API Connect
January 2008 issue
Investors profiled in the January 2008 issue of API magazine answer questions from readers.
Case Study: Bill O’Neill
Published: January 2008
Selling before completion
Q: I would like to know how Bill goes about selling at frame stage: When is settlement? Who is responsible for complying with the relevant environmental code in the ACT? What about quality of finishes, homeowners’ warranty insurance cover and other factors?
A: It is possible to sell even before frame stage. Once you have the plans approved by council and a thorough inclusions list it would be possible to sell. Quality of finishes is normally laid out clearly in the inclusion list and for areas of note such as the kitchen, bathroom, and floor and window treatments a budget is stated. The budget for these areas is a good idea as it allows the buyer to indulge in better quality inclusions, fittings and appliances if chosen prior to the goods being ordered.
Homeowners’ warranty is included by my builder and any defects are taken care of by the builder in the 90 days following the building getting its Certificate of Occupancy. In saying that I am still the owner until the building is completed and the new buyer settles on the property. I have my own quality assurance checks to ensure the builder meets the original standards as detailed in our building contract.
You need to come to an arrangement with the buyer as to an agreed settlement date. It is best to keep an open-ended date determined by the building’s completion. An example would be two weeks after receiving the building’s Certificate of Occupancy.
The government department ACTPLA (www.actpla.act.gov.au) is responsible for ensuring you are complying with the environment code in the ACT. This varies depending on the suburb of the development and varies again from new and established suburbs. The ACT Territory Plan is a good resource for this information and can be downloaded for free from ACTPLA’s website.
Profile: Deborah Taylor and Geoff Round
Published: January 2008
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Q: Wow! Deborah and Geoff your story is so inspiring. I was wondering if you could give me some advice. I’m stuck!
I currently have five residential properties worth $1.5 million and one holiday rental (and an empty block as I subdivided and put a new house on one side with the intention to do the same with the empty block once the first was up and running) worth $330,000. So altogether I have $1.8 million in property and $700,000 in debt. I am 26 and still live at home.
I have had my first property for 10 years so I too have seen what a boom does. What’s frustrating me is that I want to keep buying and I’ve seen so much potential in areas I’ve been researching but my financial institution says no! I can’t even put another house on the empty block! My land tax is killing me (it's $12,700 this year) and I feel like I just break even every year while all the opportunities pass me by.
Like you, I have purchased at a good price and renovated my first five properties, which are always rented as I take great pride in their maintenance. The problem is I have put all my eggs in one basket. I have tried other brokers and banks and they all look at what I have and think its great, pat me on the back and say they can't help me. The last broker said he couldn’t better the rates I had even if he tried to help me pull apart my cross-collateralisation. So I would be no better off and he really needed a longer record of the holiday rental to even give me another loan. Outsiders say SELL. It drives me nuts! Why would I want to sell something that has given me so much and will continue to the longer I keep it? At the same time I have all this equity that I can't use.
It’s obvious I need to split the ownership, as you have suggested, for the land tax issue, but who do I split it with and if it’s through a company does that affect what I may want to do with the property in the future? (For example, redeveloping the large blocks.) There’s also my serviceability. I calculate my loan-to-value ratio and debt-to-service ratio on a regular basis and I just fit into the requirements, but if I set up a business wouldn't that make things worse with overheads, set-up cost etc.
I would like to buy/hold, renovate, subdivide and sell on a full time basis but I can’t ever see that happening. I feel I’m already too late to bank on the boom in my own state, where Adelaide is really moving right now.
I know it’s hard when you don't know everything about my situation but do you feel that I could get around this without selling and do you have any suggestions?
A: We were also in your position a number of years ago. We realised that we were fostering a banking relationship that eventually capped out. As they say relationships with the banks are generally one way. We weren’t going to let our primary banker restrict our progress so we approached another two banks and deconstructed the cross-collateralisation of our securities. We increased our redraw facilities with our primary banker and then sought standalone lenders to an 80 per cent loan-to-value ration for the new property purchase.
We don’t seek the lowest possible interest rate because we view the cost of borrowing as a cost of doing business, and we treat our property portfolio like a business and manage it accordingly. We seek the deal that best suits us for the longer period and one that will allow further borrowings on a specific property as and when required.
We would consider you to be in a sound position for someone so young. Sometimes a short period of consolidation is needed to allow your portfolio to mature. You should also get an ABN and then after the qualifying period seek a low doc approach to borrowing. Again you will pay a premium for the privilege (interest rate and mortgage insurance) but you will be allowed to grow your portfolio to a critical mass that will become significant when the effects of compounding returns kick in.
Setting up a discretionary family trust will allow you to purchase property through that entity and minimise your land tax. Remember that land tax is a marginal tax so the greater the value of property held by a single ownership entity the greater the land tax you will pay.
We always remind ourselves that when you throw the variable of time into your property investing and manage your debt levels, the increase in your property portfolio value will take care of itself. So hang in there and don't sell. Geoff and Deborah
