Borrowing with asset protection in mind. When three's a crowd

Borrowing with asset protection in mind

Q My question relates to setting up a structure with the right to borrow, while protecting any accumulated assets from personal liabilities (such as a discretionary family trust with a corporate trustee) and associated set-up and ongoing costs. Just as a starting point, for instance, how would such a structure be able to qualify for a loan for its first property acquisition? What source of income would the bank assess to determine the ability to service the loan (after the structure has been loaned any deposit amounts by the directors)? I would assume that the corporate trustee directors would be guarantors and therefore have to meet any cash flow shortfalls not met by rentals, is that correct?

A For the first purchase under a discretionary trust with a corporate trustee, the bank will use the guarantors' (usually the shareholders of the company and specified beneficiaries of the trust) income to show the servicing capability of the property bought. If there is a cash flow shortfall on the rent of the property less all the interest and other cash outgoings of the property this is made up via the guarantors contributing money via an interest-free loan to the trust. This structure totally protects the family's personal assets from being exposed because the trustee company holds legal title to the asset on trust. Pat Mannix

More equity or more properties?

Q I'm 30 years old and have two properties:

1. A three-bedroom, one-bathroom home on 715 square metres of land in Reservoir, Victoria (purchase price $194,000; current value $450,000; outstanding debt $180,000). Rent takes care of the mortgage and the property is positively geared.

2. A four-bedroom, two-bathroom, two car park home on 500 square metres of land in South Morang, Victoria (purchase price $335,000, current value $480,000, outstanding debt $150,000).

My total equity is around $600,000. Please note, the values are conservative figures, as both houses have been valued higher by real estate agents. I work as a contract recruiter with job uncertainty looming, and earn an $87,000 base salary plus super. My wife is a housewife and we have a baby.

My questions are:

Do you think anyone in my situation should wait to gain more stability or use the equity to buy at least one more property?

Is it better to build more equity in a smaller number of properties or buy more homes and spread the risk perhaps? I see a lot of people with five, 10 or more properties, but at times they have less equity than people with one or two properties.

AThere's no right or wrong answer to your first question. The decision to buy comes down to your own personal risk profile.

An aggressive investor would move forward and buy more property and use a line of credit to help fund the portfolio in the event of a job loss.

On the other hand, a more conservative investor would wait until there's more certainty around job security before jumping in. It's you that has to sleep at night and the answer lies in how comfortable you feel with risk.

When you're building an investment portfolio I'm a believer in quality over quantity.

A capital growth-focused strategy is best achieved by buying properties with a high land-to-asset ratio. It's land that appreciates in value while buildings depreciate. The limiting factor here is the majority of high capital growth properties will be negatively geared and cash flow becomes a problem.

If cash flow is an issue then buying positively geared property is the way to go. However, many of these properties are in regional areas where the land-to-asset is low and therefore so is the capital growth. If you go with this strategy you'll need to buy more property to achieve your financial objectives.

The simple fact is there's no perfect one-size-fits-all investment strategy. The right strategy is determined by your individual financial position, investment goals and risk profile. Mark Armstrong

When three’s a crowd

Q I'm in a messy situation and hoping you can help. I have exchanged a sales contract with a vendor for the option that they have on a property. The vendor isn't the owner of the property but has taken an option to buy the property and wants to on-sell the option to me. I've paid a 10 per cent deposit and the stamp duty, however the actual owner of the property is reluctant to settle on the property with me and didn't provide the Section 109 certificate, so the deal crashed about three weeks ago. What should I do to defend my legal rights? How can I push the vendor's side to settle the deal quickly?

A Your legal rights are primarily governed by the terms of the option itself, the Assignment of the Option, The Property, Stock and Business Agents Act and the Conveyancing Act. However in the absence of knowing the precise terms of the option and the assignment it is simply not possible to advise on what you're lawfully able to do nor what you ought to do. I assume however that a contract of sale hasn't been executed by any party as yet and that you've exercised your right to purchase under an option which was assigned to you. Options do give rise to an equitable interest in property which interest is capable of being secured by a caveat. That approach would at least secure your interest in the property by recording it on the title. Unfortunately any specific advice is complicated by the existence of three parties, all of whom may have different rights and obligations based upon what they have respectively signed. In that respect I urge you to seek assistance from a solicitor who has expertise in property transactions and can review the paperwork and advise you accordingly. I'm afraid the questions are so specific to your individual circumstances that any general advice is likely to be unhelpful and potentially damaging to your cause. Sean Ryan

