Forums / Getting Technical / Finance / Structuring and Financing for Positive Cashflow Portfolio

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  • David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    Hi,

    Just wondering if you could share your knowledge, insights and experience with regards to how to structure and obtain finance for a positive cashflow portfolio in today’s market.

    I recall Steve mentioning in the past that you could obtain finance for Discretionary Trust by going as Guarantor, and paying a 20% Deposit, and by structuring it this way you won’t be limited by your borrowing ability.

    Not sure if this is something that still applies in today’s market with banks tightening their lending criteria, but I’m interested in learning more…

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,173

    There is no real difference with structuring loans between negative and positive cash flow property. You should still borrow 104% and avoid cross collateralising securities.

    For the trusts this is a complex form of legal ownership which you should seek legal advice on.

    I am made a thread here on how trusts can improve borrowing capacity. See if you can find it from a few months ago.

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

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

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    https://www.propertyinvesting.com/topic/5031860-trust-strategies-to-increase-borrowing-capacity/

    Great information there Terryw, but I’m still trying to get my head around how this works…

    Let’s say you’d like to own 9 positive cashflow properties but the banks would only loan you money for 3 properties

    You could get around this by setting up 3 separate trusts each holding 3 properties?

    – TRUST X with COMPANY X as Trustee
    – TRUST Y with COMPANY Y as Trustee
    – TRUST Z with COMPANY Z as Trustee

    You are the Director of Company X, Y and Z and Guarantor as well?
    The loan is in the name of TRUST X, Y and Z
    With you loaning the 20-30% Deposit to each Trust for each property?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    If the lender asks you would need to disclose personal guarantees given so the lender would then assess you on the full debt of the 3 trusts. If they don’t ask about personal guarantees then you would be assessed on your personal debt and the debt for the borrower in quesiton.

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

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

    Profile photo of JaxonJaxon
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    @jaxona
    Join Date: 2014
    Post Count: 282

    David I dont want to overstep the question but what is the end goal in relation to this approach and how do you see it playing out?

    Profile photo of fxdaemonfxdaemon
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    @fxdaemon
    Join Date: 2013
    Post Count: 114

    If the lender asks you would need to disclose personal guarantees given so the lender would then assess you on the full debt of the 3 trusts. If they don’t ask about personal guarantees then you would be assessed on your personal debt and the debt for the borrower in quesiton.

    Hi Terry,
    Will I be right to assume if all 3 trusts (in OP’s example) take out lease doc loans, then there will not
    be personal guarantees required by lenders?

    Thanks,
    FXD

    • This reply was modified 1 year, 11 months ago by Profile photo of fxdaemon fxdaemon.
    Profile photo of TerrywTerryw
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    @terryw
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    I think there will always be personal guarantees with commercial lenders. Never seen the ability to avoid one.

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

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

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Hey David,

    You’ll find those days are over – lenders require any loans that you’re guaranteeing/structures you are a director of be loaded into the liabilities of applications so there isn’t a magic bullet in this regard.

    fxdaemon – you still need to provide personal guarantees for commercial lending, hence why its generally best to start with exhausting your traditional residential borrowing, then move into commercial property. Be careful not to exhaust it before releasing any available equity however, otherwise you might have no borrowing capacity to release the deposit funds, leaving you in a catch 22 situation.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    @terryw: Thanks for the clarification. I just didn’t understand how an entity could borrow money without proving any source of income.

    @jaxon: My goal is to make +$500 positive cashflow per week, and I’m thinking maybe this could be achieved by finding 10 properties yield $50 positive cash flow per week. Maybe renovate and increase the rent? I’m not really sure, but I’m open to suggestions on how this could be achieved.

    @corey Batt: Are there any lenders out there that don’t require you to disclose any loans you are Guaranteeing or is it mandatory by law now?

    Profile photo of JaxonJaxon
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    @jaxona
    Join Date: 2014
    Post Count: 282

    Ok David,

    Well I think that is very possible and realistic (not to say a bigger goal wouldnt be)

    The problem I think many people run into with similar goals to you, myself included, is lack of instant equity building, buying below market value isnt enough to then within 3 months revalue and have instant equity to reuse (generally) unless your value adding.

    so for e.g. lets say 7 years for your goal from today.

    you currently have one property (call it P1)
    p1 = 350k value, 170k debt Income 50k a year (save 20k a year)

    buy p2 for 230k spend 20k and three months later its valued at 300k

    So thats
    p1 350k
    p2 300k
    = 650k over 420k debt
    now you use that to purchase another property shortly after
    buying p3 for 250k spend 50k on fully redoing the whole house
    and now worth 410k and your other properties both went up 10k each
    thats
    p1 360k
    p2 310k
    p3 410k
    = 1070k over 720k and lets say thats within a year (yes you spend a bit of time building that original equity (years)
    but if you bought correctly that could already be around 70-150 per property in return so already over $300 per week in income of the property and all properties could be structured P and I so they are reducing the loan amount.

    Now this is a very rough example but I hope it shows a glimer of the breakdown.

    There are deals far better than the above out there as well.

    Just need to be able to source them and understand the risks.

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    In regards to fully answering your question

    how to get that goal!?

    -Positive geared properties
    -AIRBNB properties
    -Adding value (repaint reno etc)
    -Sub division
    -adding granny flat
    -Room letting
    – revaluation on property
    – buying under market value
    – Smart insurance structure so if it goes south you are more than covered to build above the current value
    -adding value, one of my favorite sayings is

    “Buy a problem, Sell the solution”

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    @terryw: Thanks for the clarification. I just didn’t understand how an entity could borrow money without proving any source of income.
    @jaxon: My goal is to make +$500 positive cashflow per week, and I’m thinking maybe this could be achieved by finding 10 properties yield $50 positive cash flow per week. Maybe renovate and increase the rent? I’m not really sure, but I’m open to suggestions on how this could be achieved.
    @corey Batt: Are there any lenders out there that don’t require you to disclose any loans you are Guaranteeing or is it mandatory by law now?

    Everyone asks it. Not only because this loophole (it really wasnt one, specific lenders had very specific policies permitting it under certain circumstances) has closed and there’s a standardisation of input of data through a third party channel for most institutions – it’s being asked and to not note it is mortgage fraud.

    Lenders are digging into credit hits on your file from 5 years ago now – they will certainly ask questions even if you don’t disclose them.

    In reality with the right structuring using the right lenders at the right time you can still achieve quite a reasonable size portfolio – I’ve written about this previously here: http://www.precisionfunding.com.au/diversified-lending-structure/

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    @jaxon: Thanks for the valuable input. I’m going to learn more about Vendor Financing Strategy, and see if I can use this to access properties for Renovation to build up equity more quickly.

    @corey Batt: Are you still able to increase your borrowing capacity by structuring your portfolio this way? P.S. I can’t access that link you provided “www.precisionfunding.com.au didn’t send any data.
    ERR_EMPTY_RESPONSE”

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    @david-thiu still works for me – maybe give it another try.

    And yes correct, you can still increase your borrowing capacity structuring in this way, it’s all just a case of using a little foresight and planning to make sure you can eek out as much as possible.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    Corey out of curiosity what your debt to ownership ratio then?> LVR against your properties

    David Thiu
    Participant
    @david-thiu
    Join Date: 2017
    Post Count: 75

    @corey Batt: Yup it works now, but I’m not sure how this relates to borrowing under a trust structure and going as guarantor. All this talks about is that you can increase your borrowing capacity by using different lenders. One of the graph is also confusing – says lender 1 $400,000 debt but the graph shows $800,000.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Corey out of curiosity what your debt to ownership ratio then?> LVR against your properties

    Floating around circa 70% at the moment – generally the leverage stays at this point as I debt recycle to leverage equity into property deposits/shares. So long as there is a reasonable enough ROI I’ll keep doing so.

    @corey Batt: Yup it works now, but I’m not sure how this relates to borrowing under a trust structure and going as guarantor. All this talks about is that you can increase your borrowing capacity by using different lenders. One of the graph is also confusing – says lender 1 $400,000 debt but the graph shows $800,000.

    It’s about achieving the desired outcome – borrowing more/as much as you can. The old trust ‘loophole’ is dead – but you can still squeeze the capacity more by using the right lender approach whilst growing the initial portfolio.

    re; the debt amount – as per the scenario you can see the borrower has a 400k existing PPOR mortgage + a 400k proposed IP loan = 800k.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

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