Structure for someone starting out

Long time lurker, first time poster. I am planning to buy my first investment property. I am currently renting (and plan to keep doing this as it is cheap and suits my lifestyle). I have no other property, no debts, no long term partner and no children. I live in Victoria, have about 150k to spend and am currently earning $95k approx.


My plan is to ideally purchase two properties this year (ideally in the $300-350k range) that would be positively geared. I’m wanting to get an idea of what people would suggest in terms of structure for someone like me at the entry level – I will meet with an accountant before going ahead with anything but wanted to get a better sense of what people here think (1) so I know the right questions to ask and (2) because as I have these questions, I imagine many others in a similar position do as well.

My plan is to build a property portfolio over time that will eventually generate passive income for me and potentially a family one day. I want to keep things as simple as possible (and obviously unnecessary legal/accounting costs down) but also don’t want to make decisions now that I will regret later (if possible). Here are my initial thoughts:

1. I have seen people write that if buying positively geared properties, it is a “no brainer” to buy them in a trust. This makes sense. I have seen some people complain about not doing this from the start. Do people have any strong thoughts on whether I should be the trustee or whether a corporate entity should be setup to do this? My understanding is that setting up a corporate trustee could be done at a later stage (I think it would not attract CGT but would require payment of stamp duty if the trustee changes?).

2. People have also written that over time another trust (Piggy Trust?) whereby the income from the investment properties (which are each in trusts of their own) would flow to. This income is then used to go towards the deposit of another property. I don’t understand the need for this – do people suggest this as it is a more effective tax strategy? Or is this to protect the income in case I was sued or ? Can someone explain how / why this works?

3. People also mention the use of a bucket company at a later stage – I understand the reasoning of this but pretty sure I am a long way from needing that at this stage.

4. As I am someone who is just starting out, is what I am writing above reasonable? Or am I overthinking it? I understand many lawyers and accountants will always want to sell fancy structures as it can give them an annual stream of fees but given my savings and the amount I’m earning (compared to a lot of other posters) maybe this is not a smart use of my $$?

Any thoughts / opinions welcome.


Thank you so much in advance.

 

Think more on this. Whats the expected capital gains on this, and would you do better with properties that have more capital gains v rental income? If you need to sacrifice some yield for more capital gains, would you? Why / why not?

Forget the structure for a moment and explore what your strategy is and why.

 

are you prepared for the extra land tax in a trust? I would disregard what people say or be very critical, but seek proper legal advice.

4. no, doesn't seem reasonable to me. Not overthinking it but probably listening to the wrong people.

I am a lawyer specialising in structuring and I rarely recommend trusts to hold property, especially for new comers.

 

Not my area at all but from a borrowing perspective which IS my area, trusts definitely complicate things.

Lender choice is limited, borrowing capacity is limited, and you can be forced into business banking instead of resi which is a pain in the butt.

You need to weigh up whether it's worth it for the asset protection side of things.

 

Also some people equate trusts with asset protection - which is not necessarily so.

 

Why do so many new investors believe that they must go down the path of having to invest via a trust?

Stable low risk job, stable relationship, low value assets - @Terry_w maybe a little guidance note on "Trust or not to trust"? What forms a reasonable risk to consider that a trust would be necessary?

 

The first rule is
a) not to use a trust to hold property unless someone - who is a lawyer - can convince you otherwise.

 

Because Trusts sound cool. All the rich people I read about have them so I want them too.

 

As another point, little benefit of having a trust now as all the income would go to you unless you have other beneficiaries you could flow income too. You could use a bucket company but for a simple person that’s just extra accounting and tax lodgement fees for very little benefit. If the property is negatively geared (it’s hard to find properties that are positively geared to begin with) then the losses are also trapped in the trust and you can’t offset it against your personal PAYG income.. lost tax savings there (or deferred).

 

Start with the basics - determine your borrowing capacity and your lender options and do you need to do anything to increase your borrowing capacity, pay off car loans, reduce credit card limits, etc.

Then you need to plan at what LVR you are going to do the purchases - i.e. 80%, 85%, 88%, 90%, etc. Each scenario has its pros and cons. LMI skews at those intervals.

Also how are you calculating the gearing of the property? Are you factoring in all of the upfront costs? Its not overly common that a property is positively geared when you factor in all the upfront and ongoing costs.

 

Just curious where you read it’s a no brainer to hold positively geared property in a trust?
I would argue it’s a no brainer NOT to.

Also when working out + geared, be sure to factor in ALL holding costs.

Purchasing for + geared properties I would say is a very specialized strategy in today’s environment. Not saying it’s not possible, but it’s much harder than it was. Speak to @skater for advice as she is a master in this area.

 

And structure doesn't just mean considering trusts or companies. it involves how and who should enter contracts, who should be the legal owner, even who should be the beneficial owner, or how to do things so you can argue this later to enable duty and tax free transfers.

Then you have the structuring of the funding - deposit and then loan for the rest.

 

Someone needs to #*@€ up first.

 

Well, when the asset protection fails, and you cant pull out of a contract.......

 

Have you heard of the saying "Keep it Simple, Stupid" or KISS?

I think you are overthinking this and over-complicating this. A Trust does offer more asset protection, but it does come at a cost. If you are trying to find cf+ properties, all your meagre 'passive income' from them will be taken up with compliance. Some states Land Tax begins with the first $ for Trusts. Losses will be trapped in a trust also. Think very carefully if this suits your situation before you head down the path of Trusts.

Not sure I'd call myself a master, but have had many over the years.

 

Thank you very much everyone for your responses - this really is an amazing community of people. It seems most people here think this is over complicating it and/or most likely will not be the smartest strategy for someone in my position to embark on at this point in time. I'll try and respond to you all.

 

Trainee - you are right in that exclusively hunting for positively geared properties might not be the best strategy as they are unlikely to have the same capital gains. I guess I was wanting to get a sense of whether the Trust approach is really a "no-brainer" as I had read elsewhere. I thought it would be a no-brainer for negatively geared properties but wasn't sure about positively geared ones.

 

Thanks Terry.

My (limited) understanding is that the extra land tax in a trust for properties around the $300k mark might be a few hundred dollars (but I might be wrong). I guess when you factor the amount in with extra accountant / lawyer fees it makes even less sense.

My thinking was that this would at least provide some protection and peace of mind in the (admittedly unlikely) case I was sued by a tenant or someone else and so properties held in my own name would be better protected. I can also see the potential benefits of holding property in a trust in the future and wondered whether the added costs is something I just have to wear now as transferring into a trust at a later stage is probably a waste of money?

I'd rather not have to worry about trusts at this stage but my concerns are what i've mentioned above (potential of losing everything if sued & whether I am shooting myself in the foot by not doing this from the start)?

Or are these things that make more sense to factor into my strategy once I've actually got something significant to lose?