Transcription
Let's talk about trusts today and what they can do for you. This gets a bit complicated, but to give you an idea of, I suppose, what we're going through and why we want to look at this, affordability is probably, probably the most important thing, especially from my side. Anyone that, you know, you hear about those everyday people, they buy 10, 20 properties, and you talk to your broker or your banker, and they say, "No, you, you've got two, you can't afford another one." This is how they do it.
We can use a trust to essentially buy infinite properties within Reon, but you could use it to buy 20, 30, um, without too many dramas. On top of that, we've got things like land tax, uh, distributing profits, um, in a more tax-efficient way, um, and also asset protection. So, a few things to go through. I guess we'll start with, what is a trust? So, in a general sense, a trust is an agreement between the trustee, and we'll go through all the specific rules later, but the trustee, who's at the top, they control the trust. Um, they'll loan assets for the trust, and then there's the beneficiaries at the bottom. And the beneficiaries might be, uh, yourself, your spouse, and your two children, or whoever it is. And there's different types of trusts. There's quite a lot of different types, but we're going to go through discretionary, um, or family and unit trusts today, a little bit, because that's what's generally accepted for lending, and that's generally what should be used for property.
Firstly, um, let's talk about advantages again, to recap. We put a property in a trust, we exclude it from affordability. It means that you don't get capped at one or two properties, you can just buy 10, um, as long as they're all in the trusts, that's fine to do. Tax-efficient for distributing profits, um, that's super important, especially if you have children, or if you have one working spouse and one non-working spouse, um, you can save tens of thousands of dollars a year. Lower land tax, we'll talk about that later, but again, a tax saving. Asset protection. We are not going to come back to that later, so that's, that's not my area of expertise. My understanding is that a property within a trust will be generally protected from anything where you're personally sued. So, if you get in an accident and you don't have insurance, or you're self-employed, or something like that, I don't think there's any protection from, uh, family court or in some circumstances, um, but there's definitely a level of, uh, F of protection there overall. Usually cheaper on large portfolios. So, it does, there are setup costs or ongoing costs, and when you have one investment property, it is more expensive. There are still benefits, and but more expensive. But as you grow out to 5, 10 properties, this is just generally a lot cheaper, as long as you do it correctly.
Disadvantages of purchasing within a trust. So, here's, I guess, these are the costs. So, $2,000 per trust, that's how much you'll pay Sler account to set it up. Um, complexity. Hopefully, it's not that complex once we go through this video, um, but there is definitely a learning curve, and every transaction just has an extra step or two. Um, ongoing accountancy fees, you're going to have to pay $2,000 is per annum to get the trust financials done every year. At higher land tax for one, two properties, I just went through that. And then negative gearing effects are trapped in the trust. Don't stress about that one now, I got a whole slide on it later.
Let's talk about affordability first, and I want to explain why an investment property hurts your affordability. If we ignore trusts for a second, um, everyone comes to me and they say this, "I got this property, it makes me $4,000 a year. Why is my affordability lower?" And I guess we'll go through that now. So, in reality, so this left side, reality, I.E., what is your actual cash flow? You got your rental income of $800 a week, or $41,000 per year. You got your mortgage expense of $31,000 per year. Now, this is a $480,000 loan against your $600,000 property, and you're at 6.5% interest only. And you've got your rental expenses, which is $6,240. So, you've got a net profit per year of $4,160.
