This article was written to describe the key elements of establishing and managing a successful property portfolio. These elements are profitability, scalability, sustainability, structuring for asset protection, tax minimisation, borrowing capacity and succession planning.
Profitable
You might have heard of negative gearing and how this can be used when purchasing property to reduces taxes, there are scenarios when this can be a useful strategy such as being an above average income earner wanting to reduce your income tax, however my perspective of a successful investment is that you generate money from it, you want your real estate to return a profit each year.
You don’t want to pay more than your fair share of taxes, but the by-product of successful investing is paying taxes.
Just think, how many properties can you own if they are all losing money? Perhaps one, maybe two, best case scenario three! My point is that there is a limit to this strategy before your properties start eating into your cashflow. This also leaves you at unnecessary risk if your income earning capacity is reduced due to unforeseen circumstances.
Scalable
Most people do not have enough cash to purchase multiple properties debt-free and retire off the passive income. Generally, there are three distinct phases to achieving this goal:
1. Maintain regular stream of income, set aside savings, and manage your outgoings.
2. Use your income and savings to finance real estate, which in turn leads to capital gains.
3. Use your capital gains to purchase investments debt-free which in turn provide a passive revenue stream regardless if you work or not.
Sustainable
The main obstacle I have seen in practice is that investors run out of cash to buy more property to use as deposits or cannot borrow more money from lenders.
I have helped clients solve this issue by organising their affairs and presenting their financial statements and tax returns to lenders, setting up realistic budgets, and calculating a safe level of debt.
Secondly, by advising clients to purchase property in an appropriate accounting structure, having an appropriate structure for your investment properties is crucial to protect your assets and minimising your income tax whilst growing your portfolio. Not having the above in place will restrict your ability to consistently purchase properties.
Structuring
An often overlooked but essential issue to consider when purchasing property is how to structure the purchase?
The term “structure” is used by Accountants and Lawyers to describe how you will own and control your property wealth. Ideally, a solid structure will:
1. Protect your assets
2. Minimise your taxes legally
3. Maximise your borrowing capacity
4. Provide flexibility for succession of wealth
Asset Protection
You may be asking why do my assets need protecting?
Say you are sued; you do not want everything you worked hard for to be at risk of being lost.
By separating your investment assets into separate structures and out of your personal name, you limit the amount potential litigators can attack.
This is especially important for professionals giving advice such as doctors, lawyers, and financial planners to tradies such as builders, carpenters, plumbers, electricians that could be sued for faulty workmanship. Also, business owners are at higher risk.
Unfortunately, we live in a world where if you have wealth, you must take actions to protect it.
Tax Minimisation
Another important reason for having the right structure in place is to minimise taxes, we are talking about thousands to potentially tens of thousands of dollars.
This is a complex area with many finer points to consider that do not form part of this article, however when set up, is a completely legal and ethical way to reduce your taxes.
Borrowing Capacity
The way in which you finance your property and the entity it is purchased in will affect your borrowing capacity. Your lender normally determines your borrowing capacity based on your income, once you reach your limit, access to finance dries up.
Purchasing property through an appropriate structure allows the finance to be secured against the property in that entity rather than against your personal name.
The entity who controls that property owning entity would provide a guarantee which is the promise to repay the loan if it defaults. Therefore, subject to criteria, your personal income can be used to secure finance multiple times because the property is not held in your name.
Succession Planning
The day will come when the wealth you have accumulated will pass onto the next generation. Having the appropriate structure in place from the beginning makes this process much smoother and easier to transition control when that time comes whilst minimising any unnecessary fees and taxes.
It also protects these assets from being contested as they will not form part of your estate if structured correctly. This is important if you wish to leave specific properties to certain family members or protect family members in the event of bankruptcy claims, divorces, or business disputes.
No matter what stage of the property purchasing cycle you are in, I am here to help you ensure the best outcome is achieved.
Thank you for taking the time to read our article.
Disclaimer
No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is for discussion and education purposes only and the editor is not responsible for the results of actions taken on the basis of information in this publication, nor for any error or omission from this publication. This editor expressly disclaims all and any liability to any person, including reader for any part of this publication.