Just wondering if you could share your knowledge, insights and experience with regards to how to structure and obtain finance for a positive cashflow portfolio in today’s market.
I recall Steve mentioning in the past that you could obtain finance for Discretionary Trust by going as Guarantor, and paying a 20% Deposit, and by structuring it this way you won’t be limited by your borrowing ability.
Not sure if this is something that still applies in today’s market with banks tightening their lending criteria, but I’m interested in learning more…
There is no real difference with structuring loans between negative and positive cash flow property. You should still borrow 104% and avoid cross collateralising securities.
For the trusts this is a complex form of legal ownership which you should seek legal advice on.
I am made a thread here on how trusts can improve borrowing capacity. See if you can find it from a few months ago.
Great information there Terryw, but I’m still trying to get my head around how this works…
Let’s say you’d like to own 9 positive cashflow properties but the banks would only loan you money for 3 properties
You could get around this by setting up 3 separate trusts each holding 3 properties?
– TRUST X with COMPANY X as Trustee
– TRUST Y with COMPANY Y as Trustee
– TRUST Z with COMPANY Z as Trustee
You are the Director of Company X, Y and Z and Guarantor as well?
The loan is in the name of TRUST X, Y and Z
With you loaning the 20-30% Deposit to each Trust for each property?
If the lender asks you would need to disclose personal guarantees given so the lender would then assess you on the full debt of the 3 trusts. If they don’t ask about personal guarantees then you would be assessed on your personal debt and the debt for the borrower in quesiton.
If the lender asks you would need to disclose personal guarantees given so the lender would then assess you on the full debt of the 3 trusts. If they don’t ask about personal guarantees then you would be assessed on your personal debt and the debt for the borrower in quesiton.
Hi Terry,
Will I be right to assume if all 3 trusts (in OP’s example) take out lease doc loans, then there will not
be personal guarantees required by lenders?
Thanks,
FXD
This reply was modified 7 years, 3 months ago by fxdaemon.
You’ll find those days are over – lenders require any loans that you’re guaranteeing/structures you are a director of be loaded into the liabilities of applications so there isn’t a magic bullet in this regard.
fxdaemon – you still need to provide personal guarantees for commercial lending, hence why its generally best to start with exhausting your traditional residential borrowing, then move into commercial property. Be careful not to exhaust it before releasing any available equity however, otherwise you might have no borrowing capacity to release the deposit funds, leaving you in a catch 22 situation.
@terryw: Thanks for the clarification. I just didn’t understand how an entity could borrow money without proving any source of income.
@jaxon: My goal is to make +$500 positive cashflow per week, and I’m thinking maybe this could be achieved by finding 10 properties yield $50 positive cash flow per week. Maybe renovate and increase the rent? I’m not really sure, but I’m open to suggestions on how this could be achieved.
@corey Batt: Are there any lenders out there that don’t require you to disclose any loans you are Guaranteeing or is it mandatory by law now?
Well I think that is very possible and realistic (not to say a bigger goal wouldnt be)
The problem I think many people run into with similar goals to you, myself included, is lack of instant equity building, buying below market value isnt enough to then within 3 months revalue and have instant equity to reuse (generally) unless your value adding.
so for e.g. lets say 7 years for your goal from today.
you currently have one property (call it P1)
p1 = 350k value, 170k debt Income 50k a year (save 20k a year)
buy p2 for 230k spend 20k and three months later its valued at 300k
So thats
p1 350k
p2 300k
= 650k over 420k debt
now you use that to purchase another property shortly after
buying p3 for 250k spend 50k on fully redoing the whole house
and now worth 410k and your other properties both went up 10k each
thats
p1 360k
p2 310k
p3 410k
= 1070k over 720k and lets say thats within a year (yes you spend a bit of time building that original equity (years)
but if you bought correctly that could already be around 70-150 per property in return so already over $300 per week in income of the property and all properties could be structured P and I so they are reducing the loan amount.
Now this is a very rough example but I hope it shows a glimer of the breakdown.
There are deals far better than the above out there as well.
Just need to be able to source them and understand the risks.
-Positive geared properties
-AIRBNB properties
-Adding value (repaint reno etc)
-Sub division
-adding granny flat
-Room letting
– revaluation on property
– buying under market value
– Smart insurance structure so if it goes south you are more than covered to build above the current value
-adding value, one of my favorite sayings is
@terryw: Thanks for the clarification. I just didn’t understand how an entity could borrow money without proving any source of income. @jaxon: My goal is to make +$500 positive cashflow per week, and I’m thinking maybe this could be achieved by finding 10 properties yield $50 positive cash flow per week. Maybe renovate and increase the rent? I’m not really sure, but I’m open to suggestions on how this could be achieved. @corey Batt: Are there any lenders out there that don’t require you to disclose any loans you are Guaranteeing or is it mandatory by law now?
Everyone asks it. Not only because this loophole (it really wasnt one, specific lenders had very specific policies permitting it under certain circumstances) has closed and there’s a standardisation of input of data through a third party channel for most institutions – it’s being asked and to not note it is mortgage fraud.
Lenders are digging into credit hits on your file from 5 years ago now – they will certainly ask questions even if you don’t disclose them.
@jaxon: Thanks for the valuable input. I’m going to learn more about Vendor Financing Strategy, and see if I can use this to access properties for Renovation to build up equity more quickly.
@corey Batt: Are you still able to increase your borrowing capacity by structuring your portfolio this way? P.S. I can’t access that link you provided “www.precisionfunding.com.au didn’t send any data.
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@david-thiu still works for me – maybe give it another try.
And yes correct, you can still increase your borrowing capacity structuring in this way, it’s all just a case of using a little foresight and planning to make sure you can eek out as much as possible.
@corey Batt: Yup it works now, but I’m not sure how this relates to borrowing under a trust structure and going as guarantor. All this talks about is that you can increase your borrowing capacity by using different lenders. One of the graph is also confusing – says lender 1 $400,000 debt but the graph shows $800,000.
Corey out of curiosity what your debt to ownership ratio then?> LVR against your properties
Floating around circa 70% at the moment – generally the leverage stays at this point as I debt recycle to leverage equity into property deposits/shares. So long as there is a reasonable enough ROI I’ll keep doing so.
@corey Batt: Yup it works now, but I’m not sure how this relates to borrowing under a trust structure and going as guarantor. All this talks about is that you can increase your borrowing capacity by using different lenders. One of the graph is also confusing – says lender 1 $400,000 debt but the graph shows $800,000.
It’s about achieving the desired outcome – borrowing more/as much as you can. The old trust ‘loophole’ is dead – but you can still squeeze the capacity more by using the right lender approach whilst growing the initial portfolio.
re; the debt amount – as per the scenario you can see the borrower has a 400k existing PPOR mortgage + a 400k proposed IP loan = 800k.