So you’re considering if you should buy a property under a company in Malaysia? There can be significant benefits to doing so depending on your current situation. Read on more as I discuss how buying a property under a company can be used to your benefit.
Some of you more seasoned property investors might have heard about buying a property under a company instead of buying it under your personal name.
But you won’t find much useful information out there on the web on this topic. None of the websites really tell you clearly, exactly what the reasons you should consider buying a property under a company name are.
I’m going to go through with you the reasons why you might be considering buying a property under a company name in detail. So, if you fall into any of these categories, you can see which reasons make this a viable option to increase your property investment portfolio, and also those which don’t.
This is probably the most popular reason for someone to consider buying property under a company name – when your DSR (Debt Service Ratio) or the maximum amount that the bank will lend you based on your income and expenses, is already maxed out and you want to be able to borrow more. (In Malaysia, this varies from bank to bank but it is about 60 – 70% of your income minus your other commitments, such as loans and credit card debt)
If you’re looking for other methods of pushing your dollar so you can get some of that delicious financing from our banks and also if you’re not too comfortable buying something under someone else’s name (a proxy) – buying a property under a company to get the DSR based on the company’s earnings and not yours, might seem like the most logical option.
But is it really?
The problem with this, is that the business entity, though not being you – is still going to be granted the loan (provided the company accounts show that it’s capable) BUT with you as the guarantor. This means that the bank will still assess your personal capability to pay back the loan should the company wind up.
Therefore, your eligibility to take the loan under the company for the property purchase is still based on your current DSR. So, it basically leaves you right back at square one.
If you can’t take the loan yourself, it’s unlikely that you’ll be able to take the loan under the company.
If you’re looking to reduce your exposure to risk from your investment, this is also not the option for you. As mentioned above, you’ll still be the guarantor for the loan that you’ve taken, even though through the company, so if your company fails and you are unable to repay the loan, the banks are going to come after you.
Your risk will still very much be your own and it won’t be offset in any way, shape or form, unless of course, you’re looking to spread out your risk with other investors – which you’ll find out more of how this is done below.
Stretching Your LTV
This is another top reason you might be looking into buying a property under a company but sadly you are going to be quite disappointed if thought you’d be able to get 90% LTV (Loan-to-Value or the amount the banks will lend you based on the property price) on your first property purchase under your company.
Buying a property under a company means that you will have to fork out a larger down payment as banks only lend company’s 60% of the total property price, compared to the 90% which they offer to first time buyer individuals.
60% is even lower than the 70% cap that’s on your third property or more, under your own name, so it really isn’t a useful option here at all.
One thing a lot of people might not know, is that this only applies to residential properties.
Where it comes to commercial properties the LTV is 85% for the first property, second and even third property onwards.
It’s important to note here that when I say commercial properties, this does NOT mean that your service apartments and condominiums in mixed developments are included (These types of units are still considered residential units with commercial titles) – they are NOT considered commercial units.
Most of these units are under a ‘commercial’ title but they are not considered commercial developments. Commercial units in this case refer to Office, Retail and Industrial lots.
But before that light bulb goes off in your head and you leap for joy at being able to get 85% LTV – you’ll find that this is actually the same LTV that will be granted to individuals making a commercial property purchase under their own name, for the first or any others thereafter.
So, trying to stretch your LTV by buying a property under your company doesn’t really help you do any better than you would have been able to if you were buying it under your own name.
Lowering Your Taxes
For the big boys in property investment, this is definitely something always on their mind. Properties taxes can be quite scary for the average investor, but things can really get out of hand when your portfolio starts to grow.
A lot of investors think they can ’siam’ (or reduce) some taxes by buying their property through a company instead of being under their own name.
Is this really possible?
The short answer is – yes.
But it’s not applicable to most of us.
It is only possible to offset some of your income tax provided you have plenty or properties that are generating a significant amount of rent or it simply isn’t worth the hassle of paying for a company secretary and all the other fees that come about with setting up your own company.
It is possible to offset some of your rental income by declaring it as earnings from your business instead of your personal earnings but as businesses are taxed at 20% at the lowest bracket, this is also the same with personal income tax.
So, there isn’t much you can gain here by doing so unless you are being taxed at a much higher bracket.
You’ll also be able to offset some of that rental income by deducting expenses which you would not be able to do so if the property was under your name, such as renovation and furnishing expenses for the property itself.
Whether this is really worthwhile for you will depend on your current situation and it would be best to talk to your accountant as I’m no tax expert and they will certainly be able to advise you better.
[Find out more about Property Taxes in Malaysia]
You’re a Foreigner
As most foreigners who are keen on investing in the Malaysian market, you’ll know that you’re only allowed to purchase properties that are above 1 million ringgit in KL and 2 million ringgit in Selangor.
The various property price minimums for foreigners described by state can be found – here.
By being the director of a Sdn. Bhd. Or LLP in Malaysia (that has the majority of its directors who are Malaysia) in the company, you will be able to purchase a property that is below the cap because the property is considered a Malaysian entity that has been registered in Malaysia.
You’ll be able to gain access to cheaper properties, but you’ll still only be able to get limited financing due to the LTV limitation when buying residential units but it’s a lot more useful if you’re after some commercial units.
This however does require your other Malaysian directors to be keen to take on the loan and are also capable to take on the loan based on their own DSR.
So it can be quite useful here to help you gain access to the market as a Foreigner.
Investing as a Group
This is actually where buying property under a company in Malaysia makes the most sense. When you and your business partners are interested in investing in a property together, (diversifying your risk among one another) there is simply no better structure to buy in a group, than through a company.
Buying a property under a company with your business partners takes away a lot of the headaches that come about when making a joint property purchase.
Firstly, all the business owners will have joint ownership and while you are unable to put an unlimited number of non-(blood or legally)-related names down on your SPA, you can have 5 or more unrelated people who have joint ownership as directors of the company.
It will also allow you to avoid any issues should one of the directors who signed the SPA pass away. There will be no legal issues as to who the property belongs to following their passing as the property will clearly belong to the company and not solely to his next of kin or spouse (they still may inherit his shares if this is what was stipulated in the partnership agreement but there will not be any dispute between the company and them for full ownership).
It also makes for easy transference of shares of the property between the investors in the group. If one investor wants to opt out of the investment, it’s also easily done by simply transferring shares from one member to another at just 0.3% share transfer stamp duty compared to 3% property stamp duty if there was to be an actual name transfer.
Buying a property under a company in Malaysia can be beneficial depending on your circumstance.
The gist being that if you are trying to get more loans from the banks by using the company as a proxy to increase your DSR, reduce your exposure, or get a better LTV – this is not the solution for you.
It’s only useful when you are considering buying property as a group, trying to buy properties as a foreigner, and also possibly reduce some of your tax (provided you’re a whale when it comes to property investment).
Would love to hear more from you guys if you know how else this can be useful, please leave a comment below and tag us @rentandreturns!