Transcription
Welcome back to the channel of truth, trust, and transparency. Today I'm recording a quick video about the utilization of purchasing property in a trust.
Now, before we begin, it's important to note that this is a video for educational purposes only and is not financial advice. Sure, I'll give you some things to think about, but take those and speak to people like your mortgage broker um to get that proper financial advice they can give you. I don't have an AFSL and I can't give you financial advice. So, I like to answer questions, give you things to think about, give you opportunities to explore, to go off and do your own research. A lot of the time people ask questions, they just want to hear my way of thinking so they can approach a problem differently and they can, you know, take that sort of level of thinking into, you know, questions and meetings that they have with their own property team.
So, today I wanted to talk about trusts. And the question came up on a video that I've done just recently about if you're stuck at three properties some ways to look to get out of that. So the couple of things I want to talk about today's one is like how trusts trusts work. Two uh a little bit around the structure and then three what most people don't tell you.
Now, I know there's going to be buyers agents watching this and hopefully ones that are on the come up and learning because a lot of the information out there is, how would I say this? A little cooked because people are giving the advice. They're one [snorts] or two properties in potentially buyers agents. They're not experiencing the space. They don't know what they're talking about and therefore it's quite dangerous them not having experience in giving the information to you guys as an audience or to to clients.
Technically how the trusts work just to again conversation to have with your mortgage broker, conversation to have have to your accountant, but essentially a you know who who and where who and when should you start to think about trusts? It's probably not going to be your first property. Why? Because to get into the trust or to buy a property in a trust, you're going to likely need a 20% deposit or for that purchase, the repayment and the cost of that entity to be covering itself. We all we all kind of know that, right? The issue is at the moment with a 10% or 12% deposit by the time we pay an interest rate that's at 5 or 6% by the time you know we calculate everything else it is not leaving us with and especially if we're buying in markets like Melbourne where the yields are sub 5%. It makes it very hard. So typically we need a 20% deposit.
Now, the reason why you wouldn't get into it first because if it's a 20% deposit on a property of say $500,000, just quick maths, you need either $50,000 for a the deposit size for 10% or you'd need 100k if you were going down the road of purchasing in a trust. Now, if you're if you're trying to if you're saving that money and you're saving $500 a week and you're saving $26,000 a year, that's going to take you an extra 2 years to save up to this amount. The issue is that the property then is not worth 500K. The property goes up to say, you know, it could be worth 600 or 650 and you're forever going to be chasing your tail. So, sometimes it's better to get into that first property. I would recommend with potentially a 12% deposit so we can decrease the amount of LMI that we pay rather than the 20% because we miss sort of that opportunity cost but then after you know two property purchase two or three whilst we still have borrowing capacity left had an argument with someone briefly on social media the other day obviously doesn't know what he's talking about has watched a couple of videos on it and said by purchasing property in a trust. You know, he was able to uh after his borrowing capacity run out through the major, he went and borrowed in trust with with second and third lenders. If you've got no borrowing capacity left, you've got no borrowing capacity left. That's the issue. You might be able to tweak a few things, get a little bit, but ideally you sort of reserve a good portion of that borrowing capacity for purchasing in a trust for purchasing in a trust. So, it might not be one, but it could be two.
And the reason why it could be property two or three, now it's depending on how much you earn. But once I get this first purchase out of the way, and then I'm saving up money for a deposit. And again, we'll use this example. I buy a $500,000 house, then I can save, call it 25 to $30,000 a year. Now, if I buy in a really good market in year one, this property can be worth $550k. Then in year two, if we get another 10% on top of that, it could be worth 605K. So already there, I have created 105K in equity. not usable but equity. And here if I'm saving 25 to 30 a year, then I'm saving 50 to $60,000 in that time. Now, we'll revisit this. You had a loan of $450. You have a loan of 450 cuz you put down a 10% deposit. We know that 80% 80% of this amount is minus $130,000 from that. So, off the top of my head, off the top of my head, that's about $484,000. I just said that my loans at 450. I've paid none off because I'm interest only. That means I have approximately in that time space I have 34K of usable equity. I've say 50 to 60K. Those two together is anywhere between sort of 80 to 100K 80 to 100K. So now I'm coming up to being close to purchasing then in a trust.
Now, what is typically going to happen here, and this is how it works for you guys that don't know at home, I'm going to then have a home loan of $450,000. Then I'm going to have an equity release of, let's call it, let's round this up and say, equity of 50K. 50K release. I then have those two mortgages attached or to pay back on one property now that is value at 605K that might be yielding at 5%. That I need to cover this loan and I need to cover this loan. I then will take that $50,000 and I'll use that for the costs to get into that next property. Now, let's just say I don't have enough now. But let's just say when I got to 120, this is what I did. I used 50 in cash. I then went out and bought a property for 400K. I put down a 20% deposit, which means I have a loan now of 320K. This is sort of inside the trust. 320k loan on a property worth 400k. Now, I need to make sure that the rent coming in can service this and pay for this property as a whole. I also still need to service the equity release that is outside of the loan. Now, that's sort of the structure and how it works.
