In the world of real estate investment, one of the fundamental decisions that prospective buyers have is, “should I buy a commercial property under my name or business?”. This choice carries significant implications for financial liability, taxation, and overall business strategy. It is a vexing predicament, but one worth addressing especially given that buying a commercial property in Singapore comes with many benefits. Among them, greater rental yield and more stable prices compared to residential units. Additionally, the property tax on commercial lots is lower and more affordable.
In this article we’ll explore whether it's best to buy a commercial property under your name or business.
Owning a commercial property in a personal capacity does come with certain advantages. Let’s explore some of them.
Purchasing commercial property as an individual, is very much like purchasing residential property. The process and steps involved are far much simpler compared to what it takes to purchase commercial property under a business entity. Furthermore, there are a host of requirements that businesses are subjected to when applying for commercial properties.
For example, under the Companies Act, you’ll need to file simple accounts & corporate tax every year. In addition to this, your business will need to appoint a corporate secretary and call and file an AGM annually.
Purchasing property as an individual provides a greater degree of ownership clarity. It makes clear who has direct ownership and control of the property, reducing complexities associated with shareholder agreements and company resolutions. Furthermore, greater ownership clarity can also make it easier to apply for loans, licences or permits.
Acquiring commercial property as an individual often entails lower upfront costs compared to purchasing through a business entity. Individuals usually face fewer legal and administrative fees, as they are not required to adhere to the complex regulatory requirements of a corporate entity.
Generally, buyers stand to benefit more if they make a purchase as a business. Most of these benefits relate to both yield and financing, allowing you more flexibility and room as an establishment as compared to an individual.
In banking, the loan to value (LTV) ratio describes the margin of financing that lenders are willing to provide you with, compared to the full value of your purchase. In the context of property, it is the percentage of the property value that the lenders are willing to loan you.
Individuals who apply for property loans under their own name will usually not be accorded an LTV ratio of more than 90%. Usually this value drops further if you have other loans under your belt. However, companies applying for commercial property loans can enjoy an LTV of up to 90%, provided that certain conditions are met. These would include a good credit rating, and proof of viable income. The excess funds can be used for renovations, to offset upfront costs, spent on moving costs or used to ease company cash flow.
When a lender calculates a loan tenor for a home loan (when there are joint applicants) the age and income of these borrowers is a key deciding factor. This is known as the Income Weighted Average Age (IWAA), whereby the older borrower with a higher income will skew the tenor, making it shorter.
However, for company made applications, the income and age of the youngest borrower will be the main deciding factor of tenor. This will result in tenors that are longer, with more affordable monthly repayments. Lower monthly instalments are favourable to your business, as they have less impact on your cash flow. Additionally, if you choose to lease your commercial property, the rental returns may help offset these payments too.
The total debt servicing ratio (TDSR) refers to the ideal maximum percentage of income an individual or company should dedicate towards settling debts. For an individual intending to apply for a mortgage, their TDSR should not exceed 55%. If it does, the eligibility of the individual may be called into question.
An individual's TDSR is strictly upheld as it is a MAS regulation. On the other hand, a corporation that intends to take a property loan is not subject to TDSR evaluations, and will instead be assessed based on other metrics such as the Debt Servicing Ratio which usually just requires the EBITDA of the company to be 1.0x of the annual debt obligations.
In general, corporate loans tend to offer lower interest rates as compared to personal loans. Corporate loans are secured by company assets and income stability. They are therefore considered to bear lower risks compared to personal loans.
Personal loans are often unsecured and rely heavily on the borrower’s creditworthiness, raising the risk level for lenders. This in turn causes lenders to raise interest rates. This is beneficial for the companies in the long run. It helps to minimise the repayments spent on interests, and focuses on clearing off the principal sum instead.
In simple terms, the Special Purpose Vehicle (SPV) is a legal entity created to separate specific commercial properties from the assets and liabilities of the parent company or individual. This separates the property from any debts the parent company may have, making it easier to transfer ownership or to liquidate during challenging times.
The SPV also allows you to gain financing much easier, as it is considered a company by itself without the burden of individual or corporate debt borne by its parent company. Additionally, the SPV allows you to claim various corporate tax exemptions, which can offset the cost of purchasing your desired property.
Finally, the SPV is also valuable should you want to protect commercial assets that you plan to pass onto the next generation. A property under your name would be subject to your liabilities after you pass, but one that is bought under a corporate body can be separated by the SPV and passed financially unscathed to your heirs.
The benefits of purchasing commercial property as a company are numerous, including various tax exemptions and special buyer tax rates. For this reason, you should talk to our expert by setting up a free 15 minute consultation.
Lendingpot is the perfect place to find your next corporate loan. Our unique platform aggregates the best loan offers, sourced from more than 50 lending partners. Enjoy financing based on your revenue, or even your unpaid invoices. Register today to leverage our lenders for your corporate growth and stability.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
