How to structure property investment as a company

How to structure property investment as a company

November 8, 2019

The purpose of a property investment company is to buy property to make a profit while reducing the liabilities and risks to each individual investor. There are benefits and disadvantages for a company purchase of property over an individual purchase so it's important to look into all the facts before you proceed to make sure you have a good match for your purposes.

A company is considered a separate legal entity which means that the company and not you (and your stakeholders) will be linked to the real estate property contract, deed or mortgage.

In the instance of an individual, if you were not able to make payments and you had assets in your name, these can be used to pay back your outstanding loan to your lending agent or bank. This is not the case with company purchases because your assets belong to you and not the company, so they cannot be claimed to settle any outstanding debt.

This is also the case if someone suffers an injury while at your property. You would only be required to pay a share of the settlement from company money, your personal income and assets would not be considered as claimable assets.

That's only if something goes wrong, obviously, when you make your purchase you expect things to go right, in which case whatever profits are made will be shared out according to each stakeholder's investment.

There are several ways to structure a real estate holding company which include a sole trader, a partnership, discretionary trust or corporate structure.  Creating a company has some start-up benefits, the admin process is pretty straight forward, it is not overly expensive to put together or register, it can be self-managed by those who have shares, it allows you to isolate income, the property income, as well as, simplifies your tax and bookkeeping.

To lessen the financial burden and risks, you will need to source reliable investors. For example, if you have three people contributing equal shares you only need to come up with 1/3 of the deposit and 1/3 of the loan repayments yourself. Care and research need to be taken into your member choice, even if you know the person or people very well, i.e, they are friends or family members.

While it might seem offensive to ask about their loan history and credit ratings, this is a business opportunity and needs to be treated like it from the very beginning.

Make sure your company is made of individuals who you trust to make repayments and who have similar goals to you for the type of property you want and how the money will be made.  

Like any company, the purchase is about making a profit so that will be an important driving factor to how your company is structured and what type of property you will purchase. You need to ensure that you will be earning enough money to make all the repayments and have enough profit to make the stakes worthwhile.

A property can either be purchased to renovate and resell 'flip' at a significantly higher price in a short space of time, or it can be purchased to hold for renting out. Knowing which one you are targeting is important, so you can pitch to stakeholders as well as find and purchase your company investment property.

As well as raising funds and sharing responsibility, a company can make gains through tax benefits.

For overseas investors it allows them to become part of an Australian company for the purchase and avoid paying the additional tax applied to non-Australian residents for both the property purchase as well as income tax. It can also mean they won't need to pay income tax twice, once in Australia and then again in their own country when their funds hit their personal bank account.

Another tax break is lower tax rates. As a company, you can claim the corporate tax rate, which in Australia is 30%. This is significantly lower tax rates for individuals, with the highest marginal rate being 49% (including the Medicare levy etc).

Franking credits are also available on company dividends paid from after-tax profit.

Disadvantages

One of the disadvantages is the ongoing admin costs of having the company. For this reason, a home that you plan to dwell in is better purchased as an individual and investment properties are better company purchases.

The 50% Capital Gains Tax is not available to company properties. It may lead to higher tax bills at the end of the financial year.

Also, any loss you incur will need to be offset against the income the company earnings.

The other important thing to consider is the loan. It can be more difficult to secure a loan under a company name and you may have to go through the business banking arm of your bank and be subjected to different loan criteria.

How to structure your company

Your company will be made up of directors who manage the company and shareholders who have a financial investment in the company but are not involved in everyday operations. It is not unusual for members to be both in a small company.

Some things you need to have clearly defined before you start include:

-Rules of ownership and operation
-Instructions for how to handle profits and losses
-Each member's interest percentage
-The rights and responsibilities of each member
-Management duties
-Voting methods, criteria and timeframes

It is recommended that you get a professional legal representative to draft your shareholder's agreement once you have more than one shareholder onboard. The agreement will cover how and when decisions will be made and approved, how and when payments will be made and what to do in the instance of a dispute between shareholders.

As with any property purchase careful research and knowing your desired outcomes and budget are important focal points you need to keep referring back to.

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