In last month’s newsletter, we considered the importance of mapping out an investment strategy blueprint that is both relevant and applicable to your specific situation and investment objectives.

Clarity around your objectives will enable you have an investment goal and a clear roadmap to reach it. We spoke of the importance of treating the buying of property as a process rather than a singular event and, to this end, we continue on with our review of each step of the end-to-end investment process and examine the importance of establishing the right investment structure framework;

Step 2 – Developing the right Structure strategy

Now that you have your Initial Strategy clearly laid out and have an action plan ready to implement, we’ll now look at the importance of establishing the right ownership structure for your property purchase. It is at this point in time that we strongly recommend that you speak with a qualified advisor such as a financial advisor, accountant or solicitor.

Hiring a professional to help you structure your next purchase doesn’t mean that you lose control over what happens from there – to the contrary, your input is essential for your advisor to understand your objectives and assist with establishing the right structure accordingly.

In addition to reflecting on your initial strategy, here are a few things to consider in advance of your first meeting with your advisor;

  • Your short-term investment plans and your current savings plan
  • Your perceived risk profile
  • Current income versus what income you would like to retire on
  • Your planned retirement date
  • Your plans for your assets in context of your family – e.g. how many, overall value and acquisition timeframe
  • Your estate plans – i.e. How will you allocate your portfolio to your estate beneficiaries after you pass away
  • How willing you are to place your trust in your chosen advisor to help you create and implement your plan

With the combination of the above information and your initial strategy, your advisor will conduct further analysis and will then provide a recommendation as to the appropriate structure for you and an outline of a plan for implementation.

There are three critical elements to consider when investigating the right property investment structure. The aim is to have a structure that is entirely appropriate for you whilst at the same time providing peace of mind on your investment. Minimising your risk, maximising flexibility for subsequent steps in your plan and tax effectiveness are just a few of things to consider at this point.

The three main points to keep in mind during the structuring phase are;

1. Estate planning

Estate planning is about wealth succession and involves working out the best way to distribute your wealth and assets following your death. The more complicated your personal and financial affairs, the more important it is to have an estate plan. An estate plan is much more than just having a will. Things to consider include preparation of the will, appointing an executor, ascertaining whether a power of attorney is required and establishing trusts for asset preservation.

It is important to bear in mind that the future plans of your children and grandchildren may be quite different to you own and, therefore, ensuring the right structure to cater for your overall, ongoing estate planning needs is critical.

2. Asset protection

For those who have high risk occupations as well as business and investment owners, a trust may be useful in order to protect your assets as it is the trust and not the individual that owns the asset and, therefore, if the individual is sued they have no asset to lose.

It is important to seek advice from a qualified advisor in relation to establishing a structure which provides the appropriate level of protection in the event that you are involved in any professional indemnity, public risk or product liability insurance claims or law suits. Not all structures provide 100% protection so; again, it is vital to seek advice as to what is available and how they might suit your individual risk management requirements.

3. Tax planning

The overall taxation process is likely to become more complex as you begin to accrue investment properties into the equation. Many people seek to take advantage of strategies that can minimise tax and maximise net retirement benefits, and to maximise estate planning strategy opportunities not usually available through other avenues. As an example, Self-managed superannuation funds (SMSF’s) offer certain advantages to a wide variety of property investors, small business owners and high net worth individuals.

It is, therefore, essential to ensure that you have the right tax planning strategy before buying and the chosen structure should be complementary to this strategy in order to optimise your wealth creation plan. Again, your personal goals, limitations and identified risk profile will ultimately determine what is right for you.

If you take the time to ensure that all three of the above points are adequately attended to, you will have ensured that your investment is structured correctly and more efficiently and is in alignment with your ongoing investment objectives.

There’s no immediate answer as to which is the right structure in order to achieve all three of the above because it all depends on your individual situation and risk profile – both now and later on. The reality is that you may find that, on each occasion that you are looking to buy an investment property, the advice you receive from your advisor may be that a different ownership structure is more appropriate at the time.

There are a variety of structures available to investors – each of which has its own pros and cons when held up against your personal investment objectives. It is worthwhile getting to know each of them to help you make your final decision. Once again, it is best to consult your advisor before deciding on any structure, as it is important to make sure they best fit your objectives.
Take the time to investigate the various opportunities available to you and, in partnership with your advisor, work through the pros and cons of each before deciding on what’s right for you. In the long run, you could be saving thousands of extra dollars whilst avoiding the costly mistake of unwinding a poorly constructed / inappropriate structure.

