Posted on July 4, 2022
I am self-employed- how can I buy an investment property?
Borrowing money to invest can be difficult when you are self-employed, especially if you don’t have your taxes up to date. Lenders will also have different rules for the various business structures, e.g. for sole traders, partnerships, family trusts and companies.
Sole traders and partnerships generally have a hard time proving their income or showing an acceptable level of income for lenders. This is mainly due to the amount claimed in expenses. Most sole traders and partnerships operate from home and end up paying all the household bills and then claiming a large portion of these expenses as a deduction.
They end up showing a very low taxable income. Lenders understand this phenomenon and will look at your track record over two or three years.
Either way lenders will want to know 2 main things. How much money you earn/declare after deductions, i.e. your taxable income and how much you owe the Australian Taxation Office (ATO). Both of these major factors will affect your ability to obtain a loan.
Statistics show that people who are self-employed have a better history of meeting their payments than PAYG employees. This may have something to do with the fact that most self-employed people take responsibility for their actions.
As a lot of self-employed people are not able to prove their entire income or their taxable income on paper may be low compare to the amount of money they have, it is sometimes difficult to secure bank loans.
Family trusts and companies are a little different in that they are legal entities and generally will be required to demonstrate at least two years of completed tax returns. The tax returns will show if there is a tax debt owing to the ATO or if there is GST owing and also how much the company has paid you as an individual.
In case of a trust, your earning may come in the form of a disbursal from the trust to you for which you are responsible to declare and pay taxes on or in case of a company, the company may actually pay you a wage, your taxes and contributions to superannuation. This scenario is similar to a PAYG employee
A lender will want to see your most recent pay slips and also the last two years tax returns of the business. If the business has substantial tax debt, then this may affect your ability to get a loan.
Getting finance for an investment property can be tricky. A quick chat with one of our investment consultants will help you understand whether you are able to invest in property.
Talking directly to counter at a bank is generally not a good idea. It is always better to discuss investment loans with an experienced property investment finance broker. Not a broker who deals with first home buyers and tells you they deal with investment loans; I mean a proper broker who deals exclusively with investor lending. They’re a breed apart and can really mean the difference in being successful with an application or not.