Evidently, an increasing amount of property investors are deciding to buy properties inside of a company. This means that a lot of these property investors want to use a mortgage to buy the property but this can be quite a confusing concept.
While buyers will need a mortgage broker to run through important information (and the tiny details), there are still other areas to remember, like:
- Trading company vs. SPV – a trading company is a company that has primary activity as well as owning the property. A manufacturing company might buy the building it operates from or another business owner/property investors may buy a residential property with cash that has been accumulated through the business. An SPV is a company that only endures for the purpose of holding a property. For example, if you set up a business and buy a house but then the business doesn’t actually operate in any business activity at all. The business will just hold one property or over an extensive period of a time it might buy a property and hold in a likewise way. BOTH of these companies are limited companies and apart from the choices they make, there are no key differences.
- How lenders see the difference – If a trading company decides to buy a property with a mortgage, the lender will need to analyse the performance and success of the company. For example, they will check business balance sheets, analyse the outgoings and incomes, looks at company projections. The main reason for this is that if one of these key things goes wrong, then the lender would be afraid of the client not repaying mortgage payments, all of which makes complete sense. So if you are in the property investors’ circle, then staying mindful of this is crucial. From the perspective of an SPV company, then none o this really matters because it doesn’t hold the property. There will be no risk at all for the primary things to fail, however on the other side, the company has no financial backing as they are not running any operations. There are multiple ways of looking at this situation, even from property investors’ point of view.
- The role of the directors – most commonly, a lender will take accept a personal guarantee from every company director. What this means is that if the company stops trading or cannot pay the debts; the lender can approach the directors on a one to one level for the excess debt owed. This is even more important for an SPV company as the company doesn’t have any aptitude outside of the property to raise funds, which means that the company director who is totally liable for repaying the debts.
- Time frame that the company has to be running for – If a company decides to get a business loan, then the number of trading years is important. For mortgages for an SPV company however, then the amount of trading years doesn’t matter. This is because the company isn’t liable in this case too; the directors are the biggest game players.
It is very important that for property investors, they need to stay cautious of the new laws and rules in the property industry. Obtaining a mortgage for limited companies is an important topic, one that requires attention and room for thought.
Being aware of the relevance of certain structures in the property industry is vital; as it can help property investors make sensible decisions and more importantly, the right decisions.
Written by Gemma Smith