Chapter 5 - Property Sharing Arrangements (cont'd)
Methods of Property Sharing
3) Pte Ltd Companies
-Inconvenience of incorporating a Private Co & running it.
-Having to obtain corporate loans
Benefits: You'll treat property investment as a genuine business.
Property Sharing Agreement - Most significant clauses.
a) Name of Co & objectives - carry on a business as a property investment and property management Co.
b) Company's amount of paid-up capital for my property sharing companies.
-Every co-investor will be responsible through loans to Company for investment funds involved in the company's operations.
-Loan amount proportional to agreed shareholding.
-Once investment property sells, loan amounts returned to co-investors. After-tax profits paid to shareholders after co-tax is reserved.
c) Specified directors will have full power to manage the Company's business. Other shareholders shall not interfere with Company's management or with sale of any properties the company own.
d) Shareholding of each co-investor is clearly specified against their names.
e) Company shall neither lend or advance money nor guarantee the indebtedness of any person.
Chapter 6 - Using Private Limited Companies as Investment Vehicles
-Property Investment is a business.
-Never let yourself develop any emotional attachment to any property.
Have a Professional Corporate Secretarial Company to provide you accounting services, prices range from $1k to $2k.
Multiple Benefits through using P/L Company as Investment Vehicles
a) Fine terms of agreement between/among the property investors can be easily stated in a Company shareholders agreement.
-Any addition/reduction to such shareholding must be documented in the minutes of meetings and in official resolutions.
b) No great fear of a stalemate in event of death, bankruptcy etc affecting one of shareholders
- Company can continue to operate.
c) All expenses incurred by a Company in its management of the investment property are considered corporate tax deductible.
-Renovation and upgrading charges, maintenance bills electrical water supply.
-Even furnishings and electrical appliances can be written off as expenses via depreciation over a few years.
-This may not be the case if expenses are incurred by an individual owner of a property.
d) You can apply for your property holding private limited Company to be GST registered.
-Do this especially if you purchase commercial properties that require GST payment
e) Singapore corporate tax regime allows new Singapore incorporated startups to enjoy tax exemption for the first $100,000 of normal chargeable income for each of the company's first 3 consecutive financial years.
-A further 50% tax exemption is given on the next $200k of normal chargeable income in the same first 3 consecutive financial years.
-Effectively new startups with a net income of $100,000. Prevailing tax rate stands at 17%.
Chapter 7 - The Essence of Mortgage Planning
-Mortgage planning goes beyond a loan.
-Mortgage planning is a comprehensive financial blueprint of an investor's intended property purchase.
-Afterall, property purchase is all about affordability and budget.
Obtain Expert Advice by Alfred Chia, CEO of SingCapital Pte Ltd
-Engage a financial advisor, not only knowing mere info of latest bank mortgage loan packages.
-He/she should align recommended mortgage package to your financial plan.
The ABCs of Mortgage Planning
A for Affordability
-Must be financially able to pay deposit for your property purchase and enough funds to pay stamp duties and legal costs and GST (if applicable).
-You must also make provisions for payment of up to 12 months worth of management corporation maintenance fees, property tax, power and water supply charges.
-General Rule of Thumb: Your monthly home loan installments plus all your current long-term debts such as car loans and credit card rollovers, should not be more than 40% of your gross monthly income.
Debt-Servicing Ratio (DSR)
-varies from bank to bank.
-If your investment property has a rental income, the stamped tenancy agreement must be produced to enable the bank to assess your DSR.
- Most banks take account of only 70% of your rental income of your ability to service your monthly home loan instalments.
B for Budget
-Must take your other financial goals and commitments into consideration.
-Set realistic budgets
C for Credit
-Important to check how much you an borrow before you start shopping for a property.
-If you are setting out on the property investment path, I recommend you to secure on in-principle loan approved from a bank or financial institution.
Aka Approval In Principle (AIP)
-with principle loan approved confirmation in hand, you may then with certainty of the approved loan amount, seek out properties within your appropriate price range.
-AIP given based on investors financial standing.
-Your financial standing from Income Tax Statements for the past 2-3yrs, your payslips for the past 3-6mths, CPF statements for the past 12mths and other documents to show income such as tenancy agreements or bank statements.
-your DSR worked out taking into account your current and long-term debt situation.
-Good credit standing.
AIP + Financial Planner Assessment = Essential of Investors' Property Investment Journey
Types of Loan Packages
The Fixed Interest Rate Package
-Lock-in period usually up to 3 years. Penalty fee up to 1.5% of loan amount imposed.
The Floating or Market-Pegged Interest Rate Package
-Banks are more inclined to peg their floating interest rates loas to the Singapore InterBank Offer Rate (SIBOR) or Swap Offer Rate (SOR)
-Some do not impose any penalty.
The Interest Offset Mortgage Package
-Allows an investor to operate a current account that is linked to the mortgage loan account.
-The current account balance you maintain will enjoy the same interest rate as your mortgage loan account.
-The interest you pay on mortgage loan account will be offset bu the interest earned in the current account.
Cons: Interest rate for such a package usually higher.
Repricing or Refinancing Your Loan
-Though the process is not free, interest savings are substantial.
Property Valuation
-Valuation is both a science and an art.
-It's common for the purchase price of a property to exceed the property's valuation, so you have to set aside more cash.
Insure Yourself & Your Property
-When we own a property, we often focus on the positives - high appreciation and high returns.
-There is a tendency to ignore the "what if" elements.
"You buy insurance to protect your money. You spend a small amount of money on insurance to prevent spending a high amount on catastrophes."
-Owners can take up home content insurance and public liability insurance. The cost of replacement and repairs may be substantial.
Chapter 8 - Know Your Property, Know Your Sellers & Know Your Contract
Know Your Property - Must Know Your Property Facts
-The real estate agent, at the very least must know the details relating to the property.
Chapter 9 - Property Analysis
-Rayney advises young Singaporean friends to fully enjoy government's offer of new flats at subsidised prices or resale flats that come with grant of up to $40k.
-Citizenship has its privileges.
Property May Be a Mirage
-If you think you are going to make $100k profit for $1.5mil property. Don't forget stamp fees and legal costs.
Industrial Properties
-Leasehold land of up to 60 years.
-Lower psf compensates for the shorter leasehold.
-Businesses of your potential tenants and their reliability as good paymasters, cannot be ignored.
"Property investment is more than a profession, more than a discipline. It is a passion."
- Rayney Wong
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