All Topics / Legal & Accounting / Getting set up before investing in our first ip.

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  • Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Hi everyone.

    Firstly let me say I love reading the forum and hearing all your advise.

    My husband and I have our PPOR in Eltham, Victoria, owe $160,000 and is valued between $700,000 – $750,000. Now we are looking at starting a property portfolio and need advise on how to structure it. ie Company or Trust. Do we transfer the PPOR into my name before we start anything? Is there any good property lawyers or accountants nearby we can use to set all this up?

    Looking forward to reading your replies

    Warm regards

    Janine

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Janine

    Welcome to the forum.

    From an equity point of view, you’re in a great position.

    From a borrowing capacity perspective, it’s impossible to provide any advice without any data.

    In terms of structure, is their a particular reason you’re considering investing via a trust rather than under your own names?

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Hi Jamie

    Thanks for the reply. We are just looking for the best way to structure and set this up to protect our PPOR if anything happens. Some books talk about setting up companies with trusts and others just say trusts, its all very confusing and we are very new to it all.

    In regards to borrowing I haven’t looked into what we could borrow but my husbands wage is over 100k and I work part time earning around 28k. We own our cars and have a 10k credit card.

    Cheers

    Janine

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Hi Janine,

    Saw your post and thought I'd comment on it because we are essentially in the same position in wanting to learn more about structuring  as well – via trusts and/or a company – not in regrads to having a similar equity position unfortunately.

    Sorry I don't have any advice – as we are very new to investing and just making a start now as well – but I will watch this post with interest to see what advice other members provide.

    Cheers

    Jye Thomson

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Janine

    I understand. The correct structure from the start is always important. However, sometimes people set-up complex, expensive structures that aren’t always in their best interest.

    Generally speaking, you want to avoid cross collaterising your PPOR with your investments.

    To do this, you would set up a second loan against your PPOR which will act as the deposit/costs for your IPs.

    It’s a fine balance in determining how much to access right now because it will have an effect on your future borrowing capacity. This is due to lenders taking into account the entire debt (the equity that you’ve accessed) when looking at your borrowing capacity – even if you haven’t spent any of it.

    More importantly, you need to work with someone who understands your long term goals – a good broker with knowledge of investment structures will help you map out a plan.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Hi JT83 , I hope we both learn and achieve what we are aiming for. Im glad we are not the only beginners on here.

    Thanks Jamie for your advise. Is there a list of brokers on here near us that we could refer to? Do we need to put the PPOR is my name before we start anything? There certainly is alot to think about and lots to do before we invest.

    Cheers
    Janine

    Profile photo of ChrisA1ChrisA1
    Participant
    @chrisa1
    Join Date: 2011
    Post Count: 172

    Hi Janine

    Similar to you, I researched this forum and books, magazines etc etc etc about trusts before going to my accountant for advice (who owns IPs themselves and has other clients with IPs and trusts). We have a set up similar to what Jamie is referring to above (second mortgage against our PPOR for investment deposits etc). When I talked with the accountant, I was told that since we would be using money from the second mortgage which is attached to the PPOR, that regardless of whether we bought the IPs in a trust structure or under our own names, the PPOR would be exposed to any risks associated with owning IPs, making the complex and costly setup and management of a trust not worth it.

    It also depends on what type of properties (neg geared, pos geared, cash flow +ve or -ve) and how many you intend to own. My accountant advised that unless you are looking to go into a lot of debt as part of buying several -vely geared properties, again a trust structure may not be worth it.

    If you have an investment property savvy accountant, run the questions by them to ensure that you are not making things more complex than they need to be (and to be sure that you are all on the same wavelength!).

    My accountant's final advice was to ensure that we have our insurances up to date (income protection, landlords and PPOR house/contents, life etc etc) and go into the IP buying process with our eyes open (understanding what each IP means to our bottom line and not buying 10 over the next 6 months, getting ourselves in a mountain of debt then saying what do we do now when we can't keep up repayments??)

    ChrisA1

    Persistence is 'to keep on keeping on, no matter how hard the going may be'

    Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Thanks ChrisA1, looks like I need to find an accountant that knows what they are talking about and sit down with them to discuss all the options.

