FAQ 27 What does being Market Ready really mean?

We often hear the term Market Ready but what does it really mean?

In broad terms it means undertaking all the necessary steps required to make yourself ready to be able to purchase a property in your chosen entity/structure and at the same time protecting your personal assets from attack by litigious persons.

It follows then that we must make choices about ASSET PROTECTION first before we go on to perform any required preparatory tasks.

Q1. Do we want to protect/separate our proposed investment asset from our personal asset?

Q2. Have we any assets of value under our personal name that we want to protect?

We then might consider the tax implications of structures

Q1. Do we want to avail ourselves of the taxation flexibility that a discretionary trust might offer us when applied to an investment property

Q2. Do we want to convert ‘chunks of equity’ that we generate, by doing chunk deals, into an income stream that a lender will use to assess loan serviceability?

As can be seen, there is quite a lot of background stuff to be answered in order to proceed correctly. We advise that a consultation with a legal person would be the best course of action to ensure that a holistic solution is found.

We have set out the following steps which we believe are essential to perform and complete BEFORE attempting to purchase a property. If any are not completed the investor may place themselves in a position where they are either unable to settle or have to settle using less than ideal finance or tax arrangements .

Get accounts up to date and tax returns completed. Pay any outstanding tax bills.
Have a good look at personal finances. Produce an assets/ liabilities/ income/ expenses balance sheet. Look for ways to trim expenses. Reduce personal debt and minimize the number of credit cards owned and the limits on these card/s. Please read this Dymphna manual for fuller explanation. /manuals/Turn%20Debt%20into%20Investment%20Dollars.pdf
Contact Wizdom Loans (See the Ultimate website for contact details) and get a finances and strategy review. This review will uncover the maximum borrowing capacity and available working equity of an investor. It will assist in identifying the type of investment strategy should be employed for the first investment – An EQUITY or CASHFLOW deal. They will also look at investor securitization positions and see if it is possible to release securities that are currently crossed.At the same time they will carry out a review of investment strategies. It will look carefully at unprotected assets (properties owned in personal names) and discuss the need for the protection of those assets
Is a JOINT VENTURE a consideration? If so then put a J.V Agreement in place at this point.
Does the investor understand what is being achieved by investing in a particular property? What outcome is required and when Is this outcome to happen? Go through the exercise of setting and writing long term goals. Some assistance is provided from this download https://uresstaging.memberhost.io/goal-setting-tips/
Is a WRITTEN INVESTMENT PLANin place? This plan describes broadly(BIG PICTURE) the types of property which an investor needs to work with in order to move towards achieving long term goal/s The plan should cover at least 2 years of investing. The booklet BOOT CAMP ACTION PLAN which is obtained when attending the boot camp will assist with this process.
Decide where funds will be SOURCED from to provide to purchasing entities This may be one of a number of different types of account from a simple cash in a bank account to a Line of Credit Account. The factor to consider at this point is if these funds need to be asset protected or retain their tax deductability. Our FAQ 12 covers the question on GIFTING or LOANING funds.The important thing to remember is that if the account is a \’Loan\’ type ie one which interest is charged then if funds are drawn from it, it must be kept in mind that it is not to be used it for any personal spending . This is so that the interest paid may be claimed if the purpose of the spending was to produce an income.

A Line of Credit loan can be secured using the equity in a PPR or any investment property. A valuation of the property will probably be required. This Line of Credit can be used somewhat like a giant credit card.

IT IS IMPORTANT TO ENSURE THAT THIS LOAN IS SPLIT INTO 2 PORTIONS – ONE SOLELY FOR INVESTMENT AND THE OTHER FOR PERSONAL SPENDING. THE LOAN FUNDS WOULD COME FROM THE INVESTMENT SPLIT

Funds can be drawn to LOAN or GIFT to any trust wishing to buy an investment property. You may wish to have the Line of Credit split into 2 accounts, one for PERSONAL spending and the other for INVESTMENT spending. Use only the INVESTMENT account for funding as you will be claiming any interest paid against your taxable income. Consider setting up buffers for Personal and Investment purposes. These will provide emergency funds for personal or investment spending. These should be repaid as soon as possible so that they are available for future emergencies.

NOTE THE FOLLOWING – The setup costs for a trustee and trust used to purchase a property is tax deductible over 5 years.
Please refer to http://www.ato.gov.au/Business/Capital-allowances/In-detail/Deductions/Blackhole-expenditure–business-related-expenses/?page=5#Change_4

At this point you should refer to FAQ 55

Set up your Piggy Bank Trust. (FAQ 55) This is optional but if you are going to have one then this is the time when it should be set up. You will be the appointer, the beneficiary and the trustee. If you are not going to have a piggy bank trust please skip this step.

