What structure to use??

[Hados]

Hi guys,
I'm fairly new to the forum... have done quite a few searches and haven't really found what I'm looking for.

I bought my PPOR approximately one year ago at 90% LVR using the FHOG for costs and MI (i'm in S.A). I purchased the house with my girlfriend of almost 5 years.
My question is- How do i go about structuring my first IP purchase, seeing that we are not married and i suppose we are classified as defacto?
Is the best option for me a trust structure? If so, which one?

I have been SLOWLY renovating over the past few months to build some equity in order to invest. I believe with what i will have completed in reno's, I will have added $10k to my purchase price at max.

I suppose all i really need is some direction in regards to structure. My plan is to buy in the next 18 months.

Any help would be greatly appreciated.

Cheers

 

[Rixter]

Hi Hados,

Welcome to the good ship SS forum - setting sail to your dream destination.

A Structure and strategy that is best suited for you all depends on what you are ultimately wanting to achieve using property as your chosen wealth vehicle. Do you know what it is you are wanting to achieve and the time frame for it?

Once you have the answer to those sort of questions you can then sit down and think about ( with the aid of professional advice) the best suited structure according to your own individual risk profile so as to minimise the perceived potential risks along the way.

Hope this helps.

 

[Hados]

Thanks for the reply Rixter.

As I am only 20 now, I believe I have a few years left in the workforce. I'm a car salesperson full time and work some weeknights and every weekend behind the bar at one of our local pubs. My girlfriend is a third and a 1/2 year hairdressing apprentice.
My ideal goal is to have a structure in place where i can buy in the next 18 months and continue to buy every 9-12 months until i have sufficient income to leave the car 'game'.
My main strategy at this stage is to buy in the lower-mid price for my area, renting out these IP's and holding them long-term.

Any additional advice on which way to go and any 'nuts and bolts' investing books to aquire would be very much appreciated.

 

[MichaelW]

Hados,

Legal structures such as Hybrid Discretionary Trusts coupled with a Unit Trust provide tax minimisation benefits primarily. There are slightly different legal structures which offer better asset protection if some lawyers come after your assets.

So, to know which structure best suits your needs, you need to clearly understand what your needs are. If its primarily about tax minimisation, then the structure identified above seems to be the main one people use. This allows you to pay out the profits from your investments in the volume you require to minimise your tax by keeping it within the tax thresholds you want. You can hold profits back in the structure for the future when your personal incomes are lower.

I'm no guru and haven't got mine in place yet, but there's a few smart guys on the forum here such as NickM and DaleGG and others that know this stuff inside out. There's a recent thread about the Property Investors Trust (PIT) which has some very interesting information in it about trusts and what they can provide. Suggest you look that one up and read through it carefully, then go talk to a local expert.

Cheers,
Michael.

 

[Rixter]

Hados,

This is a recent post of mine that describes the strategy im utlilising. It maybe of interest to you.

The CGA strategy I've developed utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year.

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential
vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashbond structure.

For ease of calculation lets say we buy a property for $200k, so in 10 years its now worth $400k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 200K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc.
You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB nope only joking

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value so you complete the entire cycle once again. Infact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth the spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, Equity to TAX FREE cashflow income money machine

Seek professional advice in relation to which purchasing entity best suits your personal circumstances.

Hope this helps
__________________

 

[WillG]

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashbond structure.

For ease of calculation lets say we buy a property for $200k, so in 10 years its now worth $400k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 200K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc.
You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

Hi Rixter,

Great post, but something that has always confused me about the "drawing out" money from your IP equity. I undersatnd that you buy an annuity/cashbond with the equity, and because the annuity provides you with interest(as well as capital), you can claim the respective interest component in your IP loan. When the annuity/cashbond expires, can you still claim the interest component ?. I would assume no because it is no longer paying interest.

 

[kph]

Very comprehensive Rixter.
Looks like a good setup.

But what structure do you use ? ie.... Are all properties in your own name on in a trust structure ?

Just curious....

kp

 

[Rixter]

Very comprehensive Rixter.
Looks like a good setup.

But what structure do you use ? ie.... Are all properties in your own name on in a trust structure ?

Just curious....

kp

Properties are in own name, as this best suits my personal circumstances/situation.

