Daniel Walsh is a buyer’s agent and founder of Your Property Your Wealth that assists clients in buying an investment property in growth areas. The goal of his company is to help clients improve their property portfolios and provide investment strategies that are adaptable depending on each client’s situation.
Join us in this special episode of Investment Strategy With Daniel Walsh as we delve into how to start building your property portfolio and some strategies you can use to make it more successful, why buying property interstate is becoming more popular, what you should avoid when trying to grow your portfolio and much more on this episode of Property Investory!
– Daniel Walsh
Continuing on from the last Q&A, we received more questions. So I invited property expert Daniel Walsh back on this episode to answer your questions. Let’s jump straight in…
We have a question from Drew. My wife and I have had a running debate for a while and we’d like you to be the referee. We are in our mid-forties with young teenagers and still have around about $200,000 left in our home loan to pay. Is it better for us to use the money we have leftover at the end of each month paying down a home loan or should we park it in our mortgage offset account? Now our portfolio is generally about $20,000 a year currently and we want to buy another investment property so we can have at least $100,000 income from our property portfolio by the time we retire. What are your thoughts?
Typically what I would say is, I’m a fan of putting money in an offset account until I’ve worked out where I’m going to be using the money. Now the reason being is I know that in an offset account it’s my money and I could do what I will with that. So instead of putting it into the home loan and if I do put it into a home loan, I would want to know why. So generally if I’m putting money into my home loan, I would be doing that because I want to recycle that debt and change that back into the deductible debt. They’ve done quite well in terms of they’ve got a portfolio, it’s creating $20,000 income, but they want to create a hundred so they’re going to need to build their property portfolio and continue building a property portfolio.
Obviously they’re in their mid-forties so they’ve got time, they’ve got roughly 20 years. The very first focus would be are they going to stay in their own home that they live in? And if they are, we’re going to continue to pay down that non-deductible debt. So that’s what I’d be doing, let’s keep getting rid of that debt. I’d be putting it into an offset account until I’ve worked out what we’re doing with it. The only way that I would put it into the home loan is if I was going to refinance it back out. The reason being is, let’s say we put $100,000 into the offset account. If I was to then use the offset $100,000 to go buy an investment property with that $100,000 is [inaudible] cash, it’s not a loan. So what we’ve done is we’ve increased the home loan, which is non-deductible debt and we’ve now put that $100,000 into the investment property.
So to get it the right way around, what we need to do is then put that money from the offset into the home loan. Then we need to refinance it back out. So it’s all deductible debt and then we go buy the investment property. So I think the most important thing, and it comes down to your cash buffer, I always like to think of an offset as a cash buffer. It’s an emergency fund. So the larger the emergency fund, the less risk you’re taking on at that point. So I would say put it into an offset account until you know what you’re going to do with that money.
Walsh tells us more about recycling a debt and refinancing it and how doing that can help you.
What you’re doing is you’re looking at what you’re trying to do with that money and what’s the intentions for tax purposes. So if you’re paying down your own home, your own home is classified as non-deductible debt, meaning you can’t claim any deductions on it because it’s not income producing. It’s not giving you any income at all. So it’s not an investment property. So whenever you’re paying down debt, the very first thing you’ve got to do is look at it and say, what’s the best debt to pay down? Non-deductible debts the best to pay down. If you want to change debt into deductible debt, now let’s say that you have a house and it’s got debt on it of $300,000 but it’s worth $600,000. That equity in between, you can use up to 80% of that.
What you could do with that debt is you can go back and get the equity out of that. Let’s say you can get $200,000, you get the equity, you now use that equity for investment properties. So you’ve now changed the purpose of the debt and it’s now the way you’ve got to think about it is I borrowed $100,000 from my own home. I now use the $100,000 for an investment property. That investment property basically inherits that $100,000 debt, not your own home, because it’s all deductible debt at that point. Because you used it for an investment purpose, which is income-producing assets.
He talks to us about his reasoning behind paying off non-deductible debts first.
