All Topics / Finance / Maximising borrowings using structures

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  • Profile photo of trakkatrakka
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    @trakka
    Join Date: 2004
    Post Count: 257

    OK, I'm listening to Steve's Masterclass CDs, and I found Steve's concept of being able to use your income again and again to qualify for loans in different Trusts VERY interesting. The idea is to use lenders who only want to know about assets and liabilities in your name, NOT those for which you are guarantor (some lenders wisely ask about both).   In such a case, all the borrowings of other Trusts (ie other than the one for which you are trying to borrow right now) – and the assets of those other Trusts too, obviously – aren't declared on your personal assets and liabilities position statement, and thus you are able to use your income "over and over" to guarantee loans for different Trusts, and theoretically never run out of borrowing capacity. That goes a long way to explaining how Steve was able to amass so much property in such a short period of time!

    I put this concept to my broker, who is pretty innovative and aggressive, not a "Mum and Dad" type broker, eg he was aware that Steve has advocated this strategy, and his response was that this strategy constitutes "non-disclosure" and as such a violation of the terms of your application and loan, even if they don't specifically ask about loans that you guarantee.  I think my broker was suggesting that whilst this may be possible, he would be unwilling to submit a loan on this basis because it represents a fraud on the lender and, if or when discovered, could jeopardise his standing with the institutions and possibly even get him into legal difficulties.

    I would be very interested to hear other opinions on this matter, particularly from Steve, Dave, or their broker. I'm not saying that it's not possible – I'm sure it is and in fact thought it was a very cunning and exciting plan – but has there been any advice on whether this is legal?

    Look forward to hearing other opinions!

    Regards, Tracey in Brisbane

    Profile photo of TerrywTerryw
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    @terryw
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    If the lender doesn't ask about it, then I guess you are not doing anything wrong. But it is highly likely your lender will ask about these other loans as they will see them on your individual credit report.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of corbin77corbin77
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    @corbin77
    Join Date: 2007
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    I do not agree with the reply above " the lender doesn't ask about it, then I guess you are not doing anything wrong" there is an obligation to fully disclose your current situation as it stands and when you sign your name on the contract you are stating that all your disclosure is true and correct.

    I would be very interested to hear back from people who have successfully used Steve's concept of using your income again and again to qualify for loans in different trusts as I may be missing the point.

    Profile photo of tammytammy
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    @tammy
    Join Date: 2005
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    Whilst you may be able to continue to borrow under different trusts – dont get carried away and forget about how to service them. Yes I know, it should be obvious, t'ant always so!!!
    T

    Profile photo of cruzinbudcruzinbud
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    @cruzinbud
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    So this is possible providing you can service the loans…ie dont default?? Very curious about this topic as i, and i assume many people, dont have that high an income and thus am not able to gain high lending approval.
    I would be interested to hear from someone who has actually done it…not just theorised about it :)

    Profile photo of YossarianYossarian
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    @yossarian
    Join Date: 2006
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    Trakka,

    The lender doesn't ask about "liabilities in your name", they ask about "your liabilities". If you have obligations that, however constructed, will come to you should the proverbial hit the fan, you should declare them:

    (a) so you're not up for fraud; and
    (b) so you don't borrow more than you can reasonably afford.

    There is no magic pudding.

    Profile photo of trakkatrakka
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    @trakka
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    Yossarian wrote:
    Trakka,

    The lender doesn't ask about "liabilities in your name", they ask about "your liabilities". If you have obligations that, however constructed, will come to you should the proverbial hit the fan, you should declare them:

    (a) so you're not up for fraud; and
    (b) so you don't borrow more than you can reasonably afford.

    There is no magic pudding.

    Yossarian, I'm not suggesting committing a fraud, nor borrowing beyond my capacity to repay. I'd point out that even if all your properties are positively geared, my understanding is that there is an artificial limit imposed by many institutions as to what they will lend an entity. I don't have any guilt about using legitimate means to get around these artificial lending limits. If all properties are positively or neutrally geared, why should borrowing be limited?

    Also, I'd argue that loans that you guarantee are not your liabilities. If your son or daughter buys a car and needs you to go guarantor to get them the loan, do you think that the parents, when applying for their own mortgage, should declare that car loan on their statement of assets and liabilities? In this case, the liability is being counted twice, as presumably the son/daughter would declare the same debt on their position statement if applying for their own mortgage? Why should liabilities that are backed by guarantees be counted twice?

    For those Trust borrowings that I guarantee, my intention would be to not declare those debts, but I also wouldn't declare the Trust's assets or income. So I'm actually presenting the lender a picture – given the significant equity and positive cashflow within the Trust – that is WEAKER overall than if I did attribute the Trust's assets/liabilities/income/expenses to myself, purely to prevent "maxing out" the artificial borrowing capacity that some lenders impose. I would definitely agree that if the Trust was not financially self-sufficient, ie negatively geared, then the Trust's positions should be disclosed, and not disclosing them would be misleading the lender. I'm proposing misleading the lender to the lender's advantage, ie I'm actually in a stronger position than I'm presenting.