The cost of setting up the appropriate structure for your property purchase will generally be far outweighed by the potential losses you might incur if you get it wrong from the outset.

We’ll take a look at one of the more popular investment vehicles through which investors acquire property – superannuation.

 

Using your super to buy property

One of the most popular, yet least understood, structures is using your superannuation to buy property. SMSF’s remain one of the fastest growing sectors in the retirement funds industry. According to the ATO, there were 418,024 SMSF’s in Australia with their trustees controlling approximately $381.5 billion in assets. By June of this year, that number has grown by 130% to 963,852 with approx. $505.5 billion in assets under trustee control. Within property, SMSF’s exposure to direct property over the last 4 years has reached $66.6 billion which represented an increase of almost 62% over that period.

A recent 2013 Residential Property Investor Sentiment Survey conducted by the independent Property Observer reflects the increasing popularity of direct property among SMSFs. 53% of respondents said they intended to purchase investment property over the next 12 months. Interestingly, 17% of those intended on purchasing through their SMSF.

Buying property within an SMSF has gained popularity and trust amongst investors over the past 18 months as investors have become increasingly aware of the associated benefits of this structure. Such things as relatively low tax rates combined with the historically lower volatility of residential property compared to other assets classes have caught the attention of the Australian public. Past volatile market events such as the Global Financial Crisis (GFC) triggered many disillusioned investors to turn to residential property investing due to its relative low volatility.
 

Benefits of having an SMSF:

  • Increased control

An SMSF provides maximum control, both over the nature of the investment and associated fees. You get to decide how your fund is going to operate and what happens with your superannuation benefits (presuming you stick to the rules!)

  • Increased investment flexibility

Enabling members to tailor their investments to their specific investment objectives.
Members can quickly adjust their portfolios to accommodate changing market conditions.

  • Good asset protection

Bankruptcy legislation provides considerable protection for the bankrupt member where, generally, while the account balance of a bankrupt member is in the SMSF (even after it has been paid out as a lump sum benefit) it is protected from the bankrupt’s creditors. This makes super such a prized method of asset protection, particularly as there is no dollar limit on the protection.

  • Taxation and estate planning benefits

Having control over investment decisions man enable uptake of benefits such as franking credits and tax deductions and through the ability to manage the structure. Decisions made around how long to hold and when to sell an investment may enable members to achieve a CGT-free scenario on sale of the investment.
 

Considerations:

    • Requires careful planning to achieve the greatest benefits
    • Money is tied up in the SMSF until your “preservation age” (currently at least 55) or turning 65 if still working
    • There needs to be adequate cash-flow within the fund to service any debts
    • What will the gearing component be?
    • What will be the asset divestment plan be for properties held in the SMSF?

 

As a general rule, if you have more than $200,000 in your super, or are likely to achieve this figure through contributions within 2 years of establishment, then this may be an avenue that is worth exploring with your advisor to determine its suitability for you. If your current Super balance is less than the suggest $200,000 mark and you are unlikely to reach it via contributions within the 2 year post-establishment period, it may not make sense to use your super to purchase property yet. In this case the structuring options available to you are much wider and can be discussed with your advisor..

Even if you don’t currently have sufficient funds in your superannuation, but do like the concept and associated benefits of buying property in an SMSF, it would be worth discussing with your advisor and possibly start planning for it. Again, it’s worth planning in advance so that by the time you’re ready to enter the market, you’ll have the right structure in place.

Other investment structures available include (but are not limited to);

  • Discretionary trusts (also known as family trusts)
  • Unit trusts
  • Hybrid trusts

There are numerous benefits and considerations for each of the above and should be explored in detail with your advisor to determine suitability for your situation and requirements.

Last but not least, take action!

Second to having no plan at all, a lack of action in relation to establishing the right structure before buying is a serious roadblock to the success of many investors.

As with our recommendation to have an action plan for your initial strategy, you should set a timeline for completion of this step. Book in with your advisor and set the wheels in motion. A good advisor will ensure you’re on track and will help keep you accountable to your plan.

Remember, the Structure Strategy needs to be set in place before buying. Quite often investors will buy without setting the right structures in place, and this can lead to all sorts of unnecessary costs.

Stay tuned for next month’s article – (Step 3: Finance Strategy) of ‘The 8 steps in creating and growing your property portfolio’.

 
The above material provides general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs. Intelligent Property Services does not accept any liability for any errors or omissions of information supplied.
 

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