Mainly because most people pay taxes. You go to work, you’ve got to pay your tax each year. So if you get a tax bill of $10,000 or $20,000 per year, what we’re doing at that point is, let’s say that I’m going to put it into my own home. The money into your own home is non-deductible debt, meaning that you can’t offset any of your income tax from your own home. So you’ve got to get rid of that first because it’s not really doing anything for you. But you don’t want to be paying down the debt on deductible debt, meaning investment debt when you’ve got non-deductible debt. Because if you’re paying down the debt on investments, then what’s happening is you’re actually paying down your own tax bill, meaning you’re not going to get as much back from your tax because you’re paying down the debt, which is the interest portion. So let’s say you get charged $10,000 a year of interest on the investment property, but if you pay it off, you’re getting charged nothing. If you get charged nothing, you’ve got nothing to claim right on the interest portion. But if you still have the full debt on the investment property, you get to claim that interest. You get to claim that as a deduction on your tax. So you’re going to get some of that back depending on how your tax structure is.
We learn about mortgage offset accounts and whether there are any specifics we should know about when setting one up.
Generally, there’s no cost involved in terms of setting one up. Most people will let you set them up. So it’s almost like the same way as a line of credit. It’s almost like a line of credit, but the line of credits is getting harder and harder to come by and they cost more money to set up in terms of fees. So when you access your offset account, basically what you’re doing, let’s say you have a $400,000 mortgage and you have $50,000 in the offset account, you’re only going to be paying interest on $350,000, not the full 400,000 because you got $50,000 in the offset account. Now with that $50,000 if you go out there and buy a boat with it, now you’ve taken the money out of the offset account, that that portion is going to go back up. So it’s if it’s the whole $50,000, now you’re paying interest on your home loan on the $400,000 again at the interest rate that you’re getting charged. So that’s the difference between how you use the money and what the tax purpose is. So if you are using the money or taking the money out, you aren’t going to be saving that in interest in your own home. Interest is charged daily, so whatever’s in the account is what you get charged upon that.
Basically what would be important to note is that if you’re going to take money out of your offset account, anytime that money goes out, it will be charged interest. So whether you go and buy a boat as you say or buy a car, you’ll be charged interest on that amount. Smart strategy, in my opinion, in most cases is to take those funds out and reinvest it into the property. Which would help you pay that interest as well?
It’s definitely not the smartest move to go out there and buy a new car or go out there and buy a boat or anything like that because you’re going to be paying interest somewhere. Whether you go get a car loan or a personal loan, it’s just about what’s the best loan to have at that point. Generally it’s coming off your mortgage if you’re going to do it from your mortgage, I would always say do it off your mortgage at that point rather than going to get a 6 or a 10%, I’ve seen people literally come to me and have $200,000 worth of equity in their home and they’ve got a $10,000 credit card, but they’re paying 15 or 20% interest. I’m like, why would you pay 15 to 20% interest on a credit card when you can refinance that into your home and pay 3 or 4%? It all comes down to what’s the best scenario for you.
There is a smarter way to save money if you want to have a credit card as Walsh explains to us.
A lot of people, what they do is they’ll actually go put everything on a credit card because it’s almost like they know where the bill is and they don’t want it on their own home because they’re like, well, I’ve been paying off my own house for so many years, I don’t want to put it on my home loan, but you’re saving 10% so why wouldn’t you put it on your home loan? Because at the end of the day, money’s money. It doesn’t matter where it’s coming from, it’s where is it going to be best saved. So the credit card, yes, it’s on the credit card and it’s in a different place, but you’re still going to be paying more over that period of time to pay it down. If you put it into your own home, you’re going to be paying 10% less.
Walsh shares with us a story about how he was able to save money because of how he chose to structure the payment.
I’ll give an actual scenario. So I just recently bought a car and instead of me paying, what I did was I looked at the car and was like, okay, I’m going to put this on full finance. Now I had the cash to do it. Now the reason why I didn’t go buy it with cash is that my cash is my buffer. That’s my emergency fund. But as long as I had the amount of cash that it was to cost for the actual car, what I did was go get a loan. The loan was I think 4% yet I save about 4.5-5% on interest if I put it in an offset account. So what I did was, instead of me actually paying cash for it and owning it cash, I put my cash in an offset account, saving me 5% and I go get a loan at 4% so I’ve just made myself 1% at that point instead of blowing it with cash. So it’s actually beneficial to do it that way. And I’ve still got the money to buy it cash and I wanted to, it’s just a smarter way of doing it.
