Building property portfolio

Wanderer2023

We are a couple in our mid thirties, we own our family home with no mortgage, and one investment property with a mortgage and rental income of 1,600 pm and equity of around 110K on this property

We are looking at ways to grow our property portfolio. We were thinking of the following:

• Set up a company and transfer our investment property to the limited company, but not our home.

• Current investment property has equity of around 110K and we have cash savings of near 50K.

• We were planning on using this 150-180k (between cash/equity) as a 25% down and finance the rest to purchase additional apartments or a multiunit property in Dublin already generating rental income via our limited company.

Idea being in 20-25 years mortgage on these properties will be paid off, so this will be our pension pot if we choose to sell, or will generate income for us in those years.

Would like to get your opinions on the above and thoughts on whether this sounds like an achievable goal, and any advice on what we would need to have in place to get finance for this? 

3DataModem

It's a perfectly fine plan, especially considering the tax considerations in Ireland. You don't have to do it in a company, you can actually acquire from within a self-administered pension. The pension fund borrows, not you, so that may be a hurdle.

Doing it via a company is fine, but the profit is taxed, and then anything you take out of the company down the road is also taxed. The company will need to borrow, not you, to make this work.

Pawwed Rig

The issue with a company is ultimate disposal. It is hard to get a property out of a company in a tax efficient manner as the purchaser is unlikely to be interested in buying the company shares so you now have a ball of cash in the company and Now what? You pay CGT within the company and still have to pay a dividend which is taxed at your marginal rates.

Self admin pension schemes don't really work anymore unfortunately

Peregrinus

What advantage are you hoping to gain by holding your investment properties through a company?

herbalplants

https://www.boards.ie/discussion/comment/121390255#Comment_121390255

I would say OP wants to pay less tax but it doesn't work this way.

Peregrinus

https://www.boards.ie/discussion/comment/121390409#Comment_121390409

I agree. Holding investments through a limited company may - or may not - be effective to defer the payment of some tax, but in the long run it tends to increase the total amount of tax to be paid, since at some point the arrangement has to be would up and that usually triggers a (further) charge to capital gains tax that wouldn't otherwise arise.

Not saying there might not be some circumstances where it presents tax advantages. But you would need to have a very clear idea of what advantage you would getting and how it would accrue.

Wanderer2023

The main purpose of the limited company would be to limit risk, as our family home will be held outside of it, so in the event that things did not go well we will always have a roof over our head. We've both worked hard to achieve this from a young age so ultimately want to protect this.

The second reason is in the short term it should allow us to let cash build quicker in the company due to the slightly lower taxes that would be payable, allowing us to add additional properties. All our rental income falls in the higher tax bracket due to our PAYE income at the minute. I know that eventually this may not work in our favour in the long run but allows us to continue to build in the short term and take on more risk.

We have not done the numbers on the CGT side of it when it comes to disposal so we will put that on our radar. Ideally if it was possible to keep the portfolio and pass it on to our children. Inital goal is to really build a portfolio that generates enough income that possibly allow us to retire earlier, and gives future security to our children.

DubCount

https://www.boards.ie/discussion/comment/121390537#Comment_121390537

The limiting of risk will also impact on the willingness of banks to give any mortgages on properties held by the company. Expect higher interest rates and lower LTV offers because of this. The tax issues will probably make it unworkable anyway.

antoinolachtnai

https://www.boards.ie/discussion/comment/121390654#Comment_121390654

No bank is going to lend this money to a limited company with so few assets unless they get a guarantee. The bank would be taking all the risk and you would be taking hardly any risk whilst reaping all the upside. The bank will typically need personal guarantees from the directors. If you are not in a position to take this risk, then owning properties is not for you and you would be better off investing in a fund. But you should talk to advisors and brokers about this.

Wanderer2023

Do you think this would be the case if we were to purchase an already income generating multiunit and with a 25-30% down-payment that banks wouldn't consider this?

Can you clarify what you mean by tax issues making it unworkable?

Wanderer2023

Thanks for your insight. As i said, limit the risk, not remove it.

Perhaps a better starting point would be to move the investment property with the additional equity to the company without using the equity as part of the down-payment, for further properties and using cash only initially to build it up.

Peregrinus

Be aware that moving the investment property into the limited company will likely trigger a charge to capital gains tax on the gain already accrued, since you will be disposing of the property. Since you and the company will be related parties, the gain will be calculated based on the market value of the property at the time of the transfer, rather than based on what (if anything) the company pays you for the property.

