2013 proved once again that fence sitting is a costly exercise. While many would be property buyers sat back and span their wheels waiting for the heard to jump into the market a handful of people took action and more than likely picked the bottom of the market.

According to RP Data Brisbane house values increased by 5.3 per cent over 2013 compared and unit values 3.5 per cent.

To put this in perspective a $400,000 property purchased 12 months ago at that rate of growth would now be $421,200. And if the growth rate is repeated in the next 12 months it will be $443,523.

A number of independent researcher expect the Brisbane market to continue to grow over 2014 as it makes up time from a few years of subdued growth and it's relative affordability to the Sydney and Melbourne markets.

What opportunities are you missing?
Are there ways to improve your current cashflow that you are not currently doing? Are your finances correctly structured to build a property portfolio or are they holding you back? Do you have a plan of attack of how to build a portfolio? Are your finances set up to ensure you can acquire property without negatively impacting your lifestyle? Are there things you are missing that you should or could be doing that could have a significant impact on your wealth creation plans?

Contact us for an initial discussion.

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Demonstrating your ability to repay the loan is essential to successfully qualifying for a home loan. This means in one form or another you will need to demonstrate that after expenses such as living, and other financial commitments you have sufficient disposable income to meet loan repayments.

Lenders have different attitudes towards certain types of income but there are many areas where they tend to be relatively consistent. This is particularly the case where a loan requires mortgage insurance. As many lenders will use the same mortgage insurer and therefore be subject to the same credit policy.

The first thing you should be aware of is that the amount you can qualify for can vary significantly from lender to lender. Even between the major banks there can be significant variations. For example across a panel of over 30 lenders, a couple earning $75,000 per annum could potentially borrow anywhere between $235,000 to $512,000, based on the same information. This is because each lender has differing credit policies and formulas they use to determine your credit worthiness.

So if you are only considering one or two lenders then you could be cutting yourself off from plenty of options.

Employment

Full time and permanent part time

Lenders are looking for stability in employment. Generally at least 6 months in one job, and at least two years or more in the same industry. No probation. If you don’t have 2 years in the same industry then they will be looking for at least 12 months in your current position.  

If you have a history of changing jobs or professional on a regular basis then this could go against you.

Casual

Generally at least 12 months employment or 2 years in the same industry. Lenders may want to see 12 months worth of income to establish an average earning

Self-employed or contract worker

In almost all cases lenders will require you to be trading for a minimum of 2 years. For most businesses lenders will also require a registered ABN for 2 years. If an ABN can not be produced some lenders will accept a letter from your accountant confirming the business has been trading for 2 years.

Working in a family business

Most lenders will treat this the same as being self-employed and therefore will want to see a 2 years trading history for the business.

Income

In terms of income lenders are trying to establish regular and reliable sources of income. So if you are an employee, have been in your job for some time, and are paid the same amount week in week out then 100% of your based gross income will be considered.  

The areas where it becomes greyer are as follows:

Overtime

If overtime is standard for your industry (such as nursing) then most lenders will allow 100% to be included for servicing. It may however be necessary to provide additional documentation such as group certificates or a letter from your employer to confirm that overtime is a standard requirement of your job.

If it is not industry standard then two years tax returns or group certificates plus a letter from your employer may be required.

Commission/Bonuses

Most lenders will generally want to see 2 years history of earnings if bonuses and commissions are part of your remuneration. If you have been employed for 12 months and commission is a condition of your employment then some lender may consider 100% if this can be documented.

If you have been in your position for less than 12 months this it is likely only your base salary will be considered.

Car allowances

This varies quite considerably amongst lenders ranging from not at all to 100%. If the allowance can be cashed in then several lenders will allow 100% to be used. If not several lenders will at least allow it to be offset against any lease payments. So for example if your allowance was $10,000 and your vehicle lease payments were $8,000 per annum. Then the lease payments would not be included as part of your assessment. The remaining $2,000 however would not be added to your income. 

Some will lenders will only allow 50% to be used or will simply have a dollar cap that is applied.

Self-employed and contract

To establish your income, business and personal tax returns and financial statements will be required. Income/profit will generally be averaged over two years. Most lenders will allow add-backs for non-cash items like depreciation and non-recurring expenses.

Rental income from investment property

Lenders will generally use between 70-80% of the gross rental amount. Income must generally be confirmed from either a current lease agreement or rental statements. For newly acquired properties a letter from a real estate agent confirming the expected rental can often be used.

Rent received from boarders

Generally this type of income will not be accepted. Some lenders may consider it if tax returns can demonstrate that it has been earned consistently over a 2 year period.

Dividends from investments or share trading

Needs to be evidenced from 2 years tax returns

Child maintenance

Generally not accepted but will be considered by some lenders where there is a court order in place, the children are less than 10 years, and consistent payment over 12 months can be demonstrated.

Centrelink payments

100% of the Family Tax Benefit will be considered in most cases where the children are less than 11 years of age. 100% of government pensions will be considered if they are ongoing and are evidence by relevant documentation. Unemployment benefits and New Start are generally not considered.

