How Business Owners Can Build Property Portfolio Profitably?

We have seen many business owners, whose businesses have been doing reasonably well over many years to the point that they end up accumulating spare funds which go beyond the amount they need for working capital, plus a buffer. Each businesses have different levels required for this cushion depending on their size, but at some point, it grows to a level where essentially it is sitting in the bank achieving very little.?

In addition, the last few years has shown many SME owners the need to diversify their income source, from their mainstream trading business. Office for National Statistics (ONS) has?reported?in their Jan 2022 report that service activities industry reported 64% reduction in turnover between December 2021 and January 2022. Of the businesses that reported a change in turnover, 53% reported the pandemic as the main reason for change, while 12% reported a combination of the pandemic and the end of the EU transition period as the main reason.

Property investment is a great way of diversifying your income source and it can be a great hedge against inflation. This means, converting your proactive business profits or income into passive income, to the point where you have a portfolio of properties providing you with income, and ideally capital growth, on your investment asset base. If there is an economic downturn (like we have seen over the last few years) and your business slows or even folds, you will have something else that you have created through your proactive business activities which will provide you with great returns.?

Three ways to invest in property as a business owner

There are three main ways to invest in property as a business owner. They are:

1.?????Investing through existing company.

2.?????Establish a Special Purpose Vehicle (SPV) and lend the money across from the existing company and invest.

3.?????Establish a Directors’ Pension or a Small Self-administered Scheme (SSAS).

1. Investing through existing company

Once the business owner have structured their income or their withdrawals (salary plus dividends) in the most tax efficient way, it could mean they are left with extra funds in the company that is profit, but that they don’t want to withdraw it as they are likely to be taxed 40% on those funds (the higher rate tax band for people earning more than ￡50,270 per annum as of April 2022).?

So, the first way is to invest these extra funds in property through purchasing the property in your existing company, using leverage (e.g. mortgage) or not, but of course leverage does allow you to better utilise your funds.?

The advantage of this option is that it is straightforward, as the company structure already exists and has reduced admin.

The downsides to this are that it exposes your property investment to your existing business’s risks and vice versa. In addition, some lenders prefer to lend to a SPV property investment company for the reason above. This means it reduces the number of lenders available to provide the funds.

2. Special Purpose Vehicles (SPV)

This involves creating another limited company which you will own and is setup solely for the purpose of investing in property. This is the most common strategy for utilising business funds. Many lenders prefer this setup as it separates the risk from your main business. Your property portfolio is safe, as it is separate and can’t be impacted by any liabilities or risks in your business. It also provides better control of wealth and inheritance tax planning for when you need to pass on your portfolio, and not your business, to your children.

The way this works is that you own both, your business limited company and the new SPV company, either yourself or shared with your business partner. You can then lend the money across from one company to the other, as a commercial loan, paying a nominal rate of interest back to your original company, but that doesn’t matter as you own both companies anyway. This is a great way to leverage under-utilised business funds while not having to take the funds out of the tax effective limited company structure. This makes a huge difference to helping yourself achieve the lifestyle and financial goals you want, as well as providing a hedge against downside risk of the existing business.?

3. Director’s Pensions

This is often referred to as Small Self-Administered Scheme (SSAS) pensions. This allows you to become the trustee of your own fund, and you are taking your pension funds out of the system. Most people’s pension funds are usually manged by fund managers and financial advisors who charge significant fees for controlling these funds.?

With SSAS you essentially take control of that money. You can lend up to 50% of the pension fund to your own limited company for investment. There are, however, multiple criteria to be met which I won’t go through in details here as you must speak with your accountant or independent financial advisor to ensure this is possible for you.?

#investment #business #property #ImperativeProperty

DISCLAIMER: this is not a personal/financial advice, please always consult an accountant or a financial advisor to understand what’s right for you!