Should I set up a SPV in Ireland

L

Larkinroe

New Member
Messages
3
Hi,

I am 30 and work in commercial property management. I recently received €200,000 in inheritance and had initially thought of setting up a Special Purpose Vehicle (SPV) in Ireland to hold mixed-use residential and commercial property.

My idea was to set up a limited company and give a director’s loan of €200,000 into the company. I have spoken to a financial broker who confirmed a variable BTL finance option at 7.25% (interest + capital) for a 25-year term. The company’s €200,000 represents a 35% deposit for the BTL; the bank loan would be €371,429, totalling €571,429.

I have found three properties for €190,000 each that produce a gross yield of 11.4%. Each property has the following investment characteristics (net figures are before tax):

  • Purchase Price: €190,000
  • Annual Gross Rent: €21,600
  • Gross Yield: 11.4%
  • Operating Costs: €1,250
  • Bank Debt: €11,126
  • Total Costs: €12,376
  • Net Income: €10,474
  • Net Yield: 5.5%
As I would be managing the properties myself, I will be saving on this cost. However, is this a good use of €200,000? With the above figures, the company would make approximately €31,422 per annum (net before tax) that I would remove as a director’s loan repayment for tax reasons.

My hope is that I use the annual income plus my personal savings to add more BTL properties to the limited company and grow the portfolio.

I am sure there are issues I have not acknowledged, and I would love to understand the pitfalls and issues involved with SPVs.

Thank you.
 
I don't know if the following principles apply to you and your SPV

Key Post - Why you should never use a limited company to invest in residential property

I am not a tax expert, so corrections welcome. Some of the figures have been deliberately simplified e.g. 50% for personal taxes. This comes up a lot in various formats so I thought I would update the Key Post on the topic. This post is about an Irish individual investor who wants to buy...
www.askaboutmoney.com
 
Hi Brendan,

Thank you for linking me to the article above. You are right about the onerous tax implications of selling a property from an SPV/Company, considering both corporation tax and personal tax. However, my plan is to indefinitely retain the assets within the corporate structure, with the hope of passing them on to my children/family (subject to further tax advice).

Another point raised in the article was the tenancy implications for a company vs. a private landlord. This point does worry me, as I know Ireland is heavily weighted towards tenant rights and not the landlord. However, I am not going to be renting the full apartment but rather room-by-room. Each resident is provided with a fully furnished room with premium amenities at or below the passing market rent for a shared room. My initial thoughts were that this could dilute the risk of defaulting tenants, as there are three separate leases. However, there is not much evidence to prove if this would be materially beneficial.

The core reasons I wanted to use an SPV/Company rather than my own name are as follows:
  • No personal debt, as it is in a limited liability corporate structure.
  • Ability to draw down the director's loan tax-free.
  • Increased ability to leverage and acquire further investments.
  • Reduced tax liability when transferring ownership or paying dividends.
 
Larkinroe said:
Hi Brendan,

Thank you for linking me to the article above. You are right about the onerous tax implications of selling a property from an SPV/Company, considering both corporation tax and personal tax. However, my plan is to indefinitely retain the assets within the corporate structure, with the hope of passing them on to my children/family (subject to further tax advice).

Another point raised in the article was the tenancy implications for a company vs. a private landlord. This point does worry me, as I know Ireland is heavily weighted towards tenant rights and not the landlord. However, I am not going to be renting the full apartment but rather room-by-room. Each resident is provided with a fully furnished room with premium amenities at or below the passing market rent for a shared room. My initial thoughts were that this could dilute the risk of defaulting tenants, as there are three separate leases. However, there is not much evidence to prove if this would be materially beneficial.

The core reasons I wanted to use an SPV/Company rather than my own name are as follows:
  • No personal debt, as it is in a limited liability corporate structure.
  • Ability to draw down the director's loan tax-free.
  • Increased ability to leverage and acquire further investments.
  • Reduced tax liability when transferring ownership or paying dividends.
Click to expand...
I am not involved in lending or mortgages. But, when there is limited liability as you will have through a limited company structure, banks are very cautious on lending as they can get back the value of the property and not much else. So be prepare to to give a personal guarantee, just like so many developers had to give on their borrowings during the Celtic Tiger. When I opened my business bank account, I was offered a company credit card with a limit of €1,000 but had to give a personal guarantee.
 
Larkinroe said:
Hi Brendan,

Thank you for linking me to the article above. You are right about the onerous tax implications of selling a property from an SPV/Company, considering both corporation tax and personal tax. However, my plan is to indefinitely retain the assets within the corporate structure, with the hope of passing them on to my children/family (subject to further tax advice).
Click to expand...
You are 30. You're far too early in your life to be trying to plan the transfer of assets to the next generation, particularly by tying up yourself and your money in a corporate structure that most people will go out of their way to avoid.
Larkinroe said:
The core reasons I wanted to use an SPV/Company rather than my own name are as follows:
  • No personal debt, as it is in a limited liability corporate structure.
  • Ability to draw down the director's loan tax-free.
  • Increased ability to leverage and acquire further investments.
  • Reduced tax liability when transferring ownership or paying dividends.
Click to expand...
I don't see much advantage in any of these ideas. Why on earth for example would you wish to pay dividends?
 
