Interest in property investment is picking up, and rightly so, since it’s one of the tried-and-tested methods to building your personal wealth.
As more and more people are getting into it, it has also been made more accessible thanks to a larger selection of financing options.
If you’re thinking of investing in property, you may have heard discussions revolving around buying a property under a company. But, why would one do that, you may be wondering.
As it turns out, depending on your situation, there are actually some pretty neat benefits involved.
But first, are you a property investor or trader?
In order to tell the difference between an investor and a trader, one rule of thumb is the timeline that’s involved:
- An investor is someone who buys in order to collect rent, and then waits for many years to allow the property’s price to increase slowly before considering to sell it off.
- A trader is a person who buys a property in order to add a couple of valuable improvements, and then sell it off in a short span of time for a profit.
Now, why would either type want to purchase a property under a company, instead of doing so as a sole entity (read: individual)? Here are the 2 main reasons:
1) Tax benefits
Whenever there’s any talk of property taking place, the topic of taxes is almost always certain to pop up.
Taxes on property can be quite intimidating for investors, and it only grows in scale when your portfolio starts expanding.
One main advantage of buying properties under a company is the tax benefits.
If a company’s annual profit is below RM500,000, corporate tax is set at a flat rate of 20%. This can prove beneficial to you if you happen to exceed the 20% bracket for your personal income tax.
A company’s tax benefits also include more deductibles than your personal income tax, such as the employee payroll, capital allowances, and other operating expenses.
2) Purchasing property as a foreigner
Malaysia is one of the few countries that allow foreigners to directly own a piece of property, making it a very attractive property market.
If you’re a foreigner looking to invest in Malaysia’s property market, you might already know that you can only purchase properties that are at least RM1,000,000 in value (RM2,000,000 for properties in Selangor).
But did you know that you can purchase properties below this cap if you’re the director of a Sdn. Bhd. ("Sendirian Berhad") or LLP (Limited Liability Partnership) in Malaysia?
The property will then be considered a Malaysian-registered entity. This now widens the selection of property a foreigner can actually buy!
However, do take note that your financing options will be smaller due to loan-to-value (LTV) limitations on residential units.
What else should you consider before buying property under a company?
If you’ve been thinking about investing in property by buying one through a company, you might want to take the following into account.
1) Availability of mortgages
If you need to get a mortgage as a company, they tend to be expensive and have lower borrowing limits.
The availability of these mortgages is also quite limited. Although the number of options is still lower for companies as compared to individuals, the market is growing in this sector.
In some ways, it’s not much different from a personal mortgage – You’ll still be required to have a personal guarantee, and make sure your own finances check out.
2) Cost and hassle of setting up a company
If you’re thinking of setting up a company simply to buy a property through it, you might want to think twice. Owning a company, even a small one, is no easy feat.
Unless you have the financial means and the legal know-how, it may not be worth the cost and trouble of setting up your own company.
This may end up outweighing the benefits you would get from owning property under a company.
3) Taxation on dividends
Profits from your rental income are subject to corporation tax. If you decide to withdraw this money and use it for your personal needs, you’ll have to pay dividend taxes on it.
What this means is that you’ll essentially be paying two forms of tax – you’ll have to pay corporation tax on the income, and then dividend tax.
This can be a bit tricky if you’re thinking of living off the income from your property. While you may save on tax in some areas, you’ll have to pay extras in another.
It’s best for you to compare the figures and decide which option is best for your given situation.
4) Debt to Service Ratio (DSR)
The DSR is the maximum amount that a bank will lend you based on your income and expenses.
You might have already maxed out your DSR, but want to borrow more. If you buy a property under a company, you get the DSR based on the company’s earnings instead of your own.
It may seem like a good idea at first, but even though the company is granted the loan, you’ll end up being the guarantor.
This means that the bank is still going to be assessing your personal ability to pay back this loan in the event the company closes down.
5) Reduced exposure
If you’re looking to reduce your exposure to risk, then this will most likely not work for you. You’ll still be the guarantor for any loans taken, even if they are under the company.
If the company ends up failing and you find yourself unable to pay back the loan, then the banks will turn to you to settle the debt.
Disclaimer: The information is provided for general information only. PropertyGuru International (Malaysia) Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.