    I would also agree that the whole strategy sounds somewhat dubious, but given that someone as well-known as Steve was willing to put his name to it on CD, I thought it was worthy of further investigation… I'd still love to hear from Steve or Dave about this, or somebody else who's actually done it. And particularly anybody who has done it with the knowledge of their broker, and what their broker had to say about it.

    Profile photo of TerrywTerryw
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    @terryw
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    trakka wrote:
    Yossarian wrote:
    Trakka,


    Also, I'd argue that loans that you guarantee are not your liabilities. If your son or daughter buys a car and needs you to go guarantor to get them the loan, do you think that the parents, when applying for their own mortgage, should declare that car loan on their statement of assets and liabilities? In this case, the liability is being counted twice, as presumably the son/daughter would declare the same debt on their position statement if applying for their own mortgage? Why should liabilities that are backed by guarantees be counted twice?

    When you guarantee a loan you are giving a promise to pay the loan if the person taking out the loan cannot. Therefore lenders would want to know you could service this loan as well as all of your other loans – if you could not, then you guarantee is essentially worthless.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    Post Count: 12,024
    Yossarian wrote:
    Trakka,


    Also, I'd argue that loans that you guarantee are not your liabilities. If your son or daughter buys a car and needs you to go guarantor to get them the loan, do you think that the parents, when applying for their own mortgage, should declare that car loan on their statement of assets and liabilities? In this case, the liability is being counted twice, as presumably the son/daughter would declare the same debt on their position statement if applying for their own mortgage? Why should liabilities that are backed by guarantees be counted twice?

    A) Of course they are included and need to be declared unless you intend to submit a fraudulant application.

    Richard Taylor | Australia's leading private lender

    Profile photo of cruzinbudcruzinbud
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    @cruzinbud
    Join Date: 2007
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    So by the sound of the last two posts, and not trying to criticize anyone here, Steve was being fraudulant when taking out his loans in different structures? Or perhaps i have read his books, and watched his seminars, incorrectly. If there is another interpretation of his material i would be very interested to hear it (and use it if possible!!!)

    Cheers,
    Adam.

    Profile photo of trakkatrakka
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    @trakka
    Join Date: 2004
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    Here here, Adam. Quite a lot of posters seem very willing to assume bad faith, imply fraudulent intent, and pass their judgement, without actually answering the question with any useful information.

    I've not used this strategy and have no intention of using it if it's not legitimate. I am making genuine attempts to ascertain whether it's viable, but rather than provide solid information about the legal distinction between guarantees and loans in your own name, or talk about whether they know of people using or attempting to use this strategy with success or otherwise, many posters would rather cast aspersions for even asking the question! Which, given, as you highlight, that Steve McKnight – who presumably we all respect since we're on his forum – advocates this strategy, seems a bit over the top.

    If what some other posters are saying is true, that you have to attribute all the loans that you guarantee as well as your own loans to your personal balance sheet, then I wonder how people like company directors – often required to give director's guarantees for their company's loans – get finance for their own purposes and buy a PPR, for example.

    If I'm incorrect in my assumptions, then I'm happy to be corrected – but with facts and references, preferably, not opinions and vitriol. And it would be a bonus if the respondent assumed the question was asked in good faith, which it is.

    Profile photo of TerrywTerryw
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    @terryw
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    Trakka

    I've given you my opinions. Now why don't you just ring up a few lenders and ask them over the phone. Also grab a few loan application forms and look at what they ask.

    Just looking at a St George application, they ask for assets and liabilities and ask "What you owe". I cannot see any specific question asking "have you guaranteed any loans". So it may come down to an interpretation of the word 'owe'. I would take it to mean liable for any debts. Guarantors are liable for the debts they guarantee – are they not? Maybe I should email them and ask the specific question?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of TerrywTerryw
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    @terryw
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    St G have come back saying loans personally guaranteed will need to be declared too.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Alistair PerryAlistair Perry
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    @aperry
    Join Date: 2004
    Post Count: 891

    Hi All,

    How loans within different structures are treated is heavily dependent on the type of loans and the section of the bank you are using. If you are just buying low yielding residential properties then it is clear that each of the loans should be treated, for servicing purposes, the same as if they are all in your personal name as there is a relience on your personal income to service them. The same cannot be said in cases where companies/trusts are used to hold commercial properties or developments, which are usually self funding. Debt in such situations can often be ignored by lenders, for servicing purposes, as it does not impact on income outside. As Steve was investing in high cashflow properties and vendor finance deals, I would think that his activities would have been viewed, by his bank, as being commercial in nature and would have been treated as such.

    Regards
    Alistair

    Profile photo of MarkatMarkat
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    @markat
    Join Date: 2006
    Post Count: 12

    Hi there

    I am new to forum but am at the same point as you TRAKKA.  I have just listened, relistened, read, reread, all the information on structures and using them again and again so you are not maxed out…..obviously of great interest to me as this is exactly where I am at…..

