My First Trade

[Neo]

My husband and I own(with mortgage) 2x3bdrm houses and 2x2 bdrm units(100% finance IO) at present but feel we need more cash flow to buy more.

My mum and I have just gone halves in a 5bdrm home in Hamilton with room to build a minor dwelling @ $210K (we have gone halves to minimise the risk).

We are setting up a partnership for our 'trades' and we have our own home in a trust and the buy and holds in a LAQC.

We are looking to add cosmetic value and sell it as soon as possible, if it doesn't sell we will rent it out at $300wk.

At present we are looking to repaint inside and out, add new carpet and lino and add drapes and nets.

The house is an old weatherboard state home.

This is a question for other traders, how far do you go with refurbishments.....or does it depend on the house and how much you can make?

We are hoping to put it back on the market (after the above improvements have been done) for around $260+

Should we consider....light fittings, kitchen bench tops and new handles on cupboards, door handles, basins, toilets etc (still working just old) ...the list is endless...we don't want to overspend, just do the basics to get a good return. At this point just removing the existing owner and her 'stuff' will dramtically improve the place...but it does still need work

Would appreciate your thoughts.

Neo

[SuperDad]

Hi Neo,

Firstly, well done for finding a 5 bed house in Hamilton for $210K! Where is it?

Next, you will need to be very careful about the ownership structure for your trades. You want to avoid "tainting". From what I can tell, traders on this site use a trading trust for their trades. Their trading trusts are also GST registered, so they can claim the GST back on the purchase price. This finances the reno. This is what my wife and I will do when we get into trades.

As for how much to spend on refurbishments, I've read that some work on a certain proportion of purchase price. I don't know much about this. One thing i can suggest is belonging to your local (i.e., Waikato) Property Investor's Association. We get awesome discounts. You'll save heaps on your reno costs. PM me if you want details about who to contact to join the Waikato PIA.

Finally, while I haven't done any trades yet, I'm getting quite the dab hand at renovations/DIY (practicing on a couple of my own homes). I'd love to have a look at the place you've bought, if you'd like one person's opinion on what might be done. I've got a good idea of where to source most things in Hamilton. Again, PM me if you'd like me to do this.

Kind regards,

Paul.

[Volatile]

WARNING!

Be very very carefully with a partnership, possibly the worse business structure available.

Why not use a company, or trading trust?

[Neo]

"I'd love to have a look at the place you've bought, if you'd like one person's opinion on what might be done."

SuperDad I would love your opinion and in the same token I would be very interested in viewing your new investment too.Once we are unconditional I will show you through.

'Firstly, well done for finding a 5 bed house in Hamilton for $210K! Where is it?"

It is in Fairfeild, unlisted - client wanted a low profile but a quick sale.She had 4 offers in her first week - one fell over, one was too low and the other was a multi and I bid higher.

"One thing i can suggest is belonging to your local (i.e., Waikato) Property Investor's Association"

We have just joined, last month infact and yes we have our discount card.

"WARNING!

Be very very carefully with a partnership, possibly the worse business structure available.

Why not use a company, or trading trust?"

Volatile, I am all ears - this is just a structure my accountant recommended because I am going into a 'partnership' with my mother for this purchase to minimise risk. We will also be registering for GST to claim expenses etc.
From what I understand (please tell me if I am incorrect) is that everything is associated, trusts, company's, LAQC's partnerships...if your signature is on it then you are associated with it.
If in our LAQC we continue to buy and hold for at least 10 yrs on each property these peoperties will not be tainted (as our intention is to hold), no matter what structure we set up for our trades.
Believe me I am all ears I want to do everything correctly and pay tax accordingly etc, I do not want to taint my buy and holds.

Neo

[Volatile]

From what I understand (please tell me if I am incorrect) is that everything is associated, trusts, company's, LAQC's partnerships...if your signature is on it then you are associated with it.

Partnerships are very dangerous, you have unlimited personal liability to any creditors that you may or may not have in the future. This is very different to a limited liability company that as the name suggests limits personal liability, this is achieved because a company is a separate legal entity a partnership is not.

The other problem is that third parties can be "included" in your partnership under certain circumstances even without your express intention. Then you are personally liable for anything that third party does.

[/quote]

If in our LAQC we continue to buy and hold for at least 10 yrs on each property these properties will not be tainted (as our intention is to hold), no matter what structure we set up for our trades.

I can't see a problem if you keep this current property in a separate legal entity from your buy and holds. It’s all about intention.


It seem alot of people use trading trusts to flip properties.

Be VERY careful of Partnerships, they are dangerous and there is hundreds of years of case law showing there inherent flaws.

[SuperDad]

Hi Neo,

Great to see you've joined the PIA.

Regarding your structure for trades, you wrote:

From what I understand (please tell me if I am incorrect) is that everything is associated, trusts, company's, LAQC's partnerships...if your signature is on it then you are associated with it.
If in our LAQC we continue to buy and hold for at least 10 yrs on each property these properties will not be tainted (as our intention is to hold), no matter what structure we set up for our trades.

