Correct Financial Structure

PTagg#1 Posted : Saturday, 12 January 2013 4:24:25 PM
I've heard the term "Correct Financial Structure" being bandied about, make sure your financial structure is correct etc. What exactly is a "financial structure" and how would you know if it's correct or incorrect?

  • Eos Property#2 Posted : Sunday, 13 January 2013 11:28:41 AM

    Not a broker so make sure you get a second opinion.

    Banks have a tendency to cross collateralise loans (2nd mortgage) for property investors because it is easy for the banks and the bank also maximises their security position.

    If you have two properties and only two loans it is highly likely this is the structure you find yourself with. A major issue with this structure is that you have little control over funds received if you were to sell a property. The bank can generally speaking determine what goes where.

    A better structure is to set yourself up with a line of credit facility secured against one of the properties (usually PPOR as that is where most people start) and use funds from here to pay deposit and purchasing costs. The balance of funds required to buy the investment property are secured by the IP.

    If you look at your loan documents there is a section titled security properties (or similar). If you have more than one property listed as being security then it is highly likely that you are cross collateralised and have a sub-standard loan structure.

    It is not the end of the world if you are cross collateralised as it is possible, depending upon values and your situation, to rejig your loan structure into something more flexible and suitable.

    On top of this there are also considerations about interest only loans, offset accounts, portfolio accounts, serviceability calculations, lenders mortgage insurance premiums and so on which all come into play.

    The advantage of using a broker, who is also a property investor themselves, is that they should know this stuff too.

    In my mind there are a few key features to look for, flexibility, security levels required by banks and serviceability. Too often property investors put on their interest rate blinkers and focus on which is the cheapest deal.

    Just remember 'cheapest is not always the best'

    Hope this helps.

  • IntegrityBroking#3 Posted : Thursday, 17 January 2013 10:37:59 PM

    In reality there is no "correct financial structure" only one that best suits your own needs and property goals, including your budget considerations.

    It's more important for property owners to consider the most "appropriate" legal structure for their property portfolio.

    The structure refers to how the property is owned. Particular tax and asset or wealth protection issues will flow from the structure you have chosen (or chosen by default). For example, you can buy property:

    a. In your own name solely;
    b. Jointly, or as tenants-in-common with a partner, spouse, or with other third parties in a partnership;
    c. In a company name - so the company owns the property;
    d. In a trust structure, with single or multiple Trust beneficiaries. There are several types of Trust structures as well. A super fund is a Trust structure.
    e. Indirectly, through purchasing shares in a separately managed property fund, be that a company or Trust structure managed by someone else. There are many public and private property funds that facilitate property investment using collective funds from many members.

    So, depending on specific factors that apply to your own situation, factors like how many properties will you own, your borrowing ability, your familiarity and knowledge about trusts and companies, asset protection objectives and attitude to risk and tax situation today and in the future (this is not an exhaustive list) you can choose the most appropriate structure, generally after taking advice.

    There is no one perfect structure, and anyone who pronounces such has either an interest not disclosed, or is simply not taking your own specific needs into account. The only way to know if its "correct" or not, for you, is to assess whether it meets all your needs, and has enough flexibility to continue to meet your needs in the future.

    The question about how the bank treats your property in terms of security and cross-collateralisation, is a valid one, in terms of helping you to define your needs in this area, however it's a separate consideration to the legal ownership of the property, and the legal and tax considerations that flow from the structure.

    Kind regards

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