An interesting situation has come our way recently and I would appreciate any advice on the subject anyone could offer.
Some friends we have known for 10+ years have approached us with a suggestion to buy a house together. Currently we are both renting in Sydney and both have been unable to keep up with the market in saving a deposit. We would both like to get out of the city.
The house that they are proposing to buy is a farmlet in a growth area near the NSW coast within one hour driving to medium/large regional centres. It has a house and several sheds/garages, one of which they would intend turning into a self-contained studio for themselves to live in. The selling price is $400k (I don’t know if this is negotiable). If we decide to go ahead I will do all the usual due diligence, including getting an independent valuation.
The nature of their work is such that they could pack up and move there straight away. Our work is in the IT sector and reliant on large cities.
The proposal put forward was that we buy the place together taking out separate loans for each couple. We would be going into it 50/50. Would we need to set up some sort of ‘tenants in common’ structure?
The other part of the proposal was that, considering our circumstances, they would live in the house (for at least the first year or two, while we re-invent our careers and pay as much as possible off the loan) and we would hold our share as an investment property. The rental has been valued at approx $200 pw – so they would pay us $100 pw (our half of the $200) to rent it from us.
I am particularly interested in finding out if it is possible to claim the usual tax benefits and depreciation (the house is 10yrs old) in these circumstances. If we were invited to visit our friends several times a year, would this put it in the ‘holiday home’ category and therefore negate our eligibility for deductions?
Any other advice on what to watch out for in this sort of arrangement would also be welcome.
Thanks, Michelle.
Hi Michelle,
be very careful – partnerships are very difficult and usually result in the breakup not only of the partnership but also of the friendship. Get a proper ‘partnership agreement’ from your solicitor (our first one was 15 pages) and lay out all your conditions in the contract just in case anything goes sour.
Kind Regards,
George.“If You never never ask, you’ll never never know”
Hey Michelle,
Ever gone out to dinner with friends, and had to deal with one bill for the whole table?
If that was enough to make you see red, imagine the fun it “could” be arguing about property expenses!!!
My advice….steer well away, and keep the friendship.
But if you REALLY MUST then (as others have suggested) seek legal counsel.
Jo
Hi Michelle
I’m in a commercial property investment with Partners now for about 8 years. The partners have come and gone over the years, with relatively little trauma luckily, HOWEVER, over time priorities change for different folks. For example – one partner may want the rental income, another may want to take cash out.
At present, I’m trying to buy out two partners by refinancing. One wants to sell, the other does not. This cramps my style in terms of the freedom of what I can do with this property. Also, I get to manage the properties and while I enjoy doing it, my partners get the benefit for free (not for much longer though).
One marriage is enough. Partnerships can be marriages made in hell. How to spoil a friendship – do business with them.
I’m sounding awfully negative – sorry – it has not been that bad. The fact that you asked for advice might mean you’re not too sure……
Hey Michelle
See topic on Partnership breakup from Geo under Legal and Accounting. Seems George wants to get out of a similar situation.
Glenn
Hi, thanks for the advice so far.
I understand that if things are not put in writing up front then there will be greater scope for disputes. We definately intend to do this. We are meeting tonight to discuss the pros and cons of getting into this situation.
BTW, we have lived in a shared rental with half of this couple for several years and therefore know many of his bad points. He has improved since then and his partner is quite level-headed. She already has a -ve geared IP with family members. We are quite aware of many the potential downsides to investing together.
Mainly I was interested in the tax implications in this situation and also what sort of structure this should be set up under, if we decide to proceed.
Regards, Michelle.
Michelle_G,
Consider some form of Unit Trust. It makes it less painless to sell out of the project & easier to distribute profits effectively.
2nd option would be a company – but have to pay taxes in the company & distributed franked dividends to get profits out effectively – more work, not quite as effective in many cases.
