Getting Started

[younginvestor]

Hi everyone,
I've owned(with a mortgage) my house for 17 months now in which I live in with one other- a board paying flatmate. I've found it easy to pay the mortgage etc and still managed to save $20,000 since I brought the place, also my equity through buying right and values increasing is about $90,000 (this includes the $20,000 which I paid into a revolving credit loan-orbit to decrease the amount of long term interest I'd have to pay).

My question is simple- where to from now, I want to start a portfolio with cash-flow properties, I am single , 21, and have a steady job (3 years)with an income of around $60,000pa. I am planning on buying a property borrowing against the equity in my own home.

Should I start a trust and buy my first IP through the trust?
I have not seen an accountant yet, (don't have one either so if anyone can suggest an accountant with a good knowlegde of property investment that would be helpful- South Auckland area.)

I want to get things right the first time so that I can keep investing in the near future.

Thanks for your opinions. I am serious about this and not a dreamer!!!

[Glenn]

At long last we have a young investor that is not a dreamer.
Welcome to our world.
Good on you fantastic.
I admire you.
The way you have started is great because the "boarder" contributions are generally tax free and need to be kept that way.

I guess lots of good people can give you lots of advise.
I will give you a starter.

Now the most important thing a new investor of any residential investing is to try and get that mortgage over your house that you live in paid out of pre tax earnings and not out of tax paid earnings.
There are one or two ways to do this. This is the No1 question that you need to be asking directly to an accountant / adviser.

All the other advise you get about buying this or that or how much you should gear to and so forth is secondary to this one issue.
I think it is best to seek this information directly off a professional.
Generally the most common (but not the only way) is to form a company LAQC and move assets around a bit ownership wise.
So there you are. something to get your teeth into and your mind around.
The big difference between a trust and a LAQC is any losses are trapped in the trust for use in the future when it makes a profit. The LAQC losses can be exported to off set your personal income the year they occur. This is a much better situation. But you need to get close to someone who knows what they are doing to work through the figures.

PS I have not done it that way at all but then everyone is different.

[Rimmer]

Hi Younginvestor,

You won't regret spending a little money and time setting up the right structure for your situation at the start. By the time I realised we need to have our assets protected in some way we had many years of "gifting" assets into the trust before they were protected.

You are best to talk to an accountant and get that relationship started. Make sure you have at least a basic idea of what your goals are, ie buy and hold, renovate and sell, wrap, commercial, residential, apartments etc and he/she will be able to recommend the correct structure/structures for you. Remember your accountant is not nessessarily the best person to advise you on what to invest in he is an expert in accounting!

For our situation the accountant recommended a LAQC which is in turn owned by a family trust. We are personally both a shareholder of the company and a trustee ( with a neutral third party to avoid future problems ), and beneficiary of the trust As I understand it this set up means we can draw funds from the company as dividends and also have some protection offered both by the company and the trust. Although at the start you will most probably need to provide personal guarantees anyway, so any true protection may be a way off.

While you maybe in a comfortable financial position now, plan for the worst and smile when it doesn't happen! What would happen if you lost income / no longer single / wanted to travel etc. One of the best tings about residential investing is it's long term wealth creation, so the earlier you start...the more fianancially secure you will ultimately be. One of my favourite things I read ( can't remember where but it stuck.. ) "I am not worried about property values decreasing when I buy but rather them increasing"

While in some situations a "tax free" border may be great, in others by declaring the income it can enable you to claim a percentage of home repairs / depreciation / rates / insurance / interest which may in fact be more than you would have been taxed on the income. You accountant could advise.

I would say good luck in your investing career but luck is more often than not earned through hard work and the thoughtful post already shows an awareness maturity and knowledge I wish I had at 21! So knock em dead instead....

Rob

[drelly]

Regarding LAQC's... yes the tax benefits are great but if you're concerned about protecting assets via a trust, subsequent capital gain within an LAQC can make it time consuming to transfer the assets to a trust. I have this problem myself. Just something to be aware of when you're talking to your accountant...

[Dean@Massiveaction]

Get an education would be my advice.
Come and see me http://www.acumen.co.nz/afawcs011409.../property.html or Andrew King or someone similar and make sure you do it right!!
It can take years to recover from early mistakes

[muppet]

Hi Pooomba

Welcome to PropertyTalk.

Have just browsed your website above and there is some great stuff available.

Have also signed up for your newsletter.

Regards

[Glenn]

Yeah sure.
Saves all the hastles of bad tenants.
Far better to have a good education than a heap of rotten flats.
Seriously though. I think it is not a bad idea to have a few minor problems along the way.

[JohnL]

Just a note of caution on your advisors (ie accountant, lawyer, valuer etc). Try to get in with ones who are very experienced in real estate investing, even doing it themselves.

In terms of structures, I use a structure specialist like Company Solutions. Every accountant and lawyer say they can set up your structures (accountants generally being cheaper than lawyers). But there are many examples of poor advice floating around.

Similarly, if you want tax advice in a tricky area, use a tax specialist (or send your accountant to a specialist). This is particularly necessary if you plan to be very tax agressive or doing something a bit more creative.

Its hard for a generalist to know everything. Just relate similar examples to the medical profession. Do you get your GP to perform open heart surgery?

I think listening only to your local accountant and lawyer is one of the biggest mistakes new investors make.

But welcome to the exciting game of property investing. You have already taken great first steps. Most people do not get past their mental blocks (like fear of failure etc) and don't take any action.

John

[Dean@Massiveaction]

Thanks muppet. There's a lot of dodgy advice around these days. I like this forum because it is mostly populated by genuine investors!!