If you decide to set up a piggy bank trust and you intend to loan or gift funds to this trust then you need to setup a bank account for this trust. The type of account is a \”Trustee Account\’ The full name of this entity will be \’Personal Trustee Name ATF Piggy Bank Trust Name\’

These accounts have rules about how they operate. Refer to the bank for specific information

The following link provides information on the type of bank account to use from various lenders:

http://bfy.tw/Hltu

NOTE THAT THE PIGGY BANK TRUST DOES NOT NEED A BANK ACCOUNT UNLESS YOU INTEND TO USE IT TO RECEIVE GIFTS OR LOANS OF MONEY. IT NORMALLY WILL ONLY OWN THE SHARES FOR INVESTMENT TRUSTEE COMPANIES, THE TRADING COMPANIES AND THE NON TRADING (bucket)COMPANY. As per the diagram located under the DOWNLOADS section: Business & Trust Structure

Set up your Trustee Company. This involves a trip to either your accountant or friendly lawyer. You will need to choose a unique name so provide 3 alternative names with your application. Do not use names such as \’Development\’ or \’Investment\’ or anything which would suggest that you are in the business of property. You will also have to provide the name/s of the directors and the shareholder/s. if you have set up a \’ Piggy bank\’ trust (step 3) then this will be the nominated shareholder
Set up your appropriate Trust. This should be done at the same time that you set up your Trustee Company and if chosen , your Piggy Bank Trust. Have the same consideration when crossing the name for your trust as you did when choosing your Trustee name(see above) .Choose your appointer/s carefully as they have perhaps the most powerful position in that it is they that choose your trustee and have the authority to hire or fire your trustee. You will need to specify only a minimal number of beneficiaries as your family for 3 generations will be automatically included.
Set up your trust bank account. The type of account is a \’Trustee Account\’ It is best practice to use a different bank for this bank account to the one where the trust will apply for it\’s main loan.

THIS IS THE ACCOUNT THAT THE TRUSTEE WILL USE ON BEHALF OF THE TRUST FOR PAYMENT OF ALL EXPENSES AND WILL RECEIVE ALL INCOME. You will need to take your trust documents with you and set up the bank account as you cannot setup a bank account without these. The account name will be for example \’ ABC Pty ltd ATF XYZ Family Trust\’

The trustee has no assets and does not trade. It sets up the trust bank account and manages the trust assets within this account. A trust is not a legal entity and therefore cannot set up a bank account directly in it\’s own name.

Note that this name should be used on the purchasing contract when buying property although the name on the title deed may just be the TRUSTEE name ( title deeds vary between states and thus may be different in some states)

Hint: If you imagine that your trust is a separate person who is investing. That separate person will not be connected to you apart from having a loan agreement in place. This separate person will have their own bank account for the investment property. All expenses will be paid from that account and all rents and income will be received into that account.

Ask the settlor of your trust to deposit the settlor fund into your trust bank account and annotate it \’SETTLOR FUND\’. IMPORTANTMake sure that the settlor fund is NOT invoiced anywhere.
Fund the trust bank account using one of the following ways:
a) GIFTING from the bank account(Line of Credit) which you set up at step 7 – see FAQ 12 https://uresstaging.memberhost.io/faq-12-how-do-i-fund-my-trust-gift-or-loan/. If wishing to protect these funds then gifting would be chosen and for the most complete protection, this would be done to your PIGGY BANK TRUST(PBT) The PBT would then on lend to your investment trust.
b) ) LENDING funds from the bank account(Line of Credit) which you set up at step 7 – see FAQ 12 https://uresstaging.memberhost.io/faq-12-how-do-i-fund-my-trust-gift-or-loan/. If wishing to retain tax deductability for these funds then loaning would be chosen and this would be done to your PIGGY BANK TRUST(PBT) The PBT would then on lend to your investment trust. You would still personally own these funds and thus they would not be asset protected.

Hint: The amount needed to fund the account will usually be 30% of the cost of the property being purchased: DEPOSIT 20%, STAMP & LEGALS 6% and TRUST RUNNING COSTS 4%

Set up your \’Bucket Company\’ this is also an optional step. The directors of this company will be yourself/s and the shareholders will be either your Piggy Bank Trust or if you decided not to use a piggy bank trust then it would also be yourself/s.

NOTE THAT THE BUCKET COMPANY IS ONLY REQUIRED WHEN THE TRUSTEE IS UNABLE TO DISTRIBUTE TO BENEFICIARIES WHO PAY LOWER THAN THE COMPANY TAX RATE – OR ASSOCIATED TRUSTS /COMPANIES WHICH HAVE ACCUMULATED LOSSES FROM PREVIOUS YEARS TAX RETURNS.

If you are going to enter into a joint venture agreement then you will need initially a \’Heads of Agreement\’ drawn up and then from this a formal Joint Venture Agreement.
Check out any requirement for registering for GST and tax file numbers and register where needed.
In some states there is a requirement to insure a property after an offer has been accepted as the onus on protecting the property transfer to the new owner. Check with your legal team if unsure. Remember that if a trust is the become the new owner then the insurance company will require the policy to be taken out in the same name as registered on the title. In some states this is just the TRUSTEE name.. Your lawyer or conveyancer can assist you.

YOU ARE MARKET READY NOW!

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