Avoid partnerships – they leave you liable to the other partners to an unlimited extent. There are forms of limited partnerships around, but generally have a lower effectiveness in holding assets…more useful in trading situations.
And speak to a professional about this stuff – it’s quite complex.
Cheers,
Aceyducey
Hi Michelle,
Great advice from Monopoly…
Ever gone out to dinner with friends, and had to deal with one bill for the whole table?If that was enough to make you see red, imagine the fun it “could” be arguing about property expenses!!!
Kind Regards,
George.“If You never never ask, you’ll never never know”
Originally posted by Aceyducey:Consider some form of Unit Trust. It makes it less painless to sell out of the project & easier to distribute profits effectively.
…
And speak to a professional about this stuff – it’s quite complex.Cheers,
Aceyducey
Thanks for the information Aceyducey,
I have heard some mention of Unit Trusts, but do not really know anything about them. With the Tenants-in-Common agreement all parties are held ultimately liable by the banks for the whole debt on the property, not just their own share, thus affecting loan serviceability for future investment loans. Is this the same with a Unit Trust or does the bank only consider your own share?
What sort of professional would I see about setting up a Unit Trust? Would that be some sort of legal person?
Many thanks for your advice,
Regards, Michelle.You also mention the fact the asking price is 400k? You will receive $100 from you freinds as half the expected rental return for such a property. Do you know what your commitment would be to service your half of the loan repayments, rates, insurance etc? Doesn’t sound like a real good deal, capital gains are a while away as well.
Forget the freind bit, you should look at this from a pure investor standpoint. Do your homework as your money could be better off elsewhere if you know what I mean.
“Dont be looking in your back yard for a four leaf clover when the opportunity of a lifetime could be knocking on your front door….” “Even though you may be on the right track, you can still get run over if you sit there long enough”
Originally posted by Michelle_G:What sort of professional would I see about setting up a Unit Trust? Would that be some sort of legal person?
See a good accountant. Preferably one with property investing experience.
Nick Moustacious of Strategic Wealth Management is a VERY good property & trust accountant (www.strategicwealth.com.au)
Cheers,
Aceyducey
And a good lawyer for a Joint Venture agreement where your exit strategies are clearly defined, so either party can’t change their mind within the defined period.It can be done without complications as long as you have an extensive JV agreement covering all angles.
Great advice from Acey regarding Unit Trusts. There is some great info on http://www.strategicwealth.com.au
I agree with Mysta on this one, if you’re not going to live in it, is it a good deal from an unemotional investment point of view. A 180k loan with $100 rent coming in sounds a bit average unless there is some good capital growth!
Good Luck!
Brendon
Acute Mortgage Reductions
http://www.acutemr.com.au
[email protected]Mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm.
Heres my .22 of a cent worth.
If you EVER intend to form a partnership, simply ask a lawyer to explain the words ‘joint and severally liable’ to you. If you have a fraction of functional grey matter, you will not do it.
Read monopolies posting about the restaraunt bill about thirty times each day you are considering this deal.
If you are purely focused on the tax deal, why not just let yourself get screwed by the annual end of fin year agricultural scam? Pay less tax by earning less or losing more! Doesnt sound like a smart deal to me! (unless cap gain in future to offsett the loss)
FORGET ABOUT THE TAXATION ISSUES, AND CONSIDER THE INVESTMENT IN ITS ENTIRETY. Is it good, bad, or indifferent.
Consider WHY they want you to ‘go you halves’. In all honesty, it is probably because they cannot afford it on their own!
Even if you got the loans, (I assume) you would be jointly and severly liable (ie forget it)
Avoid, avoid, avoid.
But, after crushing your hopes, there is a way out, where all parties will gain.
You mention that it is a small farm. Great, sign some papers saying that you will purchase subject to subdivision, and your friends will buy the other half. Vendor gets paid, you and your friends both physically get half the property, and your affairs stay seperate.
