Buy and hold or trade?

[drelly]

There has been a lot of discussion on here about structures in regard to avoiding tainting issues. However, let's say you've got your structures set up... how do you then decide which entity is most appropriate for your latest purchase?

I've personally never traded a property but I can see a time in the near future when it will be better for me to trade than to hold.

It will rely a lot on personal circumstances as well as practical reasons but I was wondering how the various traders on here determined which way to go when acquiring a new IP?

[toby]

You need to decide what you are going to do before you settle.
If you own some properties already then put only those properties that you intend to keep long term in that entity.
The properties that you flick in the other.
And don't mix or change your mind after settlement as you may find that the IRD will see your intention as being different than you, and your always guilty until proven innocent.

[drelly]

Thanks Toby but that wasn't really my question...
How do you decide whether to hold or whether to trade?
It seems to me that many could go either way, so what are your criteria?

[Julian]

If you're in any doubt whether your purchase is to be a trade or hold then put it in the trade structure - that way you can still claim all the costs if you hold it, but you won't taint your strictly investment properties (that are in your investment structure) if you sell. The down side is that you will have to pay tax on any gain if you do sell - but hey, that's life. (If you wanted to avoid paying the tax you could sell it to me at cost.)

If you do buy an investment property and put it in your investment structure it is wise to document all your reasons for buying - that way should circumstances change dramatically you should be able to sell without being called upon to pay tax on the capital gain.

Julian

[orion]

how do you then decide which entity is most appropriate for your latest purchase?

Hi Drelly, sometimes it can be either, ie a trade or a buy and hold. If it could be either, it comes down to this question (asking a better question) - do I need more equity, or do I have some spare equity that I can use to buy another rental?
Most of the time I'll know which it's going to be by the age of the property(not before 1960's for rental), the condition (if it needs a lot of work it will be a trade), how much below market I can buy it for. If it's only 10% or so below market, it's not worth trading. If you still haven't decided, ask the above question on your current equity.

Regards
Graeme Fowler

[JohnL]

There can be a GST implication in trading to take into account as well. You have to register for GST once your turnover exceeds the threshold.

You do get a GST refund for the period you are holding it, but you also pay GST on any rent received.

This doesn't usually impact you for a short term trade, but say you decide to buy five properties at the beginning of the next property boom and sell them two years later, then they are still a trade (unless you plan to take a risk with the IRD), so you need to factor the good and bad things about GST into your cashflow model.

John

[Stevegoodey]

Hi All,

A couple of observations, I agree with most of what Orian has said It's up to what you feel your portfolio needs.
But also it has something to do with return also. What I mean by that is I bought 4 x2 bed units at christmas renovated them and they can out with a really good return and so I sold 3 flats in a block that did not have such a job return.

In doing so I have replaced a property that was not performing with one that will perform based on yeild.

As for the GST I think if you are a trader it can be very useful and should be included in most transactions.
For example you buy a block of flats for $600,000 the GST refund will probably pay for the refurb, then when you sell at a profit you pay back the GST (Less your expenses of coarse).
So the GST becomes an interest free loan of sorts, you are just borrowing it till you sell.

I can think of quite a few situations were this would be uswful, like late settlements were the GST becomes the deposit (not for the faint hearted).

I do agree that if you are going to trade you need to buy below valuation but there has to be other reasons to purchase in the first place.

I know of a property on the market at the moment for $645,000 with a GV of $910,000!! and It would still not make a good flip deal because it could not easily be re sold.

The main consideration I take into account is the amount of work required to increase rental return or appeal as an owner occupied home.

Cheers

Steve

[The_Dog]

I find it strange that you are faced with this decision. I would have thought (in the current market) it would be pretty clear what makes the 'deal' worthwhile. I wouldn't have thought a deal would be so attractive as to have many options as to what can be done.

A friend here in the UK has bought a couple of flats in the last year, renovating one (and then renting) and put the other straight out to rent. Now he is thinking of selling them, but finds the break clauses of the mortgages are about £6 to £7,000!!