Now, affordability of the bank calculation. So, affordability when you talk about the bank calculators, so that's based on your income, your expenses, um, but a large number of other factors, and they're always more prudent, um, than reality, which means they end up decreasing your income as a hypothetical, um, increasing your expenses as a hypothetical, and making sure that worst-case scenario, um, what's going to happen. So, when we add this same property, that's positively geared, into the bank's calculator, what it will do for your affordability. We'll take your $800 per week rent, we'll only accept 80% of that, so we'll only accept $33,000 per year. The mortgage expense, this is a very big one. So, you take the same $480,000 loan. Now, this was at 6.5, they're going to buffer it to 9.5, work out the new payments, um, and we were also interest only. They're going to look at your 5-year interest-only period on a 30-year loan term, and they're going to say, "Once that 5-year period is over, you're going to be on a 25-year P&I term." So, they'll do 9.5% principal and interest over 25 years, and that makes your mortgage expenses per their calculations about $20,000 higher at $50 grand a year. Rental expenses are our benchmark, but $6,000 is reasonable. So, when we put it all into the calculator, whatever your affordability is before it, now per annum, the bank thinks you are earning $23,000 less in income. A difference of $27,000. And that's why, even if it's a positively geared property, um, it will still reduce your affordability, and pretty significantly. This isn't even an extreme example, this is pretty normal stuff, to be completely honest with you.
All right, now excluding a property from affordability calculations. So, this is super important for a trust, and this is sort of the, the basis of a lot of this stuff. So, on the left here, we have all the exact same stuff, don't need to go through that again. On the right, we're actually going to put into the calculator zero income and zero expenses for that trust. Now, we can do that because the trust is its own entity. You don't have that mortgage, um, generally you'll have a company have the mortgage on behalf of the trust, um, so we don't include the assets, we don't include the liabilities. Now, we can only do that, so firstly, certain lenders, um, that's really important. Most lenders will not accept this, but some of them do. And then we have to get your accountant, they have to look at how the, how the trust is trading, and they have to write you a letter that says the trust is trading profitably and able to meet its commitments. Um, that wording changes a bit bank to bank, but that's the general gist. And then we're going to do net profit loss of zero in the affordability. So, if it was in your individual name, we are always having that $23,000 loss in your affordability calculator. If we have it in a trust name, we can ignore all of it. And we have to ignore the whole trust or none of the trust. And but we have the option to do that because it's in a separate entity.
Now, here we have a little, uh, I guess you call it an investment tree, whatever you want to call it. Um, what people do where they get stuck, and and here's a really good example of how you can use trusts. So, yeah, these are real figures. So, you got $150 and $150 income for a couple. And I ran affordability, you could just go ahead and buy a $1.5 million owner-occupied property. For a lot of people, this is, this is a necessary first step, not necessarily the $1.5 million property, but, um, people that don't have large affordability, they want to buy a property to live in first up, and that's very fair. Um, but then you're stuck with zero affordability. You can't buy in a trust and you can't buy in your personal name. This is fine. You got to wait. Once your income goes up, or rates go down, or a combination of those things, your affordability might be sufficient again, um, but you can't do anything immediately.
Now, if we look instead at this, uh, owner-occupied branch in the middle, we buy $760,000. And we do that because we still have affordability in the bank. So, here are the actual figures. You could borrow $970,000 investment in your own name, or you could buy a $680,000 property in a trust. Um, those figures, those are your maximums roughly, um, and those figures are different by design. You always can borrow less than a trust, which I, I will explain that later. But if we look at, if we assume we buy $970,000 worth of investment properties, um, in our individual name, that may be one property, that may be three properties, it doesn't really matter. Once you've done that, you're down to $0 affordability. So, again, you are stuck. You can't then go and buy something in a trust after that. You can't ignore anything from the calculator. You have no more affordability until you earn more money, um, or pay some of the debt down.
Now, if we instead look at this other side over here, we have $680,000 affordability in trust. Now, if we purchase for that full amount within the trust, and that trust is trading profitably, whether that's now or in a couple of years, it's very hard to buy a positively geared property right now, um, with the current rates. But if you buy one now, when rates drop a couple of percent, it probably will be positively geared. Um, so when that's trading profitably, we get an accountant's letter, and we can exclude that from your future affordability. Now, by excluding this in full, that means your affordability has not actually changed. You could still go ahead and buy $970,000 in your personal name, or you could buy another $680,000 within a trust. And this can go indefinitely. So, you buy another positively geared one for $680, and your affordability won't change again, and you can buy 10 properties like that, no problem.
