Hi everyone,
I am interested in building a multiple property portfolio and currently own no properties but would really like to know about how to structure my finance.
I have educated myself with Steve's theory on using a trust fund to maximise my borrowing power however I have been swayed away from using a trust fund after being told its costly to setup and to maintain and that it's not really worth it for someone with no assets and an average annual income (51k). I mean I could buy my first home as an individual and save myself from paying trust related fees.
Last night I spoke to a mortgage broker and she said I had the borrowing capacity of 400k. I could do a joint with my partner who together can borrow 1 million (inclusive of rental income). With this amount of money I could buy 2-3 houses around the 300k range which kind of crushed my idea of owning 5 properties in 5 years.
My ultimate goal would be to gain financial freedom but it would be a start to own a couple of properties in the next 5 years.
The absolutely first thing I want to get sorted out is, what kind of financial structure should I start off with, an individual/joint/trust or a combination of all, in order to maximise my borrowing capacity?? How should I start?
Why did it crush your idea of having 5 IP's in 5 years? You don't have to run out and buy them all today! You could buy a couple now wait a year or 2 then revalue. Then use the equity and go again. Yeah, I said 5 in 5 years and it ended up being 5 in 6 ish years. Now I can really get started and this time it will be dollar amounts rather than houses temporarily as the ultimate aim is for neither of us to have to work after 5 years from now.
As far as structure goes what has your accountant advised you of? Do you have a good accountant? They are worth their weight in gold for second opinions, issues like this and for later when you need to work out some tax minimization. You could probably do one in your own name but I wouldn't do any more than that. The accountant (specifically a good one) can advise you what do do every step of the way and what structure to use for each property.
When you get more and more properties and it comes to buying and selling or subdividing and selling you may need to buy in a different structure to just straight buy and hold. An yes we are talking later on down the track but it is better to get your education happening now rather than when you realize years later that you have made a very costly mistake. It is very expensive to try and fix things later.
(Had a very good phone call with my accountant and now understand my structure – mostly!)
Good luck
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeHi D,
Which acctant do you use?
Happy for you to PM the details if you would prefer not to post publicly.
In addition serviceability models change from lender to lender so unless your mortgage broker is adequately aware of the quirks of each model and deals with investors regularly it is unlikely he or she will be aware of everything out there.
Richard Taylor | Australia's leading private lender
I don't have an accountant and was advised by two mortgage brokers (who are also financial brokers) that an accountant is not necessary until I buy a house and then need a tax return lodged.
DWolfe – I felt as though my dream was crushed because when I was told that I could only borrow 400k as an individual with my current salary, I got the impression from my broker that once I reach this limit I would be maxed out and the only way to borrow more is unless I have more income or just do and buy and sell (but I don't think it would be right to do this over). Maybe I am wrong here?
What's not clear to me is the criteria that banks will lend against? My thinking is if a bank sees you earn enough to service a loan then its ok, but what about the loans that you may have under your name, would they see this as a bad thing towards servicability? eg I earn 51k and have a 300k mortgage (negatively geared investment but with significantly increased captial), is it easy to get another loan of say 300k to buy another property based on the fact that I keep my job but use my extra captial from my investment property?
Yes I was hoping to buy 1 property in each year for the next 5 years or so. I am initially looking at buy and hold strategy but as I get more confident I was thinking of moving on to doing renovations to houses to quick capital and increased rental returns. For now, since Im inexperienced with buying houses and everything it entails I think its wise for me to stick to my first property as being a buy and hold.
The last thing is, I have trouble just reading about strategies in order to learn about building my portfolio. Are there certain people who I can speak to about getting advice like a strategic mortgage broker/financial planner? How much do they charge and how can I find them?
Firstly, having a trust won't help with your borrowing ability.
Secondly, don't base tax advice on what an unqualified mortgage broker tells you. If you want to know what structure to use it is best to talk to a tax agent or a accountant or a lawyer before you buy. once you buy it is too late.
Each property you get will reduce your borrowing capacity. But over time your wage will rise, and rents will rise to you may be able to squeeze a few more above what you have been advised now. Probably the biggest limiting factor will be the deposits rather than your incomes.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I agree with Terry that having equity in your properties enables you to push out the barrow a lot further than your standard income may permit.
Even on a PAYG basis there are a lot of lenders that will go to a higher DSR where the loan amount is less than say 80%.PAYG Lodoc is still very much alive and especially in occupations where bonus, overtime etc maybe earnt.
Not ever lender takes 75-80% of the rent when assessing your income.
Some add back the negative gearing interest others dont.
I still stand by my assumption that because a couple of MB said NO does not mean it is the end of the world.
Plan upfront and seek professional Tax advice but buying in Trust definately will not increase the amount you can borrow.
