Thinking About Property Investment - Consider These Tips
As the aim of the wealth-creation game is to control not own assets, the single biggest mistake you can make in real estate is to buy property in your own name. It is always wise to consider the reasons why property investment in a company or business name is perhaps a smarter alternative.
Asset Protection
While it may be cheaper (and easier) to buy assets in the name of an individual, purchasing an investment property in your own name has the potentially dangerous result of mixing your personal and investment assets. As such, if you are sued by a tenant (for example), all of your personal assets may be up for grabs. If you are sued personally then all your investment assets will likely be at risk also.
The end result is that you could work extremely hard for many years to build up substantial personal wealth only to lose it all to some unfortunate event.
Income Tax
Although the federal government has increased the thresholds, individuals remain the highest taxed of any entity in Australia, with a maximum marginal income tax rate of 46.5% (including for the Medicare levy).
Even if you don't earn a large salary, if you sell one or more profitable investment properties in a financial year, your personal income could spike for that year and push you into the highest tax bracket. In fact, the major reason that people buy investment properties in their own name is to access the losses arising from the negative gearing of those properties (where expenses are greater than income), since these losses can be offset against their personal salaries. The net result of this is a lowering of the overall amount of income tax paid.
What seems to make sense in the short term however, may end up proving a poor decision in the long run if the properties are sold and the individual is pushed into the top marginal income tax bracket.
Leverage
When property is purchased in your own name, the mortgage will also be registered in your own name. There are two critical variables that determine how much a lender will allow you to borrow, they are:
Your income. Your personal net asset position.
Once you have reached your borrowing limit, it won't matter how many other lenders you approach, they will all consider your circumstances the same way because they all apply the same rules to the lending assessment. The banks will look at how much debt you are already carrying and it won't take them long to conclude that you're already at your limit. So what can you do to get around this problem? The only realistic options available to you are to earn more income or sell some property to reduce debt.
The truth is though; if you had been properly structured in the first place you could avoid this problem all together. If you are set up correctly for borrowing you should be able to borrow against your income and asset statement over and over again, not just once. The secret is to carry the investment debt as a guarantor rather than in you own name. This way, when you max out with a lender you can head up the road to the next one and start all over again.
In summary then, buying investment properties in your own name:
Provides low asset protection. Means you may pay as much as 46.5% income tax (in Australia). Places a glass ceiling on your borrowing capacity.
Next time you look to borrow for investment purposes you may consider doing things differently now that you have acquired this knowledge. Perhaps you have some ideas of your own regarding borrowing for property investment purposes. If so, why not leave us a comment below.
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