Property investments are a whole new game for some people. When you invest in a property through a private company, there are several factors and angles you will have to consider first. Property investment is one of the biggest decisions you will possibly make in a lifetime. It can be an even bigger decision if it’s your first time in the property investment game.
However, the game changes when you have a solid understanding of the basics. Property investments via private companies are a lot different from investing on your own. Some of the differences can be very stark. Whereas some other differences – well, not so much.
With that being said, and before we start on the pros and cons of investing in a private company, here are some factors you have to consider before starting on your investment journey.
Property Investment by Definition
According to Investopedia, property investment means:
An investment property is real estate property purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both. The property may be held by an individual investor, a group of investors, or a corporation.
An investment property can be a long-term endeavor or a short-term investment. With the latter, investors will often engage in flipping, where real estate is bought, remodeled or renovated, and sold at a profit within a short time frame.
So yes, if you are someone looking to rent out a property after buying it, you are a property investor by definition.
Factors to Consider Before Going Through a Private Company for Property Investments
There are so many private property investors to choose from in the country. We are sure you will be
When you buy a property (from private companies or not), one of the common topics that comes up is about taxes. You will less likely be taxed on your properties until it starts expanding and reaches a substantial “taxable amount”. Having said that, according to Property Guru Malaysia, if you are a local investing in local properties of under RM500,000 then your corporate tax will be set at a 20% flat rate. It will be beneficial if your property exceeds RM500,000 though. At the same time, the company’s tax benefits can also include exceeding deductibles than your personal income tax. The personal income tax can include your employee payroll, capital allowances, and other operating expenses.
2. Mortgage availability
When you are planning to invest in property via a private company – are you planning to invest as a company or individually/personally? This criteria matters because when you look for an available mortgage, you will want to see if you can get a “better deal” for yourself.
If you are planning to get a mortgage as a company, then your borrowing limit will be lower compared to getting one on a personal level. Personal mortgages tend to be slightly higher but not by too much.
The similarity between a company mortgage and a personal mortgage is that you will need to have a guarantee. Just in case you cannot pay for the mortgage in any way some time down the road, you know. Just make sure that your finances check out!
3. Tax on dividends
This applies when you are renting out your property as a form of investment. The rent in this case is called profits, which will be subjected to corporation tax. If you are planning to withdraw this money for your own personal use, then you will need to pay tax on it.
It’s a bit tricky when you wish to live on the profits made from your own property. You may save taxes in some areas while not really saving on others. The best thing to do is for yourself to review and compare the figures on your own before settling for one.
4. Debt to Service Ratio (DSR)
This is the part where you get accessed for your credit scores (hello CTOS and CCRIS anyone?). If you wish to buy a property via a private company, you will get the DSR based on the company’s earnings and profits instead of your own.
Initially, it may look like a great idea. It’s faster for you to get a loan, right? Well yes at first. It isn’t a bed of roses until you are named the guarantor. Not a big deal? Sure, but it isn’t when the private company you’ve decided to go with shuts down. You were named as the guarantor. That means you will have to pay off any remaining sum of money until it is 100% paid off. Again, this is something you’ll need to access yourself before you decide to choose to go with a company or by yourself.
Pros and Cons of Property Investments via Private Companies
Now that we have talked about the criteria when looking into private companies for property investments, we will have a look at the pros and cons of going with one.
|Having several or multiple investors in one property||In Malaysia, properties can have up to 50 owners or investors at any given time. That means you can share the property with 49 other investors and share the profit together. If you do it via a company, the same rule applies. Together with 49 other investors, you are able to buy several properties together.
Usually, in these kinds of scenarios, you will get a professional manager who manages the pool investment structure.
|Finding people with similar interests can be difficult because nobody has the same income and interests as you do. So getting into the same property investments together may not seem as easy as some people think it to be.
However, when you and your group of friends decided to enter such investments, all collective investments in the pool must be kept private as per Section 43(1) of the Companies Act 2016. In summary, the main thing this Act says are:
-You cannot offer up any shares or debentures to the public/other people.
-You cannot allot (or offer to allot) any of the shares and debentures to offer such securities to the public.
-Invite anyone else from the public to invest or deposit money with the company.
|Executing Documents||As a property investor via a private company, you are allowed to delegate the signing authority to the directors of the company among many things. You can also:
||When you wish to delegate signing authorities and other similar matters (stated in the advantage column of executing documents), you may be charged with a cost. You may have to pay admin or secretarial fees, property management fees, among many other monetary charges. The charges and fees may not be much. However, when it adds up, it can amount to quite a sum of money.|
|Flexibility in disposal or transfer of property shares||Most private companies, if not all, allow you to transfer your shares back to the property for valid reasons. Maybe you don’t have the money to invest anymore or you may need the money pronto. Or maybe you just wish to place that money elsewhere for investments. Regardless of what reasons you have, private companies allow you to transfer the property shares back to it.
However, there are stamp duty charges that you have to take note of though. Below is the stamp duty rates (as per year 2020).
At the same time, stamp duty rates may be lower at a rate of 0.3% – depending on the consideration or market value of the property (whichever is higher).
|Private companies’ shares are not openly tradeable and it may be hard for the company to find potential buyers for smaller shares. It’s the same for fractional shares though as the figure may be too small or too low.
We have also come to find out that a private company’s property investment shares may be subjected to transfer restrictions, pre-emption exits, among many other restrictions. This can be very off-putting for some people, hence making them think twice about going through a private company for property investments.
Source: Donovan and Ho
There are many more pros and cons we can talk about when you wish to invest in properties via a private company. The above-mentioned points in the table are just some examples of the pros and cons.
In conclusion, we will strongly advise you to weigh out your options when it comes to property investments. Property investments via private companies have their advantages and disadvantages. However, if the bad outweighs the good, then perhaps investment through a private company may not be your best option on the table.
At the same time, you will also consider some of the criteria before you start your property investments via private companies. The criteria for property investments between private companies and individuals are most times the same. However, take note of the difference to see which one works best for you.