Hi All,
A friend and I are looking at getting a group of 5 people together (work colleagues, friends, family or strangers), to invest together under a unit trust etc. Under a unit trust shares could be sold if someone wants out etc.
Everyone would put in x, lets say round figures 20K. Making a deposit of 100K. Buy a 300K house using 50K for deposit and in costs. Then using the remaining 50K to renovate subdivide strata etc.
This would be a project we have on the side from our personal investing, just to make a little bit more cash, without tying up to much of our own.
As long as the margins are there etc. What are peoples thoughts on this sort of strategy. When investing with others there will always be the possibility of complications esp with friends and family but alot of stuff I read suggests using other peoples money can be a good thing.
Thoughts?
Hi
Can work great.
Key things:
1. Unitholders agreement
This deals with the interactions between the parties and how to deal with any issues that may arise. Qutie extensive and because it outlines how things happen in different circumstances it greatly reduces risks of fights.
2. Entites that Hold Units
I would normally draft the unit holders agreeement to preclude the units being held by individuals, units are assets and can therefore be taken by creditors of the individuals, holding the units in a discretionary trust avoids that problem.
Utilise only one for first development and then setup a new one each time. Cheap insurance.
You can also investigate a partnership of entities as opposed to a unit trust. You then just have a partnership or joint venture agreement instead of the unitholders agreement.
Which state the land is in may change things also.
regards
D
RPI | Certus Legal Group / PRO Town Planners
http://www.certuslegal.com.au
Email Me | Phone MeProperty Lawyer & Town Planner
Its good in theory but you have to plan for every possible eventuallity.
What will happen with finance? All directors and unit holders need to guarantee the loan. If 5 people guarantee the loan then this is going to be 5 times as risky as an individal buying and hurt future borrowing capacity of everybody. This can be structured around so only one person need to guarantee – but then you have to ask who and should this person be compensated for the risk they are taking.
Think, death divorce and bankruptcy of each person too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
What finance strategy would you suggest Terry?
Could there be an overiding PTY LTD Trust with each unit within that owned by individual PTYLTD Trust?
There could be a pty ltd company as trustee (and should be). Each unit holder could be a separate pty ltd company as trustee for another discretionary trust.
You have to consider who will control the trustee. Who will be director? How many directors, How owns the shares in the trustee company. What happens if a director dies, how will a new director be decided. Probate may take 6 months. Who will be director of each separate trustee company underneath. Will these directors need to give personal guarantees etc?
Careful planning is needed from a tax, legal and finance perspective.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
There are syndicates that do do OK over time but you really need to have form good solid relationships for these things to work. One of the complications these types of groups run into is functioning by committee. Getting decisions made can be a nightmare at times. Hell look at government for an example.
Having been involved in a "group arrangement" with shares many years ago, I can say the most important thing is to make sure that everyone has their "goals/values" 150% aligned.
Every group thing I've ever seen (especially with friends) has ended up going sour, with the whole issue being that 6-18 months into it, it was realised that being friends didn't necessarily mean that your "investing goals/values" were aligned.
It has to be thought 100% as a business transaction – would you go into business with your friends? My advice would be to go and spend the extra time finding the right people that align as closely as possible with your and your friends goals (assuming they are aligned) rather than just jumping in with the closest people you can find – work colleagues etc.
I was inviited into a group thing many years ago and didn't join. but the group went ahead anyway. It is very hard to come to decisions when there is a group. It is dedious and then the ones who don't get their way resent the others. This group took many months to just choose the name and they then formed a company. Then they realised finance was the biggest hurdle.
Actually there was a second group that I was involved in. 5 people and 4 all wanted to be a director. I was the only one that didn't want to legal burden. This one purchased a property and 4 of those sucker directors guaranteeed the loan while I didn't. This was for a development deal and also went nowhere because it was just so hard to get people to meetings and to agree on things. Also a silly name was chosen which I didn't like, but it didn't really matter, but I was outvoted. It was also hard to extract money from members. We all had to put funds in and everyone agreed, but then when it was time to do it a few just didn't and it was like getting blood out of a stone….
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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