Now, I'm no expert on this matters, but I do get my advice from the experts (Garth Melville and his team at Company Solutions - http://www.company-solutions.co.nz/) Firstly, a properly formed trading trust with a corporate trustee (and the appropriate beneficiaries) will help avoid tainting in a way that a partnership won't. Sure, your signature will be on documents, but only in your capacity as a Director for the company acting as trustee for your trading trust. You are "removed" from that trust.

As for holding your buy-and-holds for ten years so as to avoid paying GST and tax on sale. Do you really want to have to do that because you might not be doing your trading in the coreect or best structure? What if your circumstances change, such that you must sell a property that was designated as a buy-and-hold. And what if the IRD deems that property to be subject to GST and tax upon sale?

From what I can tell, you haven't gone unconditional yet. So there might be time to seek a second qualified opinion on the best structure for your trading. I can strongly recommend Company Solutions, on the basis of my (admittedly limitted) dealings with them, as well as knowing that they come highly recommended by successful investors.

I look forward to meeting you,

Paul.

[Neo]

Thank you SuperDad and Volitile for your suggestions, I really appreciate your feedback. I will be speaking with my accountant this morning to discuss this further. As you mentioned SuperDad we have not gone unconditional yet so we need to get this right first time.
I am learning all the time and I thank you both for your thoughts.
I will keep this thread updated with more info soon.

Neo

[BusyLizzy]

Hi Neo,

Does your accountant specialise or have a lot of experience in property? If not, maybe you should consider finding another accountant that does. Many experienced investors on this site have pushed this point time and time again. If your accountant gives you bad advice in terms of structures, it could cost you big time further down the track.

Do a search on 'structure', etc in the Tax, Finance and Legal forum - you will find lots of useful info there.

Good luck!

[TWT]

Hey all,
Sometimes you have to take a step back and say... "Is this taking me toward my goal of taking it away from it?" and yes I am meaning setting up all costs and legal protection vehicles. You can always add this into the equation at a later date.

My suggestion would be to set up a simple, yet very definative Joint Venture agreement.

This way you only have a single deal to consider and each one can be unique as to ratios of profit loss sharing and other specific things. It is very cost effective and can be written up for as little as $150.00
and as much as $650.00.

I have done this a many times with both family and independant ventures (using both personal and corporate entities). It gives very specific information and agreed methods on profits, losses, dispute resolution, buying out JV partner processes and requirements, and priority on dispersments on sale of property.

This way there are no sour grapes on any misunderstandings as all points and potential issues are clearly identified PRIOR to commitment ... Especially with family as this that cause rits for generations to follow!!

The biggest factor is you can each independantly choose which entity you wish to use when entering the JV agreement and tax and risk will apply to those
decisions Well that is my 8.88 cents worth
Cheers,
Kiwi

[SuperDad]

TWT,

Could you please explain how your suggestion bears on the issue of whether or not Neo's first trade will potentially taint her buy-and-hold portfolio?

Paul.

[TWT]

TWT,

Could you please explain how your suggestion bears on the issue of whether or not Neo's first trade will potentially taint her buy-and-hold portfolio?

Paul.

Superdad.....
I am reading between the lines and commenting on the part Neo mentioned Adding value and selling ... which is of course clearly not a "Buy and Hold Strategy"

You all seem to have everthing else summed up well

Why don't you share with us your devine opinion....

[SuperDad]

TWT,

Sorry, but I don't see your point. You don't need to "read between the lines" to see that Neo is not contemplating a buy-and-hold. After all, the thread is entitled "My first trade", not "my first buy-and-hold".

My "devine opinion", as I shared above, is that Neo should seek advice as to the best structure into which to buy a property she intends to sel for a profit.

Paul.

[TWT]

and what value are you adding by querying every post?

[SuperDad]

and what value are you adding by querying every post?

I was hoping to add value buy getting you to clarify your point. This is for the benefit of all who read this thread, not just my benefit. you made the following suggestion:

Sometimes you have to take a step back and say... "Is this taking me toward my goal of taking it away from it?" and yes I am meaning setting up all costs and legal protection vehicles. You can always add this into the equation at a later date.

What on Earth do you mean here - its as clear as mud. In the context of your suggestion that Neo consider entering a joint venture, it seems that you are suggesting she don't worry about her structures, and sort it all out later. If that is your "advice", then it is worse than crap. Of course, I'm not sure that this is your advice, given the lack of clarity of your posting.

Now you know what my purpose is in questioning your post, may I ask what your point is in contributing? Is it to offer advice which, if followed, might place Neo in a position where she could end up owing tens of thousands of dollars to the IRD?

Paul.

[Neo]

Lets keep this nice and civil guys.

I really appreciate your feedback and knowledge.
As I mentioned in my previous posting, signatures link everything together, I should have been more specific - IRD numbers link everything... Trusts, LAQC's partnerships etc. I don't believe one entity can save 'us' from a situation. I am not going to go into this because I would need my accountant sitting next to me, he is the expert and I trust him.
I am going to have buy and holds in a existing LAQC (held for over 10yrs)and trades. If we have to sell a buy and hold due to unforseen circumstances (health, finances) I am sure the IRD will judge the situation on its merits at the time.
Who knows, I am no expert, but sometimes lawyers want a peice of the pie and will charge us for it and create a huge structure when something a fraction of the price would suffice with pretty much the same protection.
Anyway - keep the feedback coming through......


Neo