Properties & Pathways

Investing with an income trust? Consider these 4 things first


22 November, 2022

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You’ve decided you want to increase your regular income, perhaps to bolster the retirement that’s around the corner or merely to keep up with the growing list of expenses. And seeing as a side-hustle as a day trader is too exhausting to think about, you consider maybe an income-producing investment is the way to do it. That’s when you learnt about income trusts.

What’s an income trust?

An income trust is an investment fund that holds income-generating assets. The trust may be structured as a personal investment, where only one or a few members receive income. Or it may be a commercially-operated trust, run by professionals who control the distributions to its many members.

Income trusts are gaining momentum in the investment world, as real estate and other such assets become more difficult for any one investor to participate in. A professionally managed trust allows an investor to take part in a high-quality, big league investment with only a modest amount of capital. Sounds good, right? We think so too. We’re also realists and know that not every investment company operates – or provides investments – with the quality you deserve.

4 things to consider before investing in an income trust.

1. How does the trust earn income?

income trust real estate australiaCommercial real estate is a common investment

for income trusts. You only need to plug ‘unlisted property trusts’ or ‘commercial real estate syndicates’ into Google to get an idea of its popularity.

The high yields typically offered by commercial property is what attracts many investors to the asset class, including retirees, sophisticated investors, and family office types. After all, cash flow is king. There’s nothing like solid income from a reliable source to whet the appetites of smart investors. Commercial property investments with a national or multi-national tenant, having signed a long lease term of five to 10 years, will likely provide secure and stable income not just today, but tomorrow as well.

Real estate isn’t the only asset income fund managers might invest in. Even private debt has become a popular investment target, where the fund receives income from a mortgagee in exchange for a lump sum to invest in an asset of their choosing (usually real estate).

2. How often is income distributed?

If considering investment in an income trust, I’ll assume your financial focus is indeed on income. This means you’ll likely want that flow of funds to be far more regular than annual distributions or even income paid out at the conclusion of the investment.

Some funds distribute income to their members every financial quarter, while others – those funds which understand the importance of regular cash flow – will distribute investment income every month.

Ensure you know when funds will be distributed. The more regular money is returned to your pocket, the better.

income trust australia

3. Does income of the trust include capital gains?

Capital gain

, or capital appreciation, is the increase in the total value of your investment over time. It is the difference between the purchase price of an asset and the sale or divestment value. For example, buying a commercial property worth $10 million and selling it for $13 million gives you a capital gain (a gross gain, meaning capital gains tax and investment costs are excluded) of $3 million.

Whether or not the advertised rate of return includes this capital gain will be found in the wording of the investment, typically the Product Disclosure Statement (PDS) or Information Memorandum (IM).

Terms like ‘total return’ are likely to include the expected capital gain from the investment. Whereas the term ‘yield’ is specifically used to describe the regular income an investment will pay out. Know the difference, or simply ask the fund manager.

4. Who are the income trust managers?

income trust who are trust managers

Speaking of management, find out who is in control of your funds. Who are the decision makers? And what is their history?

You’ll want to consider investing with an outfit that has a solid track record of investments. Check out their portfolio or past investments.

Ask whether the income trust managers operate under an active license. The Australian Financial Services License (AFSL) is the minimum accreditation required for a company to offer investments to external parties. The holder of an AFSL must comply with the long list of criteria to ensure their investment services are provided with the utmost professionalism, care, and ethics.

Also ensure you understand the investment company’s corporate governance structure. What will happen to your investment in the unlikely event the business collapses or the CEO resigns? Prepare for every unexpected turn and also consult your financial and legal advisors before considering investment. It’s crucial you understand not just the returns of your prospective income trust investment, but the potential risks involved.

You can expect considerable upside if you simply do your research before investing in an income trust. This blog post by no means exhausts every consideration you should make before investing, nor does it constitute as legal or financial advice. But it should give you a solid starting block before diving in with an income trust.

More questions? Just ask us.

Commercial real estate investment comes with solid returns, long-lasting and secure cash flow, and the convenience of a set-and-forget investment. Its why most of our investors have joined us in our high-yielding trusts. But it also comes with complexities.

Guy DoggettDon’t just rely on blog posts like this one. Talk to the experts. Our Director of Investor Relations, Guy Doggett, is ready to answer your queries about how investment in a commercial property syndicate works. Select a time from his below schedule and get acquainted with us before you consider investing.

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Past performance is not indicative of future returns. Any information provided on this website has not considered the objectives, financial situation or needs of any investor; investors should consider whether it is appropriate to them to partake in a commercial property investment prior to investing, in light of their objectives, financial situation or needs. Every investor should obtain and consider the investment’s Information Memorandum before making a decision in relation to the investment.