One of the most common questions that property accountant Munzurul Khan receives from his clients is about the best structure to buy their assets in — should they buy in their own name, a partnership, a trust, or in other more sophisticated structures?
The question remains relevant due to the many different structures available for property investors to choose from.
According to Munzurul: “One can buy on his name … one can buy it on a partnership … [and] one can buy it on a trust, and there are different levels of trust. You've got a family trust, discretionary trust, [and] you've got a unit trust.”
“One can buy it on a corporate entity, one can buy it on a joint venture, one can buy it on a self-managed super fund, one can buy it on a special purpose vehicle.”
Like all investment strategies, choosing the best structure to buy in will be dependent on the investor’s personal circumstance. Before signing a contract, it’s always best to speak with your accountant to determine which structure will work best in line with your goals as well as your capabilities and limitations as a property investor.
Example 1: Buying a principal place of residence
Simply put, when buying a home, one should make sure to purchase in “the low-risk provider’s name”, Munzurul said.
The accountant explained: “If ... the wife is sort of in the open world and earns quite a bit … and the husband's income is more or less reasonable ... it [should] be bought on the husband’s name.”
“[He is] the lower income earner, so his risk is rather low,” he added.
For the purchase of a principal place of residence, an investor will do good to remember the “Golden Rule”: Whoever poses a lower level of risk should own the property.
Example 2: Buying an investment property
Determining the right structure to buy in becomes more complicated when one decides to purchase a property as an investment. Basically, a property investor must, first and foremost, make himself aware of the purpose that the property will serve as a part of his portfolio.
According to Munzurul: “It depends on how the property is … Say, if the property is more of a negative viewing if the property is more sort of your tax benefit ... buy that on the higher income earner so you get more tax benefits.”
“It [also] depends on what you're doing with that property … Are you sort of converting that into a house plus another property, [like] another granny flat? [Then it] becomes more of a positive cash flow [so] you buy it on the lower income earner,” he added.
Example 3: Adding another property to a portfolio with four or more assets
For more advanced investors, buying in a trust is recommended for its several benefits, including asset protection and the ability to conduct longer-term tax planning.
Self-managed super funds and joint ventures or unit trusts are also two of the top choices for seasoned property investors who have gathered substantial funding, especially those nearing retirement.
When choosing a structure to buy in, property investors must remember that there is no right answer for everyone. There are many different options to choose from, so it’s best to study one’s own circumstances together with trusted property experts and professionals.
“Everyone's circumstance is different ... Only by truly uncovering people's financial position, financial objectives, financial maturity, financial capabilities, and financial goals can you actually determine what to buy assets in,” according to Smart Property Investment’s Phil Tarrant.
Munzurul’s final advice for people in the business of creating wealth through property: “[As a] really, really generalised ... golden rule of thumb, initially, you buy it in an individual name … and you build a few properties on [that] individual names.”
“Then you, potentially [over a period of time], go into a trust structure, and once you have a whole bunch of properties in the trust, you might consider a second Ttust … but all should leave it nice and simple, initially,” he concluded.
Tune in to Munzurul Khan’s episode on The Smart Property Investment Show to know how the ownership of a property works when referring to names, the risks associated with having two names on a mortgage and title, the right balance of loan-to-value ratio, the ins and outs of diversification, and the right time to invest into other asset clouds.