Let’s move on to the next question. We’ve got an interesting one from Mike. He says, my wife and I are both 32 and have two young children. I make about $200,000 per year after tax and we have about $200,000 in the bank with about $40,000 in the share market. We have been saving for a 20% deposit for a house, hence the large sum of cash, but we have now moved to the USA for a three year period. Now we’ve never bought a house in Australia is it seems too overvalued. We bought a house in the USA, but I’m really worried we’ll never be able to afford a house in Australia if prices keep going up at 4 to 6% a year. We want to buy, say a million-dollar house, it might seem a little bit of a middle-class problem, but this is really stressing me out to be at the point I’m losing sleep over it. I really want to make sure I don’t mess things up for my wife and children and that I can create a comfortable life for them. Question is what should we do to make sure we can afford a house when we come back to Australia?
I guess the first thing they need to look at is can they borrow while they’re over there and buy a house here so that they’re not wasting three years while they’re over there. And if house prices grow where they want to be, then they may be continually struggling to buy into that market. So one of the things is obviously they were waiting to be able to buy a house when they should have just bought a house. I always say to someone, look, if you’re going to buy your own home, you can stay in it for 10, 15, 20 years. And that’s the long term thing that you’re going to do. Buy a house when you can, you’re not timing bottoms, you’re not timing where the market is at that point generally because nobody knows for sure. And if you look at it from a period of say, I’m going to buy this now and I’m going to live in it for 15 years, you’ve got to look at that and say, do I think this property will be worth more in 15 years time, if it’s going to be worth more in 15 years time, you buy the asset.
You don’t wait to time the bottom, a lot of people I’ve seen over the years have waited to time the bottom for 20 years. They’ve waited for the recession or they’ve waited for the downturn. And that’s one of the key things, you’ve got the money, then you buy them when you can, as long as you’re comfortable with buying it. One of the things is obviously he’s going to be over there for three years. He’s saving money, obviously saving very well. He’s got $200,000 in cash. I mean, he may look to build a property portfolio and do it that way. Or if he just wants to own his own home, I would say try and do it even while you’re over there and then rent it out here. If he can do that while he’s here. Again though he’s got to look at the tax purposes and all of that from an accounting perspective. It’s just that, the risks that he will run is, three years from now, they’ll be more expensive.
That’s what I thought as well too, because even if he buys that home that he really wants to live in down the track and he doesn’t necessarily have to live in it right now. Three years down the track when he comes back it could be something that could be a DIY. So most people who actually buy a home usually want to do something to it to make it even more comfortable for them. But if they get it, at this point in time that they can afford, they rent it out for that period of time to be able to firstly cover parts of the interest. Because with a $1 million home you won’t be able to have rent that will cover that. But at least they’re getting in the market. That’s the first thing.
But second thing is, if it’s something that they bought a little bit that could potentially add value to it and they could maybe add additional rooms or whatever they want to do to it for their family home, then there’s the opportunity for capital growth because if you hold it for long enough, as we’ve talked about, the cycle goes from 7-10 years. It will eventually double in price. So when you think about it, for $1 million homes in 10 years time, it’ll be worth $2 million and makes sense to jump in as soon as you can afford it.
I’ve seen people that have waited 3-4 years and especially like what the Sydney market did, 3-4 years on a million-dollar high and five years ago was now basically $800,000 with a capital gain. Now that may not happen over the next 5 years, but even if it goes up an extra $100,000 or $200,000, it was probably a lot better to jump in now if it’s going to be your long term home when you come back. What I would say is if you can borrow while you’re over in the USA to buy a home, what I would probably do is obviously engage where you’re looking to buy and it’s going to be a family home, engage a good buyer’s agent around the area so that they can get what you want and be able to get you a really good price for that as well.
