Getting set up before investing in our first ip.

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

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??)

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

Cheers,

Jye Thomson.

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

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

Cheers

Jamie

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.

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??

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.