Though I've not yet ventured down the path of purchasing with friends/family through a JVA situation, the thought has crossed my mind. A unique property that I've had my eye on for a few years now has just become available for sale, and, alas, with a purchase price of around $1.3m I'm not confident that I can go it alone Two other parties (both known to me) have expressed interest in purchasing together with me, but I'm very hesitant due to the myriad of legalities and liabilities involved ie: Joint and several liability with the loan in that you are responsible not just for your portion of the loan but the entire amount, thus also killing a large portion of your serviceability The obvious problems involved with investing with others in that circumstances can change, spouses can come/leave, income situations change Increased setup costs including establishment of unit trust, JVA docs etc I realise the importance of the establishment of the correct structure and the covering of all contingencies through legal docs. Making sure all parties have common goals, as well as clear exit strategies is also vital to a successful JVA. Though I have great faith in my fellow purchasers, I'm certainly not naive enough to believe that relationships can't turn sour over joint investments like this. Though I've read widely on the subject and am aware of the possible problems, it would be refreshing to hear from those who've actually done it Anyone here who has engaged in a long term JVA with others? I would like to hear of any experiences, negative or positive.
I am sure that what I have to say is not new to anyone here. Investing with others can be a great way to leverage but it is fraught with disaster of the kind you have mentioned. If you go this road then you need to make sure everything is thought through with clearly defined exit points and strategies. Sometimes more partners is better as it allows buyouts of shares if one needs out. ie if 5 partners owning 20% each and one needs out then the remainder just have to buy another 5% each... A unit trust may make this process easier? I am no expert there. The biggest issue that is rarely considered is the issue of borrowing together. Each party will be jointly and seperately liable for the debt. So whilst your share may just be $500K of the total $1M debt, if the other party stops making payments guess who has to make up the shortfall? And if that other party has no assets guess who the lender comes after if they need to sell at a loss. And... if you wish to borrow again your new serviceability will be calculated taking into account the repayments on the entire debt - not just your half. But - I have clients who do this sort of investing as JV very successfully. It can be done. Al lthe best to you Jacques....tell me about this place and maybe I can bu ya few units too
Jacque, You can trust me, I'm a nice guy, so lets just leave those others out of it and do a 50/50 JV on this one. If you've got your eye on it then it must be good... If you're not interested then just PM me the link and I might go it alone. Its at the edge of my borrowing power though. I've also been considering the JV route myself, with the possibility of doing a joint development with a close friend who's another senior Somersoft forumite. I'd welcome any discussion about the relative merits of this option. Cheers, Michael.
Hi Jacque, I have JV'd 3 times - 1st of all when I was younger with my brother. After we payed off the place, he needed his portion of the money so we sold it(that place is probably worth 4 times as much now). It was a commercial property and has a very nice cashflow, so keeping it would have been nice. The 2nd JV is the one I have with Mike Kelly (wraps), and have found these to be very rewarding. The last wrap we did was a joint venture with a friend , which we are now selling off. Fortunately this one has worked out well too, that friend and ourselves have a very trusting relationship (have know each other since we were 12) ....this is extremely important that the friends you are investing with are trustworthy (and perhaps like-minded). The serviceability issue as you mentioned is important - is the purchase going to be for more than 2 years ? - otherwise you may well jeopardise your chances in 2 years time to purchase other property yourself just when the market may (or may not) be starting its new cycle. Think of the opportunity cost if that happens!!
Funding for the JV can be structured so it is quarantined to each JV participant. Requires some upstream work, but can be done. Cheers N.
I was hoping some of our resident mortgage brokers would wade in with some wonderful war stories... Let's look at a scenario. Say the investment is a $1.5m block of flats generating (or capable without much work of generating) say 9% - that's $135k pa. A group of 3 friends want to buy it together. Let's assume that they have $130k each in cash to contribute and will borrow the remaining $1.2m . (The extra $90k is for purchase costs). If they sign up as joint borrowers on a $1.2m loan the problem is that as far as the bank is concerned they are each liable for $1.2m. Just as important though, that's the view that every other lender will take. Regardless of the deal between the 3 co-venturers, they will each have a $1.2m credit enquiry on their CRAA record AND when servicability for their next solo IP loan is assessed they'll be regarded as having the whole $1.2m debt to service despite the fact they in practice are only putting up a third of the interest. A better approach would be for them to: 1) stucture the purchaser as a unit trust 2) they then approach the bank and through their own trust or perhaps personally, borrow $400k each. 3) To secure the loan, the unit trustee which will own the block will guarantee each of their loans and grant a mortgage over the unit block to the bank to secure EACH loan. 4) the friends each subscribe for units putting in the $400k loan proceeds plus their own $130k. Net result is that instead of each of them having a $1.2m loan they only have a $400k loan. Much better outcome for their servicability and liability. In a nutshell that's how you'd do it. One solution I've seen proposed is a limited recourse loan and security. That's where the bank agrees that if there's a default, its only way of getting the money back is to exercise its rights as mortgagee and sell the particular property. If there's enough sale proceeds all well and good, but if not, instead of chasing you personally like they'd normally do, they don't chase you and can't try to bankrupt you etc. In our case you'd be getting the bank to limit its recourse against you to $400k and/or just selling the property. To my mind that doesn't really help because: a) typically much lower LVRs are permitted with limited recourse lending (that's how many developments are done and hence why developers need mezzanine finance) b) you've still technically got a $1.2m loan to service and as far as I'm aware many lenders would ignore the subtlety of the limited recourse because it's really only relevant at default time. Of course the above deals only with the financing side. Discussion of setting up the deal between the 3 amigos is a story for another day. Hope that gives some pointers. Cheers N.