You can see from above what you actually earn and what can be included for assessment can end up being quite different. The above of course is only general and what can and can’t be used will vary from lender to lender. Also as mentioned above some lenders serviceability calculators are more favourable than others.

Contact us to discuss your home loan requirements or a for a review of your current lending.

The latest mortgage index from Australian Finance Group (Australia's largest finance aggregator has shown a significant increase in activity with just over $4 billion in loans being written for October. Nearly $1 billion more than this time last year. Investment lending remains strong accounting for 38% of all loans written.

The growth in lending is underpinning the increased activity we are seeing in the property market.

Suncorp Bank is reducing the rate to its all-in-one line of credit Access Equity by 0.10% p.a.

As part of Home Package Plus^# (≤80% LVR)

$250,000 – $499,999      4.94%* p.a.

$500,000+                         4.89%* p.a.

 Standalone rate  

 $10,000+                          5.99%* p.a.

Access Equity offers the following benefits: 

• Immediate access to funds and fee-free unlimited electronic transactions (ATM, Internet Banking, EFTPOS)
• Flexible repayments, with no minimum repayment required if facility is within the agreed limit
• Low $10 monthly fee (monthly fee waived if included in the Home Package Plus).

Contact us if you would like to discuss this and othe finance options.

Cheers

Greg Carroll
MTA Finance

Understanding trusts…if that’s possible

At their heart trusts are relatively simple but at first glance their function and purpose can be utterly confusing. I am going to give my best shot at explaining trusts but if you find yourself confused you are not alone.

I think the best way to understand a trust is to actually have one and see it in operation, but not everyone has that luxury. The important point to make at the outset is that trusts will not be for everyone.

So what is a trust?
A trust is an agreement (the trust deed) that certain individuals (beneficiaries) may be entitled to certain property as determined by a nominated party (the trustee) who is responsible for holding and managing property on behalf of the trust.

The trust deed spells out the powers, responsibilities, and limitations of the trustee. The trustee can be either a person or a company. In short the trustee is generally expected to manage the assets of the trust for the benefit of the trustees.

Perhaps the most common form of trust is the discretionary trust. A discretionary trust means that the trustee has complete discretion how any income or assets of the trust may be distributed to the beneficiaries. The set up of this structure is best explained by way of an example.

Bill and Jane Smith wish to purchase an investment property using a discretionary trust. They establish a trust called “The Smith Family Trust” with a company (Smith Investments Pty Ltd) as trustee. Both Bill and Jane are shareholders and directors of Smith Investments Pty Ltd and are also beneficiaries of the trust. The trust has all the powers of a natural person.

So in essence Bill and Jane have complete control over the investment property and complete say over how any benefits coming from that investment can be distributed.

But why would Bill and Jane choose a trust structure? 

• Asset protection
• Estate planning
• Flexibility for tax planning

Asset protection
Trusts can provide a means of protecting you from litigation.

For example let’s say you owned your home in your personal names but your investment property was owned through a trust with a company as trustee. Your tenant in the property slips on the stairs and decides to sue you for personal injury.

In general terms the tenant would only be able to sue the trust and the company as trustee and would not be able to pursue your personal assets. If the property was worth $250,000 and the loan against the property was $260,000 then this would not make the trust an attractive target and may kill off any action. If however the investment property was owned in your name then this would open the door to your personal assets. 

This remains an area of contention and the laws on this are being reviewed all the time. So whether trusts remain a safe haven remains to be seen. In any case it would be wise to have landlords insurance with adequate public liability to protect you from such an event.

Estate planning
Assets held in a trust do not form part of your estate and therefore do not pass in accordance with the terms of your will. This may be of benefit where you wish to keep your assets out of reach of certain parties in a situation where a will may be contested.

A trust may also allow for a more tax effective distribution of assets to your family or other beneficiaries upon your death.

Tax planning
A trust does not pay tax. Any income earned by the trust must be distributed to the beneficiaries. The beneficiaries will then be taxed at the appropriate marginal rate. Depending on the type of trust you have established a trust allows you to distribute income in a manner that is most tax effective.

Referring to our example again. If Bill was a high income earner and Jane was not working then all income from the trust could be directed towards Jane so that any income is taxed at a lower marginal rate. Again if the trust sold the property and made a capital gain, that gain could be directed towards Jane.

It can also provide an opportunity to defer payment of tax which can be of benefit to your cashflow.

Types of trusts
There are numerous types of trusts but the most common are:

• The discretionary or family trust
• The unit trust
• The hybrid trust

The discretionary or family trust
I have already touched on some of the features of this type of trust above. The key element of this trust is that the trustee can distribute income to beneficiaries however they see fit.

This means that income can be distributed in one way in one year and in a different manner the next. Providing complete flexibility in managing tax.

The unit trust
Unit trusts are generally used where several separate parties enter into a joint venture. Each party purchases units in the trust equating to their percentage share of the assets held in the trust.

