THE IMPORTANCE OF THE CORRECT STRUCTURE FOR YOUR PROPERTY INVESTMENT PORTFOLIO
If you want to build up a property investment portfolio over your lifetime (which is the best way to build wealth), there is no other option than having a proper structure.
When you acquire investment properties, it is imperative to acquire them in a company with a Holdings Trust holding the shares of the company or in a Property Trust.
Below are our top FIVE reasons for having the correct structuring for your property investment portfolio.
1. RUN YOUR PROPERTY PORTFOLIO LIKE A BUSINESS
I always say that buying a property in your name is like running a business out of your savings account. It may be cheaper, but it will not help you build credibility or enable you to get funding or financing in the future. If you want your business to be taken seriously, you want to run the business in a separate entity with its own bank account and its own annual financial statements.
Read our article, How To Run Your Property Portfolio Like a Business, for more information on this subject.
2. BUILD A BIGGER PROPERTY PORTFOLIO
Buying property in the correct structure makes it possible to build a much bigger portfolio than what you would be able to build in your name. You very quickly reach a ceiling when acquiring investment property in your personal name.
Now, the correct structure is by no means a golden ticket to getting unlimited financing or funding to expand your property portfolio. Still, you can build a significantly larger property portfolio in the correct structure versus in your name.
3. TAX BENEFITS OF THE CORRECT STRUCTURE
Owning properties in a company with the shares held in a Holdings Trust and owning properties in a Property Trust directly provide great tax benefits.
When a company owns property, it is, in most instances, taxed at a lower tax rate than if you hold the property in your personal capacity. When a trust (directly) owns property, the conduit principle can be applied, which is a great mechanism to channel and split profits or capital gains to beneficiaries. The beneficiaries then pay taxes in their personal capacity at their tax rates and with their exemptions applied.
Another great tax benefit of using the correct structure is that tax-deductible expenses are much better recorded, and losses are much better accounted for to write off against future profits or gains (since you have to have annual financial statements in place and your entity has its own bank account).
4. PROTECT YOUR ASSETS
The reason why a trust should always be the owner of all assets, either directly, as is the case with the Family Trust or Property Trust or indirectly, as is the case with the Holdings Trust that holds the shares of the companies that own the property, is that assets are protected. If anything happens to you financially, you want to ensure that your assets are well protected, which can only be effectively done through trusts.
Read our article, Understanding The Purpose Of The Family Trust, to learn the best ways to protect your assets.
5. ESTATE PLANNING BENEFITS
One of the greatest benefits of the correct structures is that it does not form part of your estate when you pass away or if you are declared insolvent. This also means that there are no estate duties, capital gains tax, executor fees, or transfer fees on death.
P.S. SO WHERE SHOULD I BUY A PRIMARY RESIDENCE AS A PROPERTY INVESTOR?
I would never buy even one property in my personal name. This is because I do not want to expose my primary residence, have my primary residence form part of my deceased estate one day, or want my primary residence to limit me in acquiring investment properties.
You will often be advised to buy your primary residence in your name due to the capital gain exemption on your primary residence, but this comes at a cost. Your primary residence could be exposed to creditors, you have unnecessary costs on death, and it could cripple your ability to buy investment properties after that due to overexposure to debt in your personal capacity.
So, which is more important? To save in taxes or build wealth? You can answer that question for yourself…
In conclusion, make sure that you acquire investment properties in a company with the shares held in a Holdings Trust or a Property Trust. And if you have already acquired property in your personal capacity, read our article, To Restructure or Not to Restructure your Property Portfolio, for more insight into the matter.
Don’t miss out on our next property investment seminar where we will discuss this in more detail.