Reinvesting profits from a business into property is a great way to diversify your portfolio and continue growing your profits. It also gives you flexible options in the future. If you decide to exit the business or the market takes a downturn, you’ll still have a reliable income from that investment.
Investing in property is an appealing venture as a business owner. But there are also important considerations before making the leap. For example, it’s not uncommon for small business owners to structure their finances in a way to minimise their taxable income. One way this is done is by using the business to write off expenses like home office space.
The problem is that tax write-offs make it look like you’re earning less than you actually are. A lower taxable income means a lower borrowing capacity so a potential lender may be hesitant to approve a loan. So what can you do to increase your chances of qualifying? Here we’ll look at what you can do as a small business owner to get started on investing in property.
Start Planning Now
If your goal is to eventually invest in a property, you need to plan at least one to two years in advance. Ensure your taxable income is maximised so you pass any strict criteria that banks have. Lenders will look at your legal tax assessment notices to determine whether you qualify for a loan and for how much.
Get Your Finances in Order
Before you apply for a loan, it’s important to review your finances. Contact a credit reporting body (CRB) to request a copy of your credit report. You can access your credit report for free once a year and the CRB must issue a copy within 10 days of your request. Carefully review your credit report and dispute any errors or items that appear suspicious. During this time be sure to continue making timely payments and take steps to reduce your debt-to-income ratio.
Save For a Down Payment
Just like with any major asset, you’ll be expected to have a down payment. Conventional mortgages typically require at least 5% but this depends on the lender and the conditions of the mortgage. Note that if you borrow more than 80% of a property’s value you’ll need to pay Lenders Mortgage Insurance (LMI) – A one-off payment that protects the lender in the event you’re unable to continue making payments. You can avoid this fee though if you put down a deposit of at least 20%.
Research Different Banks
Once your finances are in order and you have a sufficient down payment, the next step is to research different lenders. Some banks actually specialise in providing loans for property investors so you’ll want to seek these out first to compare your options. Keep hard inquiries to a minimum as these become part of your credit report. Having too many on your credit could hurt your chances of getting approved.
Seek a Finance Specialist
It’s not easy navigating investment properties. A finance specialist can help explain the more technical aspects and explain what the exact process entails. Ask friends or family members for any recommendations. Ideally, you want to seek out a specialist who has a healthy amount of experience working with small business owners.
Kym Wallis, the founding director of Higher Ranking has over 15 years of advertising sales, digital strategy, and business development experience. He is currently working as Digital Adviser for iChoose.