There are mainly three methods to hold your property portfolio. Each method serves a certain purpose, benefits and limitations. Here, we mainly focus on the differences of mortgage.
1. Personal asset & business asset
In the old days, a lot of respectable businessmen created their wealth and bought a few properties under their belt. To them, the line between personal asset and business asset is a blurry line. Many of them, instead of setting up Private Limited status companies, they set up priotor or partnership entities.
In today’s practice, people have learnt that it is crucial to hold their properties with different entities for different purposes and benefits.
2. Individual & Investment holding
The individual investors create an investment holding company to purchase a property. This investment holding company is merely a shell company for holding property purposes. There is no operating income, no employees & no inventory.
In terms of mortgage application, the bank will request all shareholders to become the personal guarantors for the mortgage; the mortgage approval will be purely based on the respective shareholders’ personal financial strength.
In Singapore, individual or investment holding owns commercial property, usually will be offered with slightly higher interest rate and lower loan quantum.
3. Operation company & Investment holding.
If you own a business (with private limited status), you will have additional options to own a property, provided your company is incorporated more than 3 years with relatively robust business and cash flow.
As the owner of the company, you could either make the operation company to own the property directly or to own the company indirectly with a holding company.
The stringent borrowing criteria based on Total-Debt-Servicing-Ratio, banks limit the borrowing amount to individuals. The owner of a company could always make use of the company financial stand to get a bigger mortgage amount.
As a private company, the bank always requires the shareholders of the company to become the personal guarantors for the mortgage.
One of the reasons why company owners hold the commercial property in different entities, is because of consideration of the future selling of the company itself. The owner could sell the company and the property seperately instead of in a whole deal.
4. Sole proprietor and partnership.
In Singapore, sole proprietors or partnership status is treated as individual. The bank will assess the mortgage based on the individual’s financial strength, and not the business itself. We encourage business owners to change their business entity to Private Limited status.
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