Hi guys,
I've finished reading Steve’s Book and am looking to establish a family trust for the purposes of positive cash flow property investment. My understanding of the structure is this (please correct if I'm wrong).Trust called XYZ family trust.
Company as sole trustee for XYZ family trust (lets call it 'XYZ investments').Reading the book it appears as though the loans should be made in the companies name (XYZ investments) with Mr and or Mrs XYZ the companies directors acting as guarantors for the loan. The reason for having Mrs XYZ as a director as well was so my partner could do some of the leg work organising loans etc. (I work full time, she's at home with the bub).
My questions are these:
1) If the loan is effectively a company loan with directors as guarantors, doesn't that mean that you're limited to business loans (with different conditions and higher rates etc.) How can you get personal home loans for a commercial entity?2) For a personal loan you need evidence of the ability to make repayments (time sheets, balance history etc.) How does a newly created business entity within a trust communicates its ability to make repayments ? (Which will be based on positive cash flow rental return which you obviously don't have until after purchase).
3) I'm assuming the reason for acting as guarantor rather than having the loan in your name is to prevent you from appearing 'maxed out' in terms of borrowing capacity in the eyes of the bank. It appears as though the commonwealth bank no longer supports guarantor loans of any kind any more. In your experience are all the big four doing this now? What about other lenders?
Many thanks for your time!
Adam
I would suggest that it is not a good idea to have two directors of a company. There is no advantage and it doubles your risk.
1. Not necessarily limited to commercial loans.
2. Basically its the same as borrowing as an individual. Bank will look at your personal income.
3. Having a trust will not stop you being maxed out. From my experience that book is incorrect on this. The reason for acting as a guarantor is that the company is a mere empty shell with no substance. If a company were to get into trouble the individuals behind it could just walk away leaving the bank with nothing but the security no one to chase. Hence the personal guarantee.
You may be confusing this with family guarantee type loans?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 have just re-read Steve's book " From 0 to 260+ properties in 7 years" and I am also interested in how I can use a trust structure ( with corporate trustee ) to increase my borrowing ability. Chapter 9 pg 144-146. Steve states that the key is to " carry the investment debt as a guarantor rather than in your own name". If anyone can shed some light on this idea it would be much appreciated, or does anyone agree with Terry that the book in incorrect.
My Situation
I own my PPOR ( $750k) and have used that equity to leverage into an IP portfolio of around $2.5M with a positive cashflow of around $80k per annum. When combined with my salary of around $130k, I have total income of around $210k per annum but I am constrained by maintaining a LVR below 80% with the bank ( to avoid LMI). Therefore, I am forced to sit back and wait for my properties to go up in value / or contribute more savings before I can borrow more to maintain the LVR.Options I am also considering include
1. Vendor finance for up to 20% of the purchase price.
2. Paying LMI on individual properties ( huge if applied to portfloio ) to allow me to go above the 80% LVRRegards,
BrettHi guys,
My thoughts on the Trust issue is, being literally in discussions with some banks on finance, they look straight through empty trust structures to the Guarantors. This situation has changed quite a bit since the GFC and may have been more lenient when Steve wrote the book.
I think the only way to avoid this may be looking at more low doc loans, and paying a higher premium. Perhaps one of the brokers about the forum could shed light on this.
Hi Brett
Hate to say "You cannot increase your borrowing capacity by buying in Trust" and Terry's initial comment is correct.
In saying this there are many ways to gear into property without necessarilty incurring mortgage insurance.
There are lenders who will go to 85% without LMI and those that will go to 90% or 95% by charging a fee instead of LMI which can prove more attractive.
In saying all of this you need to work backwards and see what you want to achieve in both the mid and long term.
There is no point in setting up a complicated structure only to find that you buy 2 more properties and that is it.
A debt re-cycling structure will enable you subject to serviceability to carry on buying by utilising your existing equity in the IP's as long as you have structured it correctly.
Buying with Vendor finance is not that easy as most lenders are cautious about Vendor Finance and wont allow a 2nd mortgage to be registered. Of course under NCPP any Vendor Finance would need to be declared.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I can think of one indirect way a trust can help.
Say you had set up a few properties purchased under a trust structure. You kept you spouse out of it completely except for being a beneficiary. After a few years your spouse has been getting income from the trust. She/he could then use this income to demonstrate to a bank their own ability to pay a loan.
This could also be achieved by buying jointly or by setting up trusts jointly. But the difference here is that they would be on the loan or guaranteeing the loan whereas in the above structure they wouldn't.
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
Yes certainly Trust income can be added into the equasion but would need to be received consistantly for 2 years running in the current climate.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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