Middle one, I guess, I've just got this as an example of what people will often do. They'll often put one investment in their own name, which is perfectly fine. There are advantages doing that, and then you start buying in trust. If you max out in your personal name, which is this here, again, you go down to $0 affordability, and then you're stuck. Whereas if you only have one in your first in your personal name, you still have $420,000 of maximum affordability in a trust. So, you can buy this in a trust as long as it's positively geared, we can exclude that, and you can buy another $420,000 in another trust. The point is, everything in personal names reduces your affordability until it gets to zero. Everything in a trust, as long as it's positively geared, does not do that.
And here's an example of, uh, I guess what it can look like. So, you just have a single person on $120,000 income and no additional liabilities. They pay rent. Now, if they set this up correctly over the last few years, they could have bought 12 properties in 12 trusts. As long as they're all trading profitably, their affordability is still up to $480,000. Not many people know that someone on that income can buy 12 properties and still have the same affordability as someone that owns zero properties.
Quick warning here on what can actually go wrong. Um, so if we take this example where someone's bought their 12 properties, are around $120,000 income. Yes, we can do this because, uh, we're using different entities. But I wanted to quickly go through the risks of what can actually happen. So, obviously, owning 12 properties is a huge exposure as it is. Um, drops in prices, things like that can, can be very detrimental. Um, but let's have a look at how it can actually sort of get you a bit more stuck more easily. So, we got 12 properties, everything's trading awesomely, we're really happy, um, and we can keep buying. But that's only while these trusts trade profitably. So, if we go to the bank and we want to do any sort of home loan, whether it's refinance or a purchase, we can ignore all of these trusts by giving them that accountant's letter. However, what can happen is if down the track, these two here stop trading profitably. And that can be from a loss of rent. This is property one, property two, property three, four, and so on. You might put them all on interest only for five years. That's quite common. The reason people will do that is one, increase cash flow so that you can purchase more investments, um, pay down your principal place of residence, and also so that the trust is considered, uh, profitable or able to meet its commitment sooner, so that you can keep buying property. So, this would be quite common. However, if you do the math and everything is trading profitably on interest only, which is probably what you are doing to start with, then everything's happy. But what happens in five years if we haven't improved our position on these properties, we haven't increased our income or anything, um, and rent hasn't gone up enough? Maybe property one swaps over to, uh, principal and interest, and that then stops trading profitably. Now, if that's the only property where that's happened, you should be able to refinance it onto IO again, because swapping to IO again is a full application every time. Should be able to. However, let's say you don't, whether I don't know, you're out of work, you forget to do it, you don't want to do it, whatever it is, you don't do that. And then property two, this swaps over to principal and interest a few months later. All of a sudden, all of our applications, um, assuming P&I repayments make these non-profitable, which it may or may not, all of a sudden all of our applications include these two properties here, which means we can no longer refinance anything back onto interest only, which means this will take over to P&I a few months later, then this will, and so on and so forth. And you actually get very stuck where you can't refinance anything, you can't actually do anything. So, that's a big risk and something to consider.
Now, what you need to do is your own math and risk reward. Figure out what you actually want to be doing here. It depends on your situation. If this person was on, um, $500,000 per annum income, these all swap over to P&I, and they all start losing sort of $10,000 per month, uh, sorry, per year, which is quite a lot. You're down $120,000 per year. Now, on this income, you should be okay. You can ride that out, um, start paying down the properties and wait until rents go up. However, if you're on this $120,000 income, you can't afford to have $120,000 loss every year. And that's $120,000 without the negative gearing effect in your in your personal name, so it gets even worse. Just keep all that in mind.
The other things that can happen. We're talking about the bank policies now, how we can do things. Now, Royal Commission changed a lot of things. Um, something can happen in the future that changes a lot of things. So, you might set this up and you get to four properties, and the bank may say, "Well, now we have to include all of these properties in our calculations." We don't know what will change. So, just always keep in mind that we don't know what the future will hold.