That way you don’t have the stress of picking out the houses and all of that because you’re overseas. And you can then have peace of mind that you’ve got the home because obviously, that’s keeping him up at night that he can’t buy the home that he wants to buy and he’s going to really go through the next three years thinking, ‘I hope that house prices don’t keep going back up.’ We’re seeing the bounce back right now. Obviously, the time of recording this, we’re seeing the bounce back now of Sydney that would put more stress on somebody wanting to jump into the market. So I think it’s just better off to look at it and say, can I afford it? Is it something that I want to live in the long term and is it the property that I want? And if it is, and you’re going to come back in three years time, rent it out in between and then come back and then do it up if you need to do that.
This one’s from Damien. Me and my wife made a mistake late in life. We bought a house and sold it back in 2000 so we’re not first-time buyers. We’re 50 looking to get into the property train and have a good income for about $180,000 per year. We have about $4,500 per month in disposable income that we can put into property. Given everything I’ve learned and heard from you, how could a couple, now 50, with that available cash make their way through it to give themselves a passive income by mid-60s earning 80,000-$100,000 per year in passive income. Now we were thinking of buying a house for around $450,000 perhaps on the north side of Brisbane and we could smash it out as much as we could in a year and a half. Build up some equity and then buy and move on to the second house with maybe a bit of renovation in between. So my question to you is how do people of our age group get into the property ladder and make this happen for themselves?
One of the things to note is the age. So fifties, you’re getting into the bracket of the latest stages of your life where you probably want to enjoy some of your life. But you also have a small timeframe to be able to create what you want. You’ve got a really good income and disposable income, which is great. So you will be able to build a property portfolio a lot quicker and also pay down some debt in terms of probably doing it more of a sound way. I’d be sticking to those sorts of properties that you were talking about in northern suburbs of Brisbane, $450,000. You’re quite comfortable there with a good rental return. Also good long term capital growth. And you could also change those to principal and interest may be within a 2-3 year period or even pay principal interest straight away on one or two of them.
I wouldn’t be too focused on paying down all the debt on that Brisbane property if that was where he was going to go just yet because he’s still in the building phase. You’ve still got to build the asset base before you then start to consolidate. A lot of people go wrong in terms of, they buy one investment and then they go, I’m going to have to pay this down quite significantly to then go to the next one. It’s not always the case. Yes, we want to start paying down some debt. But we want to also be able to build the largest asset base we can first and then we start paying down some debt. So I think the biggest thing is to be conscious of the timeframe that he has and that’s 10 years. So he’s going to have to build the portfolio as quickly as possible. What did you say? He had $180,000 in cash.
They’ve got an income of $180,000 per year and $4,500 per month of disposable income.
They’re almost saving a deposit a year, pretty much, pretty close to a deposit every year. So that compounding with capital growth over time, plus you know the rents coming in as well. So depending on their cash position at the moment, at the time, they may have a 100,000-$200,000 or more sitting in cash that they can then straight away put that into property and they might be able to build themselves a nice little asset base straight away. I think because they’re in the later stage of their life, I would probably be more focused on, like they said, building the portfolio and getting an asset that’s producing them income. So passive income over the next 10 years instead of paying their own home off because it’s going to take a lot longer to pay their own home off and they’re still not going to have passive income at the end of it. So they’re going to really need the passive income to pay for wherever they live at that point. $100,000 might be able to do that for them if that’s what they want. But I think that it’s gonna come down to really buying affordable properties in Brisbane and make sure that they’re buying at the right time of the cycle and the right state more importantly so that they’re going to get that uplifting growth over the next 3-5 years to be able to keep leveraging.
Walsh discusses the strategy of leveraging off equity that you have in a property in order to purchase your next property and maybe the property after that.
If they put a 20% deposit down on the first one and they created, let’s say they made $30,000 or $40,000 straight away in year one, they can get that 30,000-$40,000 out. Combine that with the savings within that next year, they’ve already got themselves the next deposit, they’re already into the second property and they could do that for three, four or five properties. They’re going to need to establish a base. If they want $100,000 passive income basically they’re going to need $2 million worth of property owned outright if they wanted to go down that track. That’s on a 5% return. So they already know the base that they want. They need to own $2 million outright. So what I would say is you’re going to need to build a base portfolio of $2 million.