Larkinroe said:
Reduced tax liability when transferring ownership or paying dividends.
Click to expand...

Sorry Larkinroe

This is just wrong.

1) When transferring ownership, you will be transferring shares in a company and not the actual properties. So you are just transferring the headache of corporately owned property to your children.

2) How is the tax liability reduced when paying dividends? You will have paid Corporation Tax on the rental profit in the company and then you will be paying the top rate of tax on the dividends. It makes no sense.

Brendan
 
T McGibney said:
You are 30. You're far too early in your life to be trying to plan the transfer of assets to the next generation, particularly by tying up yourself and your money in a corporate structure that most people will go out of their way to avoid.
Click to expand...
An overly optimistic view (which is common when starting any venture) on how the empire is going to grow.

I'd alarm bells ringing all over the place:

  1. €190,000 property. Obviously not in Dublin or any major city in Ireland. Therefore riskier, especially when the next property crash comes, and it could take decades for the price to come back.
  2. High interest rate
  3. Using personal funds at outset and in later years to fund the corporate landlord.
  4. Renting per room, not per property. Good luck having 3 separate leases when they share living areas and bathrooms. Who will be responsible for damage done to a common living area, one of them or all of them? If you are renting per room, you will have a bigger turnover of occupants and an increased risk on a bad tenant.

Stick the money in the stock market and go about your life without even having to think about it. The alternative outlined is a hell of a lot of work and sounds like a full time job...with debt.
 
Larkinroe said:
The company’s €200,000 represents a 35% deposit for the BTL; the bank loan would be €371,429, totalling €571,429.
Click to expand...
Have you factored in costs of buying and furnishings the properties? Stamp duty, solicitors, engineers and furniture. And very likely some necessary renovation (kitchen/bathroom) at the price point you are looking at. I would think a contingency of €40-50k would be necessary for all of this. Great if you can do it for less but you'll still need to budget for this if you want to deliver your "premium amenities"

Larkinroe said:
I have spoken to a financial broker who confirmed a variable BTL finance option at 7.25% (interest + capital) for a 25-year term.
Click to expand...
What did they confirm? Unless you have AIP from a lender then they are just indicating what is available, nothing is confirmed.

Larkinroe said:
I have found three properties for €190,000 each that produce a gross yield of 11.4%.
Click to expand...
A quick search nationwide of 3 bed properties at that price point is not inspiring. They are either very rural or still well outside urban centres and in poor condition so expecting €1800 per month is ambitious.

I would also be using the property price register as a better guide as the asking price on daft is not a good indicator of sale price. As an example, a few properties in my locality (€500k+) have gone for more than 15% above asking. It really just depends on who's bidding

Larkinroe said:
With the above figures, the company would make approximately €31,422 per annum (net before tax) that I would remove as a director’s loan repayment for tax reasons.
Click to expand...
I think you are being overly optimistic in the rent you will receive and the price for which you will pay for the property. You need to do a few more scenarios with reduced income to see can you handle voids in rent or a change in the market. Your plan is long term so if the property market ever sorts itself out, your rent figure will reduce significantly. How would you survive if your rent was 7-8%?

Also, while the scenario you outline is profitable, how is it for cashflow? I haven't calculated it exactly but I think you are slightly cash flow positive in your ideal scenario so there may not be much to take out to repay the directors loan.

Larkinroe said:
Bank Debt: €11,126
Click to expand...
Where are you getting this figure? €371,429*7.25% is €26.9k or ~€9k per property. Or a little less when you consider the reducing capital.

Larkinroe said:
My hope is that I use the annual income plus my personal savings to add more BTL properties to the limited company and grow the portfolio.
Click to expand...
An awful lot depends on your circumstances outside of this idea. If you have inherited substantial wealth and already own your own PPR then maybe you can accept the risks involved because you are not reliant on the income from this venture.

However, if you have saved that €200k by having a high income but have yet to buy or clear a mortgage on your own PPR (or even have your kids for that matter) then it is an incredibly risky idea. It would be entirely reliant on your income to support if rents or property prices collapsed.
 
_OkGo_ said:
What did they confirm? Unless you have AIP from a lender then they are just indicating what is available, nothing is confirmed.
Click to expand...
AFAIK, mortgage brokers can't place mortgages for businesses, only for principal private residence and personally bought investment properties. It could have changed or he could have spoken to someone with an inside link, but I am almost sure banks won't use mortgage brokers for loans through companies.
 
I had not realised that BTL rates were so high. Here are AIB's rates

1718199792924.png

OK, BoI is a bit cheaper

1718199872534.png

I suspect that borrowing via a company is more expensive than direct borrowing, but I don't really know.

Brendan
 
You must log in or register to reply here.
Back
Top