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When investing, property buyers have a range of models to choose from, offering various options to maximise their returns.
Investors looking to build their property portfolio have different structures available, including individual ownership, corporate entities, self-managed super funds (SMSFs), and corporate trustees.
In the latest Pathway to Property podcast episode, co-hosts Lachlan Vidler and Luke Clifford explored the different options with accounting and property investment expert Jeremy Iannuzzelli.
Iannuzzelli explained the most common structure of individual ownership, which can involve an investor’s own name going onto a title, their spouse’s name, joint tenancy or tenants in common.
“That’s the easiest, simplest form of structuring a property with your own name,” he said.
Iannuzzelli said that, as a rule of thumb, investors should buy their first one or two properties under their name for cost-effectiveness and simplicity.
“There are rare circumstances as to why you would go into structure earlier, but nevertheless you want to keep it low cost. You want to have as much of your capital going towards your first one or two purchases as you can,” he said.
Iannuzzelli then explored the corporate entities structure, which has become more common nowadays, involving holding investments in a company.
However, he pointed out that one potential flaw of the model is that companies do not receive a 50 per cent discount on capital gains.
“You hold it for two months, six months, 12 months, 10 years on the capital gains, on the capital gains. So you make $100,000. You pay tax at the company. Company tax rate,” he said.
Further, asset protection issues must be factored in, given that the money lent out to a company becomes an asset.
“But if you’re not too worried about that and you’ve got the right insurances and you’re a good operator, you might have more capital going towards more investments,” Iannuzzelli said.
In addition, when it comes to SMSFs, he said that superannuation has been an effective way for someone to build up their wealth, becoming increasingly popular over the years.
“You control it, you get a little bit of leverage with what they call the limited recourse, borrowing structure or arrangement, utilising entities, custodians and bear trusts and trustees,” he said.
“The beauty of leverage gives you, if you do it well, with the right level of people behind you, a good cash on cash return.”
“Because 10 per cent on 250,000 is not the same as 10 per cent on a $600,000 asset. So cash on cash return really does change when you add leverage into it.”
Finally, Iannuzzelli shared the corporate trustees strategy where the manager of the trust is a company, ideally a non-trading one, with this model being a very common structure.
“It’s entity which I would recommend for people after they’ve bought their first couple (properties),” he said.
He said while the structure is a sophisticated entity, there are good tax benefits attached to it, including a 50 per cent discount on assets held longer than 12 months.
“Able to discretionally distribute to beneficiaries which are family members, people itemised in the deed. So really good way of saving lots of tax,” he added.
Additionally, Iannuzzelli said the structure can bring positive benefits for high-income earners, including distributing to corporate beneficiaries.
“That means they can fix the tax at 30 per cent as opposed to distributing it to themselves at 47 per cent. So some really good cash flow benefits there as well,” he said.
“If you use the structure well and you buy the right type of properties that are conducive for the structure and what you’re aiming to achieve long term, you will be able to continue your borrowing journey,” Iannuzzelli concluded.
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