Updated: May 23, 2022
Property Investing for Business Owners
At Ironfish, we’ve been helping small business owners invest in property since we started back in 2006. One of our three founders is a Chinese migrant, and with a high proportion of that migrant population having their own businesses, it was a natural way to go. That’s had an influence on our culture – even as we’ve grown, we remain entrepreneurial – but just as importantly, it means we have a lot of insight into the challenges around property investing for business owners.
3 reasons why business owners don’t invest in property
I admire anyone who has the courage to go out and start their own business. It's a very courageous thing to do. In my experience, starting a business appeals to a certain kind of person. Someone who's determined, who has an idea, then goes out and acts on it.
So why don’t all these courageous people invest in property? There are three main reasons:
1. Courage is not the same as wanting to take on risk.
Some people think that they’re running a small business, so they’re already exposed to quite a lot of risk, so they shouldn't buy any investment property.
But over the years, we've seen people put all of their money into a business, growing it over time. They’ve done a great job on the business, but they haven't diversified or spun out to get any other assets. And the reality is, that business can go under at any time.
Unless your business owns real estate or other assets or intellectual property with value independent from the business itself, you’re at risk.
Having something outside of your own home and your business is not increasing your risk – it’s balancing it. It’s diversification.
2. When they think of investing, they think of investing in their business
As a business owner and director myself, I know how this feels. We’re constantly reinvesting and reinvesting. But I know that I can't invest only in my business. That would be really dangerous for my family's future. Luckily, like almost all our team, I’m a client of our business and I invest in property and have a portfolio.
It’s important to look at that.
3. They haven’t set the business up to enable them to invest
We see a lot of small business owners who don’t like tax. Who does? But some have the attitude that the best way of saving tax is just to not pay it. That might mean paying yourself a low salary. It will save you tax, that's true, but property investing allows a person to legally reduce the amount of tax they’re paying.
Simply paying yourself a low salary can also create challenges when you’re going for loans and can make it harder to invest in property. Structure is important and that is why it is vital SME owners have an experienced accountant and team around them.
One reason why business owners should invest in property
Even with all this, business owners actually need an alternative income stream more than salaried employees.
Every business has ups and downs. Many business owners scrimp on their own salary and superannuation. It can be hard to build up savings. So they’re more exposed.
They also have a higher risk if the business fails. They are used to working for themselves. They’re independent. That can make it hard to get hired by someone else. So business owners have more risk of longer periods with no earnings from work at all.
Diversifying into other income streams like property just makes sense. But you need to do it wisely.
Getting strategic help to make property investing easier
There’s something about property for all Australians. As business owners too, we all think we know a bit about property. We recognise that we’re not experts in web design, or accounting, or other areas, but we don’t feel the same way about property. In reality, we could all do with some expert help.
Do you have the right mortgage broker?
As a small business owner, you're your own boss, but you may have less security and you also face some disadvantages when it comes to borrowing money. You need to be dealing with a broker who specialises in small business loans.
So many people have a broker they have a relationship with – and they’re afraid to break up. But that can really hold you back. You have nothing to lose by getting a second opinion or talking to someone new.The ideal of course is a referral from a trusted source.
Tax and financial planning
At Ironfish we help people build and hold a property portfolio of at least 4 properties outside their home. We find the properties which are right for them, but we also put them in touch with other experts who can advise them in all kinds of essential areas like finance. Without speaking on behalf of those experts there are some general guidelines to consider:
We only recommend new property. Many people aren’t aware that the tax depreciation rules were changed back in 2017 by the Turnbull government ensuring that there are higher benefits for new properties over existing ones. Imagine you have two properties side by side - identical. One has been owned by an investor from day one. The other one was bought second-hand by an investor after 3 years. Did you know that the owner of the second-hand property gets dramatically fewer tax benefits than the original investor who bought it new? Knowing how to get maximum depreciation benefits and which properties to target can save you a lot of money over time.
Investing in property is a powerful tool to minimise tax. You want to focus on earning more money through your business rather than being a lowly paid employee. As you grow your business why not pay yourself more and then you can buy more properties to offset the extra tax that might otherwise have been payable? It’s an effective way to minimize tax.
Cashflow is number 1# in business and it is the same for property investment. There are some insider tips and tricks to this, which experienced investors know. It starts with getting the right property, with good yield, then maximising depreciation. This ensures the minimum cashflow required to hold a property over time. Plus, rents will continue to rise over the next 2 years. Riding the rising rent wave’ is something astute investors are wanting to take advantage of right now.
Of course, every situation is different. Before doing anything, you first need to sit down with an experienced specialist like an Ironfish Property Strategist, along with your mortgage broker, to work out the right strategy and financial affordability for you.
What kinds of property should a business owner invest in?
Many small businesses look at commercial property - which is ideal if you have a business that you can put into the property you buy. Lease security of the tenant is one of the biggest risks when owning commercial property, and this is a good way to avoid it. It a smart option as you can really add value to your business and also add value to the commercial property over time.
But if you’re not in that position, often the best initial strategy is to build a residential, low-risk, long-term buy-and-hold portfolio of at least 2-3 properties. Once you have a base of residential property then diversifying into commercial property can work well for many business owners.
Property investing for business owners is one kind of diversification – but when building your property portfolio you should have diversity too. Don’t just buy property only in the city you live in. Perhaps get something in Sydney, something in Brisbane and something in Perth. Plus spread you risk between houses, town houses and units.
What about the current investing environment?
There are always questions about the current environment. Right now, in May 2022, here are the big ones.
Rising interest rates
We just had our first interest rate rise for years. There’s a lot of noise about it, but really, the whole fear of the market crashing is overblown. The national property market boom over the past 2 years has been owner-occupier led, but now investor numbers are rising as owner-occupier activity reduces. Ask yourself why so many experienced investors are pouring into the market – what do they know that you don’t? Rents are rising and will keep rising for some time and will offset some of the interest increases. Vacancy rates are at record lows and supply of new property has slowed down – at a time when the borders have just opened. Remember, cashflow is king. If you invest correctly you can still get great cashflow over the next few years so there’s no need to put your investing life on hold.
When interest rates go up, your business loan costs go up too. But that doesn’t stop you running a business. Plus, every cent of interest you pay on the mortgage of your investment property is tax-deductible.
You can also factor in rising rents which mean better yield.
When you consider all these facts, the interest rate rise isn’t scary at all.
People think elections mean uncertainty. A proportion wait to make any decision. But the reality is, neither party in this election is offering any great benefit to business owners or to property investors. So the result isn’t going to change a thing.
Taking stock and taking action
Things are starting to normalize after what has been a tsunami of change and uncertainty over the past 2 years and that has something that has been challenging but also presented opportunities. Change though is a constant that business owners know only too well as they are at the coal face. Waiting for complete certainty before acting often means missing out on the many opportunities that continue to present themselves right now – particularly when it comes to property investment and securing your family’s future.
And now that things have settled down a bit, it is a great time to take stock. (That’s something you should do regularly anyway). But the key thing is, once you’ve reviewed where you are and educated yourself thoroughly about your options, that you then have the courage to take action. There’s nothing worse than waiting ten years and then saying, ‘I could have done that, but I didn’t.’
So look at where you are right now, get some expert help, and take action.
Grant Ryan is the Director of Property and Research at Ironfish.
Since 2006, Ironfish has helped over 10,000 customers around Australia to build wealth for the future, through strategic property investments.
Providing an end-to-end investment service, Ironfish supports investors in acquiring a diversified property portfolio, backed by the confidence of the latest research, personalised strategies and quality investment opportunities.