    Cheers

    Jnaine

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Hi Janine, Yes so do I. If I find any further info I will repost on this forum thread.

    Cheers,

    Jye Thomson.

    Profile photo of ChrisA1ChrisA1
    Participant
    @chrisa1
    Join Date: 2011
    Post Count: 172

    Certainly keep reading through the forum, as well as books, magazines etc so you can be prepared to actively discuss your accountant's thoughts (rather than just blindly taking advice that is given), but be prepared that your accountant may advise setting up a trust (in the early stages anyway).

    I am aware that many very active investors haven't set up trusts until they had many properties (over 10 I think), so there are other options for asset protection.

    If you do a search for 'trust' on this forum, you will find many pages of threads, all which talk about different angles of trusts

    ChrisA1

    Persistence is 'to keep on keeping on, no matter how hard the going may be'

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    janinewool wrote:
    Thanks Jamie for your advise. Is there a list of brokers on here near us that we could refer to? Do we need to put the PPOR is my name before we start anything? There certainly is alot to think about and lots to do before we invest.

    Cheers
    Janine

    Hi again

    There’s good brokers on this forum who’ll be able to help. If you’re comfortable with using email/phone, then it doesn’t matter where the broker is located. I’m overseas at the moment (returning tomorrow) and I’m right now working on a loan application for a forum client in Victoria who I’ll probably never meet face to face.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Wow Chris there are so many trusts and heaps of reading for me to do.

    Jamie I will contact you shortly and see what the best way is to structure our future IP’s.

    Cheers
    Janine

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    No worries Janine – I'll be back in the country mid week.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Hi Janine

    Definately contact Jamie and get is set up correctly.

    The ACT is only a good 3 wood away from Victoria (although not the way i am playing at the moment) but you can do everything over email / phone conversations.

    We own all of our properties in a series of DFT's but that is not for everyone and each clients circumstances are different.

    It is not a 1 glove fits all solution.

    Cheer

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    There is a lot <moderator: delete language> out there about asset protection etc.

    What you need to consider is what if xx happens and follow through.

    eg. What if you set up using a discretionary trust with a company as trustee.

    A tenant gets injured and sues the owner – the $2 company has no assets but the assets of the trust could be at risk. Generally the people behing the company are safe. Directors are more at risk, but shareholders of a company can only lose the value of their shares. But if a director of the company knew there was an electrical fault and didn't repair it or take any action then they could be personally at risk. So their personal assets will be available to creditors. If the house is owned jointly then this would be only their share – generally.

    So this is a good reason to use a company as trustee and to have one director.

    But if you were to set up that structure and then be unable to meet the repayments for whatever reason then the bank will call on the personal guarantee that they would have required at the loan application stage. So if you both give personal guarantees then your personal house would be at risk. If one gave a guarantee then that person's share.

    But the bank would sell the property first, probably, and then come after the guarantors for any shortfall. Hopefully this wouldn't be too much, but it can add up with the bank's legal fees.

    Now think 20 years ahead. You have set up the above structure an have $10mil in equity and you decide to open a business. You use a company for limited liability reasons which is great, but when you lease a shop the landlord wants a personal guarantee. Your business goes under and the rent for the next 5 years is still owed. You could lose your house over this. But generally assets held in the discretionary trust could be safe from creditors (there are many ways this culd be attacked though).. So allthough one of you may go bankrupt the assets could still be controlled in a trust and you could keep going.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of janinewooljaninewool
    Member
    @janinewool
    Join Date: 2012
    Post Count: 17

    Thanks Terry

    That’s a lot to think about.

    Cheers
    Janine

    Profile photo of ChrisA1ChrisA1
    Participant
    @chrisa1
    Join Date: 2011
    Post Count: 172
    Terryw wrote:

    eg. What if you set up using a discretionary trust with a company as trustee.

    A tenant gets injured and sues the owner – the $2 company has no assets but the assets of the trust could be at risk. Generally the people behing the company are safe. Directors are more at risk, but shareholders of a company can only lose the value of their shares. But if a director of the company knew there was an electrical fault and didn't repair it or take any action then they could be personally at risk. So their personal assets will be available to creditors. If the house is owned jointly then this would be only their share – generally.