How can you protect yourself from this? Um, this again is risk reward. Some people will want to buy 10 properties all at 90% LVR, I.E., 10% deposit, gear up as soon as they can. There's obviously risk doing that. Other people might want to be a lot more conservative. My personal preference, I, what I would do, um, if this was me, is I would offset both income and equity in each of the properties. Um, so if I was on $120,000 income and I was aiming for $1 properties, I would really try and make sure that we increase the equity quite significantly. So, maybe, maybe the first two are 80%, but then maybe when we come back to buy the next two properties in a couple of years, maybe we make sure we wait and sorry if you can hear my baby. Um, maybe if we wait until these are down and we can do these at 70%, and these ones are now down at 70%, and then maybe we keep the whole portfolio down at 70%. This means that when things start to take over, if anything stops being profitable, we always have plenty of equity to sell one or two down. That'll give us cash to make sure that we can service everything else for a while. And worst case, if everything goes terribly, we have enough equity where we can actually just sell down the whole portfolio. Um, so you can do whatever you want. You can keep them all 80, do what you need to do. Um, but if your income was a lot higher, you might instead say, "Hey, I got, I got $400,000 income. Let's just check if these all tick over to a 25 principal and interest term at 8% per annum. How much money am I going to lose on each of these?" And you might just want to make sure that you have enough income to cover them. And again, you can do a combination of these. Make sure that the LVR is comfortable, whether that's 60, 70, 80, whatever you're happy with, and make sure you have a bit of a buffer with income. You can always sell down one or two properties. Um, but yes, we can use this for affordability, um, reasons to increase that, but obviously that comes with a risk, and you need to make sure that you're prepared one to take that risk, but more so, um, to actually be comfortable that you will have a solution if, if property prices start dropping or whatever it might be.
And other things to consider. So, me personally, I will, or do, even first investment property into a trust. I quite like the other benefits, which we're going to go through shortly. So, um, being able to distribute at our discretion, I like that. I like the asset protection side of it. But you'll need to do your own math on the, on the land tax. Um, and you'll need to make sure that maybe a trust is suitable for you, even if it's not viable for affordability reasons, because of changes. And that would be your accountant to talk to. But there's definitely benefits to doing it this way anyway. Um, just keep all these things in mind.
So, why is affordability lower in a trust? You don't actually need to understand this bit. So, if you don't follow this, don't stress too much. Individual. When we put it into the, um, bank's calculator, again, it's going to give us minus $23,000. Um, but the calculator will actually apply negative gearing, I.E., a tax loss of $23,000 into that calculator. That reduces the tax commitment for a year. It says it increases net annual income. That's probably a bit disingenuous. It more so you lose less money. So, instead of doing $23,000 off your total income, you might lose $15,000 because you pay less tax. Um, and this does accurately reflect reality. That's what actually happens and how negative gearing works. Within a trust, if they do the same calculations as in, if we don't ignore the trust, and we can't, um, when we're purchasing within that trust, then we look at the $23,000 loss. They don't apply negative gearing whatsoever. Um, some of them do a little bit, but for the most part, they don't. Um, and in reality, there is a reason for this. So, the $23,000 loss, we don't get the negative gearing effects for that in our personal name immediately, or ever realistically. Um, what we do get instead is we can carry that loss forward. So, if we get $23,000 loss in year one, and then in five years, we get a, uh, $23,000 profit, then we'll actually get that $23,000 original contribution back tax-free, instead of as a taxable income. So, if you're going to be on a higher tax bracket later in life, which is pretty likely, and that can be a small benefit. But usually, I'd consider this, um, I guess a disadvantage because it would be better to get the negative gearing immediately if we could. Um, but unfortunately, we cannot.