 

[Rixter]

Hi Rixter,

Great post, but something that has always confused me about the "drawing out" money from your IP equity. I undersatnd that you buy an annuity/cashbond with the equity, and because the annuity provides you with interest(as well as capital), you can claim the respective interest component in your IP loan. When the annuity/cashbond expires, can you still claim the interest component ?. I would assume no because it is no longer paying interest.

WillG,

Because of the interest rate differences between your LOC used to fund the CB purchase and the Interest being paid back to you via the CB there will be a shortfall left owing on the LOC at the completion of the CB term. It is my understanding that the interest on this shortfall is deductable. As this is my 2nd year utlising a CB , the CB expiry term is another 4 years off so I havent had to test the ATO as such. But in the overal Big picture or scheme of things in terms of the increased equity & aset base the CB has achieved for me is it really going to effect me - I dont think so.

Hope this helps.

 

[WillG]

WillG,

Because of the interest rate differences between your LOC used to fund the CB purchase and the Interest being paid back to you via the CB there will be a shortfall left owing on the LOC at the completion of the CB term. It is my understanding that the interest on this shortfall is deductable.

Thanks Rixter,

Can you point me to the ATO ruling that confirms this ?

Cheers

 

[Hados]

That's what i was trying to figure out... whether it is best to go in my own and girlfriend's name. I'm not earning hundreds of thousands of $$$'s, so i don't believe i should be too alarmed with reducing my tax bill. The properties i will be investing in will be neutral, tending towards positive cashflow.

Is there anything wrong with structuring and investing with everything in my name? (apart from asset proptection)

 

[Rixter]

Thanks Rixter,

Can you point me to the ATO ruling that confirms this ?

Cheers

WillG, its in writing via a Private Ruling.

 

[WillG]

WillG, its in writing via a Private Ruling.

Thanks. (didn't mean to get the thread off topic)

 

[Les]

G'day Hados,

Is there anything wrong with structuring and investing with everything in my name? (apart from asset protection)

First off, I'm not a registered adviser, so this is purely my opinion - and you should treat it as such. This kind of question will likely be one YOU answer yourself after you've spent a bit more time checking out the myriad options available to you.

My opinion is this though:- There are a few categories of people that probably should NOT purchase in their own names (think of people who might be sued for negligence - doctors, dentists, etc. - those that make a living out of working on our bodies, and might just "drop the ball" once...) There are probably a bunch of others that might be "advised" to buy in another name.

But for Joe Average, I don't see any major problem in buying in your own name. If you are not in an occupation that could lead to your being sued, why not buy in your own name - there are millions of Australians that do exactly that.

Then, there are knowledgable people who say "Don't OWN anything - buy your assets in another name. Own nothing, but control everything".

And, I guess, it is this latter message that I was considering when I said "This kind of question will likely be one YOU answer yourself after you've spent a bit more time checking out the myriad options available to you".

Your situation is different to mine, and maybe to many others here. Perhaps you need to spend some time checking out what others have done, then choose a way that SUITS YOU. Your plans might include owning 20 properties - if so, what would your situation look like when this has happened? Will you need to "re-arrange" your situation later (at some cost). Or, are you just looking for "one or two properties" to assist with your income into the future - in which case, the costs of other structures may not be worth the pain.....

And, to finish with a punch - if you have a portfolio of properties, what would happen if you inadvertently T-boned a Mercedes and tragically killed a passenger too? Would your life situation have you covered enough to prevent having your portfolio disappear in court?

Hados, I'm not trying to scare - but wanted you to think a bit about that "asset protection" comment. You CAN ensure you have adequate insurance, or, you can choose to have asset protection for your portfolio - or both. Good luck with your search,

Regards,

 

[tubs]

Hi

Just a quick couple of suggestions.
1. Dont get it in BOTH your names as you'll BOTH be exposed from an asset protection point of view, and if somebody comes after either of you you're in trouble.
2. If you do get it in one of your names, get it, and IN PARTICULAR THE LOAN in her name ONLY. If you plan on having kids one day and her income drops then you'll be free of borrowings, and may be able to borrow more. Anyway, that's my theory and I'm trying to work towards it, but its hard.

