How to maximise wealth creation with the right structures

Monica Rouvellas says investors can maximise their capacity for wealth creation by setting up the right structures.

Establishing the right investment strategies, especially with your purchasing entity structure, from day one is the key to tackling banks and increasing your borrowing capacity.

On Property Hub’s Get Invested podcast, entrepreneur and avid investor Monica Rouvellas discusses the best structures to put in place.

The challenges investors face with banks

For Monica, her biggest challenge isn’t deposits or finding the right property. It’s overcoming barriers with the bank.

“The biggest hurdle is always to do with just meeting the requirements of the banks, especially when they change client interest rates, and particularly now that I’m close to a sort of higher tax bracket as well,” she said.

“I still get very confounded by banks when they’re like, no you can’t borrow this much, and I’m like, well I earned more than you but you can go out and buy $1.5million properties, but you won’t give me the same amount of money.

“So, for me the best strategy to overcome this is always positive cash flow properties, with capital growth obviously, and the potential to develop on them as well.”

Determining your numbers

Bushy and Monica urged investors to first understand their goals and the numbers they need to make it happen.

“One thing to work out is how many properties you would like to get to. So when I first started out, I was happy with one or two and just to be able to have a little bit of extra income to be able to pay my rent. Whereas now I’m like, nope, I want to be able to have a fully paid off mortgage, buy a luxury car, be able to travel the world for three to six months at a time, and to not have to worry about working. So my goals have definitely changed. So the target I now want to hit by the time I’m 40 in terms of properties and passive income is probably up there,” Monica said.

How to set up the right structure from the beginning

The key is to begin purchasing with your structure in place to avoid having to undergo a costly restructure down the track.

“If I was starting now again, I would probably start by purchasing in the structures right away, because unfortunately we can’t escape stamp duty, and to pay that twice on several properties is not a pleasant experience. And not to mention the capital growth that sometimes can’t be avoided,” Monica said.

“So that would be my best advice is structure. Get the structure right from the beginning. Don’t listen to accountants and other people saying, oh it’s okay you can buy three or four in your name and then worry about structure, because at that point you have three options – earn more money, pay down the debt, or sell the properties or sell them into entities. And it’s a costly exercise.” 

One of the first steps investors should take in this process is seeking advice on which entity structure is suitable.

“Definitely seek advice on what entity structure is suitable to you. So this is also very state dependent, because you’ve got to factor in things like land tax laws, which vary from state to state. So for instance, in New South Wales and Victoria they like to tax the beneficiaries, whereas all other states in Australia tax the trustee. So that’s if you think about the trust structure. Likewise, companies have different thresholds as well from state to state. So that’s something to factor in,” she said.

“The other things then to think about as well, if you’re choosing between companies and/or company trusts, is whether or not you’re going to sit and hold, or whether or not you’re going to actually then sell. And one thing to calculate, particularly in the states of New South Wales and Victoria, is okay, if I were to pay land tax every year versus me in a company getting to the threshold and then selling say ten years later, would the amount be the same, more or less? And depending on the property, you might actually find you’re better off maybe just with a company only structure then to set it up in a trust. So those are the things you have to weigh out.”

Why investors should consider company structures

Monica delved into her journey of restructuring and the benefits of company structures.

“So what happened was, a few years after my brother and I bought a property, I wanted to buy a property on my own. I found quite a cheap property with a good rental return and quite good growth. So I bought that property, and after that property the banks were like, we can’t lend you anymore because you’ve hit your maximum serviceability. And I’m looking at my tax returns and I’m making over 100k off the tax a year, and both my properties were positively geared, and yet the banks said it wasn’t enough,” Monica said.

“So then I was looking into it, and found that my ex partner’s family would buy property in so-called company structures. So I start asking why, and then from my little background and experience, I was aware that you could buy property in companies and it would be treated differently. So I got me thinking about what if I were to sell some of these properties into a company? And then I was like, no, I’m not going to get the capital gains tax. Okay, so let’s figure out ways to do it. So I started chatting to people, and I also didn’t even realise that in a book by Steve McKnight I had bought and hadn’t fully finished reading, the answer was there all along.

“Now it took me a while to understand the structure and kind of go, okay we can still borrow under a company, but if we pair that with maybe a trust or something, then there are certain benefits. Although, there are also a lot of disadvantages you have to weigh up. So we restructured everything. And then that allowed me to go off and buy more property essentially.”

Who to seek help from

Especially for those without a corporate taxation and legal background, talking to an expert accountant and lawyer is crucial.

“You need to have both the accountant and the lawyer, because the accountant will be able to advise you on things like the tax implications, while the lawyer can advise you in terms of the legal implications and the structures. Because the other advantage to the way I set up properties is you can have things like asset protection, and you have tax minimisation strategies that you can then implement,” she said.

Listen to the full interview here.

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