Distributing profits. So, uh, discretionary/Family Trust. Now, a family trust is a type of discretionary trust, and they're very similar. I actually don't know much the difference other than the fact that a family trust is with family members. If we look on the left, what happens when you start turning a profit? We've got $50,000 profit per annum in the individual names. So, it's always distributed per title ownership. So, if we've got the wife on $200,000 and the husband on $50,000, let's shorten it. But we do some math, and we pay extra tax because we're getting 50% of the income each, and your net profit from the property is $31,000. If we instead have our profitable property in a discretionary trust, which means the trust has the discretion over where it or who it distributes the profit to, um, and that's from the beneficiaries, then we can decide, "Hey, wife's already on $200,000, let's not give her anything. Let's give the husband 25%." So, his income goes from $50 to $62.5. So, he pays an extra $4,500 tax. And let's give 75% of it to our adult child. Now, she's just, she's 18, she's just a uni, not working, earning $0. Increased a taxable income from $0 to $37,500. She only pays $3,700 tax on that. Um, so the net profit from the profit there, from the property there, is $41,000. And that's purely because we paid a lot less tax by distributing it to, um, the child mostly, and partially the husband, compared to when we distributed it to the wife over here, who's already on quite a high income. Um, and this actually says 200, but should say 150 by the looks of it.
The other thing that's important here, so add child. Now, the ATO cracked down on this. You can't just distribute to your child and then have them give you the money back. It has to be for their benefit. So, they do have to keep the money and spend it for their own benefit. Um, but if your plan, if you're planning now to give your child in 20 years, um, funds to purchase a property or whatever you want to do, instead of saving your post-tax money, you can instead, uh, distribute from your trust when they turn 18, and that will give them pre-tax dollars. It's much, much more efficient.
Withdrawing equity from trusts. Let's have a look at this. For the most part, I think most people should have one property per trust. But we're going to look at why that is, um, and when you can have more. So, in this example, we've got a person owns a $760,000 owner-occupied property. We can disregard that for now. And then within a trust, on top of that, they can borrow $680,000. That's just the figure, um, that we're going to use. If they have this $480,000 loan in trust one, let's assume property doubles in value, you can actually borrow another, uh, $200,000, and that brings us up to our $680,000. So, we can release quite a lot of equity within that trust. And when we do that, we go to the bank, and when we apply, we get an accountant's letter to say this trust is trading profitably, and we completely exclude that from the application. So, the bank just sees this picture, and we can get the full $200,000.
If, however, we wanted to do the same thing in this trust, and they put two properties in it, we'll still, we'll go to the bank, we'll ask them for money, we'll get them an accountant's letter to say this one's trading profitably, and we'll exclude it. But we're still going to expose the banks to all these properties. We can't pick and choose and, uh, exclude one of these properties and not the other. It is the whole trust or none of the trust. Now, because we already owe $640,000 in this, and our affordability is $680,000, we can only withdraw $40,000 equity, no matter what the price, the property values are. So, for that reason, unless your affordability is very comfortable, um, it is nicer to have one property in each trust. It makes the future applications a lot easier, and a lot easier to actually withdraw the equity. Um, and I guess I'll give you also the ideal situation. If you have, let's say, a million dollars equity, uh, affordability within trust, how we would actually apply for these as an ongoing thing. The best way to do it would be always ignore whatever trusts we're not using. So, in this case, we're going to say this one, expose the bank to anything in our personal name, so we always have to expose them to this. And then whichever one we're getting the equity out of. So, we're going to say we want $100,000 out of here, we got to expose them to this trust, and then we also have to expose them to our proposed purchase, which may be $400,000. So, if we have affordability to include all of these, that's a very nice and easy way to do it, because then every time we apply for a loan, we are asking for equity out of one trust and a pre-approval in the other, um, which means it all gets done in one application, and it's very neat and tidy.
