How to Choose the Right Company Structure for Property Investment for You

Understanding Property Investment Companies

Grasping the concept of a property investment company is a critical first step when looking into property investment. A property investment company is a legal entity that invests in real estate for the benefit of its shareholders and for investment purposes. The purpose of such a company is to source prime investment properties that correspond to the profile of each individual investor, including negatively geared properties. This type of investment is particularly suitable for high-income individuals who want to reduce their tax burden and optimize their tax returns.

Initial costs of establishing a property investment company include the property’s purchase price, loan costs, legal fees, and stamp duty. The establishment fee typically falls between 3% to 5% of the property’s purchase price. Moreover, managing a property investment company implies enduring ongoing costs such as council and water rates, various types of insurances, body corporate fees, land tax, property management fees, and mortgage expenses.

Property investment companies are just one option among various structures available for property investment. Others include:

• Personal or individual ownership
• Trusts
• Self-managed super funds
• Joint ventures

Each structure has its own set of advantages and disadvantages, which we will explore in the following sections.

Despite the benefits of using a company structure for property investments, potential drawbacks warrant consideration. These may include:

• Potential tax implications
• Relinquishment of personal control
• Potential legal complexities
• Difficulties in borrowing money for investments

For example, corporations may not be eligible for certain tax benefits, such as the 50% discount on capital gains tax, and finding a lender willing to loan money to a company structure, such as a unit trust, can be challenging.

Alternative Real Estate Investment Structure

Beyond property investment companies, alternatives like personal or individual ownership, trusts, self-managed super funds, and joint ventures are available for those exploring other options. Each alternative has its advantages and disadvantages, which we will explore in the following subsections:

1. Personal or individual ownership
2. Trusts
3. Self-managed super funds
4. Joint ventures

Familiarizing yourself with the diverse structures for property investment equips you to make informed decisions that resonate with your personal situation and investment objectives.

Personal or Individual

Personal ownership is the act of an individual acquiring and possessing a property in their own name, making it one of the assets held by the investor. This form of real estate investment grants the investor total authority over the property and is the most widespread type of investment.

While personal ownership provides certain benefits, such as simplicity and tax advantages, it may not offer asset protection and may leave the investment property vulnerable to creditors’ claims.

Trusts

Trusts are legal entities that enable individuals to manage and hold assets on behalf of another individual or entity, and can be utilized to purchase and manage real estate investments. Trusts offer asset protection and tax benefits, but they are subject to complex regulations.

There are several types of trusts available for property investment, including discretionary family trusts, unit trusts, and discretionary trusts. Each type of trust has its own set of advantages and disadvantages, such as the ability to distribute income flexibly and safeguard assets, or the necessity to distribute income annually and the incapacity to distribute losses.

Self-Managed Super Fund

Self-Managed Super Funds (SMSFs) are private superannuation funds that allow individuals to have more control over their retirement savings and investment decisions. They enable individuals to invest in various assets, such as property. SMSFs operate in regards to property investment by using the funds within the superannuation account to purchase and manage investment properties. This can potentially offer tax advantages and the possibility of capital growth.

However, when investing in property through an SMSF, there are rules and restrictions that must be adhered to.

Joint Venture

A joint venture in property investment is an arrangement wherein two or more parties combine their resources, knowledge, and capital to invest in a property development project. It requires the sharing of risks, costs, and profits of the investment.

Joint ventures can be advantageous for investors who want to access larger projects or leverage the expertise of other partners. However, joint ventures also come with potential drawbacks, such as conflicts and disputes between partners, an increased risk of liabilities, and restricted control over decision-making.

Evaluating Your Investment Goals

Prior to beginning your property investment journey, it’s important to assess your short-term and long-term investment goals. This includes considering factors such as your desired level of risk, financial readiness, and the types of properties and locations that align with your objectives.

Additionally, first-time investors and high-income earners should take into account specific strategies and considerations tailored to their unique situations.

Short-Term Investment Goals

Short-term property investment goals typically focus on swift returns and investments with higher risks. Examples include saving for a down payment on a home, buying a car, or funding a vacation. Setting short-term goals necessitates a clear purpose, the breakdown of your objectives into manageable steps, creation of a timeline, and regular progress tracking and review.

Long-Term Investment Goals

Long-term property investment goals prioritize stability and passive income, gradually building wealth over time. Examples include constructing a property portfolio that generates passive income or owning multiple investment properties by retirement age.

Concentrating on long-term goals allows you to build a robust foundation for your property investments, navigate market fluctuations more effectively, and achieve a national reach.