So my suggestion is, if you are going to trade, make sure it's on a floating loan. Mind you, with the floating rate so much above the fixed rates at the moment, you would have to be decisive. No point paying 9% if you end up holding it long term for rental.

TD

[JohnL]

Just one point on fixing a loan. The last 'quick flick' I did, the bank recommended fixing it. There was no break costs as the fixed rate was lower than the floating rate. The break costs will start to play a significant factor as interest rates start to fall again.

So it would pay to ask your bank about the total costs either way before just going with floating.


John

[Josko]

So my suggestion is, if you are going to trade, make sure it's on a floating loan. Mind you, with the floating rate so much above the fixed rates at the moment, you would have to be decisive. No point paying 9% if you end up holding it long term for rental.

I suggested this before, (though a little cryptically) Interest only loans suggest a trade intention, P&I Loans suggest Buy and Hold intention. Only my interpretation of it though.

[jblca]

I do not agree interest only loans infer a trading activity

Most of my loans are interest only and I have never sold a property in the past 12 years of property investment

My original property cost $115,000, and, as with all my properties, 100% financed.

Current value is $550,000 approx

Current Debt is $115,000 being 21% of property value

Had I been P & I over 25 years, current debt would be $86,000 being principle repayment of $29,000 and I would have a debt ratio of 15.6%

In the mean time I have used the $29,000 principle and the $435,000 equity to buy other properties

The repayments I have not made are minimal to the equation

It is at the beginning of a loan when cash flow is tight so I think the last thing you want to do is give cash to the bank that you have to apply to get back.

Excess cash can be used to reduce revolving credit facilities but you can take it back automatically with out having to ask or make an application

A long winded response indicating the advantage of interest only in my perception.

At the end of the day, it's all personal choice and just because I handle my finances one way and you another, I would not dare to insinuate you were wrong.

The best thing about property investment is we all have our own way of doing things and we are all different.

If it's right for you it's the right way.

You're the one who has to sleep at night

J B L C A

[Josko]

I do not agree interest only loans infer a trading activity.

I don’t have the experience to entertain the IO or P&I debate in property investing, and my suggestions are not directed at that strategy choice.

The point I am making is that if you are utilising a "buy and hold" strategy and are also interested in "trading" properties, by distinguishing your activities, you are for all intense and purposes providing the auditor with a clearer indication as to your intentions.

Only my interpretation of it though .

[ChrisAshenden]

Hello DRELLY and everyone else here. This is my first post, so Ola!

DRELLY, the first part of your question (re which entity) I think has been answered. As for the rest (ie trade or keep) it comes down to a couple of things but first.....

"I've personally never traded a property but I can see a time in the near future when it will be better for me to trade than to hold."

Why do you think this?

"It will rely a lot on personal circumstances as well as practical reasons but I was wondering how the various traders on here determined which way to go when acquiring a new IP?"

This comes down to you mate. But basically the decision will incorporate a mix based on:
YOU
-Your personal strategy for investment
-What you think the market is doing
-Your desired or required velocity on capital (similar to Graeme's point)
-Your resources (skill set, time, network, finances etc)

THE PROPERTY ITSELF
Some lend themselves more condusively to trading, some to keeping, this has been discussed earlier.

Mostly it is the "you" factors mate.

Good luck and hope that helps.

Regards,

Chris Ashenden

[orion]

Hi Chris,

Glad to see you've joined PT!!

Hope all is well with you.

Regarsd
Graeme Fowler

[drelly]

Hi Chris,

I am considering trading as my next option because I've bought a couple of negatively geared properties with good potential for development and subsequent capital gain. These are being propped up by my other CF+ IP's that allow me to keep everything about neutral.

I'll have to see what happens after I've developed this latest place but I think that I may be hitting that servicability wall. Trading could allow me to build deposits for further purchases and keep the banks happy. Also, I'd like to have the practical experience.

It's been interesting to see how other people make their decisions.

Enjoy the site, it's a great resource! The hardest part is keeping up with the posts!