Qutting time - Implications on Borrowing Capacity?

Hello everyone,

First post after migrating from Somersoft....

I'm hoping to get some thoughts / feedback on my situation as I'm sure it has been one that someone has gone through before.

Currently employed in a J.O.B. (though you're supposed to call it a career these-days....) with what one would consider quite a reasonable salary.

Over the years have put together a portfolio of properties in the double digits which is now cashflow positive but LVR would still be around 68% across the portfolio.

Looking to make a career change and try my hand at some more renovations for a while (this is already happening on the side) which means saying goodbye to a permanent income that the banks have to this point been happy with.

My question for the experts out there is what is going to happen to my ability to borrow further without being able to demonstrate an ongoing income?

I'd imagine once I've got a few projects completed successfully I'll be able to demonstrate an income trail, but this would take time....

 

People do the same for developments quite often, but get stuck when they quit work and have to resort to no / lo doc loans.

Run this idea past your advisers maybe:

- Set the renovation gig up as a separate business in a separate holding entity, away from yourself and away from your properties.
- The business project manages and consults on your renovations and receives fees from the entities your
- You can begin all this now while still working in your job. Once it has 1-2 yrs worth of tax returns, you can get loans using that income and without including your salary income.

Probably a hundred other ways as well...

 

Without a job you will be unable to demonstrate servicing. If buying and selling you will need 2 years financials showing income. If buying and holding you will need a lot more rent coming in

 

Your rental income might be positive cash flow enough to demonstrate servicing, but probably not. The break even figure from various lenders perspective is above 10% rental yield (sometimes quite a bit more).

Essentially if you're no longer working, you'll probably have a lot of trouble borrowing more money for residential property.

There might be some opportunities to get into the commercial market though...

 

It may be some time on the sidelines from a borrowing power point of view.

They won't include the income earned from renovations until you've got a couple years tax returns to back them up, like DT has suggested. You can get lease doc loans on commercial securities if you want to move into that market (Corey did a great post on it in the Commercial Property thread).

 

Thanks guys - to seek a bit of clarification is lo-doc still an option or are we talking about absolutely no ability to borrow until the new income stream is established?

 

Lo doc is only an option if you've been self employed for at least 2 years, with the ABN and BAS statements to prove it.

 

Thanks guys. I'd never actually considered the scenario in which you can't leave the rat race because you're not addicted to the disposable nature of your income, but the ability to leverage it through borrowing. Those capitalists designed a challenging game!

 

Get as much money as you can lined up now and plan on at least two years without borrowing. Get an Abn now and start doing the reno's on the side in a seperate entity as suggested earlier.

Depending on how much cash you can get you might have enough to buy Reno and sell repeat for a year or two until you have the tax returns. But I guess if you can do it for a year or two you can do it indefinitely and don't need anymore debt?

 

Actually you don't need BAS but with RAMS you can only borrow upto 750k, accountant signing off income

 

You would not be able to borrow without an income. It would be unlikely you can borrow based on rental income alone. Low docs would probably not work at this stage without dodgyness.

I would suggest you take your existing loans up to 80% or even 90% LVR if possible. Set up a LOC and then use this to pay for properties with cash.

Do the renovating through a company ownership structure and pay a dividend to a discretionary trust. Once the trust and company have 2 years income you may be able to show this for serviceability.

 

Most of us spent some time planning the exit out to ensure that we could either:
a. borrow enough before quitting that will give enough work for the 2yrs
b. set up companies and projects 12-24mths before quitting so that there was 2 yrs of company financials
c. say to the banks - see you in 2yrs and just wait it out.

A and B is most common. If you could buy a couple of reno projects before you leave or set up the companies and remain in your job for 12 more months you'd be on your way.

 

So let's say for instance I was to purchase a development site now, to be profited from in say 2 years, would you need to set up the company now and purchase the property in the company name?

 

If a company is going to be owning the property then it needs to be set up before it can enter contracts to purchase. Otherwise you would need to transfer it to the company later, and pay stamp duty and CGT.

If the company would be developing property owned by yourself then it could be set up later. But this is much more complex to set up.

 

Thanks Terry, appreciate the quick response. I should have been a bit more clear in my question actually. What I was getting at was in order to show 2 years of income from developing, in the event that one was to quit the day job, what would generally be the ideal structure? I'm a bit slow at catching on tonight.

Sorry I hijacked your post @Richard Sterling

 

In that case a company producing income for 2 years would be good.

The reason that a company works well is that income retains its character with trusts. If you are buying and selling using a trust the income will be distributed to the beneficiaries as it is received by the trust. Capital gains will come out as capital gains. banks see capital gains as 'one off' income and generally will not take it into account in servicing.

With a company capital gains will be converted into dividends (or wages). Which the lenders will see is income or profit. They will not necessarily see the income of the company as one off capital gains.

But buying and renovating and selling would not be done on capital account usually. So it would normally be income. But people try to get it through as a capital gain so they can save tax.