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Hi guys, Jason here from Positive Real Estate. Welcome to the Friday email, a bit of tips and strategies of property investing and how to keep motivated and keep going in the property world.
Now listen, today I’m going to talk about a few things, not necessarily about the strategies of the specific properties, how to buy a property at a discount or renovation or something like that. One of the things as a property investor we must always consider, especially in the early stages of property investing, is when we go to buy a property, what structure or what type of entity are we going to own the property in or buy the property in? What do I mean by that?
There’s three ways you can own a property, specifically in property investing.
- You can own the property in your own name which is useful for some reasons.
- You can own it in your company or a trust structure or a combination of a number of different types of trust and company structures.
- Or you can own it in a superfund.
Okay, three ways. Now when you use choose those three ways, you’ll have a different outcome financially now and later, which is very, very important as a property investor to consider. So those are the things that I want to cover today.
Before I jump in to that, I want to just talk about three phases of a property investor’s life. Over the years, I’ve coached hundreds and hundreds of people in property investing. They’ve been from 18 years old to 80 years old. And obviously, people at different ages will require different strategies and different buying entities and structures to be a property investor and get the maximum outcome short term and long term. There’s not that one size that fits all. It’s very specified for you as an individual and what you do, whether you’re a PAYG in, whether you’re a business owner, whether you’re a self-funded retiree, whatever it might be. You will choose different ways to buy properties for a specific outcome. I’ll show you what I mean by that in a second.
So the three phases of a property investor’s life over time are pretty simple to understand. There’s the acquisition phase. That might be a time frame of zero to 30 years. It might even be longer, zero to 40 years, who knows? This acquisition, this is where you’d go and start buying property. You’re buying property to obviously create wealth. And as you go ahead and do that, in the early days, quite often, you’re looking for the highest loan to value ratio possible, you’re trying to get your money to go a bit further. If you can borrow at 90 percent, you might go ahead and do that. And so you’re trying to get your loan to value ratio up.
Quite often in that stage, when we buy properties especially if you’re looking for good capital growth property, often that comes with some sort of negative cash flow. And we might have to top that negative cash flow up with some structures about buffers. We might have to use our tax deductions. You might even tip about income in to make sure it all works as we go along as a property investor. How we structure that really well at the beginning make sure that we’re able to continue to move forward from a cash flow point of view and a servicing point of view.
So in acquisition, there’s some certain things that we got go ahead and attempt to achieve. Using our tax deductions is really important at that stage and we talk about negative gearing. Now you can get a tax deduction as well has having a positive cash flow property. A lot of people think that positive cash flow, you’re going to need tax refunds. That’s not correct. And so in the beginning, in acquisition, we got to make sure we combine these things very, very well.
In the next phase which I call consolidation phase, where sometimes, people might choose to sell some of their properties, so this is some of the things we say, buy ten properties in acquisition, sell five and keep five in consolidation phase. The point of consolidation phase is to reduce your loan to value ratio and increase your cash flow to make it positive cash flow in consolidation phase. So we may have bought ten properties over ten years. We sell five, and we own five outright. Our cash flow goes up and we own those properties with little or no loans against it. That would be a fantastic outcome, let’s say in ten years’ time, ten properties to five we own outright.
And then lifestyle, obviously, depending on your own outcome that you want to achieve, a lifestyle outcome. Some people call it a legacy outcome as well, maybe a lifestyle or a legacy. You want to go and live it up big and have a party or whatever it might be or you might want to leave some money or some of your assets and income and value to charities or something special, whatever it may be. Those are some specifics that obviously you’ll choose to do at some point in time.
But if we want to get to this place in a good comfortable way, in a clever way, we must choose to buy these properties, or any investment, really, but properties’ I’m talking about today, in a clever way, because we want to be able to try and minimize some of the things, the in and out costs of buying real estate. What are those in and out costs of buying real estate that really erode our profits and every clever investor knows, if you manage them well, you’ll end up with a better result.
