Structure
Buying property through a trust or company
Most investors hit a lending ceiling at two or three properties. Serviceability tightens, lenders get cautious and growth stalls, even on a strong income.
The investors who keep going own their properties differently: through trusts and companies, set up with the lending in mind. Structures aren’t only for asset protection. Used properly they add borrowing capacity and let a portfolio scale.
The structure should match the stage you’re at, not the stage you hope to reach; too much structure too early costs money and borrowing power, too little too late costs stamp duty and CGT to unwind; so I model the portfolio first and choose the structure per purchase.
The entities investors use
Trusts. A trustee holds the property for the beneficiaries under a trust deed. The trustee borrows, and for lending it should almost always be a company (a corporate trustee) with you as director.
- Discretionary (family) trusts are the ones most investors use. The trustee decides each year who receives the income, and the assets sit at arm’s length from you personally.
- Unit trusts give each unitholder a fixed share, so they suit unrelated parties buying together. Some lenders assess each unitholder on their share of the debt only.
Companies (Pty Ltd, often a special purpose vehicle). A separate legal entity that owns the property outright, with you as director and shareholder. It keeps what is left after tax, and those retained earnings become the deposit for the next purchase. One special purpose vehicle per project is standard for commercial property and developments.
Pros and cons
Pros
- Self servicing debt can be excluded. Once the entity has a track record of meeting its own repayments, some lenders leave it out of your servicing, so your personal income is free for the next purchase.
- Refinance on the lease alone. Commercial property in an entity can be refinanced on lease doc or low doc terms, without full personal financials. Useful for self employed investors whose taxable income moves around.
- Separating entities can reduce risk. Debt sits in its own entity, so a problem with one property, or with a business you run, is harder to reach your other assets.
- Retained earnings build the next deposit. A company keeps its after tax profit, and lenders read a healthy balance sheet as a low risk borrower.
- Spread across lenders. Different entities with different lenders avoids cross collateralisation.
Cons
- Fewer lenders. Rates can be slightly higher because fewer lenders do trust lending. Some majors still do, though that can depend on whether you’re an existing customer, and the loan to value ratio (LVR) can be lower.
- The debt isn’t hidden. You guarantee it, some lenders add it back into your personal position, the separation protects you from other people’s claims, not from your own lender.
- Land tax and duty. Trusts, companies and individuals are treated differently, and each state has its own rules.
- Setup and running costs. A deed, a company, and a set of accounts for each entity every year.
- More paperwork. This can include the trust deed and the company constitution.
Your professionals and me
I work alongside your professionals, such as your accountant, advisers, buyers agents, and legal professionals, to get your structure and lending lined up together. I’ve set these up for my own portfolio so I can help you along the way. If you don’t have a property-savvy professional team, I can introduce you to ones I trust.
Three ways to start.
Pick the level of commitment that suits where you are up to.
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