    Somehow from what I read a lot of people on forum term "maxed out" to mean that you actually are in no position to afford more property.  We are a family on low income and the only reason I am where I am is through investment….and my effort to better our situation.  (I do not think there are many others in this position on the forum or in the program but could be wrong here).

    Essentially we now have over 1 million of assets and an LVR of 50% which will go lower to 25% when I sell the current development I am involved in. (in broad figures)

    My next move is to buy and buy again, but organise the structure and finance correctly.  I am finding this very difficult to get around (in my mind…. as I don't fully understand the concept) and b) when I ever declare income banks/lenders are not too willing.  When they check out my accounts and LVR and properties….they are all smiles…..but not so happy when it comes to income.  Of course, I have done no doc, low doc and standard loans to get where I am.  But how do we repay, meet repayments I factor it into the project costs and loan pays loan…. if you get what I mean. 

    The language I use and how I understand it….may not be easily understood…. but I get it in my brain.  I think I am having a mental block to Steve's concept because it sounds too good.  Obviously he has an income to get the first structure/loan up and running to then use over and over again?  I also need to know how to get the equity to "generate income"…..sounds complex and I am probably just stupid.  Obviously I am selling, but that released profit, and by the time all is said and done, and you write down the profit for tax etc. the income doesnt sound like something the banks would loan on anyway.

    I guess I should be doing multiple developments at any given time…which is good in theory and I feel confident I could do just that…..it's just the structuring/finance.  I have done it all wrong as in have 1)PPOR in husbands name (he is the main breadwinner) 2) IP 1 in his name 3) development in both our names which we are selling….

    PPOR valued at 500,000 no loan (once development sold…drew down on loan to finance development)
    IN 2 valued at 350,000 with 130,000 loan
    DEV 1 valued at 220,000 loan at 127,000
    DEV 2 hope to sell at 370,000 and loan at 270,000

    DEV 1 and 2 in partnership – 2 couples.

    Guess I'm not much help but I was interested to see that  you are at the exact point I am….. 

    Markat
    Email Me

    Profile photo of TerrywTerryw
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    @terryw
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    Markat

    To use equity to repay loans, you just borrow a bit extra, use that to pay the interest etc on the way and do your development then sell, or refinance and keep.

    In your situation, if you had a LVR of 50%, you could possibly take this up to 80% using a No Doc loan and have another 30% available to do more with.

    Having different structures will not really help you get more  finance – but they help in other ways.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of trakkatrakka
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    @trakka
    Join Date: 2004
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    Well, life is funny sometimes…. by coincidence, I recently ran into somebody who was intimately involved with Steve's early property dealings and I had the chance to ask him about this. What he told me is exactly what I suspected – that the strategy is "if they don't ask, don't tell".  It is possible to use this strategy in the sense that it can be done, but many brokers – as has become evident here – consider it unethical and won't become your "accomplice". I am surprised that Steve would openly advocate this.

    The majority of lenders would certainly not be happy about this if they were aware of it, but whether such conduct constitutes a breach of your contract with the lender hasn't been tested, as the people who are likely to try this strategy generally don't default because if they're at all smart they would only use it for positively geared property. Though I readily concede that if it were tested, you probably would be found to be in breach of your duty of disclosure and possibly other conditions.

    As I stated in a previous post, I was only interested in this strategy if it were legitimate. I will not be adopting the "don't tell" approach, but I like Alistair's statement about self-funding commercial ventures, ie that in many cases the lenders are aware of these additional debts but decide not to include them for servicing purposes because they're self-funding.  That makes sense and I should be able to take advantage of this as I'm fortunate to have a very positively geared commercial property which has a debt that is enormous relative to our personal income. So I definitely need to find lenders who think as Alistair portrays – and I'm sure they're out there.

    Thank you all for your input, and best wishes to all,

    Tracey

    Profile photo of VStarVStar
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    @vstar
    Join Date: 2004
    Post Count: 48

    Hey Tracey!

    Thanks for putting up this post as i've just finished DVD 5 from Steve's Masterclass as well and have pondered on this since!

    Also – having listened to his DVDs/CDs – have you also pondered how he came up with all his continuing funding for all his 350+ properties?

    Profile photo of neilvsneilvs
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    @neilvs
    Join Date: 2007
    Post Count: 36

    I wonder if anybody is wondering why Steve himself hasnt commented on this topic?

    I did wonder but then i thought to myself: if i was Steve, i wouldnt be letting on to any material secrets of the trade such as exactly how i did my financing on a free forum like this one…

    I'd keep that kind of nitty gritty detail to advanced courses and let people pay for that knowledge.
    Nothing wrong with that… Just keep it in mind, else you may get a tad frustrated that nobody ever gives any REAL answers here on these kind of questions.

    Those who seek shall find, and i intend to continue seeking…

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    I assure you there is no hidden agenda or secret financing rules you simply require income to purchase in the current finance climate.

    Richard Taylor | Australia's leading private lender

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