Unlocking Unlimited Borrowing Potential in a Trust: A Guide to Building a Property Portfolio That Pays for Itself

Building a property portfolio inside a trust in Australia is a powerful way to grow wealth, protect assets, and enjoy the benefits of long-term financial planning. However, navigating the world of financing within a trust structure can feel complex, especially if you want to keep acquiring properties. The key to ongoing, potentially “unlimited” borrowing inside a trust lies in creating a self-sustaining property portfolio – one that covers its own expenses and generates positive cash flow, making it attractive to lenders. Here’s how to do it:

1. Start with the Right Trust Structure

• Choose a Corporate Trustee: Many lenders are more comfortable with corporate trustees rather than individual trustees due to perceived stability and continuity. A corporate trustee can open doors to more favorable lending terms, although personal guarantees from directors may still be required.

• Select the Right Trust Type: Discretionary (family) trusts are commonly used for property investments, offering flexibility in distributing income to beneficiaries. A unit trust may also be suitable for those looking to pool funds with other investors.

2. Focus on Positive Cash Flow Properties

• Why Positive Cash Flow is Key: In a trust, the income generated by properties is essential in demonstrating that the portfolio can cover its own expenses. Positive cash flow properties can self-sustain within the trust, minimising the risk for lenders and giving them confidence in extending additional credit.

• Find Cash Flow Generators: Look for properties in regions with high rental demand, such as emerging suburbs, well-performing regional areas, or properties with potential for dual-income (like granny flats or duplexes). Properties with high-yielding rental income can help ensure that the portfolio remains cash-flow positive.

• ATTENTION: There is a downside to this, by focusing only on positive cashflow and not growth, you may run into an issue of not having equity to continue buying and will be solely reliant on cash deposits to scale your portfolio further! This strategy is only recommended once you have built a foundational portfolio of high growth properties.

  
  

3. Optimise Loan Structures with Interest-Only Options

• Interest-Only Loans in the Initial Years: By opting for interest-only loans, you can maximise cash flow in the early years, which helps keep expenses low and income high. This approach can be especially useful when building a portfolio, as it frees up cash to be reinvested or used for additional property purchases.

• Consider Loan Reassessment Opportunities: Some lenders allow for loan reassessment or restructuring as property values increase and rental income grows, which can further optimise cash flow and borrowing potential.

4. Show Lenders a Self-Sustaining Portfolio

• Demonstrate Cash Flow Reliability: Lenders like to see that the properties within a trust can service their own debt without additional support from the trust’s beneficiaries. Consistent, positive cash flow is a strong indicator of this, providing lenders with the confidence to extend credit.

• Highlight Your Track Record: Show lenders that your portfolio has a history of reliability, with consistent rental income, low vacancy rates, and disciplined expense management. This builds a track record of performance, which can support ongoing borrowing.

  
  

5. Utilise Personal Guarantees (When Necessary)

• Personal Guarantees as a Last Resort: While most lenders prefer personal guarantees for trust loans, aim to use them strategically and sparingly. By positioning the trust as self-sufficient, you may reduce the need for personal guarantees over time.

• Know When to Use and Remove Guarantees: As your portfolio matures and cash flow strengthens, work with lenders to explore options to remove personal guarantees. Demonstrating consistent cash flow and a strong financial position can support this goal.

  
  

6. Strategise with Property Reinvestment and Upgrades

• Use Cash Flow to Fund Upgrades: Reinvent income within the trust by making value-adding improvements, like minor renovations, that can increase rental returns. This boosts both the value and cash flow, increasing borrowing capacity.

• Reinvest Wisely: Use additional cash flow to reinvest in the trust portfolio rather than distributing it to beneficiaries. This reinvestment keeps funds inside the trust, amplifying its ability to generate positive cash flow and creating a virtuous cycle for growth.

7. Leverage Self-Employment Flexibility with an Accountant’s Declaration

Being self-employed can be an advantage when building a property portfolio within a trust, as certain lenders will accept a letter from your accountant as proof of income. Here’s how this approach can streamline the borrowing process:

• Simplifies Income Verification: Traditional salaried employees often have to supply extensive pay slips and tax returns to prove income stability. However, as a self-employed individual, you may use an accountant’s letter as an income declaration. This option saves time, minimises paperwork, and allows greater flexibility in showcasing your income and financial stability, particularly useful for those whose income may fluctuate.

• Strengthens Trust’s Financial Position: When the accountant’s letter reflects positive cash flow from your self-employment income, it reassures lenders that you, as the guarantor, can financially support the trust if required. This added layer of security can improve the trust’s overall financial position, making lenders more likely to approve further loans.

Key Takeaways for Unlimited Borrowing in a Trust

In summary, achieving “unlimited” borrowing capacity within a trust hinges on maintaining a self-sustaining property portfolio that is cash-flow positive and building a strong track record with lenders. With the right strategies and professional guidance, you can continue to expand your property portfolio inside a trust structure – setting the stage for lasting wealth and financial security.