How do I borrow money when buying a property in a Trust?
Borrowing money to purchase investment properties in a trust is more complicated than a traditional home purchase, but obtaining finance for your trust purchase is still possible.
Finding a mortgage broker specialising in trust lending is the first step in making this process possible. They understand the unique requirements of purchasing property under a trust as they deal with these types of transactions on a regular basis and hold the required knowledge.
Purchasing under a trust is similar to buying a property in your personal name, with the addition of some documents, such as a trust deed or company constitution.
It is important to note a trust itself cannot obtain a loan. The loan must be taken out in the name of the trustee or trustees. Additionally, the lender may require the trustee to guarantee the loan personally.
It is important to consult with a financial advisor before applying for a loan in a trust. This will ensure that borrowing money in a trust setup aligns with your financial goals and objectives.
Setting up a family trust or discretionary trust to buy property
Purchasing property under a family trust or discretionary trust is not for everybody. Trusts cost more to set up and maintain, so you must ensure these expenses will be justified to reach your financial goals.
Some financial planners and accountants may not have the knowledge to set up structures for maximum financial gain.
Like a mortgage broker who specialises in this type of lending, you will also need a financial planner or accountant who specialises in these types of structures.
Can a trust borrow money to buy a property?
Yes, a trust can borrow money to buy a property. Over the years, I have spoken to many people who have dealt with brokers and lenders who have provided misleading information, such as having to provide two years’ trust financial statements or the income from the trust having to service the loan.
In certain circumstances, yes, these documents are required. Suppose you want to purchase a property in a trust and not provide a personal guarantee. In this case, these documents will be required. But, if you want to purchase a property in a trust for asset protection or to maximise your lending capacity, these documents are not required.
It is also important to consider the tax implications and additional setup and operating costs of borrowing money through a trust. A financial adviser can guide you on these matters, and I strongly suggest getting advice on whether this option is a good fit for your long-term goals. Ultimately, borrowing money through a trust can be a useful tool for achieving certain goals. Still, it should be done with careful consideration and expert advice.
How can I maximise my lending capacity by purchasing property through a property investment trust?
I work alongside a very well-respected property advisor in Australia named Steve McKnight. In his best-selling book “From 0-130 properties in 3.5 years“, he discusses the ability to maximise lending by purchasing properties under multiple trusts.
I speak with many people who have read the book through the Property Investing channel and then communicated with other lenders and mortgage brokers who have told them, “This cannot be done” or “This is no longer a strategy that works”. This is not the truth.
There are a couple of prerequisites for this strategy to work, and the main one is that this strategy DOES NOT work for negatively geared properties. This is because these trusts are treated like businesses, and if a company is profitable and can cover its own expenses, the associated income and liabilities can be removed from servicing.
How does a positively geared trust help my servicing?
Let’s say you have three companies set up, all profitable. You apply for a home loan to purchase an owner-occupied property and are requested to provide your income and liabilities for the application.
Out of the three companies, one is your main performer and provides enough profit to service the loan you are applying for. The other two companies operating have a $1M debt spread between them.
As long as you can provide a letter from your accountant confirming the income from these two companies can cover their expenses in full without any financial assistance, these are treated as positively geared, and lenders do not require any financial information regarding these two entities.
The process for purchasing property under trusts works the same way.
Let’s say you have three property trusts already set up, and these trusts own eight properties between them, and all expenses relating are covered by the rental income.
If you can get an accountant letter confirming this, all associated home loans are not required to be included in the new property application.
This means if you have $1M of home loans against these properties, they do not need to be included for servicing.
As long as you have the funds to complete any new purchases going forward, you can continue borrowing money and purchasing property without worrying about hitting your maximum borrowing capacity.
What documents will I need when buying property through a trust?
Depending on the trust set-up and whether other entities are involved, such as companies or other trusts, will decide what additional documents will be required.
For example, and to keep in line with the article, to purchase a property under a trust, the only other document required is a trust deed.
A trust deed is a document that breaks down the ownership and operation of the trust, who the trustees are, who the directors are and if there are any specified beneficiaries.
When your accountant sets up a trust, this document will be provided to you once everything has been finalised, and this will need to be provided to the lender as part of the application process.
Can I transfer ownership of my property into a trust?
If you have a property you are considering transferring into a trust, yes, this can be done. However, this transaction will be treated as per normal sale conditions and will incur full stamp duty.
Even if you are planning on selling your existing property to your trust at a heavily reduced amount, this can be done, however as there is no real estate agent involved, this will be treated as a ‘Non-Arms Length Transaction’, and full valuation will need to be completed to confirm the market value of the home and stamp duty will be payable on this figure.
I hope this provides you with some insight and answers a few of your questions. If you have any further questions you would like to discuss further, please contact Christopher Berry from Find A Better Rate Home Loans at 0477 212 840 and I will be more than happy to discuss any of your Property purchasing questions and provide you with some contacts including an accountant/financial planning group to assist with trust structures.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
Christopher Berry | Owner and Director of Find A Better Rate Home Loans
Christopher Berry is the owner of Find A Better Rate Home Loans which was establish in July 2015. Christopher has been a Mortgage Broker for the past 17 years and has arranged finance for all types of applicants from first home buyers to complex company and trust lending. Christopher has customers located all over Australia and can assist with all of your finance requirements. Christopher can be contacted on 0477 212 840 or email firstname.lastname@example.org
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