D,
Nice try, but that's not what I am talking about. In your situation you are getting to a 100% leverage situation, and this will be tough to get approval for because when lenders do their due diligence in the post GFC environment, I suspect it will be identified and knocked on the head.
Also, I'm not sure it would work out in the debits and credits in the underlying accounting.
To start off with, in the books of Trust A:
DR Asset (Property) $1m
CR Loan (You for lending in the equity / deposit) $300k
CD Loan (Lender) $700kThis is a cash transaction, so the journal above also indicates the cash outlay and source of funds, namely:
Cash In
Loan (You) $300k
Loan (Lender) $700kCash Out:
Property Purchase $1m
Now let's say you set up Trust B and want to buy another property on the same basis. Assuming you could get a 70% loan from another lender ($700k), where is the other $300k going to come from? While you can 'loan it form Trust A', it won't be a cash transaction because Trust A doesn't have cash to hand over (unless it refinances the property, but how much more will be loaned because it is already at 70% LVR?)
For example,
TRUST A
Dr Loan (You) $300k
Cr Loan (Trust
$300k<now Trust A owes Trust B>
TRUST B
Dr Loan Trust A
Cr Loan (You)Overall Cash Position (Trust A &
Cash In
Loan (You) $300k
Loan (Bank Lending To Trust A) $700k
Loan (Bank Lending To Trust $700kCash Out
Property (Trust A) $1m
Property (Trust $1mCash Shortfall: $300k
As you can see, all you are doing is transferring the loan to you from Trust A to Trust B and there is no cash movement. This means that you are still short $300k of physical cash which is needed to buy the second $1m of property (Trust
.As mentioned, you might be able to refinance the property in Trust A (say, up to 80% LVR), but this would only give an extra $100k, you would still need to find another $200k from somewhere else. You couldn't even x-securitize the property in Trust A as it is at max LVR.
Overall then, and as I will outline at the upcoming get together, for this strategy to work you need:
a) A source of cash to provide the 20% deposits that does not rely on refinancing or other debt. In my case this money came from realised profits as I sold property, and from good cash flow businesses
b) You need to be able to demonstrate that you can service the debt.
c) You need a strong asset position
d) You need to source a lender who knows and understands what you are doing.
Terry makes a good point about residential lenders. I deal principally with business bankers who operate with more advanced structures and situations. But business banking is not for the elite… it is open to anyone (or can be if you can write a business plan!).
This has been a technical answer, and sorry if it has put some readers to sleep or frazzled them with accounting, but it sets out the nature of the transaction and the source and use of the cash needed.
Regards,
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Right! Well this is the discussion that I just had with my other half who told me I was wrong when I said it your way around! It was then explained to me the way I posted it (incorrectly)
So if done correctly then you could set up multiple trusts and really keep borrowing especially if you had no problems with serviceability. Probably more so in the good ole days before gfc (should have been called cfg – crap fiscal governance) but probably still can be done. I guess this comes down to risk and and how much you are willing to guarantee yourself into the hole.
How many loans are too many to be guarantor on? If you are in a relatively stable position with the ability to repay, with an decent asset base then can this actually work?
Yeah I got the phone call as well as the paperwork from the nice bank lady who wanted to make sure I knew what I was signing "dear". The bank also told us to seek legal advice, then not to worry and then in the end it was seek legal advice. Try getting a straight answer.
Thanks Terry your posts are always great shame you are getting out of broking, hope you are staying in advice giving and knowledge sharing!
Ta
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeThanks Steve!! I'll show the other half tomorrow. I will be watching your upcoming events closely. What would you consider as a decent asset base? And are we talking at 80% LVR or less?
Thanks and wow.
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeThanks for the replies to my thread Steve, though i am still hoping that someone can answer some of the questions in the original post that provoked this whole thing
D Wolfe no you are more likely to get the loan accepted at 65% lvr with a decent asset base (not talking a $1-2M but a decent asset base $5M + minimum).
Steve is referring to his dealings directly with the Business Banking section of the Bank. I for one can confirm that when we were active in the Vendor Finance market the Banks which openly stated they would not lend where the property was being onsold by way of an instalment contract used to welcome our applications with open arms in the Business Banking side totally contry with their own residential policy.
Whilst i totally agree with Terry that all lenders i have spoken to will take the guarantee as a debt and this will have an negative effect serviceability lending rules with certain Business lenders are different. i mean no recourse lending is still alive and well with the right Bank and dependant on your own Asset position.
Richard Taylor | Australia's leading private lender
$300k
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