Articles by Nathan Budd
Are you interested in investing in property but find yourself locked out due to the high buy-in costs or the recent debt-to-income (DTI) restrictions? Joint ownership of property may be a path worth exploring to get in the game and ensure you don’t miss out on the next growth cycle. This approach can leverage the collective purchasing power of families, friends and wider networks to help you grow your wealth.
Joint ownership can take various forms. Below I explore some of the options we’ve seen people use.
An informal partnership is the most basic form of joint property ownership, where two or more people buy a property in their joint personal names. Costs to establish an informal partnership are minimal, which can make them seem appealing. This is often how spouses own a rental property together (especially if they haven’t had professional tax and asset protection advice).
The major drawback of a partnership, however, is that members of the partnership are personally liable for all partnership debts. To mitigate this issue each partner would typically leverage their personal assets to free up cash to buy the partnership asset. This leaves the partnership asset free of debt.
A further drawback is that partnerships may not deliver optimal tax outcomes for high income partners.
Additionally, as the assets are in your personal names, you are personally exposed to risk if something goes wrong.
As a general rule, at GRA we don’t tend to recommend partnership structures for property investing, as they expose the partners to too much risk and are often not tax efficient.
If you do decide to invest using a partnership, then you should have a partnership agreement that stipulates the responsibilities of each partner and what happens if they don’t meet them, how profits are dealt with, and what happens if one partner wants to exit the partnership (or dies). For couples, if you don’t have a relationship property agreement stipulating otherwise, the asset will be considered 50/50 ownership and proceeds split accordingly.
A joint venture (JV) is where two or more parties come together to achieve a shared goal. The parties to a JV are not in business together; they merely pool their resources. Resources typically include funding, knowledge, labour and professional expertise. JVs are common for development activities and property trading. Often, one party will provide the funds required, and the other party contributes in other ways, e.g. time, expertise, labour.
Each party participates in the JV using their own structure (e.g. company or trust). It is not advisable to do this in your personal name.
It is important to document a formal Joint Venture Agreement before activities commence. This agreement will specify how the JV operates, whether liabilities are shared, and how profits are to be split. As with partnership agreements, it will also stipulate what happens if a JV partner doesn’t meet their obligations, or if a partner wants to leave the JV.
A JV is preferable to an informal partnership, as you are not exposed to the other party’s liabilities, and is generally more versatile. Additionally, using companies and trusts provides the advantages of risk minimisation, tax optimisation and asset protection.
An ordinary company is a separate legal entity from its shareholders and enjoys limited liability. In the absence of shareholder guarantees, the liabilities of the company are limited to the company.
Companies are useful investment vehicles for parties that are looking to either invest long term in property or alternatively trade in property. The shareholding of the company is typically split based on how much each party contributes. Shareholders can buy in or sell out over time. Where profits are retained at the company level, high-income shareholders enjoy a temporary tax benefit of 11% which the company can reinvest for further gains.
Once again, if investing with others in a company structure, you need to have a shareholders’ agreement and a tailored constitution detailing obligations, profits, and what happens if one of you wants out.
Summary
If you have relatives, friends or wider associates with savings sitting around earning diminishing interest returns at a bank, collectively investing in property may be an alternative path worth exploring.
Reach out to your GRA Client Services Manager or book an initial meeting (free for new clients) to discuss what the best structure for collective investing might be for you – everyone’s situation is different.
The whole course was excellent and gave me the confidence to make decisions. It was all worthwhile and interesting. - Richard Pearce - Novemger 2017
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