What are they? They’re taxes, income taxes. As a property investor, we pay income tax. We can use property to minimize our income tax. That’s one. Land tax, can we minimize land tax? The answer is yes. Capital gains tax, can we minimize capital gains tax? The answer is yes.
Now how do you go ahead and do that is how you buy these properties. Now I was talking about before, how you structure them, okay, which entity you buy them in. The three entities, what are they? Who remembers that? Your personal name, you can buy them in a company, trust structure or even buy them in a superfund. Let’s make a little superman thing there, superfund.
So if you buy a property in your personal name, what are the advantages of that? Personal name, the advantage is the best one that is around right now is very easy to get a personal tax deduction. If you’re a PAYG owner, you can get your tax deduction. And many, many investors that I know had reduced their tax down, and some of them reduced it to zero legally through a tax deduction process called the PAYG variation, a 221D, any decent accountant who understands property can do this sort of stuff for you. Make sure you go and see your specific accountant to make sure you get it right. When you buy a property, you get a tax deduction, and you can offset your income tax. And that’s fantastic, well done. So then in your personal name, that’s fabulous. It’s much easier to borrow money in your personal name. It’s very easy to lend from the banks.
One of the downsides of owning property in your personal name is asset protection. What happens if you have an issue and someone wants to try and take your assets, your personal name, it’s very, very open to attack. So these are the things we got to balance out as property investors. Easy to get the tax deductions, easy to get the loans, some of the risk, and you got to weigh them up. Go and speak to a good financial planner or a good accountant to find out what specifically is going to work for you.
A company tax structure. Company tax structures, there’s some benefits to those, they give some asset protection. They give some abilities to offset profits and losses. Depending on what type of structure you use, you can do some income tax adjustments as well. However, the problem with those company tax structures is that they’re expensive to run. They cost you two or three or four times the amount, thousands of dollars each year if you got two or three or four or five of them, they’re going to cost you tens of thousands of dollars each year to maintain and audit and keep your house in order. And so, that’s the downside. If you’re only going to buy five or six properties, then a company tax structure may be prohibitive just because of the costs. They’re difficult to borrow money, especially right now. Some people that I know, as property investors, have been limited from buying property because their properties’ are in a company’s tax structure, very difficult to get hold off. But there’s some benefits there by offsetting capital gains tax and profits and losses and those sorts of things. But that’s something you’ll have to speak to an accountant about again.
Your superfund and this is something that’s a really hot topic right now. The superfund is fantastic, depending on your age and depending on what you’re trying to achieve, how many properties you want to buy, you can buy property in your superfund. Did do know over the age of 60 you can pay zero capital gains tax in your superfund. Even before the age of 60, the capital gains tax is significantly reduced as well, down to 10 percent. So as a property investor, that’s fantastic. We love that sort of stuff.
We want to minimize our costs; we want to maximize our profits. So you might buy some in your personal name. You might buy some in your superfund. And you might try and combine a really good outcome, a clever outcome as a property investor. And that minimizes your taxes and maximizes your profits as a property investor. And the way to structure obviously, will be specific to each individual as you go along. And so you must go and see someone who’s got the right nose and the right passion about property investing, too, like you.
So anyway, everyone, that’s about for me this week. If you want to find out more about this sort of stuff, you need to come along and visit one of our property information nights. They’re all around the country. And there are guys and girls there who are our coaches, talk about this sort of stuff. Our accountants are down the back of the room.
And this month, we’re running our mentoring program, a special on how to buy property in your superfund. We’ve got a very, very clever guest, one of our guest coaches who’s a specialist on superfund buying properties. And that will be fantastic, too.
So come along to our property investments information night. Find out a little bit more. And hopefully, it gets you going, gets you excited and you end up with a far better outcome as a property investor than people who don’t consider these sorts of things right from on the first stage of property investing which is the acquisition stage.
Until then guys, take care and bye for now.