If, instead, we don't leave ourselves with enough affordability, try and do the same thing, but I don't know, we don't earn much money or whatever it is, um, then instead, what we have to do is not propose this purchase yet. So, we don't do that yet. We ask the bank for $100,000 out for investments here. Um, we have to expose them to all of this. And then once that whole transaction is complete, so once that we've applied, we've been approved, we've settled it, once that's all finalized, then we go and we do a whole new application, and we ask our accountant, "Hey, we've just thrown $100,000 out. Are you happy that this is still profitable?" They say yes. We get rid of that same thing over here, and we expose our bank to the proposed purchase plus anything in our individual. Um, and then we've already got $100,000 sitting in the bank, which is our deposit. So, that can be done, but that means it's twice as many applications. It just slows the whole process down, and you've got a lot more paperwork. Um, but either way can work.
All right, let's talk about land tax next. Um, so land tax is each state, as far as I'm aware, all of them do it, have a land tax which is based on your, um, the value of the land you own in that state. Now, your principal place of residence is exempt from that, but any investments are not. Now, it's calculated, um, basically on two ways. So, it's per state in the sense that if I owned five properties in five different states, uh, the land tax wouldn't increase exponentially from that. They would all calculate and assume that I have a very low amount of land. The other thing is it's per entity. So, if I own one in Queensland, and I have 28 trusts with properties of their own in Queensland, each has one. Um, we can actually get away with zero land tax because no one entity is above the land tax threshold for Queensland. So, let's see how that works in practice. Everything on this page, there's three examples here. Everything on this page is within Queensland. So, if we just managed to purchase five properties in our own name in Queensland, land tax is $12,750. It goes up a lot. Land tax on the first one or two will be zero, but then it goes up significantly once you start to earn a lot more. If instead, we decided to put one property in one trust, we would pay zero land tax on that. But we put two properties in our next trust, the land tax on that one goes up to $5,700. It goes up massively once you go above the threshold, especially for trusts. So, I think, don't quote me on this, I think Queensland, the trust threshold is $350,000 or $300, it's somewhere in that realm. And for an individual, it's between 600 and 700. But you'll see here, the land tax on all three of these actually becomes very expensive, and it's about the same as in an individual name. Um, and then we also, because we put these in trusts, have to pay $2,000 per annum for each trust in accountancy fees, which means this becomes a very expensive way to do this. The cheapest way, if you were, we'll go into other states in a second, but if you're only buying in Queensland, the cheapest way to actually do this would be five different trusts. So, because they're all below the threshold, um, for this price range, you'd have to do the math on your own. Um, but we pay zero land tax for each of these because they're all done separately, and we pay $2,000 in accounting fees for each. So, we only paid $10,000 here, and we're paying that to the accountant and not the government, which, at least to me, is a nice thing.
So, here's an example of what things could look like, or how you can get a bit tricky using trusts but saving on accounting fees. So, firstly, this person, they, well, this couple, they quite quite high income, which you'd need to do this and start putting this many in your individual name and two in each trust. They put their principal place of residence in their own name, which makes perfect sense. They put one Queensland investment in their own name, they pay zero land tax, and they chose to put the most expensive one in there, which was clever. And then their Victoria, uh, investment, they put in their own name. The land tax is only $1,650. So, because putting two Queensland ones in their name there would be very expensive, Queensland and Victoria, not so bad. They then have three Queensland investment properties, and instead of putting any of those in the same trust, they have split them up. So, one here, one here, one here, and which means the land tax on each of those, so zero on two of them. This one's at $1,450 because it's a slightly more valuable property. And then they did the same thing with Victoria. Instead of putting those in the same entity, they have spread them out, one individual, one in each trust. Um, so with all the accounting fees, land tax, etc., it's only about $13,000 per annum, and that's for eight properties.