Richard Taylor | Australia's leading private lender
Hey,
Me and my wife earn a combined income of $40,000/year. We have set up a trust and a company and are currently in final negotiations of buying our first property.
I can’t give you legal financial advise, but here is my personal opinion.
You have to look at your investment strategy and whether trusts fit into that. Basically you buy properties in trusts to protect yourself from your own negligence. I buy older properties and thus will always miss one thing or another when it comes to maintenance.
I have set up a company, who acts as the trustee for my trusts. Each individual property I purchase in an individual trust. This offers maximum asset protection. The company costs $212/year to own and doesn’t lodge a tax return (it is a non trading company), the trusts cost $0/year and I do my own tax returns.
Trusts make lending more difficult, as banks prefer you to buy it in your own name (it makes it easier for them to get their money back if the investment goes bad), but it makes you liable.
Buying in a trust is good as if you do something stupid (like run over someone while drink driving) your properties are protected as you don’t “own” them. You own the company that controls them, so if someone sues you they take ownership of the company. You then set up a new company, boot the old company out of the trustee position and reappoint your new company (as far as I am aware). Always see a qualified account though, don’t take my comment as ‘law’.
It is my goal to buy 3 properties this year and be financially free in 5 years. If 5 properties is your goal why not start buy purchasing cheaper properties around the $100k-$200k mark. CashflowInvestor.com.au is a property finder service that finds positive cashflow properties and they have quite a few properties in that price range. They charge a standard monthly subscription fee, but are WAY cheaper than a property broker (who tends to charge $500 upfront and 2% of the purchase price).
Hope this helped
Ryan McLean | On Property
http://onproperty.com.au
Email MeThank you all for you advice.
I plan on seeing an accountant in the following week or later and see what he/she says about buying in my own name or in a trust.
I was reading the 'Your Investment property' magazine today and read that its becoming more difficult to buy in a trust and from the advice above it doesn't necessarily give you more borrowing power. Besides asset protection what other benefits does it hold?
I'm beginning to think buying my first one as an individual is more beneficial and for my subsequent properties, I'd do joint ventures with my partner and family members to help with getting my 5 properties in the next 5 years? Maybe, I could do this it this way for now and then transfer all the properties in a trust later on, or is this something that is difficult/costly to do?
Discretionary trusts also offer significant tax flexibility and can make borrowing more flexible as well. Also are estate planning benefits.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Discretionary trusts also offer significant tax flexibility and can make borrowing more flexible as well. Also are estate planning benefits.Hi Terry,
Can you please elaborate on what you mean by “can make borrowing more flexible?”
Thanks
You can add guarantors more easily, and if you have a company as trustee you can removal people from the loan (such as someone who suddenly gets credit impaired).
If you owned a property in your own name there is little flexibility if you suddenly cannot qualify for finance.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Imagine X owns a house with heaps of equity. He suddenly gets a court judgment which is recorded on the credit file.
He needs some money to pay the judgment, but he cannot get a loan now because of the blemish. He could be stuck.
Now imagine if X had used a discretionary trust with a company as trustee. Initially he was the sole director and so he was the one that guaranteed the loan. This was no problem before, but it is now that he has a judgment. The bank won't lend the trust anymore because of his blemish.
So a way around this would be for him to resign as director and put his wife as director. She is working and has a clear credit. The bank then gets her to guarantee the loan and releases some funds.
( this is a simplistic eg, there are a lot of factors to consider with this sort of thing)
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
Interesting, so can you remove yourself as a guarantor to free up your borrowing capacityy again? (By removing liability or debt?)
Terryw wrote:Imagine X owns a house with heaps of equity. He suddenly gets a court judgment which is recorded on the credit file.He needs some money to pay the judgment, but he cannot get a loan now because of the blemish. He could be stuck.
Now imagine if X had used a discretionary trust with a company as trustee. Initially he was the sole director and so he was the one that guaranteed the loan. This was no problem before, but it is now that he has a judgment. The bank won't lend the trust anymore because of his blemish.
So a way around this would be for him to resign as director and put his wife as director. She is working and has a clear credit. The bank then gets her to guarantee the loan and releases some funds.
( this is a simplistic eg, there are a lot of factors to consider with this sort of thing)
I think you pretty much answered my last question just there, although as you said it is a simplistic description.
I think one major factor to consider is trying to keep your properties seperate rather than cross collaterelised.
Imagine you buy 3 properties worth 300k with 60k deposits ie 240k loans on interest only.
In 3-4 years they are worth 350k and you refinance to 280 (80%) drawing 40 k out of each.
You now have 80k.
you sell one and now have another 110k
you take your 190k plus another 20k which you have saved and put down 3 x 70k deposits on 350k properties
You now have your 5 properties all valued at 350k…Just an example. Hope it helps.
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