Where to start with cash....

[JennaJenkins]

Hi
I am needing a point in the right direction. Have been cashed out by IC and wish to rebuild house on my land with intention of living in it for next 10 years plus. while house is being built (10 + months) need to purchase property to live in then will rent out post new house build. can someone advise me on the following:

1. do I use all my cash to purchase rental property to live in, and have no mortgage on it, then draw down a mortgage on it to build new house on my existing section land.
2. do I need to set up some kind of company, LTC, business or family trust?
3. do I put down minimum deposit on rental and pay P&I or just interest only, keeping capital back for the build and build company?
4. should I go via a broker to arrange finance or put all with bank who have already said yes to my idea.
5. what pitfalls can you see ahead and where could I run into problems?
6. if i cant rent it out at a break even amount on the rental after I move back into the newly built home then I would just sell it and pay off the mortgages.
7. point to note, husband is risk adverse builder, who hates debt. I feel opposite and really want to make a go of investing now and get into it, renovations possibly etc. Surely I can put his skills to good use some where along the way to make us a little nest egg/or some passive income?

I don't have a plan yet as I don't know what I don't know but I know that I need to do something not nothing.....and soon...

I have been to a property investment seminar - for 10k should i be working thru them?
Many thanks
Jenna

[Don't believe the Hype]

Which prop seminar company did you go to?

[JennaJenkins]

Which prop seminar company did you go to?

I went to an evening with Positive real estate.

[JennaJenkins]

Are there others?

[Don't believe the Hype]

Lots of them! Many very topline leaving people with more questions than answers.

Some questions for clarity on your situation to determine if buying a temporary place is a good plan before we get to structure of ownership/finance etc...

> you want to purchase a house to live in temporarily while you re-build. Why buy vs. rent if your timeframe is only 10 -12 months?

> is the area that you want to live during rebuild period a good investment? I.e do you have set investment criteria guiding the choice of your new property? or do you just need somewhere to live and when you're done with the rebuild you'll have 2 house so may as well rent out the 2nd?

Point 6 - understand if the investment will be a break even proposition before you buy otherwise in 12 months when you find its not break even you will pay selling costs and legals along with rates which could end up being more than you'd have paid in rent for the property if you'd rented it for the year. Remember in some parts of the country yields are 3-5% and selling costs can be 2-3% so holding for one yr could cost more than renting.

Point 7 - if you don't get the questions above right my bet is you're 100% likely to prove your husband right and murder any chanc you had of your Reno dream!

[JBM]

Well what I would do ...if it would work for you is another thing ,,,(maybe ask your "Positive real estate" guys)

I would look for good solid house mid level priced family home ..to live and reno ...... brick /coloursteel roof etc 90s-2000's that due a freshen up ...i.e pretty straight forward work (even though your hubby is a builder so maybe a major reno might work) new carpet / re-paint / update some fittings lighting etc ...

So yes spend your money on your reno ....then once done start looking at your building your new house ...you then have options while living in your hopefully increased value reno ...borrow the funds to start the new house .....

Husbands a builder ....go get a kitset house etc (A1) hire a hammerhand .. new house with added free equity

then maybe even during the new build list the reno for sale (no harm putting a good size profit margin for a start ) ....worse case doesn't sell you rent out (as long as you didn't go over board on price paid /reno costs) you should be able to cover all holding costs

[Anthonyacat]

Answering from a tax-optimisation perspective; just to clear that bit up.

Rather than spending cash to purchase the rental, you'd be better to mortgage it as highly as possible, which is probably 80% (or 70%, in Auckland). Keep the loan on interest-only, and keep the remaining cash in an offset account to bring interest charges down.

Note the difference between use of an offset account such as those offered by BNZ and Kiwibank, and use of a revolving credit facility such as those offered by Westpac and ANZ. With the former, you keep a loan, and a cash balance in separate accounts, and only pay interest on the net position. With the latter, you pay down the loan using your cash, but can then take it back out again - effectively a large overdraft.