Acceptable trust structures. So, as I said, there is a lot of, um, different types of trust. But here's what you can actually use to get a home loan. These are the trusts you'd ideally want to use for property investing, um, if you're going to need a home loan, which presumably you will. Uh, discretionary or unit trust. I've talked about those, but the main difference, they both come with basically the same advantages. But the discretionary trust, which a family trust is a discretionary trust, and they have discretion over how they distribute their profits. A unit trust is different. Instead of having beneficiaries, they have unit holders. So, if I buy a property with my friend John, he might put in most of the money, so he puts in 75% of the funds, and he owns 75 units, and I own 25 units. Now, any profit that comes out of that trust will always, always be paid 75% to John, 25% sent to me. There is no discretion, it's just per the units. That's the main difference. And but it is a really good option if you're buying with a friend where you know, you know how the profit should be distributed, you don't need to mix that around. Um, trustees, individual or corporate trustee. I personally will always go for a corporate trustee. So, some banks, if you are the individual trustee, which means you as a person, so me, Zach, I act as the trustee for my trust, that means that I get the mortgage and the property in my name as trustee for the trust, but I have to own the assets and liabilities on behalf of the trust, which means most banks, not all banks, but most banks, then don't exclude that from affordability using those, um, those letters. So, it's definitely losing some of the benefit there. Um, where it's a corporate trustee, I, we set up a company, and we control the company, and we have the company as the trustee for the trust. The company will then own the property and the mortgage on behalf of the trust, which means we do not, in our personal name, and we can then start to exclude it a lot easier. Um, it does also add an extra layer for asset protection, um, and whatnot, but that's what I will do for all my trusts. Corporate trustee for corporate trustees. So, in this case, you set up a company and a trust. Um, you don't actually have any income, so you can't afford a mortgage. You add the individual as is servicing guarantor, which means the individual is responsible for paying that mortgage. That's not optional, that's just what it is. So, you will end up being a guarantor. And here's what I was saying, individual trustees. The individual must be the borrower in their own capacity and as trustee for the trust. So, that's what we want to avoid. The trust should be a non-trading entity. So, you set it up for property investment. It can't be your business, and you want to purchase purchase a property in that. As well, you want to set up its own entity. It shouldn't have an ABN, should own less than five properties, nothing crazy about that, and have only natural persons as a beneficiary. So, the beneficiaries, and we have, I think it's the next slide, goes through this a bit more. The beneficiaries of the trust, um, they all need to be real people. So, myself, my wife, my child, that's all fine. You can't have, if you know what a bucket company is, you can't have one of those, just people.
Now, here is an example of setting up a trust. Let's say Bob and Jen want to set up a trust. Let's start down here at the trust level, this little box here. This represents our trust. Now, this is a family trust, which we'll use to distribute it at our discretion to our family members, who are our beneficiaries. We've got husband, wife, daughter. They are our beneficiaries, and those are the ones that benefit from this trust. Then we have up the top, we have a corporate trustee. So, we set up a company, and we'll call this company Benani Proprietary Limited, which is the trustee for Benani Trust. It's a proprietary limited company. And to make sure that Bob and Jen always have control over this company, and therefore the assets, um, they will both be the shareholders and the directors. Um, so they will both have equal, um, ownership over this company, and the company will then own the assets for the trust and make day-to-day decisions about how the trust should operate.
Now, a few other things to go through here. So, appointers. You will need to set appointers on the trust. The appointer would usually be Bob and Jen. And the appointers are the people that appoint whoever is the trustee, which means they can change the trustee. So, they realistically have, um, I guess probably the ultimate power because they can always change the trustee at a later date.
Let's talk about the contract of sale. So, contract of sale. If you then, once you've got all this set up, you can't go and purchase property and put Bob and Jen on as the purchaser. You need to put on Benani Proprietary Limited as trustee for Benani Trust. That exact wording is what you would want on the contract of sale. There is another option. You can actually, if you don't have the trust set up yet, you can actually write as the purchaser, uh, Bob or nominee. Don't quote me on this wording, talk to your solicitor about this. I'll convince, um, but that's when you don't have it set up. You can, um, then do a nomination form later and nominate that this trust purchases on behalf of Bob. But again, talk to your solicitor about that bit, please. Um, and who actually sets up all of this? So, use this, this may not be best for you. Use this as a starting point. If you don't know what to do, send a picture of this to your accountant or solicitor. If you don't have an accountant, you definitely need one, um, before you start purchasing in trust. So, have a meeting to do that, show them this picture and say, "Hey, this is probably a good starting point. Can you recommend a different trust structure that might be suitable, or are there any other considerations or anything else you'd recommend?" Definitely, definitely, you'll need to talk to an accountant.