If this is "doable", then it sounds like the ideal solution. Thanks so much for that, Nigel. You've given me real food for thought here. Nick, would love to hear if you've set up any unit trust structures for a similar JV scenario? I guess then that my first stop would be the accountant, closely followed by the broker Has anyone else participated in something like this at all?
In a unit trust scenario most lenders will lend the Unit trust 70-80% and then the individual parties put in the balance A partnership / tenants in common of trusts may be an option. say 4 parties each on title for 25% keeps it clear the structure will be ultimately determined firstly by what the financier is willing to work with and will depend on the individual parties finances. I would strongly recommend that whatever is worked out that it is documented. Exit strategies, disablement, inability to pay/ loss of employment ?? I am not all that keen on them unless each party is in a similar financial position. I have seen some very successful deals done that may not have been possible without a partner. This often is the case when things go well and according to plan. It is trying to plan for the unexpected that is difficult NickM
Thanks for that Nick. The unit trust structure sounds like the correct setup to use for the purchase. My accountant can set this up for me, so no problems here. The JVA would obviously need to be drawn up by a solicitor experienced in this area, and the lender would need to be willing to accept the use of the unit trust, with the use of individuals or family trusts (as in my case) as borrowers. However, I still am grappling with the joint liability issue. Though Nigel has suggested a possible scenario around this by taking out individual loans, my broker has told me that the trouble with using guarantees is that we are still exposed to the entire debt, and not just our portion. Can anyone shed any light on this?
As Nick mentioned, there are many ways to structure this. If preserving your borrowing capacity is a key objective I don't think many of them work. Jaq's point about guarantees is correct - but the question is WHOSE guarantee? If the unit trustee (which owns the property) is guarantor and mortgagor but not your own trustee or yourself (either in your capacity as director of your own trustee company or the unit trust company) then there's no problem (and it shouldn't appear on CRAA). The key as Nick observes is to get your bank on board to accept that they're getting a real property mortgage with an LVR of 80% (in the scenario above) and that's all they'd get for a "normal" lend. Without getting too technical, the guarantee by the unit trustee is typically required because otherwise the unit trustee is giving "third party security" (i.e. the real property mortgage) and there is lots of case law about ways to weasel out of third party security on the grounds, essentially, that you get no benefit from granting one. The bank here may also require an all assets fixed and floating charge over the unit trustee company - but provided it's a special purpose vehicle (i.e. a one project trust and trustee) then that's no real problem. Of course, all this covers the debt funding side only. The equity funding and thus the deal between the three amigos, requires considerable work in figuring out their rights and obligations between themselves. Cheers N.
Hiya Jacque I'm currently doing a JV with someone I've known for a long time. We discussed the JV for 2 years before we embarked on it. We have similar goals, similar financial situation and we are both flexible regarding exit strategies. The main goal in mind is to make XX% profit, which we both agreed on. We set up our JV via a unit trust and got finance on that basis to 80% LVR. Both parties are exactly equal although we have pruchased the property as tennants in common (legal reasons for estate). My opinion is that you need to know thoroughly your potential partners personally, know what their goals are, financial situation, and most importantly, their personality and character. The last item is vital as if you do hit a snag during the process (even if you do have a well documented agreement with exit strategies and trouble shooting strategies), you need to know how the other party(ies) will respond to each issue. Just as important is how you would respond under those circumstances, which, sometimes, you won't know unless you've been through similar previously. Our JV is working exceptionally well. My partner is essentially 90% silent, for a number of reasons, so most of the managing is done by me, which I love. On the other hand, I would be quite happy to sit back and do nothing (ha, ha) and let others do the work and wait for the profit. Maybe next time. Hope this helps. Yes, there is a myriad of issues to consider, but if you approach it openly and honestly, there are many rewards to reap and a huge big learning curve to undertake about yourself. Cheers
Thanks Jane Your contribution here is very appreciated. How is your dvpt all running? Though you might want to post this info in the other thread that it all started in....
On a smaller scale Jacque we (husband and I ) have started a jv with our 3 adult boys, 19, 21 and 24. We did this to get them started in RE and none of them have invested in their first home yet. We are on to our third property investment and we all knew that the intention was to buy land, build and sell or sell off the plan. Thats working for us at the moment in Perth because of the market conditions. We didn't have the intention of hanging on to anything. (Although that would have been nice) . We set up a family trust, used the family home as equity for the loan and we have actually taken the main risk. But hey you do that for your kids! Two of the boys study full time so only have "pocket money" as income but they have done well from the ventures and are learning a lot about market forces as they go. The loans with the bank have actually been set up in all our names and yes we are all liable for the whole debt. When the market changes we will have to change our tack ,probably buy, renovate and sell on after the 12 months.
What great and generous parents your sons have! So how did you structure the shares in each purchase- do you all have equal shares? The WA market is still riding on one of their biggest booms ever- why not take advantage of it to make some cash? I know I would be!
Yes we made it all equal with the five of us. 2 parents 3 kids. Its very exciting especially in this kind of market and we are really enjoying ourselves. Its become the new family hobby! lol. The initial idea was to look for old places needing reno work and one of the boys who really can't do much financially was prepared to put some heavy work in, but really the opportunities in this kind of market haven't involved any hard work yet. That will change of course but for the time being we are enjoying the ride.
