API Connect

May 2008 issue

Investors who have been featured in API answer questions from readers.
For more Q&As, see this month’s API magazine.

Book of rules

Q: I loved Dave's article in the May issue and thought it was a wonderful way to help young people get started, as well as a beautiful legacy for his son. I had always thought of 'property groups' as groups that would have to put in $10,000 each to start, which is out of the question for many.

I am now very keen to look into this further to help our girls (20 and 22 years old) as particularly the younger one just can't see any way of getting a house. They have many friends who think it isn't possible and we have many of our friends with kids that age so it could also grow. I'm very keen to find out more about the Avalon Bulldogs Trust's Book of Rules, how taxation works, the procedure if someone wants to leave, and how a 15 year-old can be part of it (I thought you needed to be 18 to own a property).

A: It would be nice to start with a reasonable amount as this would give you the opportunity to purchase much earlier. But small amounts weekly by quite a few people add up surprisingly fast. Some of our members pay lump sums in advance (eg. one year).

Because we won't be making any profit there will be no tax payable until the trust winds down or if someone leaves and makes a profit on their share. The members don't own property. The trust is the registered owner of the properties. The members hold shares.

The cost for entry and exit is the value of the holdings at any given time. A valuation is done every year before June 30 or more often as required by the directors. Each member signed a document stating the value of each share on leaving would be the current value less 5 per cent. Dave

Legal protection

Q: In response to the question of what you'd do differently, you mentioned setting up trusts for the houses to protect from potential lawsuits. Could you please detail more about these trusts, how to set them up and what law suits one would be avoiding? I'm also wondering about serviceability of all these properties. I have two properties and would love to buy more and more. How can people, such as yourselves, who purchase a truckload of properties in a short period of time actually pay for them?

A: I can't give details about setting up trusts because I'm not a professional that deals with trusts but there are many good books on trusts, or talk to one of the professional advisers in the magazine or at investment conferences. That's where we found one of our team of advisers. We spoke to one of our team of professional advisers to set up the trusts.

Some of the lawsuits that you could avoid have been shown in newspaper or magazine articles. As to serviceability, we bought some of our properties before the recent boom and the value of the properties has more than doubled, so we then used the increase in equity to purchase more properties.

Finance is one of the keys to successful property investing. We have a number of risk management strategies we can use - for example, interest-only loans, fixed interest rates for a set period, some loans have fixed interest rates and some have variable rates. Bruce and Shirley

Ed note: The October 2006 edition of API featured an introductory article about trust structures.