Thursday, 3 July 2014

Property Investment Vehicles

Using an investment vehicle for your property venture is a topic that I wished I knew earlier. So far, none of the properties that I have purchased utilizes an investment vehicle. Now knowing some benefits of this method, I may consider this in my next purchase.

I discovered this tip from my property agent (who was just as clueless as myself!) who casually ask me the question, “I have been servicing a loyal client over many years, every time he makes a property purchase he would form a company and buy in the company 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 some value information that I discovered.

Overcome Local Property Ownership Laws

An experienced property investor friend of my mine shared with me once that in the Iskandar Region in southern Malaysia, foreign property owners must resell their properties to a local below RM1mil. 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.

Tax Exemptions

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 would therefore be tax-free for the first few years!

Tax Reductions

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 just to name a few are, utilities, repairs, agent fees, maintenance fees, property taxes, furnishings and renovations.

Property Sharing Agreement

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 shareholder’s 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.

Larger Pool for Investment

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!

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 xyz. 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.

Perhaps one day, I could manage my own mini REIT through this method! I hope the day will come when I can blog about this! 

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