If you're owning the rental in your own name, the offset accounts are much more tax efficient than revolving credit facilities. If it's in a company, there's no difference.


Another big note - if your husband is a "builder" in that he builds houses, there are specialist tax laws which exist to catch you out. Get professional advice. If by "builder" you just meant tradesperson, building decks and treehouses and that sort of thing, you're less likely to be at risk.


One thing to note from a non-tax perspective - keep your expectations sensible when buying the first house. Buy a property that you think will rent well, and buy it at a good price, rather than buying the house you want the most for whatever you feel it's worth.

Most of the time the houses that you want to live in aren't good rental propositions, because their prices are based on the emotions of home buyers, instead of the rational return expectations of investors.


And totally against the grain of your questioning, now... Have you considered just renting for 10 months?

[sidinz]

Ross will be along soon to explain it all further, in legal terms, but in the meantime, your #1 will be problematic. You need to be careful about not just what property the lending is on, but what the purpose of the loan is.

From what you've said, you're intending to mortgage the rental to build a home. So the purpose of the mortgage is actually to build a home, potentially making the interest non-deductible as your home is not an income-producing asset. To solve this issue, most people would choose to sell the rental to an LTC but this will depend on your particular circumstances. How you structure things is crucial, especially with the tainting rules and your other half being a builder.

[Nick G]

First of all, Anthony's question is good - why not just rent a home while you build, do you want to become a landlord?

Regarding your questions about structures and financing, I suggest paying an accounting for an hour of their time to go through it. In particular if as Anthony has said your husband is in the industry you want to be careful.

Without knowing your cash position, age, other goals, income etc here are some thoughts:

1. Think about your retirement and what you need.
Generally the NZ pension is set up so that people can "get by" with a free hold house and on the pension, with some savings to help things along. In terms of "passive income", the rule of 20 is a good idea, if you want $25K per year passive, $25K x 20 = $500K in assets is what you'll need.

2. If you have some debt on a rental at the other end of this and a tenant covers the mortgage and all costs, then your risk is quite low, in particular if the house you will live in is freehold. You can pay off the house while the tenant pays the interest, rates and insurance. If you aren't paying rent on your own and focus on something like this you can have two freehold houses surprisingly quickly.

3. If you have to choose which house to have debt against, you want to have low/no debt in your home, high debt in your rental. A rental is a business so costs are tax deductible, for your home it is not.

4. Pitfalls - I don't really know your situation but as Anthony mentioned, when you buy your property that will become a rental, you ARE buying a rental. Don't think much about it as your home for a year because that brings in "home-owner" criteria, when you should be focusing more on a profitable rental property. Also it depends on your age.

5. Remember you can always hand over the keys to a professional property manager. I have a few rental properties and every time there is a problem I get an email about it, an action plan and then once it is sorted I get another email. Yes I pay for the service but I don't care, it means I spend about 1hr a year on running my rentals. The small percentage of rental income that costs me simply does not matter while I am working full time. In fact, my managers are probably on the expensive end by 1-1.5% because I'm paying them to look after my entire financial future. They also move rents up as the market changes, tell me what maintenance needs doing and then organise it.

If you would like some more help, we operate an investment property agency and Sally in Christchurch is really solid. She works one-on-one with new investors regularly. I will PM you as well.

[JennaJenkins]

Hi Hype
thanks for your reply. In response to your questions;
buying vs renting makes sense to me, I hate the idea of renting. we have show dogs and renting with them will be a nightmare. I prefer the responsibility of taking ownership, can modify to suit our animal family etc. (yes emotive but that's the deal).

area - what do you mean by good investment exactly? ratios, etc? would like to know how to set the investment criteria.
yes we do just need somewhere to live and I would like to use this opportunity to get on the investment ladder.

I intend to hold the investment property as long as I can. 18 years to retirement at present.

Hubby not that motivated to get doer upper unless totally at this stage, skeptic.

[JennaJenkins]

perfect thanks.