Tubs

 

[kaf]

Les

I'm with you on the asset protection and as we are not in high risk jobs I’m not really worried about that. But what about the tax advantage of trusts? If both people are on the same salary then fine just buy 50/50 or one of you buys the IP. But if you have a difference in income the high income earner can negatively gear through the trust initially and then once the IP generates some income it goes to the lower income earner. That’s something you can’t do when you buy in your own name. Well and there are all sorts of other tax advantages, apparently you can even get your sex toys tax free, just ask DaleGG how that works .

So trusts are not only for asset protection, so definitely worth thinking about.

Cheers

kaf

 

[Rixter]

2. If you do get it in one of your names, get it, and IN PARTICULAR THE LOAN in her name ONLY. If you plan on having kids one day and her income drops then you'll be free of borrowings, and may be able to borrow more. Anyway, that's my theory and I'm trying to work towards it, but its hard.

Tubs

You lost me there, tubs. Can you elaborate more for me

 

[goddessk]

That's what i was trying to figure out... whether it is best to go in my own and girlfriend's name. I'm not earning hundreds of thousands of $$$'s, so i don't believe i should be too alarmed with reducing my tax bill. The properties i will be investing in will be neutral, tending towards positive cashflow.

Is there anything wrong with structuring and investing with everything in my name? (apart from asset proptection)

Hados, I struggled with this question for ages! I am single, however have a boyfriend not living with me yet, and went through the whole nightmare of deciding what to do. Trusts are good from an asset protection point of view however generally nothing will protect you from being sued. And it's hopefully unlikely to happen to the average person and if its a problem with a tenant that's what you have public liability for in your landlords insurance policy.

Many people on the forum will say to set up a trust and I am not saying that you shouldn't. However everyone's circumstances are different. In my case the costs of running a trust outweighed any advantage it would give me. In my opinion if you have a positively geared property they are worthwhile looking at as you can look at distributing the income to your girlfriend potentially. In my case my properties just happen to be negatively geared and having them in my own name was good for tax purposes. Having a HDT set up would achieve the same outcome however it would cost me money to run it. Also, keep in mind that whilst you may set out to find positively geared, you may not always find them! So you need to factor that into your decision too.

It really depends on your circumstances now and in the future. It is worthwhile to get a really good accountant, one who is an investor and understands trusts, tell them what you want to do in the future, your possible future with your girlfriend and listen to what they have to advise. Then make your own decision.

Good luck!

 

[geoffw]

That's what i was trying to figure out... whether it is best to go in my own and girlfriend's name. I'm not earning hundreds of thousands of $$$'s, so i don't believe i should be too alarmed with reducing my tax bill. The properties i will be investing in will be neutral, tending towards positive cashflow.

Is there anything wrong with structuring and investing with everything in my name? (apart from asset proptection)

As well as asset protection, a trust can be flexible enough to change for changing circumstances.

I bought a property in 1997. It was negatively geared; so it was purchased in my name to maximise tax deductions. However, now it's become quite positively geared, so I am paying tax on the rent (with interest etc deducted). And when it's time to sell, the CGT will be in my name only.

If I had bought that property within a trust, the income when it became +ve would have been able to be allocated between myself and my spouse in the most tax effective way; and when the property is sold, the CGT would also be split in the most tax effective way. That alone could save tens of thousands of dollars in CGT payable. If it had been in a HDT, I could have also received -ve gearing benefits along the way.

If circumstances had changed along the way (eg, if our respective incomes had changed) the trust allocation would still be able to deal us the most tax effective hand.

 

[NigelW]

That's what i was trying to figure out... whether it is best to go in my own and girlfriend's name. I'm not earning hundreds of thousands of $$$'s, so i don't believe i should be too alarmed with reducing my tax bill. The properties i will be investing in will be neutral, tending towards positive cashflow.

Is there anything wrong with structuring and investing with everything in my name? (apart from asset proptection)

Lack of flexibility. Perhaps the missus would like to stop work at some stage and raise little Hados (or vice versa for that matter ).

If you have assets in a trust structure there will be scope to stream income and capital at your discretion to reduce your tax bill.

While there's setup costs (which may seem quite high when you're starting out) and ongoing costs (which will also seem high at the start) and added complexity (which will add cost and time) you've gotta take a loooong term view of things.

Make sure you talk to someone who understands what they're doing though. There's been some great recommendations so far in this thread.

Cheers
N.