Here we go, the home loan process when buying in a trust. Step one, talk to a broker. Um, obviously, we do this, so feel free to talk to us. Um, if you aren't already, um, but any broker comfortable with this sort of stuff will be fine. It is definitely a bit of a niche, not everybody does it, but you should be able to figure out pretty quickly if they have done it before. Um, talk to your accountant. As I said, some people don't have an accountant, so you do need to find one. You want to have a meeting, you want to talk about what you're trying to achieve, talk about the pros and cons of different trust setups, and then figure out a plan from that. And then go through the fees, the timeline for actually getting that, um, trust set up. Once you've, uh, here we go, set up the trust, so your accountant can walk through that, but the general gist of it is, um, they'll ask you a few questions, they'll do up all the paperwork, it's about 800 pages or something, and then you sign it. And then only then we can get a pre-approval if you need it. So, not all borrowers need a pre-approval, a lot of them do want it, but we can't get a pre-approval until you have the trust. That's really important. And with the pre-approval, they usually free. However, some banks in trusts will charge, and this is whether it's pre-approval or a formal approval, um, they will charge a trust vetting fee, which is about $300. So, just keep that in mind. And then from there, we just proceed as normal. So, there's no huge changes to the whole process, but there are a few key things. So, um, extra paperwork everywhere. Just every stage will have some extra paperwork. Digital documents are generally not accepted at all. So, everything gets printed, signed, mailed. Before settlement, you'll need to see a solicitor who will sign a legal certificate for you. They'll go through all the documents because you'll be a guarantor. Other things you'll need when you set up the trust, you need a certified copy of your trust deed. That's a really important document. So, you'll get a hard copy, keep that somewhere safe. If you lose that, it's a nightmare down the track. So, please do keep that. Otherwise, interest rates, loan products, you're limited by banks, but there's still some very competitive banks that do this. But for the most part, everything else is the same.
This is, I guess, there's so much to consider. So, if you think you want to do this, yes, do all the stages, yes, talk to a broker. But you don't have to get tricky with trying to balance it between your affordability and the land tax and all that. That is to save a small amount of money. This is, and I can't recommend anything because I don't know your situation. But this is probably the standard setup that you've got on screen. It is also what I do do for my own. Um, you put one property per trust. It just gives us the most flexibility with affordability. No matter what happens at any point, we always have flexibility. Um, we put our loans, I like 80%. You get better rates, you don't pay mortgage insurance. Um, some people will push that to 90% so that they can buy more properties sooner. You can do whatever you want depending on how much risk you're willing to take on. And and then you can do P&I or interest only. I personally like interest only. Um, the biggest reason I like that is because we need to show our accountant that this trust can meet its commitments as soon as possible, and keeping the repayments lower will do that. Um, so if you don't want to go through all the land tax and the affordability and you're not sure what to do, this is a really safe bet that's always going to work, um, for the vast majority of people. Just one property in each trust. And I think I put $400,000 here because generally you can get closer to positively geared if you go for that sort of price range, $4 to $500,000. But do what, do what you want to do.
I just wanted to quickly show your website. I will put up there are a couple of other really important things you do need to know, but I haven't done the videos. I will stick them around here somewhere. Um, this is the web page where, uh, this video will be, um, but just keep an eye here for the videos. But otherwise, everything I've just gone through, um, and probably more, is here with written examples, so you can go through this, um, at your own pace whenever you want to. Cool. If you've got any questions, please email me. I will put a frequently asked questions down the bottom here, so if you send through what, what you need to know, I'll make sure I update the website so you can always see what other people have asked, and hopefully we can have something pretty comprehensive. Thanks.