Real Estate Questions Answered

Panel of experts in real estate investing answer questions from API Magazine readers in the March 2007 issue.

Using a trust structure

Question: My husband and I own an investment real estate property in Queensland and we rent a house in Sydney. We’re buying a second investment property using a company/trust structure. We’ve set up a hybrid trust for future real estate purchases. For our third property purchase, would it be legal for our company to purchase and we, as individuals, rent it at the current market rate? I’ve asked two accountants this question – one said there was nothing illegal about it but the other wouldn’t support such a move.

Answer: Most trust deeds allow the trust to rent a property to the beneficiaries of the trust. So, from a legal perspective, there’s certainly nothing to stop you from doing this. Further, there was an important legal precedent set in 1987 when the courts found in favour of the taxpayer in just such a case. For what it’s worth, this is known as the Janmor case. However, before you do this there are a couple of issues to consider:

- the home won’t be exempt from capital gains tax if you were to sell it in the future, whereas it would be if you owned the home in your own names;

- the home may attract land tax that it wouldn’t attract if the home was in your own names.

So, I would suggest that you consider whether this real estate property will be your home for a long, long time or just a short while before making your decisions. The real problem arrives if you wish to negatively gear your home using the hybrid trust features of having the loan in your own names while the trust owns the real estate home property. This is because the Tax Office has said that it will attack this. More information can be found about how the Tax Office would view y our negatively gearing your home through the trust in TR 2002/18. There are legal arguments that suggest that the Tax Office is wrong, but, of course no-one wants to be the one to test whether the Tax Office is wrong or right. As a general rule, you’re wise not to have your home in the trust and negatively gear this real estate investment.

Dale Gatherum-Goss.

Unit or House for Real Estate Investments?

Question: I’m unsure whether to purchase a unit or house. What are the positives and negatives of both? Apart from local property average prices what should I look for? And how long will the real estate buyers’ market last for?

Answer: When it comes to investment property real estate, the first thing you need to do is be clear about why you’re investing. Do you need enough rental income to replace your salary, or do you need to build equity through capital growth in real estate? Since I don’t know the particulars of your situation in investing, I’m going to assume for the purposes of this column that you’re like the majority of property investors, who need to focus on assets that will deliver strong capital growth. In this case, it doesn’t matter so much whether to buy a unit or a house. The most important thing is to identify properties that are in limited supply and have experienced consistently strong demand over a number of years, regardless of whether it is an apartment unit or home. More often than not, these are within short commuting distance of the CBDs of major capital cities, where a scarcity of available land drives up real estate property values. You should also focus on locations where there’s strong competition during negotiations, for example where there are several or more bidders vying for the same home real estate property during an auction. This is a good indication of strong demand and capital growth potential. If you’re looking at apartment units, stick to low rise developments with less than 20 properties. There are less likely to be multiple units in the same block on the real estate market at the same time, so the resale value will be higher.

In terms of research, look at recent sales results in ‘comparable’ properties, i.e. those in the area, with a similar land size, architectural style, and degree of renovation. This will help ensure you have a realistic purchase price in mind, and don’t overpay for the real estate property.

Generally speaking, the ‘right’ time to buy is when the right real estate opportunity presents itself – that is – when you find the real estate asset that’s most likely to help you achieve your objectives. However, there are indications that property investors will begin returning to the market in greater numbers during 2007. So if you find the right property, don’t procrastinate. You’ll face more competition from other real estate investors as the year goes on, which will drive up the asking price.

Mark Armstrong

Questioning a Property Valuation

Question: In September we completed building two residential properties with two different lenders. We asked for a revaluation on one and sold the other last December for $330,000. (We expected this sale price). For the other house the valuation came in at $285,000, well under the sale price of our other property next door! Both completed at the same time, similar size, same finishes etc. Our real estate agent organised sales comparisons for similar properties in the same estate, indicating $320,000 to $330,000 for two properties. Tell me what’s wrong with the facts? Can this low valuation be adjusted?

Answer: When a valuation is lower than your expectations the best approach is to supply some recent sales evidence which supports your case and simply ask the valuer to review the valuation in light of this evidence. Generally, a balanced and informed communication with the valuer will resolve any misunderstandings. If your real estate property next door hadn’t settled at the time of the valuation, there’s a chance the valuer may not have been aware of this evidence. In addition, some lenders insist that valuations be based on settled sales only – not on properties which are still under contract. Remember that valuers are totally independent and have no vested interest in your home property or the outcome of the valuation.

Phil Grahame