“Should I buy a rental property?” – It’s the million(s) dollar question! We’re not financial advisors and can’t tell you how to spend or invest your money. We can, however, be an ear to listen, bounce ideas off, and pass on any experience we’ve got in the area.
There are generally four common ways to build wealth; work your arse off in a job, use your skills to start a business, buy shares or invest in property. The way you go will usually be pre-determined by your appetite for risk. All the options have their pros and cons, well maybe not working your arse off but hey you have to start somewhere! Although we have an appetite for building businesses, we also understand that investing in property can have its perks especially if it is done the right way. Remember it’s not usually what you do but how you do it that counts
Our first piece of advice would be to get some advice before you buy. Whether you are buying a business or investing in a rental property, how you structure the purchase can make a big difference to your overall wealth.
With any investment, you should always begin with the end in mind. The more you chop and change the more unnecessary compliance costs and distractions you will create. There may be tax implications if you get it wrong too. One size does not fit all when it comes to the ideal structure. It’s important to consider your overall income position or future income position, what other assets you own, and how important asset protection is to you. Everyone’s situation is slightly different and it’s crucial to understand the big picture before pulling the trigger and settling on a solid structure.
A common situation we see is someone who has outgrown their home so is looking to buy a new home. During home ownership they have created enough equity to turn their current home into a rental property and buy a new home. This could be a great time to sell your current home to a company structure and buy your new home in your own name/Family Trust.
A company structure has limited liability which means any claims against the company are limited to the net assets in the company. It makes commercial sense to limit this risk as much as possible and protect your assets. In this example, we’d suggest having a mortgage in the company (the new rental) as close to the market value of the property as possible. The crux of it here is high debt in the Company (rental), and high equity in your new home. From a tax perspective, this is beneficial because interest in the Company (rental) is deductible.
With interest rates at record low levels, property portfolios around the country will start to generate taxable income. Another trick in our toolbox to keep tax as low as legitimately possible is to increase the depreciation on the depreciable assets. One of the quickest and cost-effective ways to do this is to get a chattel valuation when you sell your property to a company. While there’s a small up-front cost, the savings in tax are typically made back within the first year.
Not to sound like a broken record… but this is a general example, and if you’re getting other things going on, we would look at your full picture before giving any concrete advice! In the meantime, it might also be a good idea to look at what your obligations would be as a landlord and gather whether abiding by these obligations would require any extra costs. Check them out here.
Your Outside team