    So this is a good reason to use a company as trustee and to have one director.

    Hi Terry

    Thanks for your valuable comments. From a cost/input vs. risk point of view, if an investor chose not to go down the company or trust path, are there options to protect from the situation you mention about a tenant falling over and suing the landlord – would Landlord insurance cover this? In what situations would the tenant sue the landlord for damages?

    You also talk about if both parties personally guarantee the repayments then regardless of whether the property is bought under a trust or company, the bank will seek assets under both names to recoup costs. This would then make buying properties under a trust or company structure a rather pointless exercise??

    ChrisA1

    Persistence is 'to keep on keeping on, no matter how hard the going may be'

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Hi Chris

    Yes, certainly get insurance. This should cover many things – but not all. Say a tenant reported some damage and the landlord knew about it but didn't rectify the fault. The insurance may not cover something like this.

    There is a nsw case where a tenant punched a class door and did some bad damage to his hand. From memory the tenant was awarded $800k because the landlord didn't use the proper glass that was required in the door. If you want I can list a few cases for you to read.

    As for the personal guarantees, these can be reduced by having just one person as the fall guy. and have no or little assets in that person's name. But this would still be strong asset protection if the assets were held in a discretionary trust because if that person where to go bankrupt then the trust assets would generally not be available to creditors.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of ChrisA1ChrisA1
    Participant
    @chrisa1
    Join Date: 2011
    Post Count: 172

    Hi Terry

    Coming through clearer now. I am interested in your comments about the personal guarantees and understand what you are saying about having one person as a fall guy. From this, I would have thought that if one person was the trustee with all the investments under the trust,and the other partner owned the personal assets (PPOR, cars etc) then the personal assets might be protected. My accountant countered that by saying that they could go back in history, see that your share of the PPOR had been transferred to the your partner (at some point in history) and still seek the PPOR if the assets in the trust didn't repay the debt.  

    Could you also please provide comment on my comment above that if the deposit for the investments under the trust came from a loan that was attached to your PPOR then the PPOR is at risk due to the trust becoming linked to the PPOR through the deposit money loan.

    In another thread, you wrote

    "As for asset protection it is not just as simple as setting up a trust it is but how it is set up and how you use it. I can think of around 10 ways that a trust could be attacked if done incorrectly."

    Which interested me, could you please expand on this more; as you can see I am looking at why my accountant is rather anti-trust but a lot of investors are pro-trust/company.

    ChrisA1

    Persistence is 'to keep on keeping on, no matter how hard the going may be'

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Your accountant is correct. Under the bankruptcy act (and conveyancing act nsw and even corportations act) there are provisions to allow transactions to be voided in certain instances. see s120 and 121 for example.

    If you were to transfer half of your house to your spouse now with the intention of asset protecton – that is to avoid it falling into the hands of creditors then the transaction could be voided indefinitely if you were to later go bankrupt. I say could because not all trustees would investigate. If you go bankrupt and have no money a creditor would have to pay a trustee to examine you and do all the checks and to start court proceedings etc. This is costly and most would think it throwing good money after bad.

    If you sold your half of the house to your wife at maket value then later went bankrupt then this is different. I think the clawback period is around 4.5 years in this case.

    But, there are other ways to attack an asset. Say your wife didn't work but owned your house with a mortgage. You lived there too and you even paid the mortgage and mowed the lawn. In this situation could be deemed that she actually owns the house for you or owns 50% for you. This is called a constructive trust. Even though a trust hasnot been formally established, a court to construe a trust out of the situation.

    If you lend money to the trust then the money is your money. So if the trust were to go down then you would be a creditor. But if you were to go down then the trust would still have to repay the money to you. The trustee in bankruptyc would come after the trsutee of the trust for this sum of money. They may be able to take court action if the trust doesn't pay up. But this is like you lending money to me. It is still your money and I must repay it whether you go bankrupt or whether i die – my estate must pay it

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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