By Tam Ging Wien (guest contributor)
Using an investment vehicle for your property purchase is a topic I wished I knew about earlier. So far, I have not used an investment vehicle for my property purchase. But knowing now the benefits of this method, I may consider it for my next purchase.
I discovered this tip from my property agent (who was just as clueless as myself!) who casually asked me the question: “I have been servicing a loyal client for many years, and every time he makes a property purchase he will form a company and buy in the company’s name. Do you know why?”
I set out to research this topic and to my surprise, I discovered a wealth of advantages in doing so! Here are the five benefits of using a company to invest in property.
Benefit #1 – Overcome Local Property Ownership Laws
An experienced property investor friend shared that in the Iskandar Region in southern Malaysia, foreign property owners must resell their properties to a local if the value is below RM1million. Some savvy investors therefore incorporated a local company to purchase the property and later sold the company (with the property as an asset) to other investors. While I can’t verify the story, this might be an interesting point to research when investing in foreign properties.
Benefit #2 – Tax Exemptions and Reductions
To encourage small businesses, countries in South East Asia have special tax laws where new companies enjoy tax exemptions for the initial years of incorporation. The income generated from the property could therefore be tax-free for the first few years.
In most countries, companies enjoy a much wider variety of tax breaks or deductions. As a property investment company, many of the expenses incurred can be expensed in the company books. Examples of expenses include: utilities, repairs, agent fees, maintenance fees, property taxes, furnishings and renovations.
Benefit #3 – Clean Way for Multiple Investors to Invest
Direct property investments require high upfront capital. Therefore a group of investors may pool resources together to share in a property purchase and profit together. By incorporating a company as an intermediary, the shareholders can easily draft terms and agreements into the company’s shareholders agreement. The share of the property can also be easily apportioned by using company shares. In the unlikely event of death, bankruptcy or major illness of one shareholder, the interest of the remaining shareholders is still protected using company law.
Benefit #4 – Ability to Make Larger Investments
By incorporating a company to pool resources together, a group of investors could potentially negotiate for better prices with developers by making bulk purchases. Perhaps with a larger pool, the group of investors may even acquire costlier properties with higher yields such as shop houses or even buildings.
Benefit #5 – Enjoy Company-Specific Benefits
Many governments support small and medium businesses by providing assistance to support their businesses. This may take the form of tax rebates, innovation credits or something else. A good example is Singapore where the government has encouraged local businesses to improve productivity through the PIC scheme. The scheme provides up to 60% grants to businesses that invest in innovative ways to enhance their business productivity.
By guest contributor Tam Ging Wien, an avid investor and blogger who spends his time empowering the masses in financial education.