Should you buy an investment property through a trust?

Should you buy an investment property through a trust?
Should you buy an investment property through a trust?

Question:

My husband and I are considering buying our first investment property. Given the current economic climate, is now a good time to be investing in property? Secondly, we are thinking of buying the property through a trust my husband set up as part of his self-managed super fund – what are your thoughts?

Answer:

While there never seems to be an ideal time for investing in property, the number one rule is to try and take the emotion out of the process. This is easier said than done; however, here are some suggestions that may help you and other readers in achieving “emotion-free property investment nirvana”. Remember that property by and large is a safe long-term investment but it does move in cycles and the more you understand these cycles (both local and national) the better.

  • Remember that property by and large is a safe long-term investment but it does move in cycles and the more you understand these cycles (both local and national) the better.
    • Are you looking to own investment property for a regular income stream or leverage it for long-term capital gain? My suggestion would be the latter.
    • Find the right deal – the competitive lending landscape is making now an ideal time to look for a deal, but you need to do your research.
      • Adopt the right attitudinal mindset and look at the bigger picture. If you do you’ll see that the currently low interest rates and strong rental demand are both welcome factors for property investors.
        • Create a “buffer” to help you fund the property in difficult times.

        I would argue that right now is not a bad time to consider investing in property, you just need to buy in the right geographic area where the cycle is more on your side than against you. However, you and your partner need to ask yourselves one further question: do you feel confident with your decision? For example, if a tenant moves on and the property lies vacant for a number of weeks, will the short-term loss of income create a significant problem? If not, I would say you are ready to take the plunge.

        Whether you should own the property through your husband’s trust or in your own name depends very much on your specific circumstances. There is certainly no “one size fits all” approach, and you should speak to a specialist who can advise you on the advantages versus the disadvantages (and there are some subtle nuances through asset ownership in a trust) before making your decision.

        In general, there are three broad benefits of owning a property through a trust structure.

        1.       Income generation It is critical to have a properly drafted deed based on your circumstances (i.e., you must have a reasonable expectation that your investment will recoup your costs and make a profit, in other words the rent you receive over time will become greater than your expenses).

        2.       Asset protection Trust law has, as part of its central core, the fundamental principal that ownership is by the trust and beneficiaries or unit holders (in most trusts) don't have a right or ownership to the underlying assets of the trust. This can be beneficial in the event of litigious circumstances.

        3.       Estate planning Trusts can be useful tools when looking at estate planning needs. In essence, a trust is a structure whereby the "family" can control its assets for the benefit of the family now and in the future, passing on assets from generation to generation and in many instances without incurring stamp duty or capital gain tax.

        In conclusion, buying through a trust mechanism, as part of a self-managed super fund, is an excellent way of long-term wealth generation, asset protection and passing on assets within the family. However, it's absolutely imperative that your accountant has the right trust deed in place from the outset and knows how to use and manage the trust moving forward as non-compliance is invariably what causes problems further down the track.

         I wish you luck.

        Ken

        Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Ken’s experience lies in working with large publically listed multi-national companies, which gives Ken excellent insight into international market trends. Ken specialises in educating “mum and dad” property investors and small business owners with advice on wealth creation, asset protection, taxation, superannuation and compliance.

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