I agree with others that banks are likely to want a personal guarantee from you and the other directors of any loan to the company. If you decline to give this, and ask in effect for a non-recourse loan (meaning that in the event of default the bank has recourse only to the mortgaged property) this will limit what the bank is willing to lend. I can't say whether they would consider lending 70%-75% of the value on a non-recourse basis; the only way to find out is to ask. I also can't say what interest rate premium they would seek. And of course be aware that, in the event of default, the bank would move much more rapidly and vigorously to enforce their security than the would if they also had the benefit of a personal guarantee.

Your alternative plan, as I understand it, is to move the existing property into a company and not seek an immediate loan, instead letting the cash income from that property accumulate in the company for a while so that you can, in time, seek to purchase further properties with, say, a 60% or even 50% mortgage, making it easier to get a non-recourse loan at an acceptable interest rate. Possibly; I really have no idea how the banks trade off interest rates and LTV ratios in a non-recourse situation. I think you'd want to talk to a specialist broker about this. And of course there's a possibility that property values will rise while you are building up your cash reserves, meaning you'd need a larger loan.

But I think you're still going to face a CGT cost just to set the structure up, so you would need to investigate all this thoroughly and be satisfied that you would, in time, be able to borrow on acceptable terms before going ahead.

On edit: It occurs to me that you can separate out the question of whether the bank will lend on a non-recourse basis and the question of whether to transfer the property to a limited company. If the bank is willing to make a non-recourse loan, they can do so while you still own the property. The loan agreement simply specifies that, in the event of default, the bank may have recourse to the mortgaged property but no other recourse.

If the bank is willing to make a non-recourse loan, then the question then becomes do you still want to use the limited company in order to be able to accumulate income at a lower immediate tax rate? You can weight the advantage of being able to do this against the CGT cost of transferring the property into the company in the first place.

antoinolachtnai

https://www.boards.ie/discussion/comment/121390701#Comment_121390701

I think you would need a lot more cash. A 30 percent downpayment is not much on a single small non-home property.

Even if you got the loan, it would have strings. There would be no forbearance. If you missed two payments, the bank would appoint a receiver to liquidate the whole thing. You would then likely lose all or most of your investment

Talk to a broker about it to find out for yourself though I don’t think you’ll be able to get it to work.

DubCount

https://www.boards.ie/discussion/comment/121390701#Comment_121390701

The bank will extend a maximum 70% LTV on any buy2let mortgage. The concern is not just the income generation, its possible negative equity.

For tax, if a property is in a company, then the company will pay Corporation Tax first (25% as this will be deemed passive income) and then distributions will be subject to income tax. There may be a close company surcharge for undistributed profits. The extra tax paid will be too expensive. Thats why owning property in companies is not popular in Ireland. Maybe putting it in a pension scheme might be a better option, but then you wont be accessing it until you retire.

In terms of risk, what risk are you taking on that you think you need the protection of a company?

Buddy Bubs

The company I work for, is owned by a family member a generation older than me. He has a holding company for his property portfolio, but all loans to add properties need to be guaranteed by the trading company, there are liens involved in every loan. And the banks are getting worse and more difficult to deal with. It's very complex, very time consuming and needs proper financial and tax advice which costs thousands. No harm throwing out ideas but don't take anything here as gospel, there's a huge amount to it. And don't try to do it without proper advice.

maxwellhouse

How are you @Wanderer2023 just wondering if you have made any progress with you plan?

@everyone else on this forum, I guess I'm thinking similar, albeit I already have one investment property in my name not a company. I don't aim to change that setup. But for my next investment (probably a fixer upper), I'm considering a company setup with a view that my property portfolio is to be multi-generational, while hopefully using the company to minimise tax liability and day to day expenses.

Welcome feedback

Peregrinus

Well, talk to your accountant and work out in detail how you will use the company to minimise tax liability. In general using a company as a property holding vehicle is problematic — the company has the usual tax liabilities of a property owner, and then there's an exposure to a further tax liability when the company's profits are paid to shareholders as dividends. Not saying it can't be tax -advantageous in some circumstances, or that there might not be other advantaqes that would make the tax complications worthwhile, but there's are reasons why it isn't often done.

So, think this through very carefully, and with a focus on your particular circumstances and your particular investment objectives.