This structure may be appropriate where a number of friends or family wish to buy or develop a property but will be contributing differing amounts. Those who provide a higher level of equity would receive a larger number of units.

The difference here however is that there is no discretion as to how income can be distributed. Any income earned by the trust must be distributed to beneficiaries according to the number of units they hold.

The hybrid trust
This is essentially a cross between a discretionary trust and a unit trust. Hybrid trusts are generally used where a property is negatively geared and the beneficiaries want to use those losses to reduce their taxable income.  

Income can be distributed to beneficiaries according to their unit holding or at a later date income can be distributed at the trustee’s discretion. For example in the case of a capital gain. 

Asset protection, greater flexibility with tax planning…all sounds good. But before you get too excited there are some potential downsides.

Negative gearing
A trust can only distribute income not losses. So in the case of negatively geared property the losses are trapped in the trust and can not be passed on to the beneficiaries to reduce their taxable income.

There can be a number of ways around this depending on your personal situation.

Using your business

For example if you have a profitable business which is operating through a trust you can establish a separate trust for property investment.

It is then possible to divert profits from the business trust to soak up losses in the investment trust. For example if your business trust made a profit of $100,000 and the investment trust made of loss of $10,000, then the business trust could distribute $10,000 to the investment trust to absorb the loss.

The business trust would then only need to distribute $90,000 to the beneficiaries.

A hybrid trust

A hybrid trust can also be effective. Under this scenario you borrow funds in your name which you use to buy units in the trust. The trust then pays cash to purchase the investment property. As long as the property is rented the trust should then be cash flow positive as it is not carrying the major expense of interest.

Surplus income from the trust is then distributed to you, which can be offset against the interest on your loan.

Costs
Setting up trusts, in particular trusts with a company as trustee can be expensive. You could expect to pay close to $2,000 or more. Because you have a separate entity there will also be additional accounting fees at tax time to prepare your returns.

If you have a company as trustee then there will also be ongoing ASIC fees, and fees if you make any changes to directors or shareholders.

Land tax
In general the tax free threshold for trusts is lower than with individuals plus the rates are higher.

Lenders
Not all lenders will lend to trusts or will only make certain loan types available. Also additional fees will generally be payable at application for perusal of the trust deed.

In summary
Certainly there are some significant advantages to be had by using a trust, but these need to be weighed up against the potential costs. And as mentioned trusts are not for everyone. The key here is to do your homework in advance and get advice 

What opportunities are you missing?
Are there ways to improve your current cashflow that you are not currently doing? Are your finances correctly structured to build a property portfolio or are they holding you back? Do you have a plan of attack of how to build a portfolio? Are your finances set up to ensure you can acquire property without negatively impacting your lifestyle? Are there things you are missing that you should or could be doing that could have a significant impact on your wealth creation plans?

Contact us for an initial discussion.

What are the secrects you need to know before you start investing?
Sign up for FREE Online Investor Bootcamp to start receving information straight way

All the best

Greg Carroll
MTA

If you are considering upgrading your property you may be looking at your existing home and feeling it could make a good investment property. Whether it is the right move for you will depend on a number of factors read on

Repairs and maintenance is one of the main areas where there is a great deal of misunderstanding and ill-conceived plans by investors. read on

Depreciation can be one of the most significant drivers of cash flow for a property. 

Depreciation for properties takes two forms:
 
•Plant and equipment or fittings - ovens, air conditioning, carpet or furniture if you furnish your rental property.
•Capital works deductions - Construction expenditure

It is deemed by the tax office that the useful life of the above assets decline over time through wear and tear. To be compensated for that decline in value, each year the investor is allowed to claim a tax deduction equivalent to that decline and therefore reduce the net income for the property. 

The beauty of depreciation is that it is a non-cash item. Unlike other expenses like loan interest you do not physically pay any cash to meet the expense. It is a paper deduction only. For this reason many investors seek out property that has a high level of depreciation, so they can reduce their taxable income without any cash outlay. Boosting their tax refund and hence the cashflow connected to the property. 

The highest level of depreciation is typically found in newly built properties which have not been previously occupied. Because they have not been occupied they will have no wear and tear and therefore have maximum deducibility. Whereas older properties will tend to have little to no depreciation available as the useful life of the building and fittings has already been expended. 

An important note about Capital works deductions

Capital works can be claimed at 2.5% of the construction value over 40 years from the date of construction. For example if the construction for a new property was $200,000 then the investor can write down their income by $5000 a year for the next 40 years if they continue to hold the property.

Note however if an investor bought a property that was 20 years old, then they would only be able to claim a capital works deduction for the next 20 years as the first 20 years of useful life have already passed. 

Further to this the value of the capital works is determined by cost of construction at the construction date. Twenty years ago the build cost would have been approximately $50,000. Therefore the investor will only be able to deduct $1,250 per annum (2.5% of $50,000) over the next 20 years. Therefore the investor is missing out on $175,000 in potential tax deductions.

If the property was built pre 17 July 1985 then different rules apply.

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