That $2 million over the next 10-15 years will grow to $4 million-plus. And if they can get it to say $4 million and you’re paying down debt over that time, then you’ll be able to create $100,000 passive income. So it’s quite a safe way of doing it because they’re saving well. So because they’re saving so well, they’ve got a lot of time to be able to pay down some debt over the time that they’re building the portfolio. But I think they just need to not get too caught up on paying one investment property off and actually keep building the property portfolio rather than just reducing the debt. Once they’ve built the $2 million portfolios or $2.5 million portfolios, then they can start turning around and say, you know what, we can really focus on the debt, paying down the debt over time now to create the income.
I guess to add to that strategy as well, if they are interested, they could also do some renovations on it to add value to the property so they can accelerate the actual equity creation. So manufacturing equity much faster than waiting for the actual property price to actually grow over a period of time. Because as you know, they’ve only got maybe 10-15 years left. We don’t want to be waiting 10 years for the property prices to double for each property. So some of the strategies there are quite good to be able to do. And if they can actually manufacture that equity in the properties they buy, it really, really helps them to add to that. So also to maybe touch on diversification there’d be an interest in purchasing in Brisbane.
There are other markets all across Australia to be able to help them. A lot of people sort of take a step back and go, I’m living in Brisbane, I don’t know if I can buy interstate, how do I manage that property interstate? That’s been a common question. How does somebody like them purchase multiple properties in different states to ensure that you continue to grow and then also to help them balance out and have the opportunity to ride the waves in each different markets?
The first we’ll touch on is why do we diversify instead of just buying everything in one state? I recognised this very early on in my career in investing and that was that the Perth market had really taken a hit. And I thought to myself, man, if I had all of our portfolios in Perth, you know, you might be waiting 5 or 10 years to make any money out of that. And you may have taken a hit of 20% at that point and you’re going to have to sit on that for the next 10 years just to break even. So you’ve really got to be careful. And this is where diversification comes in. If you had bought one, let’s say five years ago, you bought one in Perth, one in Brisbane, one in Sydney, one in Melbourne, well you would have done quite well.
Yes, the Perth one went down, but the Brisbane one went up and the Brisbane would’ve gone up a bit and then we would have had really good growth on the Sydney one and in the Melbourne one. So your overall portfolio is doing quite well at that point. So it’s not only minimising land tax, which is another thing, but it’s minimising the overall risk to the portfolio and maximising the growth potential for the portfolio. Now in terms of being able to invest interstate, this is a common question where people are a bit scared because they want to be able to touch and feel and drive past their property. I have properties like that were 3 streets away from me and I don’t even want to see them. It’s not really my thing. I run it as a business and it’s whatever the best business decision is for me to buy that property.
So I would no longer buy around where I live because I don’t believe it’s going to grow. So why buy an asset that’s not going to do anything for me when I can go buy that somewhere else? Now in terms of being able to buy interstate, I think it’s very important to make sure that you have the right team of people in the state that you’re trying to purchase. Somebody that has that level of experience to be able to get you into the market that you’re looking at because you’re not going to really understand that market and you’re not going to go in and understand how to find solicitors or pest and building inspectors and build that team out. So leveraging somebody else to build the team out for you and already have the team ready for you to go. In terms of managing the property, I mean that comes down to really good management in terms of property management.
It is important to have someone that you can trust to make the best decisions for you in a market that you are not physically in.
Now I see a lot of people, they’ll choose a property manager just on the basis that they’re 6% and the other one’s 7% because they’re 6% I’ll go with them. Like that’s the wrong way to choose a property manager. You might be spending $500,000+ even on an asset, and then you’re not really worried about how they’re looking after it. You’re more worried about how you are going to save $2 a week. So instead of looking at the savings, look at how good are these property managers, what they do and what can they do for me interstate. Getting a good property manager, they should be able to pay all your bills for you in terms of rate notices. They should be able to pay maintenance bills and they should be looking after your property from a maintenance perspective as well.