What people don't tell you now what people don't tell you about trusts people say that it's obviously an infinite money glitch and that you can keep using it and keep using keep using them right so for example if my borrowing capacity was just say uh round numbers sake um I'm on 200 grand and I can borrow a million I can borrow $1 million and I've used $450,000 of that up on that first purchase um on this first purchase here, 500 grand, 450 mortgage, I then have 550k of borrowing. Now, if I' if I go to the bank, I've got 550k borrowing, I go out and I use that. What most people think is that because I've started a trust, I can come back and use that 550 and go again. I can come back and use that 550 and go again. No, you can't. I'll tell you why. Tell you what you missed. you miss this little thing here because if you go and your deposit is going to be equity, right, from that remember equity is still a loan. This is what everyone [ __ ] misses. It drives me crazy. Equity is still a loan. So to get into that property, let's just say you've used 50 to 100K equity loan. You've then shaved this down to 400K, right? you save that borrowing because you've used that as a loan. Then when you go do it again, then you've saved it again. So it's not an infinite money glitch. The only time where you can do and utilize this better is if you come up with that 20% deposit in cash. Think about that's the safest. I always say to people the quickest ways to use equity. But as you see from the last couple of videos, you get into 30 40 grand negative. Not a lot of people like that. But if you can, if you've got a highpaying job, if you've got a good business, if you can get your hands on large chunks of cash, then you can build the safest property portfolio out there. Why? Because then I can reuse that 550. I can come in and go, okay, the 20% deposit that I need here, I'm going to use in cash. That way I don't have to worry about this loan here and my cash shortfall. It means in the first property. Perfect. I don't even have to use that equity. I can come back and go cash cash. Because at the end of the day, if I use all equity, then I've got to sell. You've got not only the home loan, but then the equity. And once you put those two things on top of each other and then only the growth, you make a lot less than you think when you sell. So people don't tell you that it's not an infinite money glitch. If you're using equity to go again and again, your equity is still taking up your borrowing capacity. It's still shaving off parts of your borrowing capacity, even if it's 100 150 for those deposits. So quite quickly, you can still get tripped up if your income's not rising. So, the way I always say to people, yeah, you can scale relatively quickly if you're using equity, but just know you're going to be severely negatively geared. Think about what that's going to do to your lifestyle, cost of living, all those sorts of things. If you can be diligent and if you can somehow I'm a developer so I have solved that problem myself because I know 12 18 months I do a project that I can make 500 anywhere between sort of 500k up to 2 mil. I've solved that capital issue cuz I can come in and go okay 500 grand boom dump in massive deposit mill boom dump in massive deposit. You need to figure out the way to solve that. It's both income and and cash, too. Now, I can't give you guys advice. I don't know what you do for work, but if you can put that deposit every single time in cash, it means you go from 80% loan and 25% loan because remember, you're borrowing the the cost as well. Your repayments are on that. Whereas if you can come in and just make repayments on this 80% it's a lot less here that could be 550 here that could be 450k you know or it could be less that could be 400k or 350k depending on um yeah it could be yeah it could be 350k or something. It's a lot less if you can come in 80%. that little portion there that you've put down in cash is going to save you in the long run in terms of in terms of that cost of that property in terms of that negative gearing. So something to think about and something that people don't tell you about trusts. That's sort of the structure and how they work and how most people use them. I believe the best way that you can utilize them is if you can put that cash in and that's sort of the detail with how that work.
But for the person that that asked me that question is go into and start thinking about trust. And this is why I always bung on about this. The pro your property plan and your planning is key. This is why everyone every member of ours we always do a property plan because if you go out there and you go, "Oh Dave, I've bought bought four I've bought three properties and now I'm stuck." Well, you're stuck. I've used all my borrowing capacity. Then you have limited options. if you can't do sort of those other plays from my video of when you're stuck at three. But if you're smart, we go, we've planned this out. We know that we need to get to five, right? We know that we need to get to say we know we need to get to six. If we're smart, we go personal name, we go personal name, and then we go trust. We've preserved that borrowing. And then we go, okay, we can maybe we've got a bonus that comes in. Then we can go trust. Then we can go trust. And then we might for the last one, we could go equity in a trust structure, too. But that's why the planning is so crucial guys because we can forecast we forecast cash flow savings amount you need amount of negative gearing amount of equity that you have for everyone that does a plan with us for the next 30 years. So you know at each opportunity at each year where you're at. If you're just flying blind you fly into it you go three properties and you get stuck then you see what you've missed. you've missed that extra three where we could have if we actually planned that out we could have got you that extra three should we have a way to do it. That's what they don't tell you about trusts. Trust me, I'm a guy on the internet. Um that's the sort of structure and that's how to utilize them best. Click overview video. Let me know any thoughts or questions in the comments and um I'll see you.