Someone Elses Equity?

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From: Kippy :)


Hi peoples,

I promised I'd start posting regularly in my last one so here goes:

Whilst thinking about ways to get equity for investments the idea of tapping into another persons (family member etc) came to mind. So eg, using the equity in your parents property as deposits for IPs. (Not in this situation but is an interesting idea)

A few questions:
1:Is the best approach to get the other party to simply secure a LOC against the prop and then use that for deposits?

2:How is this structured legally? I presume the equity can not simply be given from one party to another.

3:Is the only way to do this simply to have the IP loans in both parties names and use the LOC as the deposit?

4:Could the % of ownership still be proportioned as usual? So 99% to the party that wants to use the equity to allow all deductions etc

Thanks and I look forward to bouncing more ideas off the amazing people on this forum.

Cheers
Kippy
 
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Reply: 1
From: J Parker


Hi Kippy!
Don't really know the legals side of things but I'm sure a solicitor would be able to answer your questions here. I know people who have used their parents houses as security for their own IP purchases, though, when they didn't have enough equity in their own. It can work, you've just got to have willing relatives and a big smile!!!
Good luck Cheers, Jacque :)
 
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Reply: 2
From: Joo Joo


how are you Kippy,

Luckily for you I have just purchased my first IP and I used my parents equity as guarantee.

You do not have to put it in both your names, it could be in your name alone and they are your guarantour. As long as they have equity, the bank can use this, but this means that this value is deducted from your parents equity which restrics them and also if god forbid you default in your loan they try to sell your property charge you fees and charges and if there are any shortcomings, they then take this from your parents.

The best way to show u how it works is to analyse my situation.......

property=205,000
loan amount=224,000 (for fees and charges and car upgrade)

now the bank lends 80% of value of home so 80% of 205,000=164,000, my parents only agreed to sacrifice 60,000 so I was approved for 164,000 + 60,000 = 224,000

Make sure to find yorself another solicitor and about $100, because you need to go through this with an independant solicitor (different to the one who is handling settlement)and sign some documents. If your property is negatively geared, i recommend income/repayment insurance to protect your parents.

The hardest part of all this is not convincing the bank manager but your parents

joojoo
 
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Reply: 2.1
From: Liam McGrath


Hi Guys,

As a newby to the forum I’d just like to say thanks to the seasoned pros out there in property land, although I’m having difficulty getting through my work with several emails every hour.

Thanks for the personal example George I’m just beginning to get my head around this concept.

My question relates to the utilisation of other people equity (OPE – perhaps) and how the financing works.

So I’ve got someone in mind with lots of equity who likes my smile, I approach the lender for a line of credit as a deposit for the IP, as a student with a modest income. (also at UTS George as it so happens) What exactly would the lender look at in determining the loan, if the property is almost positively geared would it be enough to have my equity partner go guarantor in addition to me demonstrating that I have the ability to meet any shortfall b/w rental income and all associated costs.

Thanks Liam

(insert witty/inspirational/motivational line here!! :)
 
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Reply: 2.2
From: Fiona W


Hi Kippy,

At the start of the year we used my partner's mother's equity to purchase a property. We had her as a guarantor, but this means her name has to be on everything. It has affected all our investments, as every time we apply for a loan or whatever, we have to get her to give all her information as well because she is technically a part of our overall equity picture. It has been really great using her, however it does have drawbacks, especially as she doesn't believe us or understand property investment...mind you she is happy for us do it all so she can retire and live off the fruits of our labour!!
 
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Reply: 3
From: Rolf Latham


Hi Kippy

I have but one reply.

DONT ! use a guarantee.

Find some other way to xtract the equity directly. This will prevent the almost ubiquitous hassles when you and your benefactors paths diverge.

Ta


Rolf
 
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Reply: 3.1
From: Kippy :)


Hi peoples,

Thanks for all the replies and it is interesting that a lot of people have gone down this path.

It appears that Rolf is more inclined to go down the equity owners getting a LOC and then giving the LOC to the IP investor. From a VERY short chat I gather that this has the effect if limiting the equity owners liability and also preventing a lot of the hassles involved with wanting to use the new IP's equity etc at a later date.