So you shouldn’t have to be like a business. You shouldn’t have to be going out there and attending to those issues. That’s what you’re paying them to do. So interviewing property managers, I do it. I actually put it in my ebook, how to interview a property manager. And the reason I did that was because it’s one of the most important things you need to know is how to choose the right property manager for you and what questions to ask. And I think it’s very important for people that are going to invest interstate. Don’t get emotional about it. This is a business. If I have the right people in my team, they’re going to manage my property for me, just like I would if I had a business. And what is that property going to do for me?
So I think people are coming around to the idea of the interstate. It doesn’t matter really where it is as long as it’s going to do what it needs to for me. And it’s becoming a lot easier. I’ve managed complete renovations from my home even though it’s an interstate property. And that’s because I’ve got good people on my side in that state to be able to do that. You’ve just got to really have a good team and make sure that you have a good team on your side to do it.
That’s a really, really powerful thing about this is that making sure that you run it like a business and you take the emotion out of it and you focus on finding the right people. Because once you have the right people in place, you can pretty much invest anywhere across the world, the country and so forth. I’ve spoken to lots and lots of investors who have invested in the States, in the UK and stuff like that. And it’s only because they have great teams in place. So that’s a really, really good point that you’ve raised for this. And I hope that this really helps with a lot of other investors who are a bit scared about investing overseas or interstate as well across Australia. So we’ve got another question from Allistair. He says, I’m in my early thirties and I’m single earning $75,000 a year for my job. I’m looking to increase my portfolio from two investment properties to three investments and possibly a fourth. I’m sitting around about 90% LVR and I read somewhere that around the million-dollar mark, it gets quite difficult. And I’ve heard that the portfolio is almost impossible to get over $2.5 million. How can I move forward to purchase the next investment properties?
I think the very first thing is to look at the total scenario. So one of them is, in investing, mindset is the biggest thing. Having a really good mindset. I can see straight away that it sounds like he has a limiting belief which somebody else has instilled in him and that is that, it’s going to be hard to go over $1 million worth of portfolio and $2.5 million is going to be almost impossible. I’ve built portfolios for my clients all the way up over the $4 million and even to the $5 million range and they just worked normal jobs.
So you do it. But it does take hard work and it does take a lot of sacrifice and time to build a portfolio as well. It doesn’t happen overnight. What do people think that they could build a 2-$3 million portfolio in two to three years? Unless you earn very good incomes, you have some good equity, it’s going to take a long time to be able to build your portfolio. But it’s a sacrifice you need to make and you need to look at it from a position and say, is this the best position that I can be in today? How do I maximise my position so that I can grow in the future? And that’s what you really need to ask yourself in terms of his scenario. So he’s in his 30s, earning $75,000 a year and single. He’s got two properties and he wants to buy three or four.
One thing that I’ve noticed is his leverage. His LVR is quite high and we need to look at the first two properties and say, are they cross collateralised? He seems like he’s quite high in terms of LVR. So he may have gone to a bank and may have cross collateralised those two properties to be able to get himself to 95% LVRs. So being that he’s got quite a high LVR in terms of the only owns roughly 5% of the total portfolio of those two properties, I’d be more focused at that point to be able to reduce the risk, which is paying down some debt. And I would be doing that via an offset account. I’d just be paying money into an offset account to be able to safeguard myself depending on how much cash buffer he has. I’d be trying to get that LVR down and naturally, that will come down as the property prices grow as well, where he bought.
I’d be trying to get that LVR down to 80%. Typically I don’t like to buy or build. Like when I’m building a property portfolio, I might put down a 10-12% deposit on a property, but I typically don’t take it beyond 80% of its value after I’ve purchased that. So that property needs to grow in value by anywhere from 8-10% so that I own 20% of that property and then I’m going to leverage out of that from whatever it is. When I’m doing that, what it’s doing is meaning that I’m going to have a 20% stake in my property portfolio at all times unless it’s a new property that I just entered into the property portfolio. So your overall LVR is lower and it’s going to be more favourable to the banks and then building the portfolio from there. So it does come down to two scenarios. One of them is the property portfolio has got to grow over time and it’s reducing your LVR. You’re going to have to have money saved and you’re going to have to sacrifice to save some good money to build the portfolio to get to the second and third one. That’s hard to get to the third and fourth one. But I think his most important thing is to get his overall leverage down and to not expose his portfolio to too much risk.
