API Connect
March 2008 issue
Investors profiled in the March 2008 issue of API magazine answer questions from readers.
Profile: Libby and Egan Soderholm
Published: March 2008
Understanding depreciation
Q: I have two investment properties. They were built in the 1970s and I believe I can't claim depreciation unless they were built after 1981. Is this correct and if not will it still be worth having a depreciation schedule written up?
A: Although you can't claim for the building, you can claim depreciation for all the chattels in the building or any renovations done on the building. This is done from date of purchase and can be done by your accountant, yourself or a depreciation specialist (approximate cost $350). From our experience, depreciation specialists will tend to find more items to be depreciated and will estimate appropriately. It may be worth getting one done for one of the properties, and then use that to assist you or the accountant to do the other building. You may be able to backdate your tax deductions if you haven't claimed in previous years. Check with your accountant. You should be claiming depreciation on all your properties, although the older properties won't have as much depreciation. It's like having an expense on your property and not claiming it. You're short-changing yourself. Libby and Egan
Case Study: Nicky Marten and Debbie Williams
Published: March 2008
Selling before completion
Q: My wife and I have been investing in real estate in South Australia since 2001. Since then we have constantly grown our investments and have learnt a lot. However, my wife and I are still working full-time and find it tough to secure funds without having to rely on our steady incomes. In 2005 a project almost fell through as the lender wasn't prepared to offer a loan due to a three-month probation on a new job I started then. The job was within the same industry and I had increased my pay package by $15,000 per annum but I had to get the new employer to waive the probational period in order to secure the loan.
What type of funding do you use, since you have quit your job? How do you buy properties without showing a constant income from a job? Also, what type of interest rate applies to the funding you use and what income do you rely on to pay for your living expenses?
A: I believe that understanding finance and valuations are two of the most important areas to spend time understanding to be really successful in property investing. My husband Chris was on wages when we first started investing just as many people are today. So, prior to quitting his job we explored low doc loans, making sure we understood them, then went to a broker and did a couple of property purchases with low doc loans.
The main difference between full doc and low doc is that with low doc loans you're required to declare your income rather than have it verified through pay slips. I have found that the amount of paperwork to apply for a low doc loan is much more user-friendly too.
I have had a few coaching clients that have come to me after having difficulties with loans usually because of not knowing the finance system thoroughly enough. One particular client had applied for a full doc loan to increase (up-stamp) the mortgage on their own home but was declined based on serviceability (income versus repayments), so they applied for a low doc loan but were refused again because it went to the same mortgage insurer who noticed the sudden increase in earnings.
Using a good broker is essential. I look for a broker who invests in property. Someone that has experience with renovations is often good for loans of that kind. If we're renovating and want a loan for a short term (three to six months) then we need low break costs rather than a low interest rate. We need to know that we can either up-stamp the loan after renovating or can sell the property without incurring huge exit fees. But, if we're purchasing for a long-term buy and hold then the interest rate and low ongoing fees may be more important. We look for a broker that does developments for financing our developments. Also it's worth noting that there are brokers that specialise in low doc loans.
The income we declare comes from a variety of places including funds management and property and business coaching. We're doing some property management also that helps with verifying cash flow. We make a good income from renovating but the financiers don't like to use that for income declaration.
The interest rates we pay are generally the same as a full doc loan but like I said before if we're looking for a short-term loan then the exit fees are more important than the interest rate.
In saying all this, the finance industry is going through massive changes and lenders are scrutinising their borrowers ever more closely so I am definitely putting "Subject to Finance" in all of my property purchases from now on! As for purchasing at auction and waiving the finance clause - no way, not for me! Debbie
Now that we're no longer "working full-time" (for a boss) we use low doc or no doc funding for any properties we buy. In these cases the funder is looking to have enough security on the lend so that if the borrower was to default, they would be able to get their money back at "fire sale prices".
Essentially, we draw the equity out of any of our properties up to 80 per cent. This can be done as either a second mortgage or line of credit. (We do this "rotating" the six residential properties we already own.) We then use those funds for living expenses, propping up any shortfall we may have at the time for property loan repayments after rents are received and finally for deposits and fees for new properties we're looking to purchase (if any).
Being "no doc" we know that any properties we purchase can be funded by around normal interest rates (we always borrow interest-only and usually fixed rate) if they're residential properties. We know we can borrow anywhere from 65 per cent to 80 per cent of the property's contract price but even sometimes 65 per cent to 80 per cent of the property's valuation. If I've done my sums and due diligence right when I find a property, the value of the property we're purchasing will come in above what we're paying for it, as in the case of the church property, for example. Nicky (and James)
