There are a number of different borrower types that banks will lend money to for property investment in Australia. This article looks at what you need to know if you want to take a loan as: an individual, a joint venture, a trust and a self-managed superannuation fund (SMSF).
I’m an individual
Borrowing as an individual is the most common and straightforward way to get into the property market and you can use equity in your family home, the estimated rental return and your own steady employment to appease lenders. It also means you are the only one who signs off on selling, raising rent, engaging property managers and other decisions.
You are the only one responsible for your property investments and debt strategy and you won’t be affected by anyone else’s financial misfortune or mismanagement. You need to personally suit lender eligibility requirements around income, spending habits and credit history. Bear in mind that individuals with a full-time job will be assessed differently than someone who is self-employed.
Another benefit is being able to use negative gearing as a strategy, as long as it suits you. This means that if you are making a yearly loss by putting more money into the repayments and holding costs of an investment property than you are getting in return from rental income, you can offset that loss against your personal income for the year and pay less tax, while still benefiting from the growth potential of the investment. Negative gearing is not available when borrowing as a trust.
Let’s get together
If you and one or more associates want to get into the property market but don’t have enough of a deposit or serviceability to buy alone, you can go in together on a joint venture. If the property you purchase grows in value, you might find you can sell or withdraw enough equity to each go alone on a future investment. However, there are things to be aware of. If you split the loan and serviceability requirements down the middle, each investor will be held liable for the full debt, but will only have half the rental assessed as an income. So, if one loses their job and can’t make repayments, other members of the joint venture will be held liable and in the event that you’re not able to continue the full commitment your credit record and future borrowing power might be personally damaged.
If you’re going into a joint venture, you will need independent financial and legal advice before borrowing. Ensure you agree on a financial debt structure and exit strategy and have a legal professional draw up an agreement for the venture, to be referred to down the track if circumstances change or if one member wants to take a different direction than the others.
In property we trust
Creating a family trust is a method of property investment growing in popularity. Under this financial structure, the assets and income are held by the trust and profits are distributed to the members/beneficiaries of the trust by an appointed trustee, who manages the investments.
Trusts offer a good way to create intergenerational wealth by passing assets to future generations without having to sell and pay capital gains tax (CGT). It also protects assets from the circumstances of individual beneficiaries: i.e., if financial disaster should befall one of the beneficiaries, the trust’s assets are not under threat from debt collectors.
The trustee can also use discretion to distribute profits to beneficiaries in a way that can reduce the amount of tax everyone has to pay. There are several different types of trust that will be considered, so engage a professional for advice on which is the best structure for you.
Wanna be a super star?
Every year there are more Australians establishing SMSFs in order to manage their own superannuation. One of the key reasons they do so is to invest their nest egg in property. Your SMSF can borrow for a property but it’s harder than borrowing as an individual and there are complexities.
First, there is more risk attached for lenders, so banks are more conservative. You may need more than the usual 20% deposit and could pay higher interest rates and fees than a regular borrower. Superannuation law also makes it harder to service and benefit from the loan.
For example, when making repayments, your SMSF can only use the property’s rental income, plus 10% of your personal salary (your superannuation contributions), so you need to make sure it’s positively geared and in a market with great tenant demand.
Because it’s your super, you are not allowed to access the income or equity of the property until you retire (at least age 60). Also, neither you, nor your family or friends can stay in or use the property for personal reasons.
The good news is that investing using super is a non-recourse loan, so if the loan defaults for some reason, the lender can only access the asset in the SMSF trust, not your personal assets outside of super.
If you have any more questions or want some information on borrowing and debt strategies, reach out to Zinger Finance. Our team of Mortgage Strategists can help you choose the best options for your investment journey.