So in Steve’s book (0-130 properties, revised edition) starting at page 172 he talks about how once he reaches his borrowing capacity he then re-structures his family trust and then approaches another lendor.
I read in another post that this is no longer possible?
Would another bank loan money if say the original trustee (e.g Trustee Company Pty Ltd) was sacked as trustee and another company was created and made trustee which in turn the directors would then be the guarantor/s? Therefore creating a new trust structure?<i class=”rw-ui-like-icon”></i>0<i class=”rw-ui-dislike-icon”></i>0
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If the new company had the same directors the same problems would arise. You would also have trust assets owned by a non trustee which would cause other problems including possibly breach of existing mortgage agreements.TkpurserParticipant@tkpurserJoin Date: 2014Post Count: 5
Thanks for your reply Terryw. Do you have an idea/example then of what Steve is talking about? Do you have an idea/example of how restructuring a trust would then increase the borrowing capacity?
I don’t have an idea what Steven is talking about. But here is an example of how restructuring a trust could help in one instance.
Tom is director of Tommo Pty Ltd which is trustee of the Tombo Trust. Tommo Pty Ltd owns a property as trustee of the trust and the property is worth $500,000 at purchase with a loan of $400,000. After 5 years the property is now worth $1,000,000 and the Tom wants to cause the trust to purchase another property by accessing the equity and using this as a deposit.
But Tom had a dispute with a mobile phone company about large downloads and he refused to pay the bill. It went to court and Tom lost with the mobile company getting a judgment for $3000. Tom quickly paid the bill, but he now has a black mark on his credit file and he can no longer get finance at reasonable rates. This means the trust will no longer be able to get finance to access the equity or to buy a new property. Tom seeks legal advice and resigns as director of the Tommo Pty Ltd and his wife Mrs Tom becomes director. Mrs Tom is clean credit wise, and has good income so she can now provide personal guarantees for the existing loan, equity increase loan and new purchase loan. And the trust can now buy that new property.wobblysquareParticipant@wobblysquareJoin Date: 2010Post Count: 95
At some point the banks want you to repay the principal, and this comes into their serviceability calculation. So if you can find, extremely unlikely, or create (more probable) an asset (that the banks will lend against) that returns 10% net+ you should be able to drive your portfolio forward. What will slow you down will be drumming up the 20-30% deposit each time.
If you created an asset for 500k, that returned 10% net, and could borrow at 80%LVR at 5%. Your net (ignoring interest) income from the investment would be 50k pa, your interest repayments would be 20k. Leaving a taxable income from the investment of 30k pa. Lets say this was taxed down to 20k pa in hand. The banks would be happy as you could in theory use this excess 20k pa to pay down the principal in 20 years.
Even with this truly excellent asset it would take over 3 years to save the deposit to allow you to repeat the process. So as the original poster said. It is very hard to cash flow your way to financial freedom. Best bet is to develop a few properties first, sell, take the profits and repeat – until you have a decent whack in the bank (say $2M). THEN switch to positive cash flow assets.
Capital Growth should be viewed as a bonus. It sure is nice but it is far from guaranteed. I wouldn’t factor CG expectations into any buying decision.TkpurserParticipant@tkpurserJoin Date: 2014Post Count: 5
Thanks Terryw, that’s a useful example.
So would I be correct in thinking that this following scenario could work?:
Tom is the director of Tommo Pty Ltd which is the trustee of Tommo Trust.
Tommo Pty Ltd owns a property as trustee of the trust and the property is worth $200,000 at purchase with a loan of $160,000. The property has not changed in value and Tom cannot purchase another investment property because the banks believe he has maxed out his lending capacity.
Tom resigns as director of Tommo Pty Ltd and Tom’s wife signs up as the new director.
Tommo Pty Ltd can now borrow more money to purchase a new property because Tom’s wife is the guarantor and has no debt plus secure work as say a nurse and a 20% deposit on hand.
Is this scenario feasible?
Tom resigning as director would likely be a breach of the mortgage agreement for existing loans. All these loans would need to be redone with the new director as guarantor. Lender would also see trustee owning existing properties with loans.
In summary – no won’t extend borrowing capacity, unless perhaps the wife has a much higher income.