When You Should Buy Properties Using a Company?
When someone asks me if they should or can buy properties using company instead of their own name – I can easily read their intention. Long story short, if you don’t have a good financial record and you are thinking that you can get away with it using company name instead – let me save your time – you can’t.
Using a company to purchase property has its own benefit thou, it works well as an instrument of control when it comes to bulk buying and arguably, some tax benefits. It also has additional benefits which we will dwell on later.
Now let me tell you why it is not possible to try and escape from your insufficient/bad financial situation using the company as a shell:-
- Over the limit DSR
Before we go even further – what exactly is DSR? Debt Servicing Ratio.
In layman term, DSR is a formula used by the bank to check if you have the ability to repay back your loan. When it comes to DSR, different banks can have different requirement before approving your loan application. The general rule is that your monthly commitment shouldn’t exceed 1/3 of your income.
To calculate your DSR, you have to gather all the information about your monthly commitment versus your gross income. Here is a brief example:-
- Monthly income
- Monthly commitments
- Property rental yields
- Personal loan installment
- Car loan installment
- Housing loan installment
- Credit card installment
Here is a simple formula to calculate your DSR:-
Total Monthly Commitments / Total Monthly Income X 100% = DSR
So take an example of my good friend Genie (fictional character) who earns RM 7,000 from her salary. She has monthly commitments, car loan installment, rent and credit card installments that comes up to an average of RM 5,000 per month.
RM 5,000 / RM 7,000 x 100% = 71%
She wants to buy a house – but in all honesty, the bank will probably not approve her loan. Even if she thinks that she can bypass procedure by buying the house under a company name, the main problem is that even if the bank approves the loan under the company name (provided that the company account shows that it is capable of repaying the loan) it is YOU who is being the guarantor.
The banks will still have access to your personal assets should you fail to repay back the loan and the company winds up. Therefore, even if you are purchasing the property under the company’s name, the company’s eligibility to take up the loan is still based on your current DSR which basically makes your entire plan pointless.
I will write another article in the future about how to improve your DSR – but just take note that buying property using company name is not a solution to your busted DSR.
2. Stretching Your LTV
This is the second most common reason why you might be looking to buy property using a company. It’s because you have purchased your first property under your own name, and you think that if you have a company you can purchase the second property with 90% LTV (Loan-to-Value).
Again, this is a misconception. If we are talking about residential property, you will only get 60% loan from the total property price. This is even lower than the 70% cap on your third property or more under your own personal name. So this option isn’t helpful at all. Now, it is true that you can get up to 85% LTV for property purchase using the company name, but it is only for commercial properties.
3. Limiting Exposure
When it comes to investing, limiting your risk/exposure is surely one of the key factors in your mind. However, as can be seen from the above example, when it comes to property investment, using a company as a vehicle doesn’t really help. You will still be the guarantor, and the bank can still come after you if the company fails or if you fail to repay your mortgage.
As mentioned thou, using company as a tool in property investment has its own benefit, and that will be covered in the coming article.