Transcription
Here's how I used trusts and companies to build investment portfolios three to four times as large as I could if I was building it in my personal name.
If you haven't heard of this structure before, essentially, instead of buying properties inside of our personal name, being Jack Henderson, we buy properties inside of a trust or a company structure. In this very simple example, what I'm going to show you is how if you have a million dollars worth of borrowing capacity, you can actually buy two, three, four, $5 million worth of property as opposed to just $1 million like you could in your personal name.
If we have $1 million in borrowing capacity and we set up a trust or a company, which is what this circle represents, and we buy a property inside of that trust, we can recycle that serviceability multiple times. So, let's use an example that we go and buy an $850,000 investment property. We use $200,000 of our cash savings for the deposit and the costs on that property. So, on an $850,000 property, we put down a $170,000 deposit, which means we have $680,000 worth of debt inside of the trust and an $850,000 property.
And remember, we have a million dollars worth of borrowing capacity. Let's say 12 months on, two years on, however long it is, that property goes from being worth $850,000 to now being worth $1.1 million. Now, based on an 80% loan to value ratio, we can now borrow up to $880,000 of the $1.1 million, which means we have $200,000 of available equity, which is the difference between our debt beginning, which was $680,000, to the new debt we will have, which is $880,000.
So, we pull out $200 grand, which is essentially all the money we put in to begin with. We now have $880,000 worth of debt inside of the trust. Remember, we have serviceability of a million dollars inside of the entity, so we still have some coverage there. And then, with that $200,000 of equity, we then go set up a new trust and we use that $200,000 of equity as the deposit and the costs on another property, just like we did in this first instance here.
So, we then go buy another $850,000 property. We take on $680,000 worth of debt and we use the $200,000 worth of equity as a deposit and the costs. Two years on, that property then gets revalued at $1.1 million. We refinance up to $880,000, we pull out $200,000, and we go again. And we go again. And essentially, you can do that four, five, six times until you run out of lenders that will actually allow you to use this structure.
Now, a few caveats to it. The entities have to be paying for themselves, meaning the rental income has to be covering the debt that is inside of that entity. So, you have to work out what rental yields you need inside of the entity. The entity, if you have a million dollars worth of borrowing capacity, can really only have one property inside of it, or you can have two properties at $500,000 each, or three properties at $300,000 each. But my personal preference is to just use all of the borrowing inside of each entity to just buy one property because you're going to get the best quality asset.