviously he is dumping the audio cassette stock)
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