Trusts can be a very powerful tool for property investors, but there is also a lot of confusion around the best way to use them.
One of the main questions I’m asked regularly is whether you can hold multiple properties in a single trust or company. The answer isn’t as straightforward as you might think, and there are a few different factors you’re going to have to take into account.
The key factor actually isn’t the number of properties, but rather the serviceability within each entity.
Serviceability is essentially how much debt an entity can take on based on its income and assets. When you approach a broker or bank, they’ll assess the serviceability of your trust or company. This determines how many properties you can purchase within that single entity.
For example, if your entity has a serviceability of $1 million, you could potentially buy one property worth $1 million, two properties worth $500,000 each or any combination that doesn’t exceed $1 million.
Once you’ve maxed out the serviceability in one entity, that’s when you need to consider setting up a new trust or company for additional properties.
But here’s where it gets interesting. If your entity has a higher serviceability, say $3 million, you could potentially hold three $1 million properties in that single trust. This flexibility allows for some creative structuring of your portfolio.
It’s possible to even take this one step further by combining different types of assets in one trust. For example, you might have a residential property but then add in a commercial property.
The residential property might be negatively geared, but when combined with a positively geared commercial property, the entity technically becomes profitable and you’ll be able to hold those assets more easily.
At the same time, when you take on debt in the trust, you’re not going to be doing that at a 100% LVR. If it’s more like 80%, then it also allows more room for the entity to be profitable and pay off its own debts.
If you can find a combination of properties yielding 6-6.5%, and you’re paying 6% interest on 80% of the property value, you’re in a good position to cover most expenses.
The goal is for each entity to pay for its own associated costs. If you can ensure the properties within the entity are producing more income than expenses, you’re on the right track.
The beauty of this approach is that it allows you to maximise each entity’s potential before needing to set up a new one.
It’s not about cramming as many properties as possible into one trust, but rather about optimising the debt and cash flow within each entity.
By understanding how to structure your portfolio effectively, you can set yourself up to be able to hold the assets for a very long time with them effectively on autopilot, growing your equity in the process.
Engaging a trusted buyers advocate through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
