Want my 20% back

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From: Martin .


The Background.
I understand that when the 20% deposit required by the bank is put into a I/P total cost, the equity for further loans only begins with CG or further reduction in principle.
- Why does the 20% get blended into the total forever?

On a positive I/P & interest only, the income generated from dollar one is taxable, if used to put back in the pot used for the 20%.
(Simply gaining the 20% back without using any "claim it on tax" methods).

The Question.
Now, if using a trust to own the I/P and having to obviously come up with the 20%,
- can this be a loan TO the trust,(I've been told you can make a loan to the trust),
- enabling the 20% to be paid back to you - (remember positively geared),
- hopefully "obviously" without tax,
- as it REALLY is YOUR money?

If this is a dead end, I'll soon find out anyway, but if anyone has thoughts, (it may be commonly or never done, I don't know), they would be appreciated.
 
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Reply: 1
From: George M


if you have no equity in a property, maybe you could look at putting your cash into a managed fund and then borrowing against it to fund youre purchase deposit.
then it would all be tax deductible and you would hope better returns than a bank on your cash

George Mariotti
 
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Reply: 1.1
From: Martin .


Thanks George,

O.K. that sounds like more of the right way to control the 20%.

The difference between what the managed fund can produce(%) and a loan rate at ? category - (housing rate would be close),
is one thing,
I suppose the borrower would somehow tie up the managed fund until that amount was repaid, preventing access?
Even then it sounds ok - while I like "Tax Deductible" where ever possible, I would rather avoid it,
(that is, "to keep" is better than "to pay" and get some of it back).

Still would loaning the 20% (or thereabouts)to a trust and being paid back the money,
a) have any chance of being tax free?
b) if so, be worth organizing that way?

ML
 
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Reply: 1.1.1
From: Dale Gatherum-Goss


Hi Martin

Yes, if you loan money to your family trust, the trust can repay that loan at any time that it has the funds to do so.

Moreover, that the repayment of the loan does not affect your tax, or the trusts.

I hope that this helps.

Dale
 
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Reply: 1.1.1.1
From: Paul Zagoridis


And your loan to the trust can and should have a commercially relevant interest rate.

SO if the IP is positive cash flow you could siphon some funds off that way.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 1.1.1.1.1
From: Martin .


Thanks Dale,
Thanks Paul,

Hmmm..so I get to loan out at a commercially relevant interest rate... sounds good to me.

It looks to be workable, still have to see if the Lender will appreciate the Trust "borrowing the 20%" as well as their 80%, - although they said that it's ok using their credit line for coming up with the deposit.

Now using the point George referred to, of using equity, say, in family home....and trying not to cross collateral it with I/P...

Using the family home to extend a credit line by the required deposit amount,
and borrowing from the credit line to loan TO the trust at "matching rates" (I get to set my rate to match theirs?),
- I can keep the family home separate, (hopefully delete "all monies" clauses if using same lender), from the I/P arrangement?
- (And retract credit line again when trust returns loan amount to take family home out of the picture again)

The ATO wouldn't say if it were possible to receive from the trust untaxed, apart from recommending I should know a lot more on trust law. No such thing as a simple tax question?

ML
 
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Reply: 1.1.1.1.1.1
From: Dale Gatherum-Goss


HI Martin

You seem to have a good handle on the idea. Well done.

Don't be surprised about the ATO not answering you about the trust situation. Trusts are something that they, and most people including accountants and solicitors either don't understand, or, have a very limited understanding.

You are on the right track and good luck with your plans.

Dale
 
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Reply: 2
From: Mike TheBloodyIdiot


Guys,

Sorry, I do not get it - I am too dumb.

DO I understand it right that the whole idea is to get access to that 20% of your property value that is being held by bank as a de-facto mortgage insurance?

I agree this is a big problem which is getting bigger and bigger with the time.

On $100K property bank freezes just $20K worth of your equity. But when you accumulate small size of portfolio of say $5 million, there is a million of your money frozen by banks. It is quiet ridiculous that banks do not benefit from it in any way (apart from "peace of mind").

But frankly, this trust strategy (which looks brilliant on the surface) does not provide any solution to the problem.

Bank still lends you at 80% LVR, thus still freezing 20% of your money. Trust money is your money after all, so you lend yourself, borrow from yourself, pay yourself interest, charge yourself interest.

You get deductions on the interest you pay as a trust to yourself at a company tax rate.
You pay tax on the interest you charge as an individual from yourself as a trust at a personal tax rate.

The only thing you achieve - you complicate your life. Wrong, there is a bright side - you make your accountant and ATO happier.

There is a good news - there is a way to get your 20% back. Bad news - I do not have a liberty to discuss it here and now.

Sorry if I disappointed you,

Mike - TBI
 
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Sim

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Reply: 2.1
From: Sim' Hampel


On 4/11/02 3:49:00 PM, Mike TheBloodyIdiot wrote:
>
>20% of your
>property value that is being
>held by bank as a de-facto
>mortgage insurance?

This is simply a risk management strategy by the banks. Why is this such a problem for people ? Banks are businesses and need to manage risk just like everyone else.

sim.gif
 
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Reply: 2.1.1
From: Mike TheBloodyIdiot


Sim,

The problem is that you are nice and very generous person and I am not.

I really admire your ability to let somebody get hold of as much as of 20% of your assets for their "risk management".

It is simply like every fifth property you own, you are denied access to.

As to me, I always ask "Management of what?!?!?!". There is a very interesting link in the thread "Are we too much in debt?" on this forum.

Average household debt level is now at 110% of household income, which means that average Australian has $1.10 of debt for every dollar they earn.

Can you relate to this? I would doubt it very much, because if you were in category of Average Australians, you would not be able to borrow a single cent from the bank to buy your IP.

Perhaps, it would be fair to say the same thing about anyone who visits this forum.

80% LVR is designed to protect banks from Average Australian, in other words serious property investors get punished just because banks are the way too lousy to recognise the difference between lunatics who have no idea what to buy, how to buy, when to buy and how to hold it and the people who have chosen property investment as their second (or even first) occupation, who pocess enormous amount of knowledge and experience in the area (very often together with proven track record).

If 80% LVR is not the way of banks to demonstrate contempt towards property investment community, what is "contempt"?

Cheers,

Mike - TBI.
 
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Reply: 2.1.1.1
From: Les .



G'day all,

Maybe I'm missing something here, but don't some banks lend to 95% (and even 97% when LMI is capitalised). So what's all this "I want my 20%" business??

Is this part of the problem one faces once borrowings exceed (say) $1m??

If so, won't Banks lend 97% to an entity that DOESN'T have $1m borrowed?? If so, how about having one trust/company for every property? Surely the costs of such a setup would be FAR less than the otherwise unusable $150,000 (diff between 95% and 80% of $1m)

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Sim

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Reply: 2.1.1.2
From: Sim' Hampel


Mike,

If you can guarantee that you can always get it right and will never ever need to sell in a hurry at less than what you paid for a property, then great... we'd all love to know your secret, and I would definintely take you up on that guarantee.

There is a concept of fiscal responsibility, and you don't seem to be willing to let a business use any of it.

If I came to you and asked you to lend me some money so that I could go buy some property, what would be your criteria for agreeing to that loan ?

sim.gif
 
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Reply: 2.1.1.2.1
From: Mike TheBloodyIdiot


Les,
Sim,
Thank you for your interest.

Les,

Great example of thinking outside the square, but...

I hate to disappoint you, but you really missing a lot of things.

True, you can go as high as 97%. But...

I guess I do not need to explain that the MAIN rule of investing is regular reinvesting your gains.

Lets say you have bought $200k property borrowing $194K after 12 month your property gone up in value by $30K, and you have repaid $10K of principal.

If you reinvest those $30K at 97% LVR it can potentially give you $1,000,000 of borrowing power.

Gooood!!!!