Sometimes, I astound even myself with my brilliance[biggrin][grad][thumbsupanim][wink]
Thankyou Geronimo, Aceyducey and Bionic Beer Gut for your helpful advice.
Wrappack wrote:
If you are purely focused on the tax deal, why not just let yourself get screwed by the annual end of fin year agricultural scam? Pay less tax by earning less or losing more! Doesnt sound like a smart deal to me! (unless cap gain in future to offsett the loss)I am not “purely focused on the tax deal”. I was simply asking this question to give myself as much information as I could, before deciding whether to go ahead or not. I believe it’s part of the “due diligence” we should all be doing in our each of our investing decisions.
Wrappack wrote:
Consider WHY they want you to ‘go you halves’. In all honesty, it is probably because they cannot afford it on their own!Yes, it is because they cannot afford it on their own. Is it a bad thing for them to seek alternate sources of financing their purchase? We all do it in our investing – we ask the banks to finance our house when we cannot afford to buy it ourselves.
All along we have been considering this from an investment point of view.
While ngatively geared, the property is in an area which is experiencing growth at this point in time. The vendor is selling it at below value (compared to other properties recently sold in the area) as he is keen to sell before the new CGT rules start. So there is quite a good potential for capital gains.
We have looked at the property this weekend and will most likely pass on it, as we had intended from the start to buy into positive cashflow properties and this one would tie up too much of our cash and loan serviceability right now.
Our friends have found another possible avenue to fund this, so we are all happy.
They have an interest in a negatively geared property, which they had originally planned to sell in about 9 months from now. They have spoken to the vendor of the property they are looking to buy and he is satisfied with their offer to sign and lodge deposit before the new CGT rules and settle in 9 months. They will move in after signing and pay rent until the settlement date.They’re happy, vendor’s happy, we’re happy, a win for all.
Once again, thanks for all of your helpful contributions,
Regards, Michelle.Is it better to own 50% of something or 100% of something else worth 50% of what the value you were going into partnership for? with the smae benefits to you personally?
Michelle,
I am not so much into the traditional thing of “only invest with your husband” kind of approach. Marriages can come just as unstuck as investing with your friends. Perhaps, given that they have a less financially stable situation to your own, you might want to structure things so that you have a greater share in the house.
As far as the numbers on the cost of hte house and the rental yield… only YOU can determine the type of dwelling that you want. It seems that you’re not looking for a 40k house, but you want a house that is a peaceful retreat. That’s oviously suitable to you.
It seems that you have known this couple as friends for a very long time. I am sure that you’ll get suitable legal and financial advice on how to do things. I know buggar all about trusts and the financial side of things. I just wanted to wish you good luck in it all, and let you know that I feel that there is nothing innately wrong with buying in with your friends. After all, Steve McKnight based his RE business on working with Dave. If it’s good enough for him, I guess a number of people would agree with the strategy! And some wouldn’t- and that’s fine too
kay henry
Hi Michelle,
I am involved a partnership, similar to what you are descibing & it is an excellent arrangement that has provided an opportunity for both parties to purchase an assest that neither could have afforded alone.
We have some written agreements between us that our solicitors are happy with and we have changed our wills to protect the other party in the event of our deaths.
I think only you can judge if you should do buiness with your firends. I chose to do business with my friends because:
1) I have known them for a long time in various contexts (eg, work, socially, in “good times & in bad”) and I trust them.
2) They both have stable, reliable incomes of a similar level to mine.
3) They have a similar investment philosophy to me and we all have an equivlaent level of (un)sophistication when it comes to investment.
4) They live about 1km away from the IP we bought and they know the market in this area very well. Also, they were happy to provide the property management function for free. I provide the “financial function” of balancing our spreadsheet every month that shows who has contriubted what amounts to the property in terms of repayents & any cost of repairs.
We have really good, open communication which I think is the key to our success.
Cheers,
Jason.“If You never never ask, you’ll never never know”
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