Join our investing community

Beginner Question on Trusts

Discussion in 'General Investing Discussion' started by Investor_Chris, 19th Jan, 2009.

  1. Investor_Chris

    Investor_Chris New Member

    Joined:
    19th Jan, 2009
    Posts:
    2
    Location:
    Newcastle, NSW
    Hey Everyone, newbie looking for some advice here, any help greatly appreciated :)

    I'll give a brief run down of my situation. I'm 23, about 10k in the bank and just about to start a phd which i'll be doing for the next 3-4 yrs. While im doing the phd i'll be earning around 40k a yr tax free.

    Myself and two mates are currently looking at buying a property which we will live in. We have a 3 bedroom apartment picked out which we hope to get for 330k. One of my mates moving into the place is talking about forming a trust between the three of us. So he would get the loan for the property and his name would be on the deed and so forth, but we would say put in $200 ($80 above the expected rent per room) each week into a trust so that when we sell the place we pay off the loan and then divide any profits between us.

    Is there any general advice / explanations regarding property trusts? I'm fairly new to the real estate game so anything is helpful.

    Cheers,

    Chris
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,623
    Location:
    Sydney, Australia
    Obtaining finance (getting a loan) is the one thing that will usually put a stop to most nice ideas about using a trust.

    The lender will typically want all trustees of the trust (or directors of the corporate trustee) to offer a personal guarantee over the loans the trust takes out.

    Or are you talking about your mate effectively buying the property in his name and taking out the loan on his own (assuming he has the servicability to be able to do so) ? In which case, what security will you and your other mate have over the property that you are contributing to - or will you just be tenants ?

    What happens if one of you needs your money back because your personal situation changes and you need the money ?

    What happens if one of you gets hit by a bus ?

    What happens if you have a falling out between the three of you ?

    What happens if one of your mates does a runner and stops paying rent ?

    Not trying to scare you off - just trying to make you think through all the things that could go wrong - because they often do! You really need to make sure you enter this arrangement with your eyes very much wide open.

    In general, I would avoid entering into long term financial arrangements with anyone other than a life-partner (eg spouse or defacto), personal situations and goals change all too easily and this can lead to complications in untangling financial dealings with family or friends.
     
  3. Investor_Chris

    Investor_Chris New Member

    Joined:
    19th Jan, 2009
    Posts:
    2
    Location:
    Newcastle, NSW
    Cheers for the reply. Definitely some good points there

    At this stage we are looking at my mate taking out the full loan. So he would effectively own the place and we would be tennants. With regards to security within the property, is it possible to draw up an agreement when entering the trust which states the conditions under which people get their money back, how much they get etc etc? This could also cover the eventualities of someone dying, falling outs etc etc? I understand that there is some inherent risk and that we can't foresee all eventualities but at the same time it can be argued that the chances of people getting divorced is larger than having a bust up with a best mate who's also a family friend.

    The way I figure it, I will be paying $120 a week rent anyways to live there if I dont enter the trust, but with the trust I'm not paying "dead money".

    If assuming the abovementioned issues get sorted out, what are the specific advantages / disadvantages of being in a trust. For example

    • Would this affect whether I can apply for the first home buyers grant in the future (assuming it still exists in the future?)
    • Are there any tax benefits? I've read that you can't negative gear within a trust but this wont effect me because I won't be paying tax for 4 years + we'll be living in the place anyway
    • What are the specific advantages of having a trust when we sell the property i.e. in regards to capital gains tax and stamp duty?

    Thanks
     
  4. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD