Joint IP, loan, best admin structure

Burramys · 22nd Oct, 2014

In a few years I hope to buy an IP with a friend, Kim. Yes, I know, there are often problems, but there is great trust and we will have a legal agreement from a lawyer that we engage. Kim will put up half and I will put up the rest. I can pay for my half in cash but prefer to have half of this as a mortgage. The IP will be about $400 000. The end result will be something like:
Kim, 50%, $200 000;
Me, 25%, $100 000; and
Mortgage in my name on my half, $100 000.

This gives an LVR of 50%, doable.

Can someone please give me an idea of how lenders think about such an arrangement? Also, is there a better structure? TIA

SK Investments · 22nd Oct, 2014

Hi Burramys,

I can't comment on the structure but i question why you want to go joint on a $400K property when you both have $200k cash available.

Have you thought about buying properties individually at 80% LVR?
This way you can buy more property, the loan interest is tax deductible instead of you paying tax on the rental income, and you save money on a potentially messy joint venture.

$100k should easily get you a $400k property all to yourself, or 2 @ $200k!

Shahin_Afarin · 22nd Oct, 2014

If Kim is on the title then you will both need to go on the loan.

Only way around it is to do an equity release against your existing property to use for this purchase.

Also borrow as much as you can and park the cash in an offset.

Terry_w · 22nd Oct, 2014

What if one of you wants to sell or wants out?

A fixed unit trust may make it easier to change underlying ownership.

Burramys · 22nd Oct, 2014

Thanks for the advice. i could easily fund the property but Kim could not. Kim will be selling the current PPOR to buy half and leaving enough cash to still qualify for the pension. Without other assessable income Kim has no advantage in having a mortgage, which is why I want it in my name. I should have advised that Kim will be living in the IP and paying me rent.

Another option may be for Kim and I to go 50:50 and for me to use a $100 000 mortgage on my PPOR to pay for half of my half. This is not ideal but would achieve a similar result. The IO loan would be an allowed deduction for me, and I'd rather have that that a mortgage for my PPOR for that property.

The legal agreement would cover all contingencies. Maybe set up as joint tenants to allow easier transfer and no CGT.

Terry_w · 22nd Oct, 2014

Burramys said:
Thanks for the advice. i could easily fund the property but Kim could not. Kim will be selling the current PPOR to buy half and leaving enough cash to still qualify for the pension. Without other assessable income Kim has no advantage in having a mortgage, which is why I want it in my name. I should have advised that Kim will be living in the IP and paying me rent.

Another option may be for Kim and I to go 50:50 and for me to use a $100 000 mortgage on my PPOR to pay for half of my half. This is not ideal but would achieve a similar result. The IO loan would be an allowed deduction for me, and I'd rather have that that a mortgage for my PPOR for that property.

The legal agreement would cover all contingencies. Maybe set up as joint tenants to allow easier transfer and no CGT.

In that case a unit trust may not be a good idea.

Best not to put too much faith in the written agreement as it won't be able to cover everything.

And joint tenants may not be a good idea. If you die would you want Kim to inherit automatically?

Burramys · 22nd Oct, 2014

Terry_w said:
In that case a unit trust may not be a good idea.

Best not to put too much faith in the written agreement as it won't be able to cover everything.

And joint tenants may not be a good idea. If you die would you want Kim to inherit automatically?

Agreed, a written agreement will not cover everything, but it's a good starting point. The intention is that when I die Kim gets the IP and other assets of mine, enough to discharge the mortgage and change.

Terry_w · 22nd Oct, 2014

Burramys said:
Agreed, a written agreement will not cover everything, but it's a good starting point. The intention is that when I die Kim gets the IP and other assets of mine, enough to discharge the mortgage and change.

She will get the whole property, not just enough to discharge the mortgage. There are little in terms of estate planning strategies that you can do. If you held your interest as TIC you could pass it via your will - in any way you please.

Also you should get advice on the deductibility of interest. You probably won't be able to claim all the interest on your loan.

Joint IP, loan, best admin structure

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