Next questions: The LOC is transferred to the IP investor by personal agreement or caveat (maybe I have this wrong). What effect does this have on the owner of the Equity? Nothing other than a reduction in the equity?

Also how does this arrangement impact on the IP investor? Does the LOC somehow have to be taxed and shown as income? Or is it simply a gift from the equity owner?

I can't imagine that receiving a 20 - 120k gift would not have some impacts on both parties.

Thanks again and sorry for the 59000 questions.

Cheers
Kippy
 
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Reply: 3.1.1
From: Sergey Golovin


Kippy,

Sorry I do not know the answer for your tax questions, but, your people (the one who did give you equity you required) can be discharged from it (cut loose) as soon as you do have enough your own equity (or money) in your own place and you do not have to be responsible for their actions as well as they for yours.
But before that, it is like family - you have to do everything together. I agree with Rolf it can be very painful if you decided to pull out right on middle of it for whatever reason, painful and messy. But it can be done.

I guess if you adopt simple approach - anything you do with properties does attract some sort of payments and if it is not, well, it is bonus, and you will be safe. But how much (payments and safety) I do not know.

Serge.
 
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Reply: 2.1.1
From: Joo Joo


Liam,

Im not sure how you mean by "use the line of credit as a deposit", the way I see it, the guarantor is basically to cover the deposit value which one may not possess. Correct me if im wrong guys but isnt to substitute for a deposit the only use of a guarantor, or could bad credit or unstable income also be a reason to use one.

george
 
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Reply: 2.1.1.1
From: Terry Avery


George,

If a line of credit is used that means that the parents borrow against the
equity in their house and then lend the money to you. The advantage of this
is that if anything goes wrong with the IPs then the bank can't sell the
house on them. The LOC helps isolate their asset. The LOC still has to be
paid back though.

As a guarantor they are subject to greater risk as they are liable for
payments on the IP loan if you are unable to meet the repayments (no
tenants, house burns down and the insurance company is slow to process
claim...).

You are right that a guarantor can be used to substitute for a deposit or in
the case of bad credit ratings. But the bank likes it because they can get
their money back by selling the parent's house. Anyone contemplating this
method should think carefully and put appropriate risk reduction strategies
into place, such as disability and loss of income insurance as well as
malicious damage insurance (landlord's policy).

It would be a crying shame if a parent lost their house because their
children became over-enthusiastic about property investment and bought
unwisely. Better to use a LOC and risk becoming bankrupt than to have to
tell your parents they are going to lose their house because you forgot one
small detail.

Cheers

Terry
 
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Reply: 2.1.1.1.1
From: Joo Joo


your starting to scare me a little now terry, I wish I found out about this forum a month or so ago. I suppose, the risk isnt that great. They dont automatically sell your parents house if you default, they sell the IP first and then any shortcomings come from your parents. Another thing is that its a DHA property and is positiveley geared and will remain that way till mid july 03, so I found no need for morgage insurance. I was probably stupid for doing this but I didnt think of the LOC option, silly me.

joojoo
 
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Reply: 2.1.1.1.1.1
From: Terry Avery


George,

With a DHA lease you at least have the certainty of income which lowers the
risk. Depending on where the property is located DHA may extend the lease
but I don't like the new lease with its 16.5% commission as that equates to
a lot of money over the lease. With that money you could pay a manager, rent
on the open market and afford a drop in rent and a long vacancy. One would
pay a very high insurance premium by accepting the conditions laid down by
DHA for a little security of mind.

Like everyone else here I am learning new ways of doing things and have made
mistakes in the past but the more you learn from your mistakes the better
off you will be in the long run.

Cheers

Terry
 
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Reply: 2.1.1.1.1.2
From: Robert Forward


Hi George

Don't worry to much. We have all paid for our education in some form. And your is in the form of a positively geared property. I'd say not to bad at all.

To my mind it's better then throwing your money at a seminar that is costing over the $15k mark for your education. They only get theory, you got practicle application of your education. So your a step ahead of the pack now.

Cheers
Robert

The Sydney "Freestylers" Group Leader.
 
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