Most Kiwis have the property itch. Some have full-blown property eczema. So much so that we can often resort to relying on friends to help with the scratching in order to get our property buying financed. Rupert explores the ins and outs of this common approach.
It’s part of our culture that we must own a house somewhere, no matter what the cost. And sooner or later, most entrepreneurial types look toward getting a group of friends to pool their funds and begin purchasing properties.
The reasons for this are usually one of the following:
• Not having enough equity to purchase by yourself
• Not having enough income to purchase by yourself
• Telling people you are part of a “property syndicate” makes you feel awesome (these people will eventually buy themselves some sort of flashy BMW)
• You particularly like to, metaphorically (and sometimes literally), smash your head against brick walls as a form of investment.
History is littered with smart people who decided to set up a group of buyers. And for every graveyard of cleverly structured LTCs that are owned by trusts that are owned by corporate trustees, there is the one anecdotal company that made it.
I get it. In fact, I’ve done it (I’m a resident of the graveyard). It’s a massive ego stroke to turn up and purchase a property and begin the project that will start the financial snowball rolling.
And, believe it or not, I’m not here to talk you out of it. But I do have some suggestions as to how you can make your life a lot easier and increase the odds of succeeding:
1) Not all banks like property syndicates.
Some require each person to be able to individually service the loan (in case the rest of the directors leave in a huff). These banks are no good to you at all. You need to go to a bank that tallies up the income and deposits of all participants and treats them as one entity.
2) Set up the legal structure early.
Like, months beforehand. If you need a trust, get it sorted before you start looking at property. It’s a really expensive exercise to change legal structures afterwards (not to mention, it can void the finance preapproval if you change the investment vehicle at the end).
3) If you’ve got someone with bad credit, don’t make them a guarantor.
The one bad fruit spoils the whole bunch and can crash the deal with the bank. The person with bad credit should instead be treated as a silent investor and shouldn’t be part of the mortgage.
4) Set everyone a role or form committees.
Some might handle the renovations, some might handle the accounting, some might handle the negotiations. But, importantly, don’t let everyone handle everything or you’ll have five different opinions on what pattern the new bathroom wallpaper should be.
5) No money. No say.
While we’re on the subject of unwelcome opinions: For partners … just as in life … the rule remains that if they’re not an owner then their opinion is not required. Otherwise you’ll now have 10 patterns of bathroom wallpaper
6) Do the maths.
Last of all, before you pull the trigger, ask yourself why you’re doing it. Do some solid maths around the value of your time, the return on your money, the tax implications you are opening yourself up to and the risk that you are exposing yourself to and how much risk you are willing to accept.
And if the maths checks out, here’s the next link you’ll need: http://www.bmw.co.nz.
Rupert Gough is an Authorised Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.