Walsh explains why it is hard to start your portfolio and why the first 2 properties can be the hardest to buy.
The first one and two properties in anyone’s portfolios, it’s the hardest properties to buy. It’s like having trees out the backyard and you want to go grow an apple tree. If you’ve only got one apple tree to pick the apples from, you’re going to pick only a few apples. Whereas if you had five of those apple trees, you’re going to have a lot more apples at the end of the day. Very much the same as properties. If you have one property, you’re only going to get the equity from the one property, so you’re relying on it. When you get to say 10 properties or 5 properties, you’ve got a lot more equity to cherry-pick from each property to be able to build the portfolio. So it becomes a little bit easier over time. Once you’ve built the portfolio a little bit larger, maybe three to five properties to be able to extract equity.
We delve into how important the structure of your portfolio is and Walsh shares with us different scenarios where this comes into play.
It depends on what you’re trying to achieve, what you’re trying to do. A lot of people jump into trust. They want to buy in trusts. And I’ve talked to my accountant in length about this that has grown portfolios. He has portfolios under his belt in terms of his clients that have over 200 properties. So quite large portfolios and he’s very properly orientated. And he says the same thing to me. He says people try to jump into trust for the reason that they think they’re doing the right thing. But it depends on your situation and what you’re trying to achieve in the trust. Now, the trust might be good for development and distributing income and all that type of stuff. But a lot of people buy one, two, or three properties and then they’re like, I’ve got to start a trust, well you’ve got nothing to start a trust for. You haven’t created a significant amount of wealth to be able to distribute heaps and heaps of income.
So what are you trying to achieve at that point? Buying in your personal name, you can do it a lot quicker. So you can build your portfolio a lot quicker and you’re a lot more nimble at that point. You can still distribute income, especially if you’ve got a partner and you’re 50/50 in terms of how you actually own the property. So you can do very similar things in your own name to trust. But you need to work out, if I’m in a trust, why am I in a trust? Because it costs money to set up, it costs money to keep running and at the end of the day, it needs to be benefiting you in some way. A lot of people will say, I’m doing it for protection.
Well, it’s not a foolproof way to protect yourself. And not only that, 99% of people aren’t in the line of work where they’re personally getting sued. So why are people trying to take your assets from you at that point? Are you a surgeon? Maybe that’s a really good case of we need to look at structuring in trusts and different entities to be able to protect that person or that individual. But the guy that works at Bunnings, I don’t think anyone’s really suing him and trying to take his assets. So it’s not benefiting him in many ways unless he has a significant amount of wealth that he needs to do something with.
You need to have a handle on your own situation and talking to an expert is a way that can help you decide what the best move for you is.
There’s even an added thing with like land tax and that comes into it. A lot of trusts don’t have a land tax threshold. So now you’ve got to pay land tax as well as the setup of the trust as well as the ongoing of the trust. So if somebody comes to me says, Daniel, I can’t afford more than a $100 a week or $50 a week in terms of one property, why would you buy a trust? It’s going to add to the extra negative costs that you’re going to have because you’re not going to get land tax thresholds and all of that. So it really just comes down to the individual situation. How much wealth have they got, what are they trying to do with that wealth and how long are they going to keep the property portfolio for? Again, it comes down to a question of talking to your accountant and your specific situation because your accountant would know you better than anyone and how he would like to structure you. But I know in 99% of cases, unless you’ve got a portfolio, once you start getting up to around anywhere from say, maybe 3-$5 million, that’s when a lot of people start to then go into trust entities for different reasons.
This episode was produced by Andrew Faleafaga with narrations and interviews conducted by Tyrone Shum.