If you’ve ever purchased a gorgeous cocktail dress, a dapper suit or a fabulous feathered coat (OK, the last one may be just me) you’ll understand that buying your prized outfit is only the first step.
The next steps are organising where you’re going to wear your new outfit, working out how you’re going to accessorise it and of course, the latest step, how it’s going to look its best in a selfie.
Of course, once the outfit is worn, photographed and uploaded to your various social media sites, the most important step is still to come. That’s becauseyou’re (hopefully) not going to take off your now slightly soiled outfit and leave it on the floor to be kicked to the bottom of the wardrobe where it will live for the next few months. You’re also (hopefully again) not going to throw your new suit or cocktail dress into the washing machine without checking first if it’s handwash or dry-clean only.
Instead, if you’re wise, you’ll work out how best to care for your new outfit, follow those instructions and then store it appropriately until the next time you want to wear it. Now if all you do is go away and decide to follow washing instructions my work here is partly done. However I think too often we’re not following the care instructions of the biggest assets we’re purchasing.
Let’s take a big, commonly purchased asset: the commercial property of a business. What business owner hasn’t shown off their shiny new office or warehouse when they’ve first bought it, in the same way we might twirl around in a new cocktail dress or swagger in a new suit? However when the new owner signs on the dotted line they, in effect, throw their new purchase onto the wardrobe floor and stomp on it because they’re not following the proper care instructions.
What do I mean by that? Well deciding to purchase the asset is simply the first step. Sure it might be one of the hardest and most exciting steps but it should always be the first step. After that you should follow step-by-step care instructions to make sure your asset is protected and looking its best for the long term.
Let’s use the example of the commercial property of a business and look at the care instructions I believe need to be followed:
Step 1. Make sure the property is purchased in the most appropriate structure
Too often I see business property being purchased in the company name the business is operating out of. This is like wearing your new suit or cocktail dress and sitting next to your clumsy drunk cousin at a wedding.
The question isn’t will you get red wine spilled all over your new outfit, it’s when and how much. Instead the property should be purchased in a non-trading structure and perhaps not in the name of the director of the company so there is more protection afforded. One of my preferred structures for business premises is a Self Managed Superannuation Fund (SMSF).
Holding your property in an SMSF means you can effectively contribute more to your retirement, your property is protected and once you retire, all profits and rents may be tax free.
Step 2. Make sure you are being commercial
So you’ve decided your business property should be sold to your SMSF and you figure it’s worth about $200,000 because Tommy, the gardener, told you it’s worth that and your friend mentioned his rent is about $5000 a month so you’ll stick with that too. And no need for a lease because it’s yours anyway, right? Wrong!
When I’m cleaning my feather coat (yes I really have one but just deal with it and move on) I don’t hang it outside in the rain because I figure that’s how birds wash themselves. Instead, I talk to the manufacturer, check the washing instructions and find a really good drycleaner. It’s the same with your business property.
You need to ensure everything you’re doing is based on market value, which means obtaining market opinions from those qualified to give them and drawing up commercial leases. There is also the matter of having the rent paid to the correct entity and the expenses being paid from the correct entity rather than just thinking it’s all the same pot so it doesn’t matter. This is particularly important with an SMSF.
Step 3. Make sure your property is protected for the long term
Yes it’s money we sometimes feel is being thrown to the wind but spending money on the right level of insurances and having appropriate wills drawn up means our assets are protected for the long term.
This shouldn’t be a do once and never worry again exercise but a regular check-in. In my local community, bushfires last year left many residents and business owners drastically underinsured because the cost to rebuild and replace had risen so dramatically. Make sure you don’t leave you, your business and your family short-changed if something were to happen.
Often we’re so caught up purchasing our bright new shiny thing that we don’t think enough about the after-care instructions.
Make sure you talk to your advisor or accountant about how best to care for your major purchase so it’s not laying at the bottom of the cupboard but is protected and looking its best for years and decades to come.