To Trust or not to Trust?

Discussion in 'Accounting and Tax' started by BS77, 28th Jun, 2007.

  1. BS77

    BS77 Member

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    Hi All,
    I am just starting out in the investing game and am keen to clarify some planning issues....
    Currently I have about 40k cash and a good salary(about 100k per year). I have just bought my first property(settled today) in my own name for 390k, renting 400 per week in a good capital growth area(as per residex anyway).
    I am happy to work in my current job for 5 years, then my salary should go up significantly(about 3 times initial). I plan to work for another 5 years in that second job - so the long term plan is the 10 year plan. I want to aggressively invest(but am a little time poor), happy with risk(single, no debt, good earning potential), and have good job security(income protection insurance, secure job). The 10 year plan then is for maximal property portfolio growth, with little need for cash from investments for the next 10 years. In 10 years I will reconsider....and may want to start to live off investments to some degree.
    I am considering my next moves:
    1) do I start a trust for further properties? I know about asset protection and tax issues, but my main concern is borrowing power. Would I have better borrowing capacity if I started a corporate trust and went guarantee?
    2) what is the fastest way to grow my portfolio? I see that I could buy another property now with my cash and income, and am looking at cash flow positive ones in mining towns. This would then bring my overall position somewhat closer to neutral so serviceability issues shouldn't arise for further borrowing. I then plan to revalue my properties in about 6 months time and hopefully use the equity to fund another purchase - however how much cash will I need for each property thereafter? If I continue to buy around the 400k range, and get interest only, how much cash will I need to save up? I see that as my limiting factor - my salary is good but to save up 30-40k is no mean feat!
    3)After 10 years of maximal portfolio growth I can see my wealth on paper being good but I also see that I would have heaps of debt with no cash flow to me. How would I start to live off my investments down the track?

    Well I have many more questions but I don't want to overload everyone....so please give me some help to build the property empire!
    Cheers
    Brent
     
  2. alexlee

    alexlee Member

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    You serviceability certainly wouldn't be increased by using a trust. Some banks might decrease it.

    The key with using a trust is asset protection and income streaming. This effect is increased if you have, say, a non-working partner and dependent children.

    The issue is if you use a trust, do you use a family trust (losses can't be distributed but can be carried forward) or something else?
    Alex
     
  3. knightm

    knightm Member

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    I have also recently heard that using trust and being a garantour in place of borrowing in own name increases effective DSR rates to bank. Can anyone explain this as I also am considering setting up a trust in coming months.
     
  4. Terryw

    Terryw Investor

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    I think the only way a trust can assist with serviceability is if the individual doesn't tell the new lender about the previous loans they have guaranteed.

    When you think about it, trusts should decrease serviceability as the rental income could be distributed to a large number of beneficiaries - not necessarily the trustee or guarantor. But in practice lenders generally accept it as all going to the person giving the guarantee.
     
  5. knightm

    knightm Member

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    Do lenders normally ask about other loans guaranteed or not?
     
  6. Terryw

    Terryw Investor

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    Many, if not most, do ask. Those that don't ask will probably find out about those loans from the credit check.