But... To redraw those 30K you will need to pay mortgage insurance, because you again will go over 80% LVR. Hence you need insurer's approval. My guess is that even at this stage you will find that mortgage insurers are too nervous people indeed.

However, there is a good chance that you manage to get an approval and redraw funds.

So you develop understanding that to ask for another loan even at 90% LVR involving the same insurer would be far too optimistic move. But you have ingenious idea of setting up holding company/trust and buy in their name.

So you gather all the documentation about your company/trust assets/liabilities, bank statements showing good saving history, two recent payslips, etc - In other words everything that average mortgage insurer requires to approve your loan.
Just kidding.

Your company/trust is nothing more then piece of paper, so you (unless you find an idiot who is obsessed by using his pen to sign any paper which comes in sight) are the guarantor.

This is you whose your financial situation will be assessed by the insurer.

Ok, you are very smart and go to the different lender who uses different mortgage insurer. You are in for bit of a surprise.
Most probably they will decline you without stating a reason (this is because privacy law has come in power).

But there is a small chance that you learn that they know everything about your previous deals.

Mate, this is not a secret to anyone that insurers share information between them. Before HK seminars speed of sharing was not so great, but after HK revealed some of his strategies info sharing has become lightening fast.

Here comes the worst thing. They do share not only info, but also their fantasies about you. The most innocent I can imagine would be "involved in suspicious activity".

And this will be it, i.e. end to your mortgage insurances - you will be once and forever at 80% LVR.

Of course, real scenario can deviate a little from a picture I painted, but final outcome is the same for all - LVR 80% or lower.

BTW, troubles with LMI do not necessary start at $1M mark that you mentioned. For a single security property some insurers start drive maximum LVR down from $300K. It is much less then rock bottom prices in any Sydney's decent area.


Sim,

If you ever decide to stand for Prime Minister, you have got my vote. You are so convincing mate, but...

First, you perhaps missed in my posts that I actually know how to get those 20% back (and I use this strategy), so I simply do not get why you waste so much energy trying to convince me to accept the way things are.

Second, what you are advocating is nothing else like smelly piece of good old communist dialectics, namely "Freedom is a recognised necessity" (Karl Marx). In other words if you understand this is necessary for banks to freeze 20% of your hard earned money, it would never represent problem for you, and hence you get a "freedom".

If you have chosen to go in this direction, why don't you extend your freedom by accepting John Howard's extremely convincing rationale for you to stay in rat race until you are 70?

Imagine how much time and stress you can save by not bothering with all this investment stuff and especially educating such an idiot like myself.

If you are consistent in your pursuit, your freedom will automatically be extended after you are 70 by recognising the necessity to live on $25,000 pa income while bums like bankers and myself will be living in lap of luxury.

Make up your mind which side of the fence you belong.

Cheers,

Mike - TBI
 
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Reply: 2.1.1.2.1.1
From: .watto .


Hi Mike-TBI,

Sounds interesting always willing to look outside my square for new techniques....

Are you willing to expand a bit on the secret method you use to unlock the vault with the 20%....

Eagerly awaiting your next post....

Cheers
Watto
Melb Freestyler
 
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Reply: 2.1.1.2.1.1.1
From: Mike TheBloodyIdiot


Watto,

Thanks for the interest.

Expand you say... You know mate, this technique is of my own making, and if I expand, it will not be long before window of opportunity will be shut down.

Tell you dark secret - it is this rare case when I can come up with only single idea about any particular problem. I feel uncomfortable with this, and I decided to piss off people on this forum. When people are angry, they often give you great hints (of course if they have any knowledge).

I give you a hint what it is all about. Let think of bank as a baby (Banks suck). He is not hungry, but when you try to pull your breast out his mouth, it starts to cry. What do you do to free your breast? You give dummy to baby, and everyone is happy.

Think what kind of dummy you can give to the bank instead of 20% of your equity?

You can't get the answer out of cashflow game, so stop playing it.

Cheers,

Mike - TBI, SDI
 
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