It is not uncommon for a group of people to entertain the idea of pooling their resources in order to increase their buying power and spread the risks associated with investing in property.
Surely this is a no-brainer, right?
By chipping in with friends or family you will have a larger deposit and can potentially purchase a more valuable asset or even a few of them.
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While it’s not necessarily a bad idea, as with any investment strategy, it is wise to know exactly what you are getting yourself into and how it will all works, so let’s dig a bit deeper.
1. Is it worth it?
In my opinion, family is much more important than money, and like it or not, when money comes into the equation relationships sometimes change.
Would you gamble your relationship for the sake of a business deal?
If you don’t have a long-standing, healthy relationship, don’t proceed. If your relationship has had a tattered past which is not fully healed, don’t believe that a successful property deal will heal the wounds.
2. Write it all down!
Before setting sail, every role and expectation needs to be clearly defined and documented. Approach your property investment plan in the same way you would a business plan, with all the partners agreeing to every aspect of the deal, including:
- Goals – how many properties do you plan to buy?
- Responsibilities – who will liaise with the banks, property managers and real estate agents? Who’s going to negotiating the purchases or sales?
- Financial contribution – how much is each partner contributing?
- Profit distribution – what cut will each partner take
- Time frame – what are your time frames? How long will you hold the properties? When, if ever, will you sell?
- Borrowing obligations
- Legal obligations
- Taxation implications
3. How well do you know your friends and family…financially?
You’re confident in your ability to take on a financial commitment. But what about your friends?
Have you had an honest conversation with them about their financial or employment situation?
4. Borrowing blunders
So you get together with three mates and all chip in $30,000 to kick start your portfolio.
Do all of you have that money in cash? Or maybe it’s tied up in your homes as yet to be released equity? Don’t cross-collateralise your home loan to fund the purchase of another property with other parties. Instead, release your equity in advance.
Then there’s a more concerning issue that you face when borrowing with others; you are jointly liable for the whole debt. In other words, if they skip the country and leave you with the mortgage, then the banks will chase you for the lot.
It gets worse; you still only own part of the property that you now have the entire mortgage repayments on!
5. Your future credit position could be compromised
While you may only have a 30% share in a $300,000 joint investment loan, making your agreed obligation $100,000, lenders are likely to view the whole $300,000 as your potential mortgage commitment.
This, of course, means you will be restricted in terms of future borrowing options.
6. What if you decide on a different path?
Imagine this scenario: You successfully grow a portfolio of 10 houses with two buddies. Your friends are content to sit on those 10 properties indefinitely.
However, you feel that a one third share in 10 properties does not a retirement nest egg make.
What do you do?
Unless all three of the partners agree, you can’t borrow against those 10 assets in your combined portfolio to buy more investments.
You now have to decide whether you are prepared to exit the partnership somehow, or just start from scratch on your own and build a whole new portfolio. Bottom line is, you are tying your future to the friends or family you invest with.
7. Who decides on the exit plan?
Often a group of single, cashed-up friends will be more willing to venture into a joint property investment exercise.
But what happens when you’re suddenly not single anymore? You find “the one” and decide to move to the country to start a family and need your money that’s tied up in the joint venture.
Or there’s the unpleasant thought of divorce that may require you to liquidate your assets. You need the money from your portfolio, but your friends refuse to sell.
These types of sticky situations are not so out of the question and could be the cause of not just a friendship breakdown, but also a tricky and costly legal battle.
8. Do you have protection?
Remember to protect yourselves with life and income protection insurance, just in case something unforeseen arises. Rainy days can happen so you may as well own an umbrella.
9. Never say never!
While there are obviously pitfalls to consider if you plan on investing with friends or family, don’t rule it out. It’s worked well for me.
I got into the property market in the 1970s because I partnered with my parents to buy my first property.
In the 1980s and 90s I managed to be part of some very significant property developments by choosing the right joint venture partners who brought complementary skills to the table. And now I am in the position to help my children get into property by partnering with them.
As with any property investment endeavour, the success is in the planning, including choosing a proven investment strategy and making sure everyone is in on the same page. If all that’s in place, then go for it!
Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.