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
Conclusion
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.
Thanks for the post.
I’m sad to learn your professional network is telling you something can’t be done when mine time and time again says it can be (and I continue to use and apply it).
I’m not sure how you reconcile that, and I’m over repeating myself over and over and over again on this issue.
If you can’t, you can’t. If you can, you can. Find a way or make a way.
Bye,
Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Toby,
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.
Regards,
I was hoping for a bit more of an insightful discussion from the man himself than “If you can’t, you can’t. If you can, you can.” Shame. Thanks anyway Steve.
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.
Cheers for the insight Benny.
Hey Toby,
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.
Good luck,
Charlie
Hi Charlie,
Thanks for that info. And Toby, why not follow the book’s invite and check this all out with Steve’s Finance guy? The book had a link that should still work. If you have any issues, come back on here.
Benny
PS I checked out the “Big Picture” topic and found a link that may hold a lot of useful info re Trusts – go here:-
Hope it helps !
Thanks for that link Benny. Lots of useful stuff that is a bit beyond my current comprehension level but I will do my best to break it down slowly and understand it all.
I tried calling through to the phone number in the book and it’s disconnected. The website has a form to fill out, so I did that. But not sure if they’d still be actively responding to forms.
really needing someone to guide me through this whole process and I’m more than happy to pay for a good professional. So far they’ve all told me it’s not possible but I’m not taking no for an answer!
Hi Toby,
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?
Benny
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.
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This reply was modified 10 months, 1 week ago by
Benny. Reason: Adding the new phone number
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.
I am a trust lawyer and mortgage broker of 24 years and you have misunderstood a few things here.
A trust cannot borrow as its not a legal entity, just a relationship. It is the trustee that borrows. If hte trustee is a company the loan will be taken out by the company with the director giving a personal guarantee. that means it is not a debt of the individuals, it is a debt of the company in its capacity as trustee and personally.If a 2nd company then borrows, in its own right or as trustee, the debts of the first company are not debts on the new company so they wouldn’t be taken into account. But the company can only borrow with the benefit of the personal guarantee which will mean that the loan guarantees for Company1 is taken into account, but there are several lenders out there that will disregard loans guaranteed, for the purposes of serviceability, if certain conditions are met.
CBA is one of these lenders too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
1 No land tax threshold
2 No option to borrow more than 80%
3 Initial and ongoing fees of managment
4 Extra tax returns and other headaches
5 No option to negatively gear, which is a huge deal breaker at current interest rates
1, Trust in NSW, but not true for most other states
2. Not true
3. Yes – a little ASIC fee plus tax returns
4 yes
5. trusts can negative gear like any taxpayer.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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