First Time Investors

For first-time property investors, self-education on the property investment process and consideration of factors like market research, investment objectives, and financial preparedness are essential. By understanding the various investment structures and strategies available, you can make informed decisions that align with your personal circumstances and goals, ultimately increasing your likelihood of success in the property market.

The Buying Process

In the property buying process, comprehending the different methods of property acquisition is essential. These include purchasing property individually or jointly, through a trust structure, or through a self-managed super fund. Each method has its own set of advantages and disadvantages, which we will explore in the following subsections.

A thorough examination of the various property acquisition approaches helps you make informed decisions that align with your personal circumstances and investment objectives.

Purchasing Property Individually or Jointly

When purchasing property individually or jointly, the process entails:

1. Transferring the ownership of the property to the individual or joint owners through a contract outlining the terms of the purchase.
2. Paying stamp duty on the property.
3. Signing a contract outlining the terms of the purchase.

While individual ownership provides certain benefits, such as simplicity and tax advantages, it may not offer asset protection and may leave the investment property vulnerable to creditors’ claims.

Trust Structures and Self-Managed Super Funds

Navigating trust structures and self-managed super funds for property investment requires understanding the unique regulations and processes involved. In the case of trust structures, property ownership is transferred to the trust, requiring the payment of stamp duty on the property and the creation of a trust deed specifying the regulations and parties involved.

For self-managed super funds, properties are purchased using the funds within the superannuation account, provided that all regulations set by the SMSF are adhered to. It’s essential to research the specific requirements and costs involved in each option before embarking on your property investment journey.

Building Your Investment Portfolio

A successful property investment portfolio hinges on the equilibrium of risk management, capital growth, and rental yield. By employing a variety of strategies, such as diversifying investments, instituting suitable insurance coverage, establishing a contingency fund, and consistently monitoring and evaluating market conditions, you can minimize risk and maximize returns.

Exploring the different types of property investments, such as residential, commercial, industrial, and mixed-use properties, and considering the available locations, including cities, suburbs, rural areas, and international markets, is important.

Selecting the Right Property Investment Structure

Selecting the appropriate property investment structure is a key step in your investment journey. Various structures, such as:

• Company structures
• Individual ownership
• Trusts
• Joint ventures
• Self-managed super funds

are available for property investment. Each structure has its own set of advantages and disadvantages, which we will explore in the following subsections.

With a clear understanding of the various property investment structures, you will be in a position to make an informed decision that suits your personal circumstances and investment objectives.

Company Structure vs Individual

When comparing company structures to individual property ownership, there are key differences to consider. Owning property as an individual provides personal interest in the property and the capacity to rent or sell to relatives, with potential tax benefits such as negative gearing.

Owning property through a company, on the other hand, offers increased asset protection and the opportunity to access tax deductions. However, there are also drawbacks to consider, such as the vulnerability of individual property owners to potential lawsuits or creditors.

Company Structure vs Trusts

When considering company structures versus trust-based property investments, it’s important to weigh the pros and cons of each. Trusts offer asset protection and tax benefits, but they are subject to complex regulations and require the payment of stamp duty on the property.

Company structures, on the other hand, provide limited liability and potential tax savings but may involve higher fees and rates.

Company Structure vs Joint Venture

Evaluating company structures against joint venture property investments reveals distinct advantages and disadvantages. Joint ventures offer access to additional resources and capital, shared expertise and knowledge, diversification of risk, and enhanced purchasing power. However, they also come with potential drawbacks, such as conflicts and disputes between partners, an increased risk of liabilities, and restricted control over decision-making.

Company structures provide more control over decision-making but require more resources and capital to set up and maintain.

Company vs Self Managed Super Fund (SMSF)

Weighing the benefits and drawbacks of company structures versus self-managed super funds for property investment involves considering the tax implications, control and flexibility, and setup and running costs of each option.

A company structure is liable to corporate tax rates on rental income and capital gains, while a Self-Managed Super Fund (SMSF) is obligated to pay 15% income tax on rental income from the property. An SMSF provides greater control and flexibility in comparison to a company structure, as well as a broader range of investment options.

However, the setup and running costs of a Company Structure and a Self-Managed Super Fund (SMSF) for property investments can differ, so it is prudent to consult with professionals or conduct further research to gain a more precise understanding of the costs involved in each option.

Summary

In conclusion, building wealth through property investment requires careful consideration of various factors, including different investment structures, strategies, and goals. By understanding the ins and outs of property investment companies, alternative real estate investment structures, and investment goals, you can make informed decisions that set the stage for a successful property investment journey. Remember to consult with professionals, such as financial advisors and real estate agents, to tailor your investment strategy to your unique circumstances and objectives.

Frequently Asked Questions