Fenced in

Q About two years ago my wife arranged to buy an investment property in Hervey Bay, Queensland. This month, my wife did an inspection on the property and it has come to light, through a sewage blockage, that the boundary fence on one side is in the wrong location. At the time of purchase, there was no house built on the property next door. All the time, according to the plans, there was a proposed pathway or laneway between the two properties. Where do I stand and what costs am I liable for? Can I take any action against the company that did the conveyancing? Should they have not picked up this error?

A Embarking upon an action against your conveyancer (or any party) requires careful consideration of numerous factors including what potential causes of action are available (if any), the cost of the action and the chances of success (i.e. a cost vs benefit anaylsis). A more prudent course would be to have the sites surveyed (if not already done) to ascertain the precise location of the boundary and the fence in question and then speak with the adjoining landowner to ascertain their willingness to having the fence relocated to its correct boundary. Legal title to your property isn't dependant upon the location of the fence so any argument of adverse possession is unlikely to succeed. There are provisions in the Law of Property Act that deal with encroachments and set out the powers of a court to make orders for relief including removing the encroachment or compensation. If negotiation fails to resolve the matter then prudent and timely advice is essential. Encroachments ought not be ignored as there are obligations of disclosure imposed upon you if you sell and subsequent owners inherit the encroachment. In respect of the proposed pathway/lane shown on the plans it's difficult to advise about your ability to enforce that without knowing if it was represented on an approved plan or just on the marketing material. A representation inducing the purchase of land is a complex issue and requires careful analysis of what was represented, issues of reliance, a consideration of the terms of the contract to purchase and what losses might flow from that. Prudent advice from a solicitor is highly recommended. Sean Ryan

What now?

Q I'm in a dilemma. I have lived two years in my house that I purchased after divorcing. When I settled I had a buffer to get me through the first 12 months. My daughter was looking at entering the property market so we decided to buy a house together. This worked for us as I had the deposit and she had a high income. I was unemployed but looking for work. We did a 'no document' loan as my daughter's finances weren't in order. After 12 months my daughter decided she wanted out of the mortgage, so I continued paying alone. I've now used up all my buffer, can't find work, had a breakdown and feel like I'm losing everything. I've nearly finished a course and am volunteering to get experience in the field I'm studying in. I'm currently on compassionate grounds with the bank. I know this isn't the way to go as my equity is now being gobbled up at an alarming rate. I've tried renting a room out and my son boards with me. I'm 54 and have owned my first home since the age of 25. I don't know whether to sell, as I have the dilemma of still not having income except for Centrelink benefits. My dogs both need operations and my car is now in need of repair which I can't afford. I need my car to job hunt and for when I get a job. Do you have any suggestions on the best way forward please?

A You're in a very difficult situation which I'm sure you already know. I wish I had the magic solution for you, but you sound like someone who has some good honest goals, and so much of what might work for you might not be as legitimate as I can tell you would like it to be!

You say you are on compassionate grounds with the bank, so start there and find out how much longer this can continue. Make some payment, however small it is, to the bank to show that you have good intentions.

Your daughter has a legal obligation to assist you with this debt regardless of whether she wants out or not, and she should be called upon to honour this. The bank will have her as a guarantor or co-borrower and they should be following this up. Sadly though, when we borrow with others we are jointly and severally responsible and so if she cannot be found then you're stuck with all the debt.

I believe you're delaying the inevitable, and it seems like the bank may end up selling your property anyway. You want to avoid this kind of forced sale and so I suggest you put your property on the market for a reasonable price now before more equity is eaten up with a compounding interest bill and while demand appears to be quite strong in many areas.

Then, with any extra cash you realise after paying off the debt, place this in a safe environment for now (even the banks offer good rates on term deposits) until the rest of your life is sorted out. Investing is important but so is looking after yourself today, and this part of your life deserves your uninterrupted attention. You may not profit financially from this experience, but you will take away important lessons about better ways to invest in the future and a determination to get it right next time. This is just as important to you, and I wish you good luck! Margaret Lomas

 

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