- Darren BearMember@darren-bearJoin Date: 2007Post Count: 4
I feel the hardest part in wealth creation is the fact that usually it is you working alone against the world. Lately I have been thinking of forming a group of investors who would like to generate stable passive income and also have equity build. My basic idea is this….
A number of us have at least a deposit available to purchase a property on our own with the use of banks or lending societies. As we all have the same goal of financial freedom why don't we put these funds together and purchase a property outright that provides a good rental return and split the rental return depending on the shares you have in the property. Noone pays interest to the overpaid banks as there is no loan and we get the rent in our pockets and in a number years we can reevaluate the property and if decided by the majoity sell and split the profits.
Obviously there would be a requirement for a structure, procedures and agreements to protect ourselves and the properties. If we get the system right it would be a very duplicatable form of passive income that could build apon itself.
Look forward to your thoughts.Mortgage HunterParticipant@mortgage-hunterJoin Date: 2003Post Count: 3,781
Sounds like a nightmare to me.
Putting up with other shareholders, keeping all informed and trying to get decisions made – then split the profit.
Who decides when to get out? What happens when one gets married and wants to buy a home? How does he get out?
I reckon you are much better off buying alone.
None of you will be able to use the property to secure other properties so the property equity is useless to you all – lazy equity.
Don't do it.brigantiParticipant@brigantiJoin Date: 2007Post Count: 4
Dangerous. What if one person has fincial problems or even worse- when you realise everybody has different investment stratergies.
When do you sell, buy, who do you blame for bad decisions and who controls the cheque book?hoboParticipant@hoboJoin Date: 2007Post Count: 1
I must say, without any malice, it sounds all a bit too idealistic to me – people may say "yeah, sure, I'm in for at least 10 years", but situations change. And, as Mortgage Hunter mentioned above, wouldn't the equity be locked/useless until liquidated….?
Personally, it's not something I would even consider.enigmaMember@enigmaJoin Date: 2001Post Count: 12
Actually, a 'Joint Venture situation is not that difficult, and not uncommon. Yes, there are pitfalls (doesn't everything?), but it is just another twist on a way of doing something. I wouldn't personally do it with more than 3 groups involved, as then it gets messy. Are you in Melbourne? Let me know if you want to follow this through.Phil44Participant@phil44Join Date: 2003Post Count: 5
Hi Darren Bear, Here's an alternative – I'll do it with 18 shareholders if you want with a simple non-JV structure and exit strategy. 55k each, 20 houses in Melbourne by May and you won't have to sign for the loans or do any work. Wrap the lot, keep any take-backs for rentals and put the +CF back into the loans.trakkaMember@trakkaJoin Date: 2004Post Count: 257
Hi Darren Bear! Firstly, I'm sorry that some previous posters have used such a hostile tone. For some reason, many people forget their manners on forums and say things in a manner which, if they'd thought about it or if they were face-to-face, I don't think they would never say. I wish that everybody responding would assume that the poster raising the issue is intelligent and well-intentioned …. that's my idealism for the day!
Now, having said that, I somewhat share their sentiments, if not their means of expressing them! Here's why…
Returns on property investments are modest, perhaps averaging a few per cent per year. For example, if you average rent @ 4% plus growth @ 8% less mortgage interest @ 8%, then the overall return is 4% pa. Whilst this does add up over time, it's very slow and really only worthwhile if you use LEVERAGE. Returning 4% pa isn't great, but if you've only put in 20% deposit, then you're returning 20% on your money. (The 4% profit divided by the 20% you've put in is a 20% ROI.) If you only put down a 10% deposit, you're returning 40% on your money each year.
Of course in both scenarios your situation improves every year, because the 8% capital growth and 4% rental income increase each year with the value of the property, but the mortgage interest going out remains at 8% of the initial balance. If you're confused, imagine you'd bought a home that's now worth $1M for $215K 20 years ago, using a 100% lend and an interest only loan (for simplicity). Your rental return now would be $770 per week, and your capital growth $80K per year, but because you've been paying the interest each year and the mortgage balance has not increased with your home's value, your interest expense is still only 8% of $215K, or $330 pw. So your property is now – ignoring other factors – $440pw cashflow positive, and increasing your asset base by $80K per year.
The logic behind leveraging is that the overall return on the property (ie rent plus capital growth) will be greater than mortgage interest rates. If that's the case, then instead of using other investors to fund your investment – with whom you share profits, ie they make the same return as you do – then you're much better off to pay the bank 8%. Having investment partners, without leveraging, is financially the same as paying a bank 12% interest, on the above figures. The benefit of leveraging is that the money the bank lent you EARNS you 12%, but you only have to PAY them 8%, so you make 12% on the money that you put in, PLUS 4% on the money that the bank put in.
If you are concerned that the overall turn will not be greater than mortgage interest rates, then you should forget the risk of owning property and just invest in mortgages instead, ie lend your money to others at 8% return.
And, as others have highlighted, there are many complications involved in joint ventures. But there are people whose personality type suits joint ventures.
If you want the best of both worlds, perhaps you could develop a joint venture with leveraging. For example, if you find 5 people each with $40K, instead of putting together to buy one $200K property, you could use that as, say, a 20% deposit on 5 x $200K properties.
If you could use your $40K to buy a $200K property yourself, then I think that would be a better option, but the potential advantages of a JV with leveraging are:
* you could spread your risk by buying 5 x $200K properties, for example, in different locations
* you have many minds put to the investment decision which increases your comfort level if you're not confident
* other members of the JV may have greater borrowing capacity than you do, allowing you to invest more than you would be able to do on your own (eg if you have unreliable income, or undocumented income)
Tracey in BrisbaneDarren BearMember@darren-bearJoin Date: 2007Post Count: 4
Thx for that very useful constructive information. My mind is two fold at the moment I have property that has around 200k equity to use and I would like to use that equity to purchase more property at 85% LVR (Loan to Value Ratio) while involving my family and friends in another property at 0% (or possibly 0-50%) LVR who are not overly comfortable with investing. I was thinking of using a combination of these systems to educate and allow them and myself to experience the property market and how it works. Using the examples of my 85% LVR properties and the 0% LVR JV property as examples to experience cashflow and capital gain with differant methods and results. As the JV group is comfortable I would approach them to use that property or other properties equity to reinvest in other projects, to continue as they are or a mixture. The thing I like about investing is the ability to live your life without thinking about a job and to help others to live the life they choose, if they choose.
My brother is a shearer and a great bloke and father of 3 beautiful young children. He loves his trade and looks forward to taking over the family farm later on. He and others I know are interested in developing cashflow from investing but are overwhelmed by what do invest in and the what ifs. This scenario is something that gives him comfort to do something while developing an understanding from real life experiences. If this is something I can do for him and others while I know I will make less profit on the $10000 I contribute than going it alone, I will still make a profit they will learn and grow financially while my 3 beautiful nieces will be in an environment that supports the understanding that dependancy on a job is also a choice.
I hope this makes sense to you, I am all for working together on differant projects so if you have some ideas or want to just chat let me know.