The issue of whether to buy my future property investments through a trust or in my personal name has been an ongoing debate for me for well over a month as I delve deep into the world of Australian Real Estate. After countless hours of reading the ATO website, listening to various experts in different forms of media, chatting with brokers and accountants and others of the like, I came to the conclusion that investing through trusts was not suitable for my situation. I even wrote up a pros/cons chart which I will attach here.
Now, Steve’s pro-trust reasonings are as follows:
Borrowing Capacity –
False. As you will read in my linked screenshot, investing through a trust does not seperate you from debt in your personal name or other trusts that you are associated with. This is straight from the mouth of CBA and multiple accountants and brokers that I have discussed this with. If anyone’s experience differs, please let me know as I’m very curious to get to the bottom of this as I’ve heard different truths from many different people. But all the professionals that I have spoken to so far have said that trusts DO NOT provide this advantage.
Tax Savings –
Even in Steve’s example of how a trust can help you save in tax on page 172 of “0-130 properties in 3.5 years”, the savings are extremely marginal at only $3,600. Which might seem decent until you consider accounting costs and other costs associated with opening and maintaining a trust. Plus the extra headache of complicating your finances, it doesn’t come out to be a huge advantage once you account for all the costs and disadvantages.
Asset Protection –
Now this one I cannot fault. It’s a great advantage if you’re someone in a role that is at high risk of being sued. But I, and many others are simply not in that position. All I’m saying is, you can’t just put a blanket statement over the structuring conversation by saying it’s a bad idea to invest in your own name. Which is basically what Steve has said in this book.
Reasons Against Trusts –
Once you add up all the downsides of holding your property in trusts, it really starts to tip the scales completely to the point where it’s not an attractive option.
No land tax threshold
No option to borrow more than 80%
Initial and ongoing fees of managment
Extra tax returns and other headaches
No option to negatively gear, which is a huge deal breaker at current interest rates
The idea of this forum post was really just to present some counter arguments to the things stated in the book and get some feelers for where other investor’s opinions lay on this subject. I’m really enjoying the book and absolutely am open to opposing opinions as I’m simply here to learn. Thanks for reading, keen to hear everyone’s thoughts.
If you haven’t already, do devour pages 173 to 175 which lay out a lot of extra information re borrowing capacity. One comment from Steve on p173 says this –
“A personal guarantee is given by the director(s) to use personal funds to repay the loan if it goes bad.” So Steve himself says such a guarantee is required. The guarantee though is not a loan per se – it is a promise to “put things right if needed”. If not needed, there is no comeback, is there?
Re the Tax Savings, it seems pretty good to me that, by apportioning Income from the Trust in such a way that the partner with the lowest marginal tax gets the biggest share, you win on Tax Paid, PLUS you have asset protection that doesn’t come with personal ownership. But yes, you pay for it through extra accounting and audit costs. Just like any Insurance really, isn’t it? They don’t come for free.
I’ve heard it said once or twice that “Some folks have a Trust that protects ‘not much’ and I guess that is a question we all must ask when starting out. Are we going to build a large portfolio, or are we going to settle for one investment property? If the former, then Trusts sound compelling. If the latter, then there are other ways to provide a modicum of protection without a Trust. Do you have a goal in mind yourself Toby?
Anyway, that is an interesting question, and you’ve obviously spent some time researching, so I hope some answers on here get to provide you with other views to help your understanding from their points of view.
Thanks Benny, yes I was very thorough in reading those pages specifically. It makes sense and it all seems fine and well until I go to my accountant/bank and they tell me that any trust that I’m associated with, whether I’m benificiary or trustee, it will show up on my credit score and affect my ability to borrow regardless. So it’s all very conflicting. Someone here is wrong and I can’t figure out who.
You make a good point that even if the tax savings balance out with the trust-related fees, it kind of works out to just be like an insurance policy in a way. I will take that on board.
Goals wise, as far as my deposits go, I believe that my income could allow me to save for realistically 10 investment properties by the time I’m 30 which is 8 years away, but I fear I will be capped out in terms of borrowing capacity by then. Hence why I’m so adement on being absolutely sure about what trusts will allow me to do.
I also had this issue surrounding borrowing capacity of trusts where I received conflicting views, with everyone saying it can’t be done.
I eventually got to the bottom of it, it can be done. You just need to find a broker that understands what they are doing. My broker even sent me screenshots of Bank Policy and emails from CBA and Macquarie Bank, which confirm that it is a legitimate strategy and can be done.
You’ll be pleased to know that I’ve talked with Steve’s finance man, Chris, and he will be contacting you to discuss your situation.
In short, I gathered from Chris that what you want to do IS possible, just like Steve has said in the book, but that there are “rules and/or limits or ways to go” that Chris will advise of. After that, I figure you’ll be in a much better place of understanding.
And for anyone else having concerns about “Will this work?” do take the time to contact Chris (or someone else like him) so that you can KNOW just how it does (and perhaps doesn’t) work. It might not work for all people in all situations, but it certainly does work for some. Is it for you?
PS And yes, I recall the phone number changed a few years ago – the new number is now 03 8592 0270. You’ll be able to make contact via that number. Just leave a message if it goes to voicemail.
This reply was modified 8 months